Thursday, August 16, 2007

Mortgage Mess

BestView is back to say "I told you so." That is no great feat since any idiot could see that when people were buying houses with no money down and insufficient funds to pay the mortgage when the loan had an automatic escalator in the interest rate in 2 years, defaults were inevitable. Well, here they are. The logic at the time the loans were taken out went something like this. "Don't worry about the adjustment of the loan in 2 years. When that time comes, we will simply refinance the loan based on the increased value of your house." So, some families--especially in high housing markets like Florida and California--signed up. Well, now they go down to the friendly loan company and find the house on which they have been paying interest only on for 2 years will no longer appraise for the loan balance and the only way they can get a loan of any kind is to come up with 20% of the house value. Most of these people didn't have even 5% of the value when they took out the loan in the first place and sure don't have 20% now. In the meantime, the lending agency tells them that the house payment is going to go from say $2,000 per month to $3,000. Whoa! $2,000 was a stretch and now the only option is to give the keys to the bank and walk away to a rental unit of some kind. So much for the home owner. What about the mortgage lender stuck with a house instead of a monthly income? In some cases, he will have to renegotiate payments or become a real estate holder. In the worst case, the one holding the bag is the one who bought high yielding bonds composed of these mortgages which are now in default. These are called CDOs (collateralized debt obligations) and carry a high interest payment which depends on the homeowner making those monthly payments.

If you don't have such a mortgage or own a bond depending on CDO solvency, you don't have a problem. Or do you? Well, you may. The unknown consists of how much paper your pension fund owns, for example. If a significant percentage of their solvency depends on these mortgage payments, your monthly income could be affected if things get bad enough.

The markets are going to have to work through all this and there will be losers of vast amounts of money. Let's hope for the best.

Personal Unsecured Loan