The U.S. Government Continues to Prop Up a Deflating Housing Bubble

The U.S. housing market beginning no later than the fall of 2010 will start the next leg down of the housing market correction. The fall of 2010 is when the next spike in U.S. mortgage resets kicks-in along with the yearly seasonal downturn in the housing market. Without a major restructuring of current mortgages and continued cash infusion by the U.S government via continuing tax credits and artificially low mortgage rates there will be no way to stop the onset of the next leg down for the housing market. The deflation of the housing market would continue into 2012 until a majority of the option-ARM mortgages are re-set.

There are two differences between the first spike in mortgage resets and the second. Not only will the second spike last for at least two years (longer than the first), but it will be much harsher. A majority of the loan resets will occur between the spring of 2010 through the summer of 2012.

Roughly 75% of these mortgages are either “option-ARM” loans, “Alt-A” loans, loans through Fannie (FNM))/Freddie (FRE)/FHA, with a sprinkle of sub-prime loans in the mix. Put another way, only about a quarter of these mortgages are “prime”. These “prime” mortgages are also experiencing their highest level of defaults in history.

The largest categories are the option-ARMs, the category of loans which have already had the highest level of defaults. With the a majority of these mortgage-holders having made minimum payments on these mortgages, their monthly mortgage payments will increase to multiples of their current payments; even with interest rates at record-lows. Many of these loans are negative amortization type loans adding to the problem.

The next-largest category in this group, the so-called “Alt-A” loans were supposed to be of a better quality than sub-prime. The default rates on Alt-A mortgages are approaching the levels for sub-prime mortgages. Many of the Alt-A mortgages has limited documentation loans or “liar loans”.

Then we have the agency mortgages, from Fannie Mae, Freddie Mac, and now the FHA. If the massive losses which these quasi-government entities have already suffered on previous loans aren’t enough to frighten people about the future wave of defaults coming from this source, then their current lending practices should certainly do the trick. U.S agency mortgages make up over 90% of all mortgage-funding for new home loans, the U.S. government has essentially nationalized the U.S. mortgage-market (which is insured by U.S taxpayers), but with the free-loading bankers able to act as “middlemen” - taking a cut of profits for themselves, while having zero, personal risk.

The level of risk the U.S. government is taking on with many of the FHA loans is insane. The U.S. government is taking minimal down-payments on these mortgages, over 90% of the time the home buyer is putting less then 4% down. And with the other hand the U.S government is handing out an $8,000 check, paid for by the U.S taxpayers.

The net effect is that for virtually every new mortgage which these government entities underwrite which are for $250,000 or less there is zero (net) down-payment. Given that a large majority of current sales in the U.S. are below this level, this means that most of the home-buyers in the U.S. this year are putting up zero down-payments.

The Federal Reserve also allows the banks to “borrow” money at 0%. The banks then deposit this money with the Federal Reserve as a savings account” for which they collect interest, while paying no interest on the loan. In other words the Federal Reserve is simply giving the banks free money. But the money doesn't actually sit there; the Fed uses that money to buy U.S. mortgage bonds to keep the U.S. mortgage rates artificially lower. When the current U.S government scheme to prop up the housing seizes to work and the housing market will implode as soon as the U.S. government stops buying its own mortgage bonds. Obviously, even the U.S. government can only soak-up so many billions/trillions of dollars in this manner without taking the U.S. dollar down to levels near zero. The U.S. government is initiating millions of new mortgages, to questionable buyers, at interest rates which can only remain artificially low for as long as the U.S. keeps buying all of its own mortgage bonds.