patrick.net

I heard a stunning report this morning on Bloomberg radio from Laurie Goodman, an analyst at Amherst.  She is well respected in the mortgage backed security industry, formerly from UBS.

Highlights from the report:

• 25% of US Mortgages are underwater - negative equity.
• 7.9 million mortgages are not making any monthly payments at this point.
• Estimated 7.1 million of these mortgages will end up back on the market - default or strategic default.
• Every month - 250,000 more get added to this list and stop making payments.

The real problem with the loan modifications going on right now is that the banks are unwilling to take a haircut on principal.  So far, the modifications only affect interest rates or monthly payments.  All the banks are trying not to notice the 900 lb. elephant in the room - negative equity.

Another thorny issue is second mortgages - The banks that hold most of the second mortgages are the same ones that got TARP money.  They don't want to take a hit on their balance sheet, but in order to get through this, they need to wipe out second mortgages and that means a lot more large bank failures.

Predictions (again from Laurie Goodman):

• Housing will bottom from a price level late 2010.
• Housing will remain flat for an extended 4-5 years as all the excess inventory works through the system.

One thing's for sure, I won't be buying any bank or financial stocks in the near future.  I'm strongly considering taking my money and putting it into a local credit union instead of a bank.  I know the FDIC supposedly backs these things, but if the banks have to take a loss on all these second mortgages, everyone might realize they are bankrupt and start a bank run.

Here is an article back in September when there were only 7 million of these - now it is 7.9 million:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aw6_gqc0EKKg

#housing