Home | About Us | Resources | Archive | Free Reports | Market Window |
Who Is Still Paying Their Mortgage?By
Saturday, January 19, 2008
Like anyone with working eyeballs and functional gray matter between the ears, I've known for a long time that real estate prices reached unsustainable levels in 2006.
But even so, I have to admit being very surprised by how rapidly the crisis has accelerated since August and how far prices on mortgage paper have fallen. The principal cause of the crisis is structural: A shocking number of people simply cannot afford to actually pay for the houses they've bought... Countrywide Financial makes and services about one in seven American mortgages. It is the largest mortgage lender in America and the largest mortgage-servicing company. This month, it announced 7% of its loan book (7.2% by value) is in default – more than 60 days late. That's up two full percentage points, from 5%, in only one month. Almost all of the loans in default feature adjustable-rate mortgages, which have reset to higher rates based on changes to LIBOR, an international interest rate. With another 2 million homeowners facing higher interest resets on their adjustable-rate mortgages, it seems the total number of defaults is going to keep climbing. And that's trouble... There's a well-known and historically proven correlation between the default rate and the recovery rate, which is how much money banks are able to salvage from their loans in a foreclosure. When default rates are low, the market for housing is strong and banks can generally recoup the full amount of the defaulted loan. But when default rates are high and rising, recovery rates plummet. Buyers know the amount of supply is rising. Nobody wants to be the first guy to buy a foreclosed property when he knows millions of properties are in the pipeline. Prices, at least temporarily, can spiral down 50% or more. As you can see, the system's leverage is magnifying the impact of falling real estate prices. And even worse, the damage to the banking system means it will be much more difficult for the Federal Reserve to stimulate economic growth through additional lending.
Further Reading:
Market NotesEASTERN EUROPE'S BULL MARKET ENDS
For the past several years, we've watched with interest the bull market in Eastern European stocks... chiefly through the huge uptrend in the iShares Austria (EWO). Although this region gets little attention in the mainstream press, its "flat tax" policies are light years ahead of horrendous codes in Western Europe and the U.S... and producing a much faster rate of growth than the likes of France, Spain, and Italy. With a heavy weighting in banks, this ETF is the easiest way to play the financing of Eastern European growth. Since taking off in early 2003, EWO was one of the best regional plays you could possibly own... rising nearly 400% to its high last year. The "shoot first, ask questions later" mood of investors right now has changed all that. EWO hit a new 52-week low this week. As our Stat of the Week demonstrates, Australian stocks, which represent raw materials, are being sold indiscriminately. Austrian stocks, which represent banking, are being sold indiscriminately. The message from the market: "I don't care what the hell you do to make money, I'm selling."– Brian Hunt |
Recent Articles
|