New Wave of Mortgage Defaults on the Horizon?

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Includes: KBE, KME, KRE
by: Bruce Krasting
I have been working with a young couple for a year now. They have been up against it. They look pretty typical. They bought an apartment with a first mortgage and low down payment. Then they made improvements with a HELOC. He lost his good job and now works for less. She works long hours and they have a kid.

They are underwater on the 1st mortgage so the HELOC is worthless. Their monthly cash flow including debt service has been negative for a long time. They have been paying the mortgage(s) by drawing down more on the HELOC.

I advised them a year ago to stop the madness. They tried to contact their lenders for assistance but were told they did not qualify for a re-financing, as they were current on their mortgage.

I told them to stop paying. But they would have none of that. They had built up a credit rating that they were both very proud of. They did not want to lose that. But more importantly they felt that walking on IOUs was something that morally they could not do. I told them they were nuts but that I was proud to know them.

I sent them a link to last week’s Barney Frank letter to the big banks telling them to write down non performing second mortgages. I sent them the link for the BoA (NYSE:BAC) story and their program to write down principal for delinquent mortgage debt.

They called just now. They made up their minds. They will not pay either the 1st or the 2nd this month. The “entrance fee” to getting the debt relief they need is to not pay any longer. The cost will be a tarnished credit. They no longer care.

Does this story mean anything in the Macro Big Picture of defaults? I am certain that it does. A rising trend is about to become a rogue wave.