The Next Mortgage Meltdown

The Congressional watchdog for the President's mortgage relief program is saying that major trouble is brewing in the months ahead.

From July 2007 through the end of August, 1.8 million homes were lost to foreclosure and 5.2 million more foreclosures were started, the report said. The HAMP program seeks to prevent between 3 million and 4 million foreclosures; on Thursday, the Treasury Department announced that its initial goal of having 500,000 trial mortgage modifications started by Nov. 1 had been met.

The congressional panel wasn't critical of those efforts; it simply said that they'll be swamped by changes in the housing market. The economic crisis, with an unemployment rate of 9.8 percent and rising, is pushing many more prime mortgages, those given to the most creditworthy borrowers, into default.

On top of that, a new class of exotic mortgages called pay option adjustable-rate mortgages and interest-only mortgages are due to reset to higher variable rates. These exotic loans were usually given to richer borrowers on fancy homes worth far less today than the value of the underlying mortgages. These mortgages are often too high-priced to qualify for government modification programs.

"It simply isn't clear that the programs in place will do enough to tame the crisis and have a significant impact on the broader economy," Elizabeth Warren, a Harvard professor who heads the panel, said in the report. "It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now."

Foreclosures also may rise to levels far beyond what HAMP anticipated because a growing number of homes are termed "underwater," or worth less than the balance due on their mortgages.

"Today, one-third of mortgages are underwater, and if housing prices continue to drop, some experts estimate that one half of all mortgages will exceed the value of the homes they secure," the report said. "Negative equity increases the likelihood that when these homeowners encounter other financial problems or life events cause them to move, they may walk away from their homes and their over-sized mortgages."

Much will depend on whether home prices have bottomed, as some economists think is happening now. Housing prices have shown small but steady improvements in most markets since March, according to Standard & Poor's Case-Shiller index.

And I can tell you my opinion is that they haven't bottomed at all.

We're still in plenty of trouble.