How Low Can The Mortgage Crisis Go?

With the nation’s current housing slump compared to the Great Depression, the question on everyone’s minds is how much worse can it get?

As reported in a March 17, 2008, article in Fortune magazine, noted Princeton economist Paul Krugman predicts that by the end of 2008, more than 20 million Americans could be sitting with mortgages worth more than the value of their homes. That’s almost a quarter of all homes in the United States.

The negative equity will cause many homeowners to face foreclosure, according to Krugman, who says the country could be looking at up to $7 trillion in capital losses in housing, and $1 trillion of losses on mortgage-backed securities.

Even if Krugman’s forecast is only partially on target, the consequences are nonetheless dire. A further drop in housing prices will prolong a recession, with people unwilling - and unable - to spend money. A domino effect could then ensue, with more unemployment, sagging retail sales and negative projections from Wall Street.

To no surprise, Krugman reserves his most foreboding comments for mortgage-backed securities. Despite the Federal Reserve’s $200 billion temporary bailout, Krugman says it is too little, too late.

“I look at the prices on subprime-backed securities. Even the AAA-rated tranche is selling for barely over 50 cents on the dollar, and the rest is essentially worthless, which amounts to a prediction that you’re going to get really very little on this stuff. Even if every subprime borrower walks away from his house and a lot of money is lost in foreclosure, it’s hard to get numbers that bad,” Krugman said in the Fortune article.

Indeed, the country’s housing crisis and the resulting turmoil in the financial markets have become both monumental and unprecedented. Exactly when the economy will stabilize and return to “normal” is anyone’s guess. As Bette Davis said in the movie, All About Eve, “fasten your seatbelts; it’s going to be a bumpy night.”

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

This entry was posted on Wednesday, April 9th, 2008 at 12:38 pmand is filed under General Investor Information, Home Equity, Mortgage Backed Securities. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.