Thursday, August 6, 2009

The Mortgage Market's Ticking Time Bomb

Do NOT believe anything you hear from the financial media, your local news sources, the Government and especially those housing industry pimps, the National Association of Realtors or National Association Home Builders. We are leading up to a crushing wave of housing foreclosures, the effects of which will be devastating to the financial and economic system in this country.

I borrowed the chart posted from This chart shows the rapidly increasing rate of mortgages that are 90+ days delinquent. I know for a fact from chatting with people in the industry that banks are intentionally underreporting delinquencies. Why? 1) When they report troubled assets, it requires them to post more capital - capital they do not have - so underreporting delinquencies allows banks to maintain the appearance of healthier capital ratios. 2) Banks do not have the manpower to process the rapidly growing number of bad mortgages.

Anectdotally, I know a CPA who has several formerly high net worth clients who lost their jobs and have not made mortgage payments for several months. Many of them have not received a phone call or a letter from their bank/mortgage servicer about their missing payments. In this case, the mortgages are not being reported as delinquent to the regulatory authorities. The point is that this delinquency graph actually understates the actual number of 90+ day delinquent mortgages.

At some point, the mortgage-backed bond trusts will run out of cash to make coupon payments to investors of the trusts and the trust servicers will be required to start putting pressure on the banks to either make the payments or start seizing collateral.

What this is leading up to is a massive wave of foreclosures, the supply of which will further crush housing prices. This is just a basic law of supply and demand. As I have previously stated, I am on the record forecasting another 35-40% of pricing downside in the housing market. I will add to that the price drops will be much bigger - i.e. greater than 40% - in all resort towns and high net worth, 7-figure housing areas.

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