Tip of the Iceberg
As lawmakers on Capitol Hill stand in front of brightly colored placards, touting their 'Save the Subprimer' proposals (witness Sen. Charles Schumer today), and banks get together with community groups in aggressive campaigns to seek out those in danger of default and save them from ultimate foreclosure (witness EMC's "Mortgage Mod Squad"), I fear something is getting lost. We're not in the thick of the crisis; we're right at the start.
Three hundred billion dollars worth of adjustable rate mortgages are set to re-set in the next two fiscal quarters. We've already seen what happened in the first quarter of this year. Foreclosures spiked, lenders balked and the spring housing market shut its shutters. Every industry association, from the Home Builders to the Realtors, revised their forecasts, pushing any thoughts of a recovery back from 2007 far into 2008.
"This is just the tip of the iceberg," said First Capital CEO John Kiefer on CNBC's "Power Lunch." Then, "There will be pain and blood in the street." Wow, this from a guy who sells financing products. Oy.
He's not the only one. And subprimes aren't the only worry, lest we forget that a subprime mortgage is not a specific product, it's a description of the borrower. There are plenty of adjustable-rate mortgages out there sitting in the home-safes of plenty of non-subprime borrowers. And while these borrowers may have enough money to cover the payments, the hit to their wallets will be substantial and will affect the way they spend the rest of their money. And that’s going to hurt.
So while it's all well and good to let this story kind of peter into the "oh, the banks and the lenders and the politicians are fixing it because they're just refinancing everyone," well that’s just not true. Some loans will be saved, some borrowers will be redirected, but the problem isn't fixed. Not by a long shot. A recent study by Credit Suisse found a full 40% of modified loans still failed in the end -- just something to think about on your way home tonight.
Questions? Comments? RealtyCheck@cnbc.com