New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

Discussion in 'Wall St. News' started by ASusilovic, Nov 24, 2007.

  1. When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.

    His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Fort Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.

    Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

    In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

    The worst-case scenario is anyone's guess, but some believe it could become very bad.

    "We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

    "Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

    Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

    Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.
  2. I have a hunch that the Fed. will have to pound short rates lower to allow banks to refi some of this stuff and still stay solvent....

    10 year treasuries at 4% with $100 oil doesn't pass the smell test...

    the great monetization is underway....
  3. I read that earlier today.
    Food for thought at the least.:eek:
  4. maxpi


    Consumers don't give a care, post Thanksgiving sales Y/Y are +10%.
  5. WinSum


    Buy Rental Properties. There will be more renters in the futures. Rent will go up.

    Less Homeowners but more Renters.
  6. agreed.. my rental properties have been performing very well the last few months. occupancy is 100%. as soon as a tenant moves out, i have applicants begging to move in, even with a rent increase. it was very different from 2005-2006.
  7. drobin


    I'm putting my money in rent-to-own properties. I buy low & structure a rent to own. It gives me higher down payments, higher rents and a lump sum payout.

    Bottom line: everyone wants homeownership. :)
  8. piezoe



    I think we can take some encouragement from the observation that even though this real estate/ building/financing crisis is serious and will very likely result, ultimately at least, in a market correction greater than what we have seen so far and also at least a mild recession, the housing bubble is quite different from the internet bubble. We likely won't see the same kind of market devastation coming from the housing bust that we saw when the internet bubble burst.

    There are many differences, but a main one is that when the internet bubble exploded there was very little left of value, as many .com companies just disappeared in a poof, and those that didn't had their market capitalization chopped off at the knees, and rightfully so! In the case of the present housing and mortgage bond woes, however, there is at least some underlying value. That will be of small comfort to those who will lose jobs, and those jobs lost will be a compounding factor. But at least the CDO's should regain a significant part of their original value once the smoke clears. I don't see them going poof as the dot com "companies" did.
  9. [​IMG]

    This chart from Credit Suisse via the IMF shows the heavy subprime resets in 2008, plus it shows the reset problems with Alt-A and Option ARM loans in later years.

    Although many of the homeowners in the 2009 to 2011 reset periods will refinance (if they can), this shows that the problems in housing will linger for several years. What is especially concerning is all these Option ARM resets in 2010 and 2011. Most of these homeowners are selecting the minimum payments (negatively amortizing) and many homeowners will be upside down when the ARM resets.
  10. Nice post...

    But all this is common knowledge among Pro Traders... of financial institution paper.
    (As opposed to amateurs staring at charts).

    I trade C, BAC, DB, ING, RBS, USB, ABN, MER, JPM, MS paper every day...
    And even CFC paper, etc, etc.

    Volatility and volume is thru the roof...
    As are profits for quants scalping well-hedged bond porfolios.

    May the "sky keep falling" for years and years...
    I can't wait for Monday.
    #10     Nov 25, 2007