Think the mortgage crisis is over...think again

Our federal government would like you to believe that the subprime mortgage crisis is over, that all of those loans have either defaulted or modified and that the U.S. housing market is beginning to grow again. I have always maintained that subprime loans were not the weakest pier holding up the fake housing market, but just the easiest target for the Fed and their lackey media to point accusing fingers at. Unfortunately Federal Reserve chairman Ben Bernanke and his crew have been too busy patting themselves on the back to realize that the second collapse, this time in the Alt-A segment, will make the first round look like a mere market correction.


The next crash will be fueled by an avalanche of “Re-Casts” of Pay Option Arms. Pay Option Arms are adjustable rate mortgages that the give the borrower options on monthly payments. Typically there were 3 options: 1. Standard amortization (normal principle and interest amortized over the life of the loan) 2. Interest only (the borrower pays only the interest due on a monthly basis) 3. Minimum payment (the borrower is making a payment that does not cover all of the interest due and results in a negative amortization). These loans were sold at the height of the bubble and sold as a way to afford more house than you would be able under normal underwriting guidelines, but the housing bubble would bail you out before your first recast in 5 years. POP, went the bubble and now these mortgage holders are stuck with a payment they cannot afford and a market that won’t support their outstanding balance. The following example cited by the attorney general of California illustrates what many of these borrowers are up against. On a $460,000 loan (typical by California standards in 2005) the minimum monthly payment would be $1,479 that is using a 1% teaser rate and a 2.9% margin (all typical for the 2005-06 timeframe). The payment increased steadily each year until it hits the 5 year re-cast. At this point the payment will increase to $3,747. With no market left to sell the house into, and no equity left to refinance this loan, is there any wonder that Californians will begin walking away from these houses in droves?

Figures from a recent issue of Business Week show that there is $469 billion Alt-A loans active and outstanding in the U.S. The Alt-A segment can include stated income loans where the borrower’s income as stated on the application was not required to be verified by the lender, as well as the pay option arms. With the bulk of these pay option arms being originated in 2005 and 2006 and most of them being recast in 5 years, it starts to become clearer what we are up against. We are currently seeing about 3 billion of recast per month, but scheduled as well as neg-amortization forced recast will increase to 10 billion per month in October of this year, and steadily increase to a peak of 15 billion per month in September of 2011.

All the while Fed Reserve chairman Bernanke insists that the worst is behind us. Do we really want to trust a guy who so completely misjudged the first round of the crisis, claiming that the “contained” losses would not exceed $100 billion, an estimate that proved to be at least 60% low? His track record at predicting such things is at best “Horrible”. The simulative policies of the Obama administration are nothing but a very weak band-aid on a gaping and hemorrhaging wound. These fake stimulus policies while claiming to have increased home sales, have effectively cannibalized the market. Their continued claims of victory only show the lack of respect for the intelligence of our “Everybody gets a trophy” society. As the banks continue to hide behind the puffed results of handpicked stress tests and sit on the rolls of federal bailout monies, the next level of foreclosures will cause further and deeper write downs. The Feds would prefer to keep the American public in the dark about this, knowing that yet another bailout will not be tolerated.

Wells Fargo may take the biggest hit of all; Wells took over Wachovia, which had already taken over Golden West and their pay option subsidiary World Savings. Since you are what you eat, Wells is now saddled with a pay option portfolio well over $100 billion. Bank of America and JP Morgan are also holding a ton of this soon to be worthless paper through their acquisitions of Countrywide and Washington Mutual. While getting fat off the huge servicing portfolios initially, the note is about to be called.

It is obvious to me that the Fed has no clue about how the effect of their protected interest rate environment and accommodating policies are having on the real estate market. Nor do they realize what is staring them in the face. It is time for the American public to realize that these guys are overwhelmed and are “faking it”. Now is not the time to get into the Real Estate market, despite the spin coming out of Washington, we are nowhere near the bottom yet.