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Paul Kiesel
Paul Kiesel
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Has the Housing Bubble Finally Burst?

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…This has been a lingering question for the last couple months, as housing bills have been signed, banks have failed, foreclosure rates continue to rise and home prices further depreciate.

So has the housing bubble completely deflated? No. At least according to all available data on the subject.

How many more loans that will default remains to be seen, but there’s a high probability that the remaining loans out there that are in danger of default and foreclosure will be more damaging than the first wave of foreclosures. The problem is that there are millions of adjustable rate mortgages, on homes that were jumbo option-ARM loans (loans exceeding $419,000), and when these loans’ interest rates reset, the impact could conceivably be twice as worse as the last round of interest rate resets.

Take for example a house that is on the market right now in Los Angeles for $875,000. According to the Los Angeles Times’ LA Land Blog, the current owner bought the home in 2006 for $898,000. The current owner has also yet to miss a payment, but is soon facing a interest rate reset that is unaffordable. If the loan is a teaser rate payment loan, meaning only some of the interest rate is paid monthly, the remaining amount is compounded (negative amortization), therefore, the balance of the loan, when the payment/interest rate resets, could be $100,000 more than the home is currently worth. That borrower is likely to walk away from his or her home, if the loan is not able to be renegotiated (of course, if there are TILA violations in the loan documents, the borrower has a strong case for rescission against the lender).

How many other homeowners are in situations like this? The number could be greater than anything DataQuick is able to track at the moment. However, since the housing market is still lagging, particularly in places like Arizona, California, Florida, and Nevada (which, incidentally, are the four states with some of the more expensive option-ARM loans out in the market), and nobody steps forward to buy homes like the aforementioned one, then default and foreclosure rates are going to spike again sometime towards the end of this year or early next year.

As Steve Preston, the secretary of Housing and Urban Development, said Sunday, the country is “pushing through the middle” of the housing crisis. We’ll have to wait and see what the second half brings.