Market Fears A Trillion Dollars In Bad Mortgage Loans
The mortgage meltdown continues. Just when the financial markets started to settle down, we have news like this to consider. The Independent ran an article today titled Markets fear banks have $1 trillion in toxic debt.
Samir Shah at Landsbanki Securities said: “People thought most of the bad news had been priced in. It seems we’re entering a second phase of the credit squeeze. We’re going back to a place where liquidity is drying up and volatility is increasing.”
This is what we saw back in August of this year. Central Banks around the world were able to jaw bone us back into some semblance of stability. It seemed for awhile anyway that the worst was behind us.
Then Merrill Lynch and Citigroup had written down their losses on their mortgage holdings costing Stan O’Neal of Merrill and Charles Prince of Citigroup their jobs.
At Merrill, The write down was in excess of $7.9 billion and at Citigroup, the write down was an even larger $11 billion. The Merrill Lynch write down resulted in their largest quarterly loss ever.
Following the lead of these two U.S. financial giants, European investment banks are feeling the pain as well. The U.S. mortgage debacle is officially a global concern.
“Some banks have particularly weak disclosure, leading investors to fear what is beyond the veil,” Morgan Stanley’s van Steenis said.
UBS, Deutsche Bank, and Credit Suisse - Europe’s largest investment banks - all reported third-quarter earnings last week, but failed despite massive writedowns to allay fears that the worst is over, analysts say.
Now many are suspicious that not all of the bad mortgage exposure has been disclosed, leading to a lack of trust in the markets. Add this to a lack of liquidity among banks and price volatility among mortgage securities, and you have an ongoing crisis of immense magnitude.
Bill Gross, the chief investment officer of Pacific Investment Management, makes the following points about this financial debacle…
US mortgage delinquencies and defaults would rise in 2008. “There are $1 trillion worth of sub-primes, Alt-As [self-certified] and basically garbage loans,” he said, adding that he expects some $250bn in defaults. “We’ve only begun to see the pain from rising mortgage payments,”
What this means to the average 
home owner and buyer is that mortgage money will be much more difficult to obtain. It also means we can expect foreclosures in 2008 to dwarf those of 2007. This will result in ongoing real estate price declines which are already at historic levels.
The home equity that you have today, may not be there in 2008. Billions of dollars in wealth is evaporating before our eyes. Sooner or later, this will make the average consumer in the United States feel as poor as they really are.
One can speculate that this will lead to a pull back of consumer spending, spreading the real estate recession to the rest of our economy. In my opinion, this is why the Federal Reserve Bank is lowering interest rates.
If you are a home owner, now is the time to take care of your mortgage needs. The mortgage products you need may not be there in 2008. Furthermore, the expected price declines in real estate values will further negatively impact your ability to obtain favorable home financing.
Hold on tight, we are about to hit some more severe financial turbulence.
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