Regional banks will experience a huge increase in the number of homeowners willing to simply walk away from their mortgage loans, and 30 percent of these banks could fail as a result, says New York University economics professor Nouriel Roubini.
"The housing recession is not bottoming out by any standard. The problem is actually getting worse."
Because the number of homes that are worth less than the mortgages their owners are carrying is growing, the number of homeowners who default on their mortgage loans is increasing, and consequently, so are banks' balance sheet woes.
Someone, Roubini points out, will have to finance the bailout of the teetering regional banks, and those bailouts will add hundreds of billions of dollars to an already gargantuan federal debt.
"Our biggest financiers are China, Russia, and the gulf states. These are rivals, not allies," Roubini told the New York Times.
Roubini, who forecast the credit and housing crisis some two years ago, believes that banks will have to write off at least $1 trillion of losses before this debacle ends.
This means that banks will have to write off $600 billion in addition to the more than $350 billion they've already written off.
As a result, most of the banks will need to raise more capital, but not all of them will be able to do so. Those that can't will go belly up.
Moreover, even those banks sufficiently stable to raise capital will find themselves in trouble because raising more capital will dilute their current shares.
Roubini's views, which were once considered unnecessarily apocalyptic by many, are rapidly finding support from formerly skeptical financial analysts.
The Case-Shiller Index, which last month indicated things may be looking up a bit for the housing market, is "just noise," according to Roubini.
Housing production and completion has fallen by 50 percent, and demand has fallen even further. As a result, the supply of new and used homes has become huge.
Home prices will continue to fall at an accelerated rate, Roubini says. Prices have already fallen by 18 percent, and Roubini's research indicates that drop will hit 30 percent before the market hits bottom sometime in 2010.
"Not since the Great Depression has there been a drop in value this huge," Roubini says.
Falling home values mean two things, Roubini says.
Homeowners won't be able to use the equity in their homes as a source of ready funds, which will push down consumption.
In addition, many homes now still barely in the black will move into negative equity, which in turn will increase walk-away foreclosures and push even more regional institutions into serious trouble.
Roubini notes that the number of Web sites devoted to helping homeowners walk away from their mortgage obligations with minimal legal risk is growing.
The United Stated, Roubini believes, will probably manage to make it through this crisis but will emerge from it a different nation with a different place in the world.
"Once you run current-account deficits, you depend on the kindness of strangers. This might be the beginning of the end of the American empire," Roubini observes.
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