Mortgage Meltdown: Wave Two

by | Nov 19, 2009 | Forecasting, Headline News | 10 comments

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    In Mortgage Delinquencies Up 58% we pointed out that the American home owner borrower will continue to experience difficulty in making their monthly payments for years to come.

    The following chart from Agora Financial demonstrates the detonation of the mortgage market thus far, where we are today, and what we can expect in the very near future.

    A BIG thank you to Patrick for pulling the research on this and providing it for all to review.

    Based on this information, it looks like the next wave may be as powerful, if not more powerful, than the first. In the first wave, we saw the sub-prime meltdown, meaning that mortgages for borrowers with lower credit worthiness exploded, leaving us in the situation where we find ourselves today.

    This next round is going to include prime borrowers, more sub-prime borrowers, and Alt-A borrowers who were able to buy homes with little or no income verification, and in many cases, nothing down. It’s possible, and likely, that the value of many of the loans that will come under threat will have higher loan balances than even sub-prime (More on Alt-A’s here). Finally, we’ll be seeing Option-ARM’s blowup for those whose rates reset, significantly raising their monthly payments.

    For an American middle class that has been financially devastated by job losses, wage decreases and credit contraction, we don’t see recovery any time soon.

    According to the chart above, we should start seeing detonations around the country some time in April or May of 2010 with the fallout clearing up some time in late 2012.

    Some estimates have forecasted that real estate is set to decline another 10% to 15%. But, what if the next wave collapses our real estate market another 30%, or even 50%? Doesn’t sound possible does it? For non-believers, we direct your attention to the Japanese real estate bubble of the 1990’s compared to the USA through 2008.

    UPDATE 11-20-09  21:42:

    For a look at home price values over the last 100 years, including booms and busts, take a look at Glenn Beck’s explanation below. This explanation suggests that we have a way to go in residential real estate prices, and the 30% to 50% drops in home values from this point may be quite possible if we are, in fact, in the midst of another depression-like event. (Thanks to NetRanger of Oath Keepers for sharing this one with the community)


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      1. I first saw this chart in 2007 and I’m just your average guy. Presumably Wall Streeters and the govt are just as aware. Presumably all the bailout and tarp funds that are in place will act to counter the presumed losses you’re expecting here.

        Does this forum have any reason to suspect that Bank losses will not be covered by existing bailout funds?

      2. Some friends and I have been talking this next wave for some time.  Great chart to show non-believers.  I am just wondering how many people in South Florida with half to 1 million dollar homes will realize that walking away from a mortgage could pay you more than any job you will have in the next 3 years.

      3. Hey! I see mine. Its just a little past the first hump. Yeah, right there. But, no, really, its coming. We’re still due for another 30-50% drop in housing prices if we are to match that of the other great depression.

        Glenn Beck did a chart a while back. It took the cost of a house in 2005 dollars and adjusted for inflation all the way back to 1890. It was interesting. At its peak, the house price bubble was 200% above what it should be, value wise. If we’re down 50%, we’ve still got a ways to go. Take a 100k house. According to Becks chart, it was costing 200k. If we’ve shaved 50% off of that, we down to 100k. That means we’ve got another 30% or so to hit bottoms like we did in the other great depression.

        Here’s a youtube of the chart and explanation:

        “Its not corruption when we do it!” -The US Government
        “But its still crooked.” -NetRanger

      4. I think Chris has a valid point. Would I suspect that there is money set aside for this second wave by the FED. My answer is based on the information presented as of today. With the top banks giving away huge bonuses to those responsible for this mess and the secrecy of the FED in giving away TARP money to foreign banks. MY answer is a resounding NO! I believe their hands will be out again saying there too big to fail. But fail they have.

      5. The chart presented is here was originated by a german bank in 2006. You have got to get an updated one because the time frame has been shifted or extended 6-10 yrs out. That means the climax of wave 2 is not at 2011 or 2012.

      6. So, what do you expect these mortgage rates to reset to?

      7. The Instead of resetting as expected after the first five years, many option ARMs are so negatively amortized that they are hitting their automatic reset cap.

        That means they are resetting early starting right now.
        According to Whitney Tilson and Glenn Tongue of T2 Partners, the experts on this subject, about 80% of option ARMs are negatively amortizing. Meaning these so-called top-tier borrowers are heading further into the hole. Once their rates reset, they could be totally underwater.


      8. Dave excellent comment!

        Pebird, I spent some time doing a bit of research, as I am no professional when it comes to mortgages.

        From my understanding, the resets are dependent on the original contract, but may work something like this:

        • The first reset may occur within 2 – 3 years of the original signing of the note. Depending on the note, it could move up as high as 2% or 3% above the original rate
        • Again, depending on the note, it can then reset every 6 months, 1 year , 2 years, etc…. and each time it can move another 2%… it depends on the prime rate, what the bank wants to do and other factors.
        • If I understand correctly, most ARM mortgages cannot exceed a 6% move in the upward direction…So, if your original rate was 5%, the highest you are going to go would be 11%. If I am not mistaken, this is enforced by law.

        what the resets will do is potentially take someone paying $1200 per month for their mortgage, and up the monthly payment to perhaps $1500 if we are talking about a, say, 2% reset…

        That will do wonders for the the people with negative amortization, as Dave mentioned above. On a broad scale, this is going to affect the bottom line of millions of Americans who hold these loans. It’s going to be quite painful.


      9. Citing Glenn Beck is sort of like saying you don’t know what you’re talking about. Beck is an entertainer. He doesn’t have a clue about finances, mortgage markets, etc. (nor does he care). You may as well use Sarah Palin as a source (another clueless entertainer). Your post is interesting, but your credibility is suspect.

      10. Glenn Beck is right about housing needing to drop.  Housing will drop into 2012 and then rally from there to 2015 and then go down again for many years. 

        People think of things nominally.  They need to start thinking adjusted for inflation because prices may not drop but housing will still be worth less.

        Also, remember governments lie about inflation.  John Williams tracks inflation like they did pre-Clinton changes.

        You can also track the price of things in gold oz.  For instance the median house historically should cost 100 oz of gold.

        If you chart prices in gold then you put yourself on a gold standard and then know what to buy in order to prosper and what not to buy in order to not throw away money.


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