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New Wave Of Mortgage Rate Adjustments Could Force More Homeowners To Default

Filed under: Mortgages
Written by: UWSA Staff
December 17, 2008

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.

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1 Comment »

  1. On Sunday, 12/14/08, CBS 60 Minutes aired a segment “The Mortgage Meltdown”.

    Scott Pelley’s piece on the 2nd Wave of Foreclosures was the first time that the mainstream media addressed this upcoming crisis. However, the report overlooked a critical fact. The 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 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 , 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 and small business owners.

    I would be happy to discuss the implications of the NASE Survey, since I created it and NASE ran it to its national membership (250,000). See the NASE website under NASE NEWS for the Toxic Mortgage Survey.

    Comment by Prof. Samuel D. Bornstein — December 17, 2008 @ 3:36 pm

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