MORTGAGE RATE SUCKS! foreclosures up! ONLY WASP MALES ARE GETTINGRICH.

Have we seen worse of mortgage crisis?

New Wave of Mortgage Failures Could Create a Nightmare Economic

Scenario

JOE BEL BRUNO

AP News

Nov 24, 2007 01:34 EST

When Domenico Colombo saw that his monthly mortgage payment was about

to balloon by 30 percent, he had a clear picture of how bad it could

get.

His payment was scheduled to surge by an extra $1,500 in December.

With his daughter headed to college next fall and tuition to be paid,

he feared ending up like so many neighbors in Fort Lauderdale, Fla.,

who defaulted on their mortgages and whose homes are now in

foreclosure and sporting "For Sale" signs.

Colombo did manage to renegotiate a new fixed interest rate loan with

his bank, and now believes he'll be OK -- but the future is less

certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like

Colombo's will reset, giving them a higher interest rate as required

by the loan agreements and leaving many homeowners unable to make

their payments. Soaring mortgage default rates this year already have

shaken major financial institutions and the fallout from more of them,

some experts say, could spread from those already battered banks into

the general economy.

The worst-case scenario is anyone's guess, but some believe it could

become very bad.

"We haven't faced a downturn like this since the Depression," said

Bill Gross, chief investment officer of PIMCO, the world's biggest

bond fund. He's not suggesting anything like those terrible times --

but, as an expert on the global credit crisis, he speaks with

authority.

"Its effect on consumption, its effect on future lending attitudes,

could bring us close to the zero line in terms of economic growth," he

said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-

rate mortgage loans, known as ARMs, that are due to reset at higher

amounts during the next eight months. Subprime loans are those made to

people with poor credit. Not all these mortgages are in trouble, but

homeowners who default or fall behind on payments could cause an

economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is

frightening. Not only would the next wave of the mortgage crisis force

people out of their homes, it might also spiral throughout the

economy.

The already severe housing slump would be exacerbated by even more

empty homes on the market, causing prices to plunge by up to 40

percent in once-hot real estate spots such as California, Nevada and

Florida. Builders like Chicago's Neumann Homes, which filed for

bankruptcy protection this month, could go under. The top 10 global

banks, which repackage loans into exotic securities such as

collateralized debt obligations, or CDOs, could suffer far greater

write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-

thirds of the economy. The Labor Department estimates almost 100,000

financial services jobs related to credit and lending in the U.S. have

already been lost, from local bank loan officers to traders dealing in

mortgage-backed securities. Thousands of Americans who work in the

housing industry could find themselves on the dole. And there's no

telling how that would affect car dealers, retailers and others

dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic

product would take the current unemployment rate to 6.4 percent. That

would wipe out about 3 million jobs from the economy, according to the

Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million

jobs were lost, according to the Labor Department. The dot-com bust

early this decade decimated the technology sector, while the Sept. 11,

2001, terror attacks hurt the transportation and allied industries.

Economists said the country was officially in recession from March to

November of 2001, but the aftermath stretched to 2003.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are

already falling behind on their payments faster than those who took

out loans in 2006, according to a report from Arlington, Va.-based

investment bank Friedman, Billings Ramsey. That's making it even

harder for would-be buyers to get new mortgages -- a frightening

prospect for home builders with projects going begging on the market,

and for homeowners desperate to unload property to avoid defaulting on

their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep

soaring after more than doubling during the third quarter from a year

earlier, to 446,726 homes nationwide, according to Irvine, Calif.-

based RealtyTrac Inc. That's one foreclosure filing for every 196

households in the nation, a 34 percent jump from just three months

earlier.

Such data suggests more Americans could lose their homes than ever

before, and those in peril are people who never thought they'd welsh

on a mortgage payment. They come from a broad swath -- teachers,

pharmacists, and civil servants who were lured by enticing mortgage

terms.

Some homebuyers gambled on interest-only loans. The mortgages, which

allowed buyers to pay just interest at a low rate for two years, were

too good to pass up. But with that initial term now expiring, many

homeowners find they can't make the payments. The hopes that went

along with those mortgages -- that they'd be able to refinance because

the equity in their homes would appreciate -- have been dashed as home

prices skidded across the country.

"It's been said a lot of people have been using their homes as ATM

machines," said Thomas Lawler, a former official at mortgage lender

Fannie Mae who is now a private housing and finance consultant. "The

risk has a lot of tentacles."

This example illustrates the distress many homeowners are in or will

find themselves in: A subprime adjustable-rate mortgage on a $400,000

home could have payments of about $2,200 a month, with borrowers

paying 6.5 percent, interest only. When the teaser period expires,

that payment becomes $4,000, with the homeowner paying 12 percent and

now having to come up with principal as well as interest.

Minneapolis resident Chad Raskovich found himself in a such a

situation. He hoped -- it turned out, in vain -- to gain more equity in

his home and that a strong record of payments would enable him to

secure a better loan later on.

"It's not just me, it's a lot of people I know. The housing market in

the Twin Cities has dramatically changed for the worse in the years

since I purchased my home. Now we're just looking for a solution," he

said.

Colombo, who lives in the planned community of Weston just outside Ft.

Lauderdale, said the reset on his home would have "destroyed' his

financial situation. He went to Mortgage Repair Center, one of

hundreds of debt counselors trying to bail out desperate homeowners,

to work with his lender.

"But many people in my neighborhood didn't get help, and some have

literally just walked away from their homes," said Colombo. "There are

over 133,000 homes on the market in Broward-Miami-Dade counties, and

some of them were actually abandoned. People in this situation don't

like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can

have an impact on everyone else's well-being and that of the nation.

After all, the amount of mortgages due to reset is just a fraction of

the United States' $14 trillion economy.

But the series of plunges that Wall Street has suffered in past months

prove that no one is immune when mortgages turn sour.

Today's financial system is interconnected: Mortgages are sold to

investment firms, which then slice them up and package them as

securities based on risk. Then hedge and pension funds buy up such

investments.

When home prices kept rising, these were lucrative assets to own. But

the ongoing collapse in housing prices has set off a chain reaction:

Lenders are tightening their standards, borrowers are having a harder

time refinancing loans and the securities that underpin them are in

jeopardy.

This has resulted in more than $500 billion of potentially worthless

paper on the balance sheets of the biggest global banks -- losses that

could spill into the huge pension and mutual funds that also invest in

these securities and that the average worker or investor expects to

depend on.

There's more pain left for Wall Street: "We're nowhere close to the

end of the collapse," said Mark Patterson, chairman and co-founder of

MatlinPatterson Global Advisors, a hedge fund that specializes in

distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy

Talbot, an advertising executive when asked about the subprime crisis

outside of a Charles Schwab branch in New York. "I guess you don't

really pay attention to things until your forced to. ... You put out

of your mind the worst things that can happen."

The subprime wreckage could dwarf the nation's last big banking crisis

-- the failure of more than 1,000 savings and loans in the 1980s. The

biggest difference is that problems with S&Ls were largely contained,

and the government was able to rescue them through a $125 billion

bailout.

But this situation is far more widespread, which some experts say

makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even

start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and

banking committees, said borrowers are the ones who need relief. The

playbook to bail out the economy would not be applied to the banks and

mortgage originators, but money could be funneled through non-profit

organizations to homeowners that need help, he said in an interview

with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our

economy, and more foreclosures make prices go down, that creates more

foreclosures, and creates a vicious cycle," Schumer said. "You add

that to the other weakness in the economy -- on one end is the home

sector and the other is the financial sector -- and it could create a

real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more

to help the economy. Bernanke said in recent comments he has no direct

plans to bail out the mortgage industry, but to instead offer relief

through cheap interest rates and further liquidity injections into the

banking system.

There's also been talk of letting government-backed lenders like

Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from

lenders, pay the government a fee for guaranteeing them and then turn

them into securities to be sold to investors. This would extend the

government's support, and its exposure, to the mortgage market to help

alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of

paramount concern to economists -- especially since there's little

certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but

are having a devil of a time figuring out how it will happen or how to

stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

Source: AP News

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