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A Second Mortgage Foreclosures Coming

When it comes to bailouts of American business, Barney Frank and the Congress may be just getting started. Nearly two trillion tax dollars have been shoveled into the hole that Wall Street dug and people wonder where the bottom is.

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 mortgage loans with strange names that are about to become all too familiar. If you thought bad credit mortgages were irresponsible 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 subprime 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 second mortgage loans. Amherst had done some financial detective work, analyzing the millions of mortgage loans that were bundled into those mortgage-backed securities that Wall Street was peddling. It found that the subprime mortgages, loans to the least credit-worthy borrowers, were defaulting. But Amherst also ran the numbers on what were supposed to be higher quality mortgage loans.  

Second mortgage rates remain very high or unattainable when borrowers have less than 20% equity in their homes.  Gone are the days of the 80-20 home loans that featured an adjustable rate 2nd mortgage that homebuyers would have to quickly refinance.  Mortgage lenders aren’t going to make that mistake again, said mortgage executive, Scott Hess.

The trouble now is that the insanity didn’t end with subprime home loans. 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 mortgage 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 home 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. Read the complete story >

Posted in 2nd Mortgage Tips, Home Equity News, Mortgage News, Published Loan Articles. Tagged with , , , , .

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