Dec. 14, 2008
A Second Mortgage Disaster On The Horizon?
60 Minutes: New Wave Of Mortgage Rate Adjustments Could Force More Homeowners To Default
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The Mortgage Meltdown
Scott Pelley reports on the mortgage crisis that's far from over, with a second wave of expected defaults on the way that could deepen the bottom of the U.S. recession.
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As correspondent Scott Pelley reports, it turns out the abyss is deeper than most people think because there is a second mortgage shock heading for the economy. In the executive suites of Wall Street and Washington, you're beginning to hear alarm about a new wave of mortgages with strange names that are about to become all too familiar. If you thought sub-primes were insanely reckless wait until you hear what's coming.
One of the best guides to the danger ahead is Whitney Tilson. He's an investment fund manager who has made such a name for himself recently that investors, who manage about $10 billion, gathered to hear him last week. Tilson saw, a year ago, that sub-prime mortgages were just the start.
"We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble," Tilson explains. "It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized."
In 2007, Tilson teamed up with Amherst Securities, an investment firm that specializes in mortgages. Amherst had done some financial detective work, analyzing the millions of mortgages that were bundled into those mortgage-backed securities that Wall Street was peddling. It found that the sub-primes, loans to the least credit-worthy borrowers, were defaulting. But Amherst also ran the numbers on what were supposed to be higher quality mortgages.
"It was data we'd never seen before and that's what made us realize, 'Holy cow, things are gonna be much worse than anyone anticipates,'" Tilson says.
The trouble now is that the insanity didn't end with sub-primes. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.
Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default.
"The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall," Tilson explains.
"What you seem to be saying is that there is a very predictable time bomb effect here?" Pelley asks.
"Exactly. I mean, you can look back at what was written in '05 and '07. You can look at the reset dates. You can look at the current default rates, and it's really very clear and predictable what's gonna happen here," Tilson says.
Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn't hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We're at the beginning of a second wave.
"How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?" Pelley asks.
"Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That's probably another $500 billion to $600 billion on top of that," Tilson says.
Asked how many of these option ARMs he imagines are going to fail, Tilson says, "Well north of 50 percent. My gut would be 70 percent of these option ARMs will default."
"How do you know that?" Pelley asks.
"Well we know it based on current default rates. And this is before the reset. So people are defaulting even on the little three percent teaser interest-only rates they're being asked to pay today," Tilson says.
Produced by David Gelber and Joel Bach
© MMVIII, CBS Worldwide Inc. All Rights Reserved.
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See all 219 CommentsOn a personal note, it''s nice to "know" that there are tougher times ahead before it gets better - I won''t be transferring my 401k into anything but low-risk funds for at least another year or so. Short-sighted, perhaps, but safer for sure. I don''t know if I could afford to lose another 20%.
I also have a ''sub-prime'' mortgage (I bought my house as I was coming off 14 months of unpaid maternity leave), I did a 101% no-doc loan. I''m fine as long as I''m employed & have been paying extra on it. But my 1st mortgage is a 5/1 loan at 8.6%... I fully expect it to reset for less than that when the 5 yr fixed rate period is up. Perhaps I''m naive but I would think there are a lot of people like me who are waiting for the fixed period of their loan to end!
NEW YORK (Reuters) - Hedge fund T2 Partners LLC on Monday for the first time was buying distressed U.S. mortgage securities on bets that losses on underlying loans will fall far short of expectations, founder Whitney Tilson said.
"For the first time in our 10-year history we are buying distressed debt, and we are selling equities to do it, Tilson said at the Reuters Investment Outlook Summit in New York.
From Forbes article Dec 8.
This completely contradicts what Tilson says in the interview where he is bullish on equities and very negative on the housing market.
Something very, very strange here.
I also have a ''sub-prime'' mortgage (I bought my house as I was coming off 14 months of unpaid maternity leave), I did a 101% no-doc loan. I''m fine as long as I''m employed & have been paying extra on it. But my 1st mortgage is a 5/1 loan at 8.6%... I fully expect it to reset for less than that when the 5 yr fixed rate period is up. Perhaps I''m naive but I would think there are a lot of people like me who are waiting for the fixed period of their loan to end!
Send a thank you note to Ronnie Reagan, address, Hell.
Ronnie, you lying draft dodger.
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Posted by jbrown88881
AMEN!
Ronnie RayGun trickled down!
leaving the edge of the cliff. No mention of lay-offs,
and they will be massive. Wonder if we will ever
recover from this mess.
I was responsible for selling these loans to brokers accross the country and then who then sold them to the public. our bank then sold them off to bigger institutions like Bear Sterns and Countrywide who sold them to investors on wall st. I left in 07 when i saw the writting on the wall before they were seized by the FDIC. I am now helping the people that are in trouble by helping them keep from etting the shaft from their bank when they try to re structure their loan under the govt. mandated modification sugestions. I have heard some real horror stories from folks that went out of the fryin pan into the fire when the bank mosified the loan WITHOUT lowerin the interest rate!
The only question you have to ask yourself is "Do I really need credit?"
Government leaders and Corporate leaders have failed America. No one really knows how long this is going to last or how bad is it going to get. The treasury can do a lot to alleviate the fear of these ARM resets. But Americans need jobs. As far as the Obama administration is concern they better lay out a vision for this country that will reward innovation, corporate and personal responsibility. Where are the creative minds in this country? We need them in Government.
Sometimes this does not happen. Look at all those manufacturers who raised prices when oil prices spiked as an excuse to cover higher transportation prices (have they heard of hedging) recently, many manufacturers have raised prices again so that retail prices have been bumper up again. What''s with this?
Remember back one season when tropical storms drastically reduced the Sugar crop and the price of a pound of sugar doubled or tripled. I have been waiting 25+ years for the price of sugar to recede to a level prior to the crop damage.
Let''s face it, we live in a society that mandates greed.
America is strong because we as a people have always risen to the task at hand, this time we have a lot of housecleaning to take care of, in 3-5 years, we will look back on these times and reflect; we as a nation have risen to the task and are justifiably the greatest society in history.
Amazing how they put Martha Stuart in jail for her little inside deal, but not one single exec responsible for these financial corps are even under investigation. And to make it worse, we are GIVING them our money to continue....
The stock market is a S-C-A-M!!!
I am getting out and NEVER getting back in.
Only an idiot would have signed for such a loan, but theres a good example of how the lenders screwed themselves up- let em fall.
I also have a ''sub-prime'' mortgage (I bought my house as I was coming off 14 months of unpaid maternity leave), I did a 101% no-doc loan. I''m fine as long as I''m employed & have been paying extra on it. But my 1st mortgage is a 5/1 loan at 8.6%... I fully expect it to reset for less than that when the 5 yr fixed rate period is up. Perhaps I''m naive but I would think there are a lot of people like me who are waiting for the fixed period of their loan to end!
1) Everybody pays THEIR OWN mortgage.
2) Those who can''t pay, or don''t feel like paying their own mortgage can rent.
3) Speculators who lent money to people in part 2) who can''t pay, or don''t feel like paying their mortgage are officially ''out of luck''. They lose.
4) NO MORE ******* BAILOUTS.
Posted by helloall6 at 10:23 PM : Dec 14, 2008
Let it go and get a lease for 500-900 and save yourself a bunch money. Who cares about credit rating anyway. Renting is the way to go for next several years at least.
Acquaintances of mine put down payments on several unbuilt condos in the sky in Miami because they were going up in value at incredible - literally beyond credulity - rates. They were speculating that prices would rise by the time the building was completed. This fueled more building which fueled more speculation which fueled more liar loans.
Stats say that 7% of all loans before 2001 were subprime paper. By 2005 than number was 20%. FauxNews is spewing propaganda that those subprime borrowers were minorities who couldn''t pay their own mortgage. I have observed far more small time speculators who lied about their income to buy several homes or condos in the hope of flipping.
Why don''t you do a story about this part of mortgage fraud?
How many people have lost serious money in the stock market? How many bought more house then they could afford? How many people were willing to run up incredible credit card debt because they wanted it all and wanted it now?
Smart people will hunker down and cut back on their cell phone bills, cut down on cable, watch their spending and become more frugal. The goal is to become "debt-free". Anyone who has cash in the next two years will be able to take advantage of some great bargains, in both stocks and housing. We have not bottomed out. What I have found out in life is that most groups of people are wrong, so I look for people like Mr Tillson for the desenting opinion. Dr Ravi Batra predicted a recession/depression in his book, "The Great Depression of the 1990''s". I read it in 1197 and re-read it the other day. A lot of it is coming true.....
No pity here for those that went for the brass ring and fell off the merry go round. If they had made a killing on their investments, would they have shared?
No to a $14 billion bailout to automakers whose troubles are partly caused by their own incompetence, but also partly due to the economic downturn caused by the aforementioned financial companies.
Yes to saving financial companies who employ tens of thousands. No to saving manufacturing industries who employ hundreds of thousands, and whose auxillary industries employ millions.
Time to put things in a little perspective.
Acquaintances of mine put down payments on several unbuilt condos in the sky in Miami because they were going up in value at incredible - literally beyond credulity - rates. They were speculating that prices would rise by the time the building was completed. This fueled more building which fueled more speculation which fueled more liar loans.
Stats say that 7% of all loans before 2001 were subprime paper. By 2005 than number was 20%. FauxNews is spewing propaganda that those subprime borrowers were minorities who couldn''''t pay their own mortgage. I have observed far more small time speculators who lied about their income to buy several homes or condos in the hope of flipping.
Why don''''t you do a story about this part of mortgage fraud?
Posted by SiValleyGuy at 10:45 PM : Dec 14, 2008
The poor are easy scapegoats; they have no means to defend themselves from their accusers.
That''s not to mention the risky bets worth $60 trillion or more of derivatives that financial institutions made.
I am baffled by the "free market" is the answer chatter. The free market unrestrained did this damage. Allowing the market to self correct could take years and push millions of people into poverty. More free market is suicide.
Posted by richrdh at 01:25 AM : Dec 15, 2008
Baffled? You must be a newbie. What do you expect when people havee been told over and over since grade school that the "invisible hand" of the free market solves everything.
Notice how our Big Businesses are crashing and burning? Notice how the Republicans have managed to make America''s economy crash and burn?
Do you see the linkage, yet?
Why are you still voting Republican?
"It''s not based on any particular data point, we just wanted to choose a really large number." - a Treasury Department spokeswoman explaining how the $700 billion number was chosen for the initial bailout, quoted on Forbes.com Sept. 23
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