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Housing Crash Part 2? A Massive Second Wave Of Mortgages Reset Starting In 2010

The housing crash of 2008/2009 was one of the biggest financial disasters in American history.  Approximately 6 million homes have been foreclosed on by lenders in just the last three years alone as millions of American families watched their hopes for achieving the American Dream go up in smoke.  Since early 2008, approximately 60 million U.S. homes have lost a combined 5 trillion dollars in value.  It has been an unmitigated disaster for homeowners, lenders, home builders, real estate agents and construction workers.  Now approximately one out of every four U.S. homeowners are “underwater” on their mortgages.  That means that they owe more money than their homes are worth.  If that wasn’t bad enough, it is estimated that by June of this year approximately 5.1 million American homeowners will own a home valued below 75 percent of what is owed.  Can you imagine owing $400,000 on a home that is only worth $300,000?  That is where millions of American families find themselves now.  In some areas of the U.S., the housing market is so bad that it is almost comical.  In California, one bank demolished 16 nearly completed homes because it was cheaper to knock them down than to finish building them.  The worst part is that by all indications, the housing crash is far from over.  In fact, a massive “second wave” of mortgage defaults is on the way over the next three years that could potentially deliver a knock out blow to the U.S. economy.

Over the next two years alone, approximately 360,000 home loans are scheduled to “reset” nationwide.  When these loans do reset, the mortgage payments will increase by an average of $1,000 per month.

Can you afford a $1,000 increase to your mortgage payment?

This is the kind of thing that we saw during the “first wave” of mortgage defaults in 2007 and 2008.  That first wave of foreclosures was one of the primary causes of the biggest financial crisis in recent American history. 

Now a second wave of mortgage defaults in on the way and there is simply no way that it is going to be able to be avoided.  A huge mountain of mortgages is scheduled to reset starting in 2010, and once those mortgage payments increase substantially there are once again going to be millions of Americans who simply cannot pay their mortgages. 

The chart below reveals just how bad the second wave of adjustable rate mortgages is likely to be over the next several years.  As you can see, we are on the edge of another huge mess….

  • Paul

    About 93% of Option ARM borrowers choose the “interest only” payment out of the different payments they could pay each month. That works for a while until one of two things happened: interest rates reset, or the principal exceeded the original loan value by 10%. At that point, a mandatory new payment would be recalculated.

    The average reset will be about $1,000 extra per month. About 80% of Option ARMs are in California. California is non-recourse state. Buyers CAN stop paying their mortgage and live about 14 months rent-free, then move to an apartment and pay half what their mortgage was.

    As you can see, California will crash much harder.

  • Tony

    My brother bought a condo for $250,000 with interest ony loan. Now that condo is worth 129,000 and sinking. Then he bought a 5 bedroom house for 345,000 and thats sinking. Am I the only one who thinks my brother is a moron? We own a townhouse together thats “paid for” and we were offered 300,000 for it during the peak and now is worth 99,000. He’s in trouble and needs to sell the “paid for” house to try and keeep up with his stupid housing decisions. So I’m F’ed because he’s a moron? I’m not signing or selling. Now we hate each other. Isnt this wonderful!

  • Joe in JT

    Something doesn’t seem right in this article. It says 340,000 homes across the country are due to reset in 2010. That’s the size of an average, middle of the road city. How is that amount going to cause a major financial disaster for the whole country.?

  • SpyBoy

    Hey Tony,

    Speaking of Morons, you could have sold your house for $ 300,000 when you had the chance, rented for a couple of years, and bought a similar house like about now, for the $ 99,000, and been in the roses. Maybe your brother made dumb decisions, be he is not the only one.

  • John

    340,000 home mortgages resetting on top of 5+ million homes that are more than 25% underwater. The potential for default on those 5+ million homes is enormous. If I owe $300,000 on a home that is now worth $225,000, even if I could sell my home I have to come up with an additional $80,000+ (closing costs, lawyers, transfer taxes and principle) to get out from under the train wreck. One can rebuild one’s credit in 3 years. It is cheaper in most cases to walk away from the existing loans, or ask the bank to forgive the difference. What the author did not mention is the looming crisis in commercial real estate. 80% of commercial loans are resetting in 2011. Given that rental rates in many areas are depressed, the income produced from such properties and coupled by high vacancy rates are making it impossible for owners to refinance. In many cases, they, too, have negative equity. Add to the mix the fact that the Fed is now monetizing debt since no one wants to buy US treasuries, and the bankruptcy of nation states and individual US states, I don’t see any way to avoid a collapse of the current system. Anecdotally, I am a commercial real estate broker. All of my clients who want to sell are either in serious financial trouble or underwater. The future looks grim.

  • alan greenspeed

    Housing will be worth cents on the dollar in the upcoming hyperinflation.

  • SW

    Aren’t banks starting to forgive part of the principal of underwater homeowners? Though they couldn’t forgive all, but that’s a start.

  • Frank

    Housing will not be worth cents on the dollar during hyperinflation, it is hard assets that hold value.