John Hussman: New Mortgage Losses Should Come as No Shock

Excerpt from the Hussman Funds' Weekly Market Comment (11/16/09):

“And let's be honest about it. Hybrid ARMs were never made based on the assumption that the borrowers would be able to make the payment once the loan reset. They were designed as two or three year ‘bullets' ... with the assumption that home appreciation would allow the borrower to refinance at, or before, reset. Given current conditions in the housing market, this business model is no longer viable, which should come as no shock to anyone."

FDIC Chairwoman Sheila Bair, October 2007

As a result, moving into 2010, a fresh round of mortgage losses should come as no shock to anyone either. I've noted that we are facing a predictable second wave of defaults, based on a mountain of scheduled resets for Alt-A and Option-ARM mortgages, which began in recent weeks and will continue through 2010 and 2011. One of the counter-arguments against such concerns is the assertion that “the majority of these mortgages have already been modified.” Unfortunately, this assertion is not true. Certainly not for distressed mortgages, and not for pre-reset mortgages either (where there is absolutely no economic incentive to modify the mortgage before the reset date).

Moreover, the 2.7 million delinquent mortgages counted above were those that were already distressed early in the third quarter of this year. Many of these modifications are simply term extensions that reset the clock. A recent Fed study pointed out that only about 3% of delinquent mortgages have received modifications that would reduce their monthly payments in the first year. As noted a few weeks ago, “coupling state-by-state delinquency rates and foreclosure starts (as reported by the Mortgage Bankers Association) with other data, the Center for Responsible Lending [which correctly predicted, but slightly underestimated the size of the first wave of defaults] projects that for most states, foreclosure totals will more than triple over the coming 4 years, for a total of 8.1 million foreclosures.”

Comments

[Adam24]

The real question is what obama is going to do with this industry? Will he nationalize these two companies? FRE and FNM. If he does the real people at stake are the share holders, mostly the working middle classes who depend on their 401(k) IRA's, etc. Over the last 5 years the volume has not changed much. This may imply, too young long-term investors that these two "too big to fail" federally subsides banks, have the opportunity too jump back to 60. I'm just saying what everyone is thinking. If obama nationalizes these two massive banks,he should not make the same mistake to shareholders of similar government takeovers. For example the GM take over not only, disrupted an international corporation throwing many countries into their own crisis, Mr. Obama also dropped the price for many shareholders to pennies on the dollar. Lets hope he makes the right change. [e-mail]

2009 Nov 19 01:05 AM

[myalina24]

As a result, moving into 2010, a fresh round of mortgage losses should come as no shock to anyone either. I've noted that we are facing a predictable second wave of defaults, based on a mountain of scheduled resets for Alt-A and Option-ARM mortgages, which began in recent weeks and will continue through 2010 and 2011.

2009 Dec 07 11:10 PM