Every day I watch the steady increase in stock prices and I hold my breath.
” Will today be the day the world wakes up , looks in horror at their portfolio holdings, and decides to Sell ! Sell ! SELL !!!”
Stocks are going to be hit hard and the Market is going to tank, when people realze that the recovery is a fraud.
There are several things which might set this off, but I believe that the second wave of foreclosures and defaults is getting ready to begin in early 2010.
Rising unemployment is definitely a major factor, pushing many prime mortgage holders over the edge into default.
The depletion of the severance packages given to bankers and other executives in the fall of 2008 and early 2009 is beginning to take a toll. Upper income executives expecting to quickly find new jobs, continued to maintain a semblance of their life style, and with the scarcity of jobs, they find severance pay dissapearing, and bank accounts depleted.
This financial deterioration and continued bleak employment picture is now affecting a new category of exotic mortgages, which were developed in the early part of this decade to enable young executives to take advantage of the exploding real estate market.
Beginning in 2002 and 2003 , just as the real estate market began to approach its peak, the Alt A, and oprtion ARM’s sprang into existence as a way for these wealths executives to purchase homes that they could not really afford, by offering loans with 5-7 year interest only payments, or low interest mortgages with an adjustable balloon after the 5-7 year period.
Additional creative, no income verification loans were created , featuring low payments for that 5-7 year period, knowing that all of these prime mortgages would adjust upwards after the initial period.
The theory was dependent upon a never ending rise in real estate prices and a endless supply of money available to fund new mortgages.
These adjustable mortgages . by contract with the buyers, are set to adjust not at prime or treasury rates, but at a premium spread above these rates.This is the payment agreed to in exchange for no income verification and low payment options selected by home purchasers.
These higher peyments are confounded by the reality that many of these larger mortgages are already under water.( Loan is more than the value of the home)
The timing of many of these loans during the last phase of the Real Estate Boom, leaves many with a very high loan to value ratio.
As these loans readjust then end up in defauld , the foreclose rate will accelerate, creating a new real estate tumble.
TOMORROW
WHY IS THE STOCK MARKET DEFYING REALITY