Exotic Mortgages Begin to Reset - Look Out Below!

The Daily Reckoning - Weekend Edition
April 28 - 29, 2006
Baltimore, Maryland
by Kate "Short Fuse" Incontrera

VIEWS FROM THE FUSE: EXOTIC MORTGAGES BEGIN TO RESET - LOOK OUT BELOW!

For those still not convinced that a real estate bubble exists in the
United States today, consider this fact:

Last year, more than 40% of the buyers in the real estate market were
in
it for the first time.

That means almost half of all home purchasers have never previously
owned
a home - and with good reason. They couldn't afford to.

But lack of money and knowledge never stopped the masses at the height
of
a bubble. Especially when lenders were waving the promise of "creative
financing" under these subprime borrowers noses. Few could resist the
lure
of adjustable-rate mortgages or interest-only loans.

And the evidence of the aftermath of this 'buy now, think later'
mentality
is everywhere. The number of foreclosures is up nationwide. Rising
interest rates have made it harder for homeowners to keep up with their
mortgage payments. After all, ARM's increase monthly payments right
behind
interest rates, pushing a once-affordable mortgage payment just out of
reach.

No one has been more affected by defaults on loans and subsequent
foreclosures than Wayne County, Michigan. The Detroit News reports:

"After recording more than 9,000 foreclosures in 2005, Wayne County
ended
January with 3,364 homes in active foreclosure, the highest of any
county
in the nation by more than 1,000.

"Katherine Ben-Ami...an attorney for the Wayne County Sheriff's
Office...supervised the auction of 379 foreclosed Wayne County homes in
35
minutes on Wednesday."

These foreclosures don't just affect the homeowner. The lenders are
then
stuck with the home, and can lose up to $50,000 per house as they sell
them at below-market prices. That, in turn, lowers property values in
the
neighborhood, pushing more homeowners out, and eventually hurts
property
tax collections for local governments.

379 foreclosed homes. In ONE day. This would make Wayne County ground
zero
for the real estate bubble, an example of the absolute worst-case
scenario. But watch out for the ripples of defaults to be felt
throughout
the country.

Short Fuse
The Daily Reckoning

P.S. The only thing that continues to keep this real estate bubble
afloat
are the overseas lenders who have socked away nearly $2 trillion worth
of
U.S. Treasuries and dollar reserves. Unfortunately, these foreign
investors are starting to give up on America - already, the Chinese are
talking about "shifting away from exposure to the dollar." Once they
do,
we will be in full economic crisis mode