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Trouble Ahead: Millions of Mortgages Will Ratchet Upward Soon

By    |   Thursday, 21 May 2009 03:00 PM

Zacks Research analyst Dirk van Dijk warns that another major mortgage crisis lies ahead as huge numbers of homeowners who have been making only minimum payments on their “pick a payment” mortgages have to start paying in full.

This can cause huge jumps in the monthly payment, with increases of over 50 percent not uncommon, van Dijk says, making these the ultimate “exploding mortgages.”

The number of these recasts is relatively small right now at $1 billion per month but will grow dramatically over the next few years, exceeding $8 billion per month in the fall of 2011.

"If the equity in your house is gone and your monthly mortgage payment suddenly jumps from $2000 per month to over $3000 per month, what do you think is going to happen?" van Dijk asks.

The next wave of foreclosures is going to have much higher average loan balances, so each foreclosure will hurt banks more than subprime foreclosures did.

This is going to be a huge problem, van Dijk says. Unlike sub-prime mortgages, these were for the most part targeted at more upscale homeowners, including high-end gated communities.

The borrowers who live in these communities — which have avoided the full impact of the housing crisis — will become the central players this time around.

Meanwhile, Harvard’s Nicolas Retsinas, director of housing studies, is uncertain when housing will bottom at all, despite numerous economists arguing that it already has.

“The expectations over the past year or so are things are going to get worse,” Retsinas tells Bloomberg TV.

“The new reality seems to be: Well, it’s not as bad as we thought it might be. But not as bad as we thought it might be isn’t the same as it’s getting better.”

There are some signs of activity in the housing market, he notes.

“But as long as we still have this slew, this tsunami of foreclosures every month, that’s going to keep us away from actually reaching the bottom.”

And how long will that take? “It’s hard to say,” Retsinas says.

“The Obama administration has announced a number of very aggressive intervention programs in terms of loan modification, encouraging short sales.”

Given that the programs were only established recently, “we haven’t quite seen whether they have traction and whether they have enough behind them to withstand the continuing loss of jobs,” Retsinas says.

That’s important “because at this point the housing market problem is really a problem of the broader economy and people losing jobs,” he says.

The U.S. economy will likely start growing again in the second half of this year but unemployment will likely keep rising through 2010 to peak over 10 percent, the Congressional Budget Office said Thursday.

Housing guru Robert Shiller at Yale agrees with Retsinas that housing hasn’t bottomed.

“The conspicuous fact with our [Case-Shiller] data is that prices are still falling, although at a somewhat lower rate,” he told Time magazine.

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Zacks Research analyst Dirk van Dijk warns that another major mortgage crisis lies ahead as huge numbers of homeowners who have been making only minimum payments on their “pick a payment” mortgages have to start paying in full.This can cause huge jumps in the monthly...
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2009-00-21
Thursday, 21 May 2009 03:00 PM
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