Expect more home foreclosures as Alt-A loans and Option ARMs reset in 2010-2011
According to columnist James Overstreet at commercialappeal.com the mortgage crisis is poised to attack again.
Defaulting subprime mortgages mauled the economy in 2008, triggering the economic meltdown. Less risky mortgages (Alt-A and Option ARM loans) are scheduled to reset next year and in 2011.
So the economy faces increasing foreclosures, higher housing inventories and more bank losses.
Meanwhile, unemployment just topped the psychologically rattling 10 percent level.
Since the first stimulus has not changed the direction of unemployment, lawmakers are under pressure to pass a second stimulus.
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“I’m concerned about how we’ll make the second stimulus more effective than the first one,” says John Gnuschke, director of the Sparks Bureau of Business and Economic Research at the University of Memphis. “I think you have to get the money into the hands of consumers, whether it is by a tax cut, some kind of bonus or even a check.
“It can’t be giving more money to the banks so they can sit on it,” Gnuschke says. “That was a real mistake.”
Washington seems to agree as the homebuyers’ tax credit, set to expire this month, has been extended to April 30 and expanded to include people with higher incomes and some who already own homes.
Goldman Sachs Group Inc. says the tax credit is of minimal benefit because it helps people who were going to buy a house without the tax credit. For example, Goldman estimates the original credit only spurred 200,000 home sales that wouldn’t have occurred otherwise.
And extending the credit to people who own homes won’t reduce high inventories because “every buyer taking advantage of the move-up credit would necessarily be a seller.”
Furthermore, critics say misguided homebuyers are at the root of the current crisis, and policymakers are just encouraging the same behavior that brought the economy to its knees last year.
But Memphis Area Home Builders Association president-elect Tommy Byrnes says the lending environment has changed.
“There’s absolutely no question that the banks are not lending unless you have a good credit score, a good credit history and the capability of making the payment,” he said.
Glenn A. Moore, president-elect of the Memphis Area Association of Realtors, agrees, adding that stimulating the housing market is crucial.
“Getting the housing market back on track is key to getting the economy back on track,” Moore says.
Stimulus of all stripes is under fire because analysts suggest the effectiveness of the programs is not the most important question: the real issue is whether the nation can afford it.
The tax credit bill will cost $10 billion in the fiscal year that began Oct. 1 — adding to a growing threat that has been dubbed the National Debt Bomb.
The Congressional Budget Office projects national debt will more than double to $17 trillion in 10 years. Last year, the debt amounted to 41 percent of gross domestic product — the value of all goods and services produced annually in the nation; that will rise to 82 percent by 2019.
Last year, for every $12 the government spent, $1 went to interest on the debt; in 2019, $1 out of every $6 will go to interest.
Source: http://www.commercialappeal.com/news/2009/nov/08/james-overstreet-mortgage-crisis-ii-looming/
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