Mortgage: A Still Ticking Time Bomb

This story yesterday from CNN is very interesting and confirms my suspicions and observations on our current economy. Basically, it says that the regulatory uncertainty surrounding the whole "Mortgage Bailout" has frozen the mortgage industry in its tracks.

Last year, people were predicting left and right that the coming wave of foreclosures will devastate the housing market and push the US into the Second Great Depression. Today, there have been some foreclosures, but definitely not the tsunami waves predicted by the Cassandras. What happened to all those ARMs?

Bush and Obama launched the "Mortgage Bailout" to rescue all those ARM homeowners. The Bailout was supposed to help these homeowners to stay in their homes. By converting the ARMs into fixed rate mortgages, the Bailout aimed to arrive at the unhappy median where both the bank and the "homeowner" lose some money, but still stay in the house and pay the bills.

The Bailout failed to rescue all ARMs. Banks and homeowners do not like to realize their paper losses. Both the banks and the homeowners are expecting the government to give them a better deal later on, so they do not have to write down their losses. So in that respect, the Bailout failed in conclusively resolving the ARM problem, and thus allowing the US economy to "Move On" toward full recovery.

On the other hand, the Bailout accomplished its political purpose, which is to hold off that tsunami of foreclosures for now. In that respect, it is "Mission Accomplished". Banks are reluctant to foreclose all those houses, because they will definitely have to write off those profits from the 10% ARM mortgage rates. Homeowners are reluctant to move in general. The Bailout gives them the expectation of a better deal in the future, so they wait the best they can.

However, the mortgage time bomb is still ticking. The hope behind the Bailout was that, by delaying the foreclosures, the economy will improve, lifting the housing markets, and thus make the ARM problem go away. "Hope and Change", in a sense.

So now we are in a race against time, as I mentioned in the agriculture and economy in general articles. The ARMs from the crazy home real estate 2006 year are resetting right now, so the full scope of the problem is coming to the surface. The commercial real estate time bomb is still ticking away. The economy is improving. The Whales now have some money to spend in Las Vegas, but not the rest of the gambling market. The other real estate hot spots are suffering similarly.

So the question now facing the economy is: Can the US multi-nationals make enough money from the Chinese and Indian economic stimulii to save us from the mortgage time bomb? Will the Chinese and Indians buy enough American wheat, industrial machinery, airplanes, and financial consulting man-hours? Or, will they and the oil sheiks be crazy enough and start playing the American stock market again, that other great "export" of our economy?

[Note: That crazy Wall Street market is our invisible export. Its promise of riches lures in investors around the world. Their active stock trades generate tons of trading fees for the traders in New York, et al, who in turn spread the wealth to the rest of the US. We will have to place our faith in the hope that foreign investors do not wise up to the wisdom of Passive Management.]