AgentMortgage

Subprime relief plan’s major flaw

Part 2 of 2: Perspectives on the financial crisis

(This is Part 2 of a two-part series. Read Part 1, "Mortgage market recovery hinges on investors.") The first article in this series indicated that the current stringency in the mortgage market will ease when investors regain their confidence, which won't happen until they can see a floor in house prices and a peak in foreclosures. Neither is yet in sight. Housing markets are always slow to adjust, partly because sellers practice denial and are stubborn about reducing prices, while many buyers defer purchases because they expect prices to decline. Rising foreclosure rates strengthen this attitude by buyers, since buyers understand that foreclosure sales depress prices. The peak in foreclosures is not yet evident because of the large overhang of interest-rate resets on adjustable-rate mortgages (ARMs). Since many borrowers facing rate resets will find the new payment unaffordable and will not have the equity or credit needed to refinance, the outlook is for continued increa...

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