Chickens Coming Home to Roost in the Mortgage Industry

The mortgage industry is getting ready to go through some major turmoil, and I've been expecting it for some time. For several years there have been constant radio ads for loan programs that were simply too good to be true. Low initial start rates that were used to qualify sub-prime lenders who couldn't possibly make the payments when the loan finally adjusted to its "real" rates have set the stage for potentially thousands of foreclosures. Both the lenders and the borrowers were counting on continued low interest rates to moderate the impact on their adjustable loans, but alas, the mortgage market didn't cooperate. Rates have been rising and the low initial rate periods are expiring. Wall Street took a hit yesterday because of the coming mortgage problems, and it's a long way from being resolved:

Late mortgage payments shot up to a 3 1/2-year high in the final quarter of last year and new foreclosures surged to record levels as borrowers with tarnished credit histories had trouble keeping up with monthly payments.

The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released Tuesday, reported the percentage of payments that were 30 or more days past due for all loans tracked jumped to 4.95 percent in the October-to-December quarter.

That marked a sharp rise from the third-quarter's delinquency rate of 4.67 percent and was the worst showing since the spring of 2003, when the late-payment rate climbed to 4.97 percent.

The burst in the housing bubble expected by many economists will certainly get a kick start from foreclosures. For those that can afford to buy a home, this will be a real benefit. But others will find the value of their homes in decline, and if their financial situation turns for the worse, they may have far fewer options than they once did.