Wall Street, along with many investors, seems to long have forgotten Subprime mortgages, which ignited the economic crisis we’re currently in.
However, there are other dangers lurking which most people are not aware of. I am talking about the upcoming recasts of Alt-A (liar loans) and Pay-Option ARM mortgages (less than interest only loans).
The more recent focus has been on lower interest rates, and how they will actually help home owners lower their payments as their mortgages get reset. While this is true, the more important fact that has not been mentioned is what happens when their mortgages get recast.
So what’s the difference between reset and recast?
Most mortgage of the past are of the adjustable kind where the interest rates are adjusted (reset) once a year. With lower rates, that has benefited many homeowners. The problem is that just about all mortgages have a 5-year term, after which they are recast. It simply means that any negative amortization is added to the loan balance, which is then amortized over the remaining 25 years.
In that case, low interest rates won’t help much, because an amortized loan has higher payments than an interest only loan.
How much higher?
One reader wrote in and said that his payment went from $2,137 to $3,730 per month, which is an increase of almost 75%. It’s pretty clear that most people with these types of loans have not gotten a similar raise recently to absorb the difference in payments. This now has become no longer a matter of lower interest rates, but a matter of cash flow.
There are over $600 billions of these types of mortgage in the market with the majority having been placed in California and Florida.
CBS featured a video on the subject titled “A Second Mortgage Disaster On The Horizon.” It pretty much explains the upcoming mortgage resets over the next 2 years.
Why bring it up?
I am not trying to focus on the negatives here, but I am trying to realistically assess what is on the economic menu for the next couple of years. These mortgage recasts will certainly not contribute anything positive, so be prepared that there will be some kind of a fallout effect on the stock market as well.
Just because we are seeing a rebound rally off the lows right now does not mean all is well. To protect yourself, if you invest in the markets, always have an exit strategy, because it will save your bacon if you’re wrong or if unforeseen events suddenly reverse market direction.
This year has confirmed that simply holding on to investments no matter what is nothing more than gambling and/or unnecessary risk taking. If you lost because of it, don’t make the same mistake in the future again.
Comments 2
I would like to bring a very important NASE survey finding to the attention of all. I have been trying to bring this to the attention of Washington because they must address the following topic as quickly as possible.
This relates to the upcoming wave of Foreclosures in 2009 that are due to the reseting of the “Toxic” mortgages.
Many fail to realize that there are millions of self-employed smaller businesses, who employ from 1-10 employees, that are holding these risky mortgages. So, here we have a major problem… Not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure. Note, although President-Elect Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.
Our priority should be to be PROACTIVE in addressing these small business owners’ need to avoid defaulting on their mortgages. They require “Immediate and Specific Financial Guidance” to weather this storm.
The 2nd Wave of Foreclosures has made it to the mainstream Media. CBS’s 60 Minutes had a segment on 12/14/08, but they missed a very important point. Here is a post which may have merit for your blog…….
I would like to bring a very important bit of information to your attention that relates to this economic crisis that was overlooked until now.
On Sunday, 12/14/08, CBS 60 Minutes aired a segment “The Mortgage Meltdown”.
Scott Pelley’s piece on the 2nd Wave of Foreclosures overlooked a critical fact.
The segment missed the fact that this next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the “Troubled” assets in TARP were specifically marketed to the self-employed who fell prey to them.
The upcoming defaults on these risky “Toxic Mortgages” will result in an increase in foreclosures. But worse, once these small businesses fail, the resulting loss of jobs will cause millions to add to the ranks of the unemployed. Note that self-employed business owners (16.2 million according to the SBA) employ between 1-10 employees.
An NASE survey at http://www.nase.org , was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis. The survey was created by Prof. Samuel D. Bornstein and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008.
According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.
These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.
The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners, small business owners, and their employees at this critical time when our economy can ill afford it.
Thank you,
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Doom and gloom scenarios were safe bets one year ago. Those who promoted them have been proven correct.
But further forcasts to the downside, even if based on pertinant data are betting against one very powerful force: the full faith and credit of the US taxpayer (a.k.a. sap).
I have come to the conclusion that I won’t believe any further downward forecasts until I actually see them happen. And I offer a peice of evidence to support my downside skepticism as reported today in the Financial Times:
“Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.”
Full Story
It’s not that I’m looking for reasons to invest. Far from it. Anyone who’s read my posts knows better. It’s simply that as I view the battlefield, with right on one side and .gov on the other, I see the odds favoring .gov.
My $0.02.
G.H.