Are We Still At Risk for Mortgage Armageddon?

Posted by: Chris Palmeri on September 1, 2009

housing burning.jpg

While much of the recent housing news has been good there remains a hardy band of skeptics that don’t believe the mortgage crisis is over. In fact, they think it’s going to get a whole lot worse over the next year or so. Investment advisor Frank Veneroso writes extensively about this on the naked capitalism blog in a posting headlined Mortgage Armageddon.

Mahese Swamingathan, a mortgage strategist at Credit Suisse argues in a recent edition of Investment News that declining interest rates only postponed a greater problem with adjustable rate loans resetting. He says that from June of this year through the summer 2012 $1.2 trillion worth of loans will jump to much higher rates. Those re-sets will peak at $42 billion in November 2011 up from $18 billion last month. Swamingathan sees unemployment rising through the first quarter of next year and delinquencies worsening.

Others, such as Veneroso and University of Texas economics professor Stan Liebowitz, say the most important ingredients in foreclosures isn’t mortgage re-sets, its negative equity and unemployment. When a home is worth less than the mortgage, borrowers in trouble tend to walk. Negative equity accounted for 285,000 or 47% of all foreclosures in the first half of 2008, according to Liebowitz’s research. That compares to only 60,000 or 8% for mortgage resets.

The second largest cause of foreclosure—after negative equity—was job losses. The plunge in home values over the past couple of years has left about 15.4 million or 20% of home owners owing more than their house is worth. If a larger percentage of those people decide to mail the keys to the bank, foreclosure numbers could surge.

Reader Comments

wowlfie

September 1, 2009 9:43 PM

It will get a whole lot worse because banks have been sitting on homes approaching foreclosures and they just won't budge and cooperate with the bailout and promises for up to 4 million refinances. Only 250,000 have been refinanced so far and millions are going to loose their homes in 2010 that will be even greater than 2008 or 2009. The farce that is our government just can't see that the biggest assistance they can do is to temporarily increase the interest deduction and this will allow many on the bubble to keep their homes because they will pay less taxes and have more take home pay to make the payments. Increasing this subsidy which was enacted after the great depression to spur home sells will do the same thing again and be more fair than all the other things proposed as it helps 70% of all homeowners irregardless of the size of their home. Credits don't help as they are one time and most will just take the credit and walk away from the home anyway. That's already been proven. The only thing that WILL help is to increase the interest deduction to double or triple it's amount by putting a factoring percent such as 150 or 200 or 300 percent so that deductions results in much greater take home pay. And if the market heats back up then just reduce it back to 100% (same as currently). I guarantee this will make a difference and it doesn't take any damn government red tape to enact it and it can be immediate!

Wilson

September 1, 2009 11:33 PM

The Fix

1. Have the Obama Administration Fix everyone's current ARM to a Fixed 30 or 15 year motagage. and on all future loans ( do away with ARM loans as a TYPE of Loan) 2 new rules. 1. No teaser Rates allowed anymore ( teaser Rates are for Children .. and we are Adults here!!!)2. no more Loans Based on Adjustment to the prime or any other Rate. no adjustable anythings...FIXED

2. Have a 2% Party. Have the Government force all Residential ( prime occupancy... not rentals) Mortgage lenders ( you know the folks that created credit defaults swaps etc) send a letter to all Mortgage holders that their New Mortgages will now be 2% Points lower going foward. so say if you have a 6.75% Loan, your new loan will be 4.75%. for the life of the loan... not this 6 or 12 month reduction TEASE the current slime is trying to sell.

This will instantly Slap the Face of the Banking industry that got US to where we are today and put much needed CASH into the hads that spend it. The American Consumer. So What if the Banks realize alittle less $$$ they certainly do not deserve more.

Wes

September 2, 2009 6:22 AM

I believe we are at major risk for this kind of calamity. Every bubble bursting in history has had one or more false bottoms, where a rush of people enter the market to purchase goods at seemingly low prices, only to watch the asset values decline further, adding them to the people who were wiped out earlier.

That said, I'm not too worried about the mortgage resets. Employment worries me, but not to the extent of being underwater. Being underwater has huge psychological effects that the loan modelers cannot begin to understand - we have seen a lot of investors walk away from their properties, but what happens when a family struggles for years in an underwater situation, only to finally give in when it becomes apparent the market will not return?

Too many talking heads in the media are helping set false expectations to people that 2004/2005 will soon return, and as housing prices rise we'll all be back in the black again, in the money, using homes for ATMs. Not gonna happen.

It's also clear to me that at some point interest rates overall will have to rise to entice people to service our national debt - this will have detrimental effects on the economy. I can see a time when risk and rates force mortgages to near 10%, just think of the detrimental effects on pricing that historical rates (avg ~8%) would provide.

I'm thinking that even in a full employment scenario we are awash in housing units and once the psychology turns against housing as an investment, the market will be constrained for years.

Also, typical housing "wealth-effect" economics (saying we need a stable housing market for economic growth) is wrong. It's all about expectations, once people learn to expect low or negative appreciation on housing units, the market will self-correct as people invest in other savings vehicles instead of putting all their eggs in one basket, as the old saying goes.

Randall

September 2, 2009 5:29 PM

Doesn't anyone believe in letting markets correct themselves anymore? Must we continue to interfere in capitalist markets and be saddled with unintended consequences. Interfering in market corrections doesn't mean the markets won't need correcting anymore...it just postpones it, while usually making it worse.

Wes

September 2, 2009 7:00 PM

WoW - I would argue the opposite.

Remove both the mortgage interest deduction and capital gains exclusion. Both of these tax subsidies were created to distort the market for a social policy (encourage ownership) and those are two key components that got us into this mess.

The mortgage interest policy encourages people to buy more house than they can afford and the cap gains exclusion encourages home flipping and lying to get around the rules regarding occupancy.

People should purchase what they want and what makes sense given their budget constraint, without government manipulation or distortion - this is a free market, correct?

Ron

September 4, 2009 3:55 AM

Good Post..This was an eye opener..just check out my blog as well ..http://blog.privocorp.com/

Bill

September 4, 2009 7:41 PM

I agree with Wes. We should not increase the interest deduction subsidies. That's what's gotten us into this mess. If you look at household debt as a percent of GDP it skyrocketed from 2001 to 2009. Here is a link: http://www.comstockfunds.com/files/NLPP00000/425.pdf

Household debt to GDP increased from 62% to 102%. Government expenditures as a percent of GDP remained at around 20%.

We should cap the mortgage deduction at some amount. Currently, because I am in a high tax bracket, it makes sense for me to buy a high priced house--this is stupid--because the interest deduction at my marginal rate is worth more. And, it is worth more to me than it is to a person at a lower marginal rate. Go figure. This is stupid. Since this country is not a net saver, we are borrowing from China to support tax deduction inspired housing inflation. Go figure.

Lance Olsen

September 4, 2009 9:19 PM

Wes is right to argue in favor of removing the MID (mortgage interest deduction), and for more reasons than one.

As Wes points out, MID "encourages people to buy more house," including more house than the buyer/borrower can afford. This is a tax deduction that does more than distort the housing market.

Because MID encourages increased resource consumption to supply bigger houses with the likes of wire, glass, concrete and lumber, MID distorts all markets that are associated with housing.

Also because MID encourages building bigger houses, it triggers costs born by wildlife and the climate via demand that more forest be forced to fall. Although obviously not the single leading threat to climate, the tax deduction we know as MID does play a contributing role in climatic change. That role could be reduced when we do away with MID.

Eric

September 5, 2009 10:17 AM

Why continue to help out the homeowner? Renters are not only getting no (even the $8000 encourages prices to stay/go higher) help but it also just makes it harder to buy because prices are being held up artificially.

GOOD GRIEF!

September 5, 2009 1:29 PM

Folks...there IS NO 'FREE' MARKET; EVERYTHING in this country runs on MONEY, and NOTHING more than Congress. Congress not only took BOATLOADS (NOT 2B confused with that new Ya WHO?) along with the SIV/CDO legislation Wall Street demanded, Congress passed Wall Street's Laws, and the CRISIS was upon us. Right now you are paying 2 mortgages, yours, and the Bush/Obama administrations where they borrowed ALL OUR FUTURES, gave it to the Banks, (and Detroit) who are now paying 1/2-1% on OUR money, that is being re-lent to us, at 5-6%.

Our Founding Fathers, who rejected royalty and indentured servitude, are sick of the pathetic, greedy whiners, we've become.

Wowlfie

September 5, 2009 2:10 PM

WES:

Were it not for the subsidization of homes after the Great Depression--home ownership NEVER would have taken off and we would all be living in 'Pottersvilles' homes. Get your facts straight WES that interest deduction is the reason why most older people own their homes now without it few would have even attempted it. Renting makes more sense if you remove it. And with a mobile society your going to destroy the fabric that made America what it is and that is stable communities of homeowners. That deduction is a valueable tool to STABILIZE the market. Yes, it can create situations where a person buys more home than they can afford but there are other tools to limit that. You simply cap the subsidization. Or other ways. America is in real danger of tipping toward another Great Depression yet because too many people who own their homes cry foul that people are getting free handouts. But so many homeowners forget THEY got free handouts since the Great Depression via the interest deduction which was enacted in 1933.

Dave Pace

September 5, 2009 8:02 PM

The people are corrupt so we have Capitalism-Out-Of-Control.
They have stolen from future generations.

Both Wall Street and doctors prey on citizens and patients. Capitalism requires ethical and not-to-greedy people to work. It does not.

Now the state needs to start paying these crooks a salary rather than building a luxurious lifestyle.

Darien

September 8, 2009 3:04 AM

Absolutely no reduction of mortgage interest rates or increase of tax credits. Why should savers like me be raped because people bought homes they can no longer afford. They signed the contract willingly and should be held to the consequences.

Dude

September 8, 2009 9:20 AM

The mortgage int. deduction encourages debt,over-consumption. until we make it more desirable to save (create capital) we're stuck in this morass. Then again mkt forces will dictate what we do. Too late to do the right thing now in order to avoid the pain

Wes

September 11, 2009 12:42 PM

WoW - look at the 1986 law that removed the writeoffs for all interest except mortgage interest. Since 1986, auto sales have drastically increased and credit card debt has gone through the roof, even without the previous luxury to write off the interest expense against income (and taxes).

I argue that times now are different than in the 1930's - we have an opportunity to stop this consumer debt binge and right size our economy with a decent amount of savings and stop encouraging overconsumption (and thus, debt).

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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