On December 14, 60 Minutes featured a story on the 2nd wave of Mortgage defaults that are coming. The 1st wave of defaults were due to sub prime mortgages, or mortgages given to borrowers with a higher risk of defaults. The report by Scott Pelley says that the new wave of mortgage foreclosures will stem from the millions of Alt-A and Option ARM mortgages that were given out in 2006 and 2007 that will be readjusting to higher interest rates in the coming years. Pelley interviews investment manger Whitney Tilson, who working along with Amherst Securities in 2007, forecast the coming disaster before it happened.

The problem they saw was that not only was there a high rate of defaults for sub prime mortgages, they found that the Alt-A and option ARM mortgages, which enticed borrowers with very low initial rates, are beginning to reset. This in turn causes the mortgage payments to go up, and many of the home owners to default. If you project the current default rate data over the next few years, the housing market is in for a very tough time.

Every time there is a foreclosure, the housing prices drop, and the falling prices only add to the trouble. There was a Miami condo featured in the report that originally sold in October 2006 for $2.4 million, the asking price is now $939,000. The report also cited statistics from the National Association of Realtors that state the supply of housing units on the market has grown from 2.2 million units to 4.5 million units in three years. With that much supply, and fewer people eligible to get a mortgage, the prices will drop further. It will be some time before this sorts itself out.

We appear to be awash in bad news. The nation has been in a recession since December 2007. The number of people claiming unemployment benefits is the highest it has been in 26 years, and consumer spending, which is the fuel for the economy’s engine is drying up. Due to years of deficit spending, the national debt is closing in on $11 trillion.

So what do the leading economists in the nation think we should do? Increase the national debt to stimulate the economy. The thought behind it is that avoiding a deepening recession is more important than higher budget deficits. We have already committed $700 billion to bailout a financial industry that could not regulate itself. President-elect Obama has pledged to plow money into the largest infrastructure building plan since the Eisenhower Interstate highway program, and now we are going to pledge $14 billion to rescue the automobile industry, that is so oafish, it needs help to keep itself from stumbling into the abyss of bankruptcy.

We need a JFK challenge for the best and brightest Americans to come up with new solutions to our pressing issues. If we are going to invest tax dollars into bailing out companies that are too big to fail, shouldn’t we also have a say in how they use that money? If it comes down to borrowing money to stimulate the economy, shouldn’t we also invest in projects such as alternative energy to put people back to work and ease our dependency on foreign oil? In exchange for tax dollars, shouldn’t we demand that the foundering auto makers come up with a plan to focus on hybrid and 100% electric vehicles? Maybe then America can once again lead the world in something other than our carbon footprint.

The stakes are extremely high, but we have much to gain. Throughout our history, America has always risen to the occasion when things looked bleak. Tapping into the ingenuity of the American people has always been America’s salvation. Our deliverance from economic ruin depends on it.

Christmas is fast approaching and nervous retailers are reporting the weakest sales figures in 35 years. Auto sales in November were at their lowest rate since 1982. That said, consumers, who haven’t gotten themselves in over their head in debt, lost their jobs, or otherwise suffered from recent economic bad times may wonder if it is a good time to spend. Auto companies are offering rare opportunities for low or no interest debt to entice buyers, and retailers are offering deep discounts to clear inventory. Here are some things to consider before jumping on board?

• Can you really Afford it?
• Is it worth the price tag?
• Will the Terms Change?

Can you really Afford it?

Lenders are right now offering very low rates, often for the life of the loan. Still you have to make sure that you can really afford the extra monthly payment in an economy where food prices are still high, and while gas prices are low right now, it may not be the time to buy a Hummer. Inflation is still high and undertaking a large new bill could be taking away from cost of living expenses in years to come. It is important to consider where to put the extra cash if you are fortunate enough to have extra. Low interest rates, and enticing terms may make important purchases more affordable, and tough times for retailers mean lower prices as well. It could be a great time to put on that new addition, upgrade your appliances or buy a new car.

Is it worth the price tag?

A deal isn’t a deal if the product isn’t worth the price tag. There are places to invest in your home where you will always get a return on your investment. Upgrading your kitchen with granite counter tops, new cabinets and stainless steel appliances are always a smart buy, provided you don’t over improve your home for the neighborhood. Research the marketplace on the Internet, or check with a local real estate professional. Spending for a home improvement that will overprice your home for the location is a bad investment. Automobiles are always a bad investment, but for most of us they are a necessity. Compare prices and interest rates. You may be able to get a great deal on a “new” 2008 model, but you must remember that the vehicle is a year older than a “new” 2009 model, so at trade in time it will be worth less, no matter how many miles it has been driven.

Will the Terms Change?

You must also consider the terms on the loan. If it’s an introductory rate, then it is important to consider if you will be able to afford the payments after it changes. You will also want to consider if the lender has provisions to change the terms if you are late on a payment. Always read the fine print, and always make sure you can afford any debt you take on.

Summary

Irresponsibility caused the recent financial crisis. Some of that was irresponsible consumers, some was irresponsible bankers, some was irresponsible government overseers. In bad economic times it is vital to make smart choices with money. Using good judgment is always a smart policy.