The IMF and NYU economist Nouriel Roubini can say "I told you so." Both put estimates for mortgage write-downs at over $1 trillion. Banks executives are hoping the number is half of that. The lower number is wrong. As Sam Spade said, it is "the stuff that dreams are made of."
Mortgage defaults are in the process of rising rather than falling.
An analysis by The Wall Street Journal shows that mortgages given out in the first half of 2007 are going bad at a much faster rate than those from 2006. The data indicate 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months.
The fantasy that the worst is over for banks is starting to fade. Executives at the firms would like investors to believe that they are writing-off or dumping their toxic loans and that will put an end to the real trouble. The need to raise new capital will evaporate. The age of dilution will pass into history.The industry will have been saved by tardy but brilliant risk management.
Alan Greenspan may be overexposed and over quoted, but he makes a powerful point when he says this "insolvency crisis" will end only when home prices in the US begin to stabilise.
The trend is toward 1% or better delinquency rates on prime mortgages. That will drive more foreclosures which will tend to keep home prices moving down. The vortex is becoming more violent.
Banks have not escaped the worst of the mortgage crisis. It is almost certainly ahead.
The Fed will have to come up with several hundred billion more dollars, or the numbers of bank failure will increase by scores.
Douglas A. McIntyre
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