23 June 2007

Systemic fallout dead ahead?

The Tip of the Iceberg?: "The near-collapse of two big Bear Stearns hedge funds heavily invested in highly-speculative packages of subprime mortgages indicates that the severe housing recession is spreading to the financial arena and is threatening the occurrence of systemic fallout. It is estimated that various institutions own about $6 trillion of mortgage-backed securities of which about $800 billion are subprime. About 13% of subprime mortgages are currently in default, and foreclosure rates on these loans are soaring.

In addition about $2 trillion of mortgage securities are backed by adjustable rate loans (ARMS) that have been or will soon be reset at higher rates. An estimated 29% of all mortgages issued in the last three years were ARMS. Home buyers who took out ARMS in 2004 have already seen their rates rise by about 40%, adding about $290 a month in additional payments on a $300,000 mortgage. Many of these buyers will not be able to refinance at fixed rates as a result of higher mortgage rates and stricter regulations that will disqualify would-be borrowers."

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