Are We Still At Risk for Mortgage Armageddon?

While much of the recent housing news has been good there remains a hardy band of skeptics that don’t believe the mortgage crisis is over. In fact, they think it’s going to get a whole lot worse over the next year or so. Investment advisor Frank Veneroso writes extensively about this on the naked capitalism blog in a posting headlined Mortgage Armageddon.

Mahese Swamingathan, a mortgage strategist at Credit Suisse argues in a recent edition of Investment News that declining interest rates only postponed a greater problem with adjustable rate loans resetting. He says that from June of this year through the summer 2012 $1.2 trillion worth of loans will jump to much higher rates. Those re-sets will peak at $42 billion in November 2011 up from $18 billion last month. Swamingathan sees unemployment rising through the first quarter of next year and delinquencies worsening.

Others, such as Veneroso and University of Texas economics professor Stan Liebowitz, say the most important ingredients in foreclosures isn’t mortgage re-sets, its negative equity and unemployment. When a home is worth less than the mortgage, borrowers in trouble tend to walk. Negative equity accounted for 285,000 or 47% of all foreclosures in the first half of 2008, according to Liebowitz’s research. That compares to only 60,000 or 8% for mortgage resets.

The second largest cause of foreclosure—after negative equity—was job losses. The plunge in home values over the past couple of years has left about 15.4 million or 20% of home owners owing more than their house is worth. If a larger percentage of those people decide to mail the keys to the bank, foreclosure numbers could surge.