Impending Resets Poised to Trigger off another Wave of Foreclosures

Posted on June 23, 2009
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There is more bad news in the offing – impending mortgage rate resets are poised to trigger off another wave of foreclosures. According to the Financial Times of London the worst has not been seen as yet.

Eric Uhlfelder writing in the article said that according to Credit Suisse Alt-A and option payment mortgage loans amounting to $1 trillion is all set to increase rates during the forthcomiteng 30 months. These will cause another foreclosure crisis of the same intensity.

If this happens then the country will be facing another crisis of equal dimensions as the first one because this time it will be a cocktail of unemployment, tumbling house prices and recession. It is feared that in the next four years foreclosures could number 9 million calculating to 18% of all the mortgages.

Financial Times estimate that there are nearly 3 million Alt-A loans with an outstanding value of $1 trillion. Fannie Mae covers 30% of loans that are riskier than Alt-A loans. Initially they were not thought of to be particularly risky as they were loaned to borrowers with good credit scores. These borrowers would have easily qualified for prime loans except for the fact that they lacked income proof. In the beginning these loans carried teaser rates but by the time the rates increase the house prices would have tumbled.

Whitney Tilson of T2 Partners (company dealing with asset management) speaking to the Times said that the fear is that with the reset of rates the default numbers will also rapidly rise and further cause another flooding of the market with foreclosures. Without stabilization of the real estate market there is slim hope for the present economic crisis to begin to turn. Tilson predicts a gloomier picture than Credit Suisse – 50% default in both type of loans (ARM and Alt-A).

As this scenario will unfold in a chain reaction it will again tell on securities. It is estimated that over $800 billion as securities is backed by the Alt-A mortgages. With their fall the credit market will further freeze.

The obvious question is that if this is the scenario why do not the corridors of power halt the resetting? It will kick off the usual excuse about the anonymous investors across the globe. But it makes no sense for them not to bring down their gains from 9% to 4% when the other alternative is no gains at all!

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