That’s about 1.8 million mortgages in default, if the average failing mortgage is approx. $150,000. Are there that many deadbeats in the US?
“Nearly 25% of mortgages — 10 million — carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association.”
From this article:
http://www.usatoday.com/money/perfi/housing/2006-04-03-arms-cover-usat_x.htm
If 20% default — bingo, you have your 2 million. I suspect the default rate could be higher. We are taking millions of people lying on their loans to buy homes they cannot afford. 2 million defaults is not a stretch. It is a huge number and therefore is hard to really grasp.
Looks like we are quickly getting there...
“The number of total foreclosure filings rose from about 885,000 in 2005 to 1,259,118 in 2006.”
From this article:
http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=1855&accnt=64847
And a couple of facts you should know...
“In a speech last May, Fed Chairman Ben Bernanke said that 30 percent to 40 percent of all mortgage originations in 2005 fell in this “nontraditional” category (of subprime loans or Option ARMs).”
http://www.bloomberg.com/apps/news?pid=20601039&sid=a2mHr9ol.GUs&refer=columnist_sperling
“More than a fifth of option ARM loans in 2004 and 2005 are upside down — meaning borrowers’ homes are worth less than their debt. If home prices fall 10%, that number would double. “
http://www.businessweek.com/magazine/content/06_37/b4000001.htm
It isn’t merely “deadbeats.”
What many people (including the Fed) are only starting to grasp is the level of mortgage fraud out there.
The number of owner-occupancy-require loans written to speculators and flippers where no owner occupancy occurred, is only starting to come to light. And as the banks and regulators are starting to get a grasp on the numbers, it is starting to dawn on them that:
1. The programs to “keep people in their homes” won’t be anywhere nearly as successful as pundits and pols hope - because many homes never had anyone in them. In Las Vegas, for example, 45%+ of the houses on the market are empty.
2. That because of #1, there are in some areas a much greater supply of unoccupied houses than previously thought.
which...
3. Will crush prices in those markets even further (oversupply begets lower prices...)
4. Which will result in yet more people being under water on their mortgages, which
5. will inspire ever-greater numbers of walk-away defaults - ie, deadbeats.
Short translation: the flippers can’t pay, which will cause deadbeats to not pay.
But don’t worry. After the residential real estate market bust is seriously under way (we’re only seeing the tip of the iceberg so far), wait until the commercial real estate market problems start to become apparent - starting with how high regional banks have stacked their loan:capital ratios on commercial real estate.