Abstract
The Problem: Delinquency, Bankruptcy, and Foreclosure
The collapse of the secondary market mortgage banking giant Fannie Mae is the ironic undoing of an institution established in 1933 for the purpose of bailing out the US economy from the effects of price level drops and mortgage foreclosures. Our contemporary crisis correlates highly with the conclusions discussed in Irving Fisher's 1933 theory on consumer over-indebtedness and high GDP. In the 1930's there were fewer than 500 Common Interest Realty Associations (CIRAs) in the US. Today, there are over 300,000 of these community associations in the US, with over 36,000 in CA, each one potentially impacted by the mortgage crisis to some level. It is not known how much CIRA revenue will be lost to foreclosure and bankruptcy in 2008 and beyond, though 5,000,000 total US housing units have been projected to be impacted before the cycle is over. This equates to potential high dollar losses in the US where annually over $41 Billion in CIRA revenues are generated, and in CA where annually over $6.3 Billion in CIRA revenues are generated.
Data Sources: 177 financial reports representing 52 CIRAs obtained from the internet and the control CIRA.
CIRA #1 provides a perspective on the mortgage market as seen from the Controller. This study analyzes 17 audited financial reports of CIRA #1 along with control data reflecting actual results arising from mortgage failures in 2008. All control data was obtained in a highly controlled accounting and collections environment of an affluent community association. Other CIRA financial reports obtained from the internet round out the sample.
Though the sample of177 is but a small representation of the 300,800 CIRAs in the US, between July 2008 and October 2008 the sample financial statements were individually found through Google searches on the internet and represent 51 CIRAs, 15 states, and combined with CIRA #1, 35,375 CIRA units. Some reports are internally generated, some compiled or reviewed, and others audited. All provide insight for comparing the financial results of the very low risk, highly controlled CIRA #1 environment to the unknown environments of the sample CIRAs.
Conclusion: Minimum risk associated with the mortgage crisis may be as high as 30% of assessments receivable and as low as .64% of assessments income.
This economic test is not yet over. It took time for the layers of debt to be established, and it will take time to unravel their truths. With national bailouts of over-indebted homeowners amounting to potentially over $700 billion, the projected CIRA revenue losses add but another layer to the debt losses that society as a whole will have to pick up as a result of this mortgage and housing crisis. The range of uncollectible CIRA revenues for the US is projected in this report to be between $262.4 billion and $720.8 billion. For California the 2008 loss projection is for a range between $40.3 billion and $110.8 billion. These results are based on a low standard risk value of.0217 and a high standard risk of. 0599. Only in the aftermath will we be able to fully assess how well Irving Fisher's theory and the projections derived from this study correlate with actual losses resulting from the 2008 mortgage crisis.