Told ya so: Mortgage and Foreclosure Crisis, Part Deux

On April 12, I wrote about a potential second mortgage crunch, possibly beginning as early as this year.  There are tens—possibly even hundreds—of billions in Option Adjustable Rate Mortgages (ARM's) and unsecuritized ARM's scheduled for reset between now and September 2012. 

Option ARM's are mortgages where borrowers pay very little actual principal and interest, rolling unpaid P&I back into the loan.  Once scheduled account caps are hit, the loan "resets," changing the terms and conditions of the loan and potentially forcing borrowers to either make higher payments, refinance completely or go delinquent.  A large chunk of resetting loans are unsecuritized, meaning banks are servicing the loans with no backup from FNMA or FHMC (that’s Fannie Mae and Freddie Mac for those of you in Santa Barbara).  But agency-backed loans are still a big part of the problem, and the ARM portion of the agency portfolios are performing about as well as the sub-primes were in 2007-08.

As Credit Suisse warned last spring, ARM resets and delinquencies are going to be a problem for several years to come.  While the percentage of sub-prime loans in the future waves of resets are smaller than those in the 2008-2009 crisis, there are large numbers of shaky mortgages left on the horizon, and the horizon is closing quickly. From 2010 through 2012, more than $1 trillion in ARM's will reset.  Pay particular attention to the proportion of agency and Option ARM's.

If large numbers of these loans go belly up—and many competent analysts think they probably will—Who's going to bail them out?

Doug Ross @ Journal has a MUST READ, IN-DEPTH review of the unraveling foreclosure scandal.  There is compelling evidence of fraud on a massive scale—fraud that congressional oversight committees could have known or should have known about years ago. 

The Money Quote from Doug:

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Fannie and Freddie were raped and pillaged by connected Democrats like Franklin Raines, Jim Johnson, Jamie Gorelick, Tom Donilon, and many others. It was wracked by accounting scandals that mysteriously spawned generous bonuses for these executives. With the help of Democrats in Congress, it blocked eighteen separate attempts by the Bush administration to audit the entities and to implement traditional risk management controls.

Should the housing market collapse again, a large part of the blame must once again be assigned to the Democrat Party and its policy of wealth redistribution. The central planners' plans can't work, won't work and have never worked.

And you and I -- the beleaguered taxpayers -- are on the hook for their idiocy.
Barney Frank, Chris Dodd, Maxine Waters and the rest of the social engineering geniuses who protected Fannie Mae and Freddie Mac from regulatory oversight during the Democrat housing boom -- and their own outrageous and damning testimony can be seen here -- should be serving life sentences in Leavenworth.

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Barney Fwank: “I have some wetland real estate in Florida to show you.”

Found this video today on The Fox Nation, in which Barney Frank suggests its time to do away with Freddie Mac and Fannie Mae:

 

 

Abolition of Freddie Mac and Fannie Mae sound good on the surface.  But consider the source, in this case.  If you think this avowed Socialist is interested in reducing government’s influence over how ordinary Americans finance their homes, then he’s got some really cheap Florida wetland real estate he’d like to show you, too.

Barney Frank would impale himself on the Washington Monument before he’d let that kind of power and control slip from the hands of the federal bureaucracy.  It just ain’t gonna happen, sports fans.

I wrote about yesterday’s mortgage market summit here.  Just to recap:

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Here we are in 2010, with the consequences of credit market-meddling still being felt, and instead of walking back the CRA and the results-oriented process of forcing banks to load to bad (i.e., subprime) borrowers, they’re talking about more bailouts of Freddie Mac and Fannie Mae.  I haven’t even touched on the rank corruption found within those two organizations, but you can see why I’m not very confident that meaningful reform is in the cards.

What needs to happen is a gradual pullback of Freddie Mac and Fannie Mae’s participation in private sector loan creation.  Let banks make credit decisions based on the perceived risk of default, and make people learn to work, save and earn the American Dream.  Home ownership is a privilege not a right, and its a privilege that’s earned.  It does not come as a benefit of government largesse.  The proposals being floated for retooling the mortgage market system do nothing to restore the natural order, and simply kick an $11 trillion can down the road.

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Frank’s comments to Cavuto are either an Alinksyesque scare tactic, designed to frighten people into thinking federally guaranteed loans are going away and thus generate support for a bailout or mortgage forgiveness plan, or he has some other scheme that would replace Fannie and Freddie with even more social engineering and punishment for self-restraint and fiscal responsibility.  One of those two scnenarios will come true.  The other one—abolition—will not.

The day Barney Frank supports getting rid of these two GSO’s is the day the Mayan Calendar warned you about.

Gimme some feedback in the comments.

Another painful mortgage crunch coming?

In 2007, Credit Suisse released an unusually frank and dismal report (PDF) on what the institution saw was a coming wave of adjustable rate mortgage resets.  Adjustable rate mortgages, or ARM's, "reset" when their terms call for a review of the mortgage terms and changes in the interest rates and payments are made, if necessary.  Factors influencing the magnitude of ARM term changes include the borrowers' credit histories, market interest rates and other effects. As we saw in 2008 and 2009, the report was as accurate as the ensuing meltdown was painful.

But as Credit Suisse continues to warn, it's not over, yet.  In the updated chart below, ARM resets are going to be a problem for several years to come.  While the percentage of sub-prime loans in the future waves of resets are smaller than those in the 2008-2009 crisis, there are large numbers of shaky mortgages left on the horizon, and the horizon is closing quickly. From 2010 through 2012, more than $1 trillion in ARM's will reset.  Pay particular attention to the proportion of unsecured and Option ARM's:

(Click the image for a larger view)

This does not mean that another trillion dollar meltdown is coming. At least not necessarily, based on the information available.  This is part of the uncertainty the financial markets face--there is no single clearinghouse for third-party data on the mortgage market like we have for stocks, bonds and Treasury securities.  Credit Suisse's estimate is a best guess calculation, based on its knowledge of the markets.  Their 2007 prescience is enough to convince me that, if they say a problem could be looming, there probably is.

What economists do know is this:

1. The economy is not well situated to absorb the impacts of another financial crisis.  Unemployment remains high; business confidence levels remain low.
2. Interest rates are likely headed higher over the next year or so, which means the ARM resets will be flying right into a period of higher interest rates, causing mortgage payments to increase and more homeowners to get squeezed.
3. The Homeowners Affordable Refinance Program, designed to help borrowers refinance risky loans, has failed miserably.  It could have taken a lot of sting off of the coming round of resets.
4. The Option and unsecuritized ARM's in the chart are major portions of the instruments that are resetting (these are the most likely to go into default, all other things being equal).
5. There is not enough money for a TARP II.

The country is already trillions in debt.  Of the original $800 billion to $1 trillion in TARP I, there is only about $200 billion left, and President Obama wants to use some of it for job creation programs this year (something he can't do, but it won't stop him).  Obamacare's costs are just now becoming known, but will add billions more debt.

So, when will we know whether it's time to head for the hills?  Look for the first indications in late spring to early summer, 2010, but don't expect to wake up one morning to breaking news of an impending meltdown.  The process will take place over a nearly two year period, characterized by increasing personal debt levels, credit default rates and foreclosures.  If the economic activity improves dramatically between now and the end of the year, the next round of resets might only cause a minor second dip in the current recession (where a few quarters of growth are followed by a few quarters of anemic or negative growth).  But if the current economic conditions are still in place by January 2011, there could be blood in the streets.