Actually, surprise really is not the correct term. A number of people and rating agencies have stated for about a year that by 2011 one in four mortgages would be underwater – that is the borrower owes more than the property is worth.

First American CoreLogic, a real estate information company, now says that 10.5 million households have negative equity in their property. For those who claim the residential real estate market have bottomed, think again. Let us deal out a few reasons why.

The case for the next leg down in real estate

1. Foreclosures are making record highs each month. This means there will continue to be extra inventory on the market, pushing down prices
2. People with negative equity – especially large amounts – will start walking away from their property (see point number 1)
3. $110 Billion in Adjustable Rate Mortgages will reset in the next two years. Seeing a large portion of borrowers cannot refinance as it is, a wave of ARMs resets will cause pressure on borrowers again leading to people being unable to pay their mortgage.
4. Unemployment is expected to remain high over the next several years. If jobs are hard to come by, how can people pay their mortgage? (again, see point 1)

What I find interesting is that 11% of people who took out mortgages in 2009 ALREADY owe more than what their property is worth. If that is not a sign that the market continues to trend downward I don’t know what is.

Anyone who even casually follows the financial market is well aware that today a horrific day in the Stock market.  While the Economy (and stock market) experienced a large amount of pain over the last 6 months, today appeared to be even more painful for a number of reasons.

• General Motors finally admits “there is substantial doubt” about their survival

Despite massive restructuring efforts, despite the loans provided by the government, and despite everything the company has said previously, General Motors finally admitted what the rest of the world already knew – the end of the road is close for General Motors.

Deloitte & Touche, the GM’s auditors, made the following statement: 

The corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern.

Having experience in the world of audit, this is the professional way of saying “Bankruptcy is going to happen”.  

The major question that is on the minds of most is how this bankruptcy take place?  Will the government act as the funding institution, propping up General Motors during the restructuring process, or will GM face a massive liquidation event pushing the into the pages of oblivion?

President Obama previously stated that he will not allow the American auto industry to fail, and Congress has already provided funding to GM and Chrysler, so what wouldn’t the Government act as the financier for a GM bankruptcy?  

Maybe government officials would fear the backlash from the general public.  

The world will not end when General Motors goes bankrupt, but it will be painful.  Other companies will suffer the same fate as a result and the stock market will whipsaw with uncertainty but we will all survive.  Politicians, however, may not survive the next round of elections if huge amounts of public funding are dedicated to propping up a company that has no hope of survival.

• The list of 19 banks undergoing a “stress test” was released:

 

Name	Total Assets (Billions)
1. JPMorgan Chase	2,175
2. Citigroup	1,947
3. Bank of America (1)	1,822
4. Wells Fargo	1,310
5. Goldman Sachs	885
6. Morgan Stanley	659
7. MetLife	502
8. PNC Financial Services	291
9. U.S. Bancorp	267
10. Bank of New York Mellon	238
11. GMAC	189
12. SunTrust	189
13. State Street	177
14. Capital One Financial Corp.	166
15. BB&T	152
16. Regions Financial Corp.	146
17. American Express	126
18. Fifth Third Bancorp	120
19. KeyCorp	105

 
What does this say to you?  The majority risk really falls within 6 institutions.  Unfortunately, institutions 2 and 3 are suffering the most on this list.

• 12% of U.S. Mortgage holders are either behind in their mortgage payments or in forclosure

This one is HUGE.  A record number of mortgage holders, 5.4 million, are delinquent in with their monthly payments.  

The Mortgage Bankers Association said Thursday the percentage of loans at least a month overdue or in foreclosure was up from 10% in the July-September quarter and up from about 8% a year earlier.

The scary part of this information, aside from the drastic rise, is the location(s) of the delinquent mortgages – Louisiana, New York, Georgia, Texas and Mississippi.  The mortgage crisis is spreading beyond the borders of California, Florida, Arizona and Nevada.  What was once a localized but highly publicized event is truly becoming a nationwide crisis.  

• Citibank hits an all time low… of 97 cents

I never thought the day would come where Citibank, once the largest bank in the world, dropped below the one dollar mark today.  While this not “economic” news it is important none the less as the price is a psychological indicator – the stock market believes that Citibank will not survive the financial meltdown.

And what does tomorrow bring?

Pundits and market watchers expect Friday to be an extremely volatile day – at 7:30 AM the new Unemployment rate will be announced. Economists predict unemployment to come in at 7.9%.  Lower and the market may celebrate.  Higher and the day may see a sell off at the open.

No one knows what awaits for us tomorrow, but it sure will be fun to watch…

UPDATE: 03/05/09 - Treasury Secretary Geithner’s choice for deputy withdraws

The person Treasury Secretary Timothy Geithner wanted as his chief deputy withdrew from consideration Thursday, dealing a setback to the understaffed agency as it struggles to address the worst financial crisis in decades.

Annette Nazareth, a former senior staffer and commissioner with the Securities and Exchange Commission, made “a personal decision” to withdraw from the process, according to a person familiar with her decision.

The decision followed more than a month of intense scrutiny of her taxes and multiple interviews. No tax problems or other issues arose during Nazareth’s vetting, said the person, who requested anonymity because Geithner’s choice of Nazareth was never announced officially.

So, did Congress find something in her past or did she simply get fed up of the inquisition?

A few days ago I commented on the recent “refinancing rush” which has/is taking place due to the recently lowered interest rates.  I would have no problem arguing that there is no “rush” as a 3% rise really isn’t a “rush”.

Anyway.. Here is the proof…

(Sources – Bloomberg and Ritholtz.com)

Here is the important question that everyone needs to be asking – if the housing market continues to fall, what can the government do to stop it?  

The belief has always been that lowering interest rates will spur buying, and in turn, property values stabilize.  Since it appears common market  principles are no applying, what is to say this will work?  

The only option, and it would have helped significantly if this was done in the first place, is to buy the toxic mortgages…

The start of the “credit crisis” is often linked to the subprime mortgage lending industry.  So, mortgages that required little or no money down, mortgages issued to individuals with insufficient income, or mortgages issued to people with troubled credit histories all fall into the category of subprime.

From the “it didn’t take a genius” to see it coming department, now the prime mortgage market is watching the default rate on once “safe” mortgages climb dramatically.  How dramatic, one may ask?  Nationally, 3.07% of prime mortgages were in foreclosure or at least 60 days late in the second quarter of 2008.  That number may not seem that significant until one realizes the highest default rate had previously been set at 1.97% back in 1985.

A very important point to notice in the paragraph above – Nationally.   Depending on what part of the country one is in, the default rate on prime mortgages could jump at high as 4.15%.   Areas with severely depressed real estate markets, where prices have dropped upwards of 30%, are at higher risk for prime mortgage defaults.

While the press may have temporarily chanced focus, I believe the credit crisis is going to get a lot uglier.

Update: Just thought I would point out, the subprime mortgage default rate in August was at 43% nationally.