Saturday, September 26, 2009

Adjustable rate mortgage defaults and lending industry consolidation.

Reuters warned last week of the next round in the ongoing financial crisis:
The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

The impact of this round of foreclosures could be severe:
The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

The loss for lenders on each "jumbo" mortgage foreclosure would be greater than the losses on smaller loans.

All of this bad news makes the following item even more interesting:
Peter Eavis, writing in the Wall Street Journal on Friday [September 18, 2009], noted: "More than half of US residential mortgages are being made by just three large banks. It is a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long term for this elite trio: Wells Fargo, Bank of America, and JP Morgan Chase? Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged."

While this second item refers to new mortgages instead of the existing ARM mortgages of the first article, it should cause great concern that lenders are about to take another round of bad hits just as the mortgage industry seems to be consolidating into only three major institutions.

The articles cited above were speaking of national trends. But someday, this crisis has to reach the point where even the supposedly stable Central Pennsylvania market will feel the effects of the credit crunch more sharply than it has thus far.

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