Lender – Current Close/52 week high

WM – $3.23/$42.93

DSL – $1.28/$65.67

BU – $0.66/$19.95

Wach – $9.84/$53.10

Washington Mutual: Curr – $3.23 52 wk hi – $42.93
Downey Savings: Curr – $1.28 52 wk hi – $65.67
Bank United: Curr – $0.66 52 wk hi – $19.95
Wachovia: Curr – $9.84 52 wk hi – $53.10

I’m not pulling a Schumer, but all four of these banks have growing non-performing Option ARMs and Alt-A portfolios.

From where I sit, there is no way in heaven or hell it will even scratch the surface. Some issues that are being freely ignored:

1. The foreclosure “crisis” isn’t over, it’s just starting. So far we’ve seen problems in the subprime sector of the market. We are just beginning to see the same problems in the Alt-A and prime sectors. And then there’s those pesky Option ARMS that will go off like a nuke beginning late this year and ramping up next year.
2. Housing prices MUST come down. In major markets that experienced high appreciation – CA, FL, AZ, NV for starters – housing is still 30% to 50% overpriced based on virtually every metric.
3. Inventory is huge. MLS in major markets represents a three to five year supply at current sales levels. MLS is not a good indicator of “real” inventory because folks are cancelling listings because they can’t get the pricing they need to cover their existing mortgage. Also, not included in MLS are the vast majority of bank REO and builder specs. Not to mention builder dirt that has been improved and is ready to build on.
4. The financing market is being restructured to remove anywhere from 30% to 50% of previously “good” qualified buyers. No more state income loans at any LTV with any credit score. High LTV financing is available ONLY through FHA. Today the announcements are out that FHA is going to “risk based” MIP, based on credit score and LTV. Investor financing is almost a thing of the past, must be full doc, generally no more than 4-5 properties including your primary residence.
5. The vast majority of new home purchases are made by folks who currently own a home and are moving up or down or to a new locale. If they can’t sell their current home, they can’t qualify for a new one. Used to be able to produce a rental agreement and claim the old home as an investment property so your debt ratio didn’t take a hit. No longer. You can only claim rental income if your LTV is less than 70% and you can show proof of not just a rental contract but an escrow check for the deposit and first month’s rent.

There is generally nothing Congress can do about any of the above, other than to loosen lending guidelines for FHA, and that does not appear to be happening. And, FWIW, raising the loan caps from $417K to $700+ is the craziest thing I’ve ever heard.

With respect to adjusting loan balances so existing mortgagees can stay in their homes, that’s a non-starter. While it may be possible to keep some folks in their homes, they will still be in the same boat when it comes to selling. Also, on jumbo loans and especially Option ARMs the reduction will have to be VERY significant. Most Option ARMs are set to adjust from a start rate of around 2% to an adjusted rate of around 8% to 9%. In order to drop the new payment to a level where the homeowner (and I use that term loosely) can stay in their home, the servicer will have to eat at least 50% of the loan balance. Even then the borrower may not have any equity.

This is a really ugly situation that the market can sort out over a couple of years, probably five years in CA & FL. If Congress gets involved – which they are and GWB will sign whatever they give him – it will be a cluster ** of the first order. It will throw layers of new regulation on the industry and trainloads of money to loan servicers. And in the long run help next to nobody.

Also, do you think there is a way that faith-based and/or charitable organizations can step in to help those in trouble?