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More Waves For Freddie and Fannie

Written By Brian Hicks

Posted August 21, 2008





It has been a tough week for the mortgage business.

One the one hand mortgage applications fell to an 8 year low, while on the other Freddie and Fannie continue to free fall.

Meanwhile, the waves just continue to build.

From Mortgage News Daily entitled: Expect Two More "Waves" of U.S. Foreclosures Economist Warns

"While the U.S is currently in the midst of the largest bout of home foreclosures in at least 30 years, at least one economist says two more ‘waves’ are likely on the way.

Patrick Newport, a housing economist at Global Insight, said the next round of foreclosures could come over the next several months as a result of continued job losses in the U.S.

In addition to the nearly 660,000 U.S. jobs lost since December, Global Insight is currently forecasting another 600,000 jobs lost over the rest of 2008 and into the first quarter of 2009.

This second wave of foreclosures, however, isn’t expected to be quite as significant as the first and current round, which has mostly been related to bad loans, Newport said.

According to the Mortgage Bankers Association, foreclosures in the first quarter of 2008 hit an all-time high of 2.47% – the largest percentage of loans in foreclosure since records began in 1978.

"It won’t be as big as the wave we’re riding right now, but it will just add to the problem," he said.

The third wave, expected to hit in 2010 and 2011, will be associated with interest-only loans made between 2005 and 2007, Newport said. In those loans, borrowers only pay the interest for the first five to seven years before they start paying off the principal, at which time their monthly payments increase.

Newport said those loans were one of the innovations that lenders came up with to make it easier for people to borrow, but noted they would mostly make sense for younger homebuyers who expect their incomes to rise in the future.

"I think in most cases they were just given to people who shouldn’t have gotten loans," he said. "A lot of these homes are going to be deeply underwater when the monthly mortgage payment shoots up (and) there will be a very strong incentive for people to just walk away from their homes."

These will be the waves that swamp the boat completely.