According to the Mortgage Bankers Association, one tenth of Americans are already behind on their mortgage. But this is just the beginning. All of the currently defaulting subprime mortgages are just the first wave of debt that wont be paid back.
Scott Pelley of CBS 60 Minutes reports on two types of mortgages you may not be familiar with. They are called Option ARM and Alt-A, and are about to deliver another critical blow to the U.S. housing market, with 8 million American families expected to lose their homes within the next four years, according the the report. These mortgages are loans with initial low interest rates, which reset after two, three or five years to much higher amounts.
Whitney Tilson, an investment fund manager featured in the video, predicts that well north of 50 percent of these mortgages will fail. This means more bad news for Wall Street, because just like subprime mortgages, the Alt-A and Option ARM mortgages were bundled into Wall Street securities and sold to investors.
This is all happening because of reckless lending by banks that made money up-front from each loan. Tilson explains to Pelley, The key assumption underlying the willingness to do this was that home prices would keep going up forever.
These loans led to the boom in the housing market a few years ago, which Tilson said would never have happened without the Alt A or Option ARM mortgages. And now the amount of housing on the market is growing out of control, with the worst yet to come.
Sean Egan, who runs a credit rating firm and predicted the fall of the financial giants, thinks it will take about three, four or five years before this supply overhang is worked through.
"It's getting worse," Egan said. "There are some statistics from the National Association of Realtors, and they track the supply of housing units on the market. And that's grown from 2.2 million units about three years ago, up to 4.5 million units earlier this year (2008). So you have the massive supply out there of units that need to be sold."
With defaults already at unprecedented levels, this second wave may create an even greater crash in the economy.
Image: "Mortgage" by Rev Dan Catt on Flickr courtesy of Creative Commons Licensing