Second Wave of Mortgage Foreclosures to be Even Bigger?

by Deb Cupples |   The International Herald Tribune reports:

"The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.

"After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.

"But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers."

"The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time....

"Defaults are likely to accelerate because many homeowners' monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks are tightening their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are alt-A loans, many of which were made to people with good credit scores without proof of their income or assets....

"A weaker job market would push more homeowners toward the financial brink. The U.S. Labor Department reported Friday that the unemployment rate climbed to a four-year high in July. Other downbeat reports last week documented another drop in home prices, slower economic growth than expected and a huge loss at General Motors." (IHT)

I'm going a bit off topic here, but it seems to me that declining housing prices are not a problem because housing prices have been artificially inflated. 

Let me amend that statement. Declining housing prices are a problem for the (minority of) people who bought houses at inflated prices -- but for much of the rest of the nation, declining housing prices are a good thing.

I'm no expert, but it seems that housing prices artificially inflated because interest rates were kept too low for too long (thereby enabling people to afford monthly payments on more expensive houses than they could actually afford).  That and speculators joined the fun, which drove up housing prices even more.

If we want housing prices to be in sync with ordinary people's salaries (i.e., if we want prices to not be inflated), then housing prices must decline.  It seems that simple.

I hope that the Fed will not knee-jerk insist (again) on keeping interest rates low for an extended period, because the likely result would be higher (artificially inflated) housing prices yet again. 

That might be nice for the minority of people who bought houses while the bubble was peaking, but it would be bad for the majority of Americans who need housing that their salaries can actually pay for.

Incidentally, the NY Times has a similar article, and Memeorandum has commentary.

Other Buck Naked Politics Posts:

* Why Alan Grayson is THE Congressional Candidate for Florida's D-8

* Air "Fresheners" May be a Health Hazard

* Progressive Mag. Asks Obama to Grow Some Principles

* Construction Contractor Takes Millions, Fails to Finish Jobs

.

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