Credit worries were upfront and center yesterday as stocks took foreclosure news very hard. Today’s problem is the loss of 63,000 jobs. This is what happens in bear markets and I firmly believe that we are in a bear market.
My greatest concern, which I have voiced for a long time now, is how the consumer is going to fare in this mortgage meltdown. The problems this time around go deeper than normal type recessions. In normal type recessions, consumer spending slows down to unemployment. In addition to unemployment problems this time around, we have huge consumer debt problems.
In previous programs, I have pointed out that I believe that we are in the early innings of this foreclosure problem and that maybe the roughest patch is still in front of us.
Yesterday the stock market was greeted with some very sobering news about what is happening to consumers and their mortgages. The Mortgage Bankers Association announced today that foreclosures hit a record high in the fourth quarter.
Now you have to love the chief spokespeople for these associations. Years ago the lead economist for the National Realtors Association was assuring consumers that there was no way we were in a real estate bubble. No one wants to admit that there might be some irresponsibility occurring within their industry.
Well the chief economist for the Mortgage Bankers Association says that these foreclosure problems aren’t a result of adjustable rate mortgages (read: not resulting from the irresponsible loans that the mortgage industry sold to consumers). It was a result of the poor credit condition of the borrower. Yeah right……
The reason people are going into foreclosure is primarily a direct result of these adjustable rate mortgages that should have never been written in the first place.
So, let me go through this with you. I want to keep this very simple. Adjustable rate mortgages (ARMs) are the source of the problem. These ARMs were originally written for the consumer as a low introductory interest rate and payment. At some time in the future, the interest rate and payment “reset.” The payment skyrockets and the consumer can no longer afford to make it, oftentimes resulting in foreclosures.
My concern is that we are now seeing the real damage from these foreclosure problems and we are potentially still in the early innings. The problem is the delayed effect. The original problems with these adjustable rate mortgages started in April of last year. We still have well over a trillion dollars of these adjustable rate mortgages ahead of us set to reset over the next two years. March is the largest month for resets with over 120 billion dollars.
This is why the risk level for this particular recession remains high.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
