31 Mar Mortgage Crisis Almost Over? Guess Again.
Without substantial changes to the mortgage market and modifications to indiviual mortgages, the current crisis is likely to hit another round of defaults and foreclosures in the next couple years.
You might have heard Federal Reserve Chairman Ben Bernanke predicted the recession may be ending this year. John Hussman of Hussman Funds thinks that the worst may still be ahead. Hussman points out that there is a close relationship with adjustable rate mortgage “resets” — when the mortgage comes off a low “teaser” rate and begins to float with market rates causing payments to go up — and default.
When these toxic ARMs adjust up and payment skyrocket, more people can’t pay. (I’m not citing a source for that. Sometimes finance is not nuclear physics.) In the next couple years, we face many more resets, according to Hussman. But in this case, these are loans that were written when the mortgage bubble was peaking — and property values were at their most inflated.
With these loans we are likely to see the worst of the reset nightmares as well. While these loans often adjust to a rate tied to Libor, and the Libor rate is lower now than previously, the adjustment rate added to Libor to calculate the new interest rate for these loans is likely to be among the worst offered in the last several years. And if these loans were written based on the most unrealistic valuations of the last decade’s bubble, then it increases the probability the homeowners or investors in the properties will not see the point in continuing to pay the exploding payment — assuming of course they could manage to do so at all.
In other words, it’s a repeat of the story we started a couple years ago with subprime loans. Now the “hits” will be coming in Prime, Alt-A, and option-ARM mortgages.
No wonder so many investors are still leery of diving into buying these mortgages up. Even Hussman admits there is only a small window for a legislative solution to this problem and doesn’t completely oppose bankruptcy mortgage modification. In other words, eventually everyone will come around to agreeing something has to be done. It may just be too late when it is.
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