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Will the Second Mortgage Crisis Directly Affect You?

Posted on | February 6, 2009 | 6 Comments

In the middle of December, we first reported the theory of the “Exotic Mortgage Crisis.”  Unconventional loans including Alt-A and Option ARMS are the next group of mortgage loans to be reset.  Many of these mortgages could see rates change from 4% to 8% in one month.  With the struggling economy, many homeowners will not be able to find capital to pay for these increased mortgage payments.  Overall, there is $1 trillion in subprime loans, but the scary thought is that there is $1.5 trillion Alt-A and Option ARMS that will be reset within the next year all the way through 2012 as seen on the chart above.  Will this second mortgage crisis directly affect you?

Every single American has been greatly affected by the subprime mortgage crisis as the stock market has lost 43% of its value and the unemployment rate has jumped to 7.6%.  It has been a very difficult year but it could get worse.  We are starting to see the slowing of subprime defaults, but just the beginning of exotic defaults.  Many of the borrowers of exotic mortgages had the mindset that things would get much better in the future and they would be able to pay a higher rate.  Hopefully this is true for many borrowers who signed an exotic mortgage, but the overall possibility of that being true is low.  Of course there are many who can take on the increased payments, but for those who cannot, it is going to be a long road to hoe.

When considering mortgage rates, always make sure to take on the least risk possible.  If sounds very alluring to go for that 1% for the first two years of the loan term, but realize that 1% quickly turns into 9% in year three and who really knows how strong the economy will be at that time.

Related Posts:

First the Subprime Mortgage Crisis; Now the “Exotic” Mortgage Crisis

Why Can’t I Get That Low Mortgage Rate Advertised?

Buying or Refinancing a Home in 2009? A Must Read!


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Comments

6 Responses to “Will the Second Mortgage Crisis Directly Affect You?”

  1. Prof. Samuel D. Bornstein
    February 7th, 2009 @ 10:43 am

    RE: Small Business, The Housing Market, Foreclosures, and Job Loss:
    It is a tragedy when an individual borrower defaults on the mortgage and loses his/her home. The tragedy is magnified when the borrower is a small business owner, employing from 1 to 10 employees. The loss of jobs related to mortgage defaults and the resulting business failures will further weaken our economy and prolong the recession.

    On December 14, 2008, CBS’s “60 Minutes” had a segment on the 2nd Wave of Foreclosures. CBS indicated that experts were expecting another wave of mortgage defaults on ALT-A and Option ARMs mortgages which will dwarf the Subprime Mortgage Crisis. CBS MISSED A VERY IMPORTANT FACT!
    Many fail to realize that there are millions of self-employed smaller businesses that are holding these “toxic” mortgages that are going to reset in 2009 through 2012. These borrowers are Prime and Near-Prime borrowers who hold ALT-A, Option ARMs, Interest-Only mortgages. There are $1 Trillion ALT-As, and $500-600 Billion Option ARMs.
    So, here we have a major problem… Not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure. Although President Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.
    I authored a survey which was conducted by the National Association for the Self-Employed (NASE) to its national membership. The NASE survey is at
    http://advocacy.nase.org/research.asp
    See the NASE News for the Survey on Toxic Mortgages. Please read my Commentary.
    According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other “toxic” mortgages. Of this number, 3 million are “very worried” about their ability to make the monthly payment due at “reset” , and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected “Resets” that are scheduled to begin in 4th Quarter 2008 through 2012.
    The solution lies in the hands of Congress as they meet in January to structure an Economic Stimulus package. Congress should take note of this survey and be “proactive” in addressing the situation, rather than “reactive” as the case has been in the Subprime Mortgage Crisis.
    We can’t afford another shock to our economic system at this time. This 2nd Wave of Foreclosures which will be caused by the ALT-A and Option ARMs will not only result in Foreclosures, but also Job Loss.
    Thank you,
    Samuel D. Bornstein
    Professor of Accounting & Taxation
    Kean University, School of Business, Union, NJ
    Tel: (732) 493 – 4799
    Email: bornsteinsong@aol.com

  2. silverfox
    February 7th, 2009 @ 3:02 pm

    It is easy to get the impression that no one really knows the full extent of the financial disaster. Every media comment or political response seems to acknowledge the damage that is now obvious to everyone, but no one is putting forward a detailed understanding of the entire scope of the crisis andwhat is yet to come within the next several months or even years.
    Last week the Republican Senate held hearings on the bank crisis, and the three witnesses responding to questioning all agreed that the banks still needed between $1.2 and $2 trillion dollars more? And now this warning of more mortgages collapsing? Were does it end?

  3. LJ
    February 7th, 2009 @ 4:39 pm

    People had no business taking on a mortgage they could not afford. Banks had no business lending them the money. The Feds ( the Dems and Barney Frank and company) who MANDATED the banks do so are culpable for this mess. I see next to nothing about this truth in the papers. Attempting to bail out all these individuals and institutions will bankrupt the country. They MUST be allowed to fail, and let the business cycle turn things around. This will NOT happen instantly, it will take a few years. If you believe that Obama can do it instantly, I have a bridge in Brooklyn to sell you!

  4. king
    February 8th, 2009 @ 2:09 am

    Very good article
    Thanks!

  5. king
    February 9th, 2009 @ 12:49 am

    1000000000000? This is a staggering number of
    I hope not to have a second financial crisis
    Thanks!

  6. Subprime Blogger » Mortgage Rate Predictions - Pimco’s Bill Gross Says 4.5%
    February 14th, 2009 @ 8:37 am

    [...] Will the Second Mortgage Crisis Directly Affect You? [...]

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