A
Amanda Williams
Guest
http://biz.yahoo.com/ap/071124/apfn_doomsday_scenario.html?.v=1
New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario
NEW YORK (AP) -- 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 Ft. 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."
------
Gee... thanks georgie.... "heckuva job"
--
AW
<small but dangerous>
New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario
NEW YORK (AP) -- 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 Ft. 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."
------
Gee... thanks georgie.... "heckuva job"
--
AW
<small but dangerous>
