[Marxism] Worst is yet to come on mortgage crash

[Margaret Wyles]

> In fact, the mortgage meltdown has arrived at something of a turning
> point. So far, most of the loans gone bad were among the worst of the
> worst. Some were based on outright fraud, either by the lender or the
> borrower. In many cases, buyers were never going to be able to make
> their monthly payments and were instead banking on a rapid appreciation
> in home values.
>
There are really two aspects to this issue and this article addresses only 
one - that being the expected rise in foreclosures due to ARM adjustments 
which will make it increasingly unlikely that borrowers will be able to 
repay their loans as rates and payments increase at their first 'reset' 
date, most of which will happen in 2008.  While I don't think the worst is 
over - foreclosures will continue to rise for the next couple of months - 
there will be no "resets."  The rating agencies are already encouraging the 
"modification" of these loans to fixed rate.  They do so because they have 
an interest in seeing a turnaround in performance so that they don't get any 
more heat from rating these deals in the first place.  The current owner of 
the loan does not want to foreclose, except in the most unusual of 
circumstances and will negotiate with the borrower to keep them paying for 
as long as possible.  Many, if not most, of these loans were 100% financed, 
meaning that the loan balance was equal to the appraised price of the home. 
Given the fact that many appraisals were overly generous and that housing 
prices are going down, it stands to reason that the amount the borrower owes 
may probably now be worth MORE than the value of the house.

I think the more systemic problem is the liquidity crunch that is 
reverberating throughout the industry.  Just today, it was announced that a 
huge MBS securitizer, C-BASS (500MM to 1Billion per month) cannot meet its 
margin calls to the lenders who financed the bonds that C-BASS kept on their 
books.  The lack of liquidity could easily trigger a recession as businesses 
will be forced to contract and/or postpone new ventures or expansions.

And lenders, used to lending 500K self employed borrowers who claim to make 
$20,000 a month fixing tires, will be forced to verify the ACTUAL incomes, 
causing a liquidity crisis of a more individual nature.   Fewer buyers make 
it a seller's market.

The Fed will be forced by year end, if not sooner, to lower rates again to 
help with liquidity, though I would not expect them to make the frequent 
cuts they made after the dot.com bust.

Maggie