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.