Investors in securities backed, directly or indirectly, by home mortgages including, in particular, subprime mortgages, may be facing a financial Armageddon. As the credit crunch continues, a virtual “tsunami” of loan defaults and foreclosures looms on the horizon.
Recent reports underscore the problems facing these investors. According to the Mortgage Bankers Association, about 3 million homeowners were behind on their mortgages as of December 31, 2007. Moreover, last week Noelle Knox of USA Today reported that “an additional 1 million-plus borrowers were at risk of imminent foreclosure.” Foreclosure activity has been particularly heavy in states such as California, Nevada, Florida and Michigan where homes were regarded as “highly overpriced” as far back as 2005.
The ongoing decline in home prices nationwide is further exasperating the situation. Moody’s Economy.com predicts that, by the end of March, 8.8 million homeowners will owe more on their mortgages than their home is worth. It is feared that, as prices continue to decline, many homeowners won’t continue paying their mortgages because their home simply isn’t worth the amount of the mortgage. Furthermore, the housing market seems caught in a vicious circle. As more homes are foreclosed, the supply of housing increases, the price of housing declines further and, in many cases, neighborhoods can be destroyed.
All of this paints an unpleasant outlook for investors. More losses, perhaps very significant losses, are forecasted.