Tuesday, March 1, 2011

Housing Disaster 2.0

If you thought the housing debacle was bad, wait till you see what 2.0 has in store!

The intransigence of Wall st to help homeowners resolve their problems is now coming back to bite them, HARD!

The mortgage backed securities that are the touchstone of the Trillion dollar securitization scam are mainly worthless, despite the industry's obfuscation. The reason is that most of the mortgages underlying the securities are underwater, worth less than the housing backing them up.

No one is willing to acknowledge this devastating fact. But remember the real estate boom? Property values were rising at 10-20% annually, but all the while, home equity was actually falling. Historically, the average home had 50% equity, but during the boom, because of the low-no down payment purchases and the cash out refi frenzy, the average home had only 25% equity by the peak of the boom in 2005-6.

Up to now, home prices have fallen 25-30%, with no end in sight, which means that the average home at this point has negative equity!

Home prices will continue to fall for the foreseeable future because of the humongous number of homes in the foreclosure pipeline. Unemployment is now driving even good credit, 30 year fixed mortgage holders to default on their mortgage payments. Experience has shown that anyone who is 3 months or more behind in their mortgage payments, will never catch up and will become a foreclosure statistic.

To that number you have to add a substantial number of people who are current on their payments, but are significantly underwater. If you paid $425,000 for your home 4 years ago, with 10% down, meaning you have a $383,500 mortgage, but the value of your home is now only $295,000, you, like many similarly situated homeowners, will seriously consider walking away, or "Strategically Default" on your mortgage. Others would not consider it on moral grounds.

Think about it. Could you buy a similar home or even a better one for the same or smaller mortgage payment? How much would it cost to rent a similar or better home? Do you really want to throw good money, your retirement, your child's educational account, into a home that may not recover its value for years and years?

As of this writing, up to 40% of foreclosure sales are the result of home owners walking away from their mortgages.

Finally, the pool of potential home buyers shrinks by the day. Unemployed people are automatically excluded from the ranks of home buyers. More and more people's credit scores are dropping because of financial hardship, while at the same time banks are demanding higher and higher credit scores, with 750-780 not uncommon. Another thing the banks are demanding are bigger down payments, with many demanding 20% down, which with total acquisition costs bring the required cash to buy a house up to 25% or more. Not many first time buyers have that and trade up buyers are few because either they cannot sell their homes because they are under water or their credit has been dinged because of missed mortgage payments.

And, of course just over the horizon are higher interest rates as the Fed QE2's inflationary impact spreads from stocks and commodities to the broader economy. Higher mortgage interest rates will be just another nail in the housing market's coffin.

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