The Eye of The Storm

Real Estate Broker/Owner

Wall Street will be facing "a headwind of continued losses for the better part of five years", that according to Whitney Tilson, the founder of hedge fund T2 Partners during a recent interview on CNBC.

Tilson estimates that over $1 trillion in residential and commercial real estate losses are still yet to come.

The perfect storm for this type of dire prediction is not complicated. When you combine hundreds of billions of adjustable rate mortgages with 600,000 job losses per month the result is going to be a prolonged housing depression which is going to further complicate the banking sector and broader economic stability.

The reason that we are currently in the eye of the storm is not only because as the graph on the left shows that mortgage resets will temporariliy moderate in 2009, but it is also because of the broad based foreclosure moratoriums that were in place for the past several months and have recently expired

The two biggest components of future mortgage defaults are option ARMs and Alt-A loans, neither of which are easily refinanced.

Option ARMs defer principal and interrest payments on to the back of the loan further accelerating the negative equity phenomenon.  Not only are these loans less likely to be able to be refinanced because of the negative equity but even if they could be, there is no guarantee that the owner could actually afford the new payment.

Additionally, in terms of Alt-A loans, if the borrower had limited documentation or a "stated" income when the loan was originated, refinancing these loans will also be problematic considering the current underwriting environment.

And then you throw in massive job losses which are causing even FHA loan defaults to rise and you have a housing hurricane that is far from running its course.



Comments (5)

Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Well Mark, thanks for depressing me at the start of my day.  Your information is valid and I've heard this.  Hopefully, a little turnaround will moderate the upcoming problems.

May 22, 2009 01:06 AM
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Ugh............but I believe you, there is just too much still waiting to happen. I love the title of your book, it all started with the housing market. But, really high up with all the loans being bundled together, but even higher up with Congress and the Senate and Acorn invading their offices. Demanding everyone has a right to a home.

The more gov't interferes the longer the recovery will take, or it will continue to go down.

May 22, 2009 01:19 AM
Mark MacKenzie
Phoenix, AZ

Gabe:  I'm glad that I could brighten your day. :)

Missy:  I think that what we are going to see is despite the government's "good intentions", until the housing market stabilizes the banking system will continue to deteriorate.  The government has it backwards, you can't fix the banking system and expect the housing market to recover.


May 22, 2009 01:47 AM
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Hi Mark

We are in very challenging waters; the key will be to find a way to succeed with the market conditions as they are.

Good luck and success.

Lou Ludwig

May 22, 2009 01:55 AM
Kevin Robinson
Twin Falls, ID
Fractional Developer

Mark- As always you are right on the money, and the mark. 5 years seems short to me.

May 23, 2009 05:29 AM