Trend: The impact of the subprime mortgage malaise may be larger than anticipated.
John Mauldin's Thoughts From The Frontline at InvestorsInsight continues to track developments in the mortgage/house arena and the possible implications.
Link: InvestorsInsight : Thoughts From The Frontline.
I have been highlighting the problems in the subprime space for a long time. As I wrote months ago, this is going to be a major scandal. It is the main (and almost only) reason that I think we are going to have a recession in the US.
Last week www.lenderimplode.com listed 28 subprime mortgage firms that were shut down or taken over. The count is now 34. Yesterday the third largest lender of subprime mortgages, New Century, stopped accepting new loan applications. The shares were once at $50. Now they are under $4 and falling. The Financial Times reports that they cannot meet their margin calls from their lenders.
The lower end of the housing market is going to find a dearth of buyers, as they will not get financing and a lot of homes are coming back onto the market. It is going to be very hard to get a floating-rate mortgage turned into a fixed-rate mortgage, and consumers are going to see their payments soar. Foreclosures area at an all-time high and rising. Cue the congressional hearings, stage left.
A special advisory committee of the Federal Reserve warned Thursday of a rise in the number of foreclosures, as new guidelines were issued. Subprime mortgages, about 20% of the total market, were 50% of the foreclosures last year. That is set to rise this year.
As the problem spreads, it is going to hit home values and that is going to limit the amount of money that can be borrowed by consumers as Mortgage Equity Withdrawals. It is not just a problem with subprime mortgages, it is starting to hit the prime mortgage world.
In short, consumer spending is going to take a hit. How much? No one knows, but this is a problem that is not in the index of leading economic indicators. Will it be enough to send the US into a mild recession? I still think so. We will see.
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