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Think The Mortgage Crisis Is Over Like All The Idiots On TV Say? Think Again…It Hasn’t Even Begun.

May 11, 2008 11:51 PM

stophand.jpgThere has been a lot of talk that a financial crisis has been avoided and now all is good. I have pointed out many times that this is total and complete nonsense and this is a 5 year problem, at least.

 Now comes word that Countrywide and Washington Mutual ALONE wrote $300 Billion worth of pay option arms in 2005 and 2006. Most of these were most likely in CA. If you are not familar with this mortgage product, it allows people to pay payments as low as 1% for a period of 5 years. The difference is added to the balance, called negative amortization.  After the 5 years, the arm “resets” to a normal amortized mortgage.  It really is shocking that companies writing these loans are either this greedy or this stupid. I suspect it is likely a combination of both.

Here is the problem. Let’s assume that a large portion of these loans are in CA, which is almost a certainty. Let’s also assume that almost all people with this mortgage are paying the minimum payment, almost another certainty. CA values have dropped 26% off the peak, and are without question headed lower. That means that unless these $300 Billion in loans had more than 40% equity at the time the loan was made, which is not even close to possible, they are ALL under water or will be after the 5 years.  This is because many, many thousands are being added to the balance and the balances are climbing DAILY.

What does this all mean? At the end of the 5 years when these arms reset, they are all going to walk away. They are all getting a free ride until then, and they know it. If you do not understand the magnitude of $300 Billion, the TOTAL writedowns of US banks thus far is just over $100 Billion. And this amount brought down Bear Stearns.

Therefore, before thinking bull market and throw caution to the wind, you had better think again. This isn’t even close to over. In fact, I do not even think this is the third inning of a game that could go extra innings.

Written by Tom@StockBlade.com · Filed Under General Market Comments 

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