Is the Mortgage Crisis Over?

In 2008 we witnessed the massive damage that the sub-prime mortgage crisis had wrought on the American economy and the world as a whole. We were horrified to see how little research had been done on the recipients of these loans and it seemed quite obvious that these loans were terrible ideas and doomed to fail. Since then we’ve experienced a melt-down in the housing markets that has spread to all other sectors of the economy. This leads us to ask:

Is the Sub-Prime Mortgage Crisis Over?

The answer to this question is not quite “yes,” but very close. We are almost certainly on the downward slope of the sub-prime crisis. The number of sub-prime defaults has been falling fairly steadily since October of 2008, despite increasing unemployment and other economic weakness. Unfortunately, that isn’t really the question we should be asking. While sub-prime destruction may be coming to an end, other types of mortgage chaos may be just beginning.

Other Types of Loans

While sub-prime defaults have been decreasing, other types of loans have actually just begun to rise in their defaults. This is a logical outcome of the housing situation. While housing prices have been declining dramatically, they still have yet to return to their trend line nationwide. Prices have historically tended to return to this trend. Despite not being there yet, many homeowners are now underwater and owe more on their home than it’s worth. This means that the catastrophe that was begun by sub-prime is now likely to spread to other types of loans.

Prime, Alt-A and Option ARM loans are all skyrocketing in default rates. Moreover this climb may have just begun. Even more concerning the size of these markets is dramatically larger than the sub-prime market. While these homeowners may be more viable, they have little incentive to stay in houses that are underwater with no sign of recovery. Mortgage holders who were previously viewed as safe seem risky now and the next wave of default may be just getting ready to crest.

The Mortgage Crisis May Be Only Beginning

Many factors point to severe dangers in the housing markets. First of all, since housing prices have yet to return to their trend line, it is reasonable to think that they will not only return to it, but overshoot it. While we may have around 15% left to return to the trend line, we could easily overshoot it by considerably more. This will of course increase the number of people who owe more than their house is worth.

You also have the dramatic number of people who have taken out Home Equity Lines of Credit (HELOCs) in the last decade, further increasing the likelihood of homeowners having a balance sheet that favors walking away from their loans. Thus while we may have seen the worst of the sub-prime crisis, it may be premature to think that that signifies the end of the mortgage crisis.