Second Wave of Mortgage Disaster

Second Wave of Mortgage Disaster

This article was found on the 60 Minutes site and ran on December 15, 2008. It identifies the next reset of ARM's supposed to hit in 2011. I have paraphrased the article here but you can find the article/video at:

The bank bailout abyss is deeper than most people think because there is a second mortgage shock heading for the economy. In the executive suites of Wall Street and Washington, you're beginning to hear alarm about a new wave of mortgages with strange names that are about to become all too familiar. If you thought sub-primes were insanely reckless wait until you hear what's coming.

One of the best guides to the danger ahead is Whitney Tilson. He's an investment fund manager who has made such a name for himself recently that investors, who manage about $10 billion, gathered to hear him last week. Tilson saw, a year ago, that sub-prime mortgages were just the start.

"The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall," Tilson explains.

"What you seem to be saying is that there is a very predictable time bomb effect here?" Pelley asks.

"Exactly. I mean, you can look back at what was written in '05 and '07. You can look at the reset dates. You can look at the current default rates, and it's really very clear and predictable what's gonna happen here," Tilson says.

Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn't hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We're at the beginning of a second wave.

In the next four years, eight million American families are expected to lose their homes. But even after the residential meltdown, Whitney Tilson says blows to the financial system will keep coming.

"The same craziness that occurred in the mortgage market occurred in the commercial real estate markets. And that's taking a little longer to show. But there are gonna be big losses there. Credit cars, auto loans. You name it. So, we're still, you know, we're maybe halfway through the mortgage bubble. But we may only be in the third inning of the overall bursting of this asset bubble," Tilson says.


Second Wave - Positive for Investors

After posting this I considered the misconceptions most people have of doom and gloom from the 60 Minutes article. I have known many people who in the 1980's made their fortunes from the real estate "gloom" then.
The benefit of another wave will be more properties for investors to snag at discounted prices.
There has been talk of foreclosures being stalled by the new administration. All the same there is more opportunity for investments as properties remain and continue to become more "affordable." As personal credit continues to be a concern to most, the rental market, lease options, and seller financing will be a progressive foothold for investing...
We'll see what happens. Kind of exciting - the glass is always half full!


FInancing will be the key. Right now it's all REOs. Need some kind of financing those. If you are going to buy and flip then its ok.

But if you are going to keep some then it gets dicier.

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