Monday, April 21, 2008

Mortgage Crisis Just Beginning

Courtesy of

The subprime mortgage crisis is far from over and may still only be in its early stages, says money fund guru John Hussman, who manages the $3.18 billion Hussman Strategic Growth Fund.

Hussman reckons the U.S. economy is just starting the game of mortgage defaults and has many more innings to go. He points to the number of adjustable mortgages yet to reset to higher rates — so high that many more foreclosures are inevitable.

"We appear to be quite early in the mortgage crisis, with only about a quarter of the cumulative resets having occurred. That places us near the start of the third inning, where we can expect each of the ‘nine innings’ to be about three months in duration.”

The next three quarters, he writes, are when the "the cumulative amount of resets will surge. With that surge, loan losses and foreclosures will also predictably spike higher,” Hussman notes.
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Other analysts tell MoneyNews they agree with Hussman’s forecast.

"We’re hearing a cavalcade of talking heads telling us the housing market could right itself later this year,” says Robert Sheridan, a housing developer with Robert Sheridan & Partners.

"Let me be clear. It won’t. Some markets may not recover until 2010, and, in cases like Florida, a turnaround could take as long as three to five years. There is lots of grim news to come.”

Experts reckon that many homeowners with high interest rate subprime loans are staving off foreclosure by taking second, or even third, jobs, to make the money to meet the payments.

Eventually, these folks will have to give up, out of sheer exhaustion.

"These families are not going to be able to make it out of the ‘seventh inning stretch’ if their interest rates don’t stop increasing at a faster rate than their home values are decreasing,” Dr. Gary Lacefield, president of financial risk management consultancy Risk Mitigation Group, tells MoneyNews.

The refusal of many economic elites and of the financial media to recognize these issues is part of the reason policymakers haven’t responded properly to the mortgage crisis, Hussman charges.

"One of the fascinating aspects of Wall Street is the ability of analysts to provide opinions without the faintest backing from evidence,” notes Hussman.

"Among the latest topics of opinion is how far the mortgage crisis has to go. Evidently, the idea is that the recession that these analysts didn't forecast is already over, so it is time to look across the valley on the belief that most of the write-downs are behind us.”

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