Nightmare Economic Scenario

Having just finished reading this article from Associated Press, I could not help to share it with my readers. It is frightening! Here are some excerpts:

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is any one's guess, but some believe it could become very bad.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Whoa, was all I could respond once I had read that. But it does not get better, as the article continues, it gets worse, much worse.

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

To read the entire story click here.

In my personal analysis of the mortgage markets, I had concluded that what we had seen to this point was not the bottom. I fully expect that the bottom will be seen some time in the second to third quarter 2008. I do not expect any recovery in the mortgage and real estate markets until the first or second quarter of 2009.

The economic impact that will be sustained by the country is inestimable. Homeowners will have a rough time in the next 18 months and values will be depressed until well into 2009.