Second Dip In Housing Could Lie Ahead - By Joe Duarte

If you bought a house near the top of the bubble, you may be in significant trouble. Indeed, the Homebuilders Index (HGX) is trying to move to the next level. Yet, there are signs that the mortgage market will be a long time in recovering. Thus, the question for investors is whether this sector is worth risking.

With money following the path of least resistance these days, the large technology and the financial stocks are leading the way higher in the market. At the same time, homeowners are facing a major problem as those who have been trying to let time heal their mortgage are not being very successful.

According to The Wall Street Journal: "Homeowners who fall behind on their mortgage payments have become much less likely to catch up again." Citing a study from Fitch Ratings Ltd., the Journal reported that the cure rate, "the portion of delinquent loans that return to current payment status each month," has fallen significantly. According to the study, the cure rate for July was 6.6%, compared to "an average of 45% for the years 2000 through 2006." And the rate is even lower for lower quality loans. The report notes that "For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%."

In other words more people are, for one reason or another, giving up on trying to pay their mortgages, a fact that is likely to lead to either steady or even rising foreclosure rates. According to The Journal: "Barclays Capital projects the number of foreclosed homes for sale will peak at 1.15 million in mid-2010, up from an estimated 688,000 as of July 1."

Making matters worse, government efforts to forestall the flood of foreclosures have failed, or at least not delivered gains as expected. According to The Journal: "Cure rates have sunk despite the Obama administration's prodding of banks to ease terms for millions of borrowers to try to prevent foreclosures. Without those loan-modification efforts, cure rates would be even lower."

This is setting up an interesting situation, with several key points. According to The Journal:

* Job losses are making the situation worse, as the unemployed can't or won't make payments.

* Investment reality has set in as "some who could continue to make payments probably are no longer willing to. That may be because the values of their homes have fallen below their loan balances and they see little hope of ever recovering their investments."

* And the system is so clogged up that "because of widespread backlogs and delays in the foreclosure process, people who quit paying may be able to stay in their homes for more than a year before being evicted."

So how bad is it? According to The Journal: "The Fitch study covers about $1.7 trillion of mortgages held in securities, representing about 16% of U.S. mortgages outstanding."

Conclusion

President Obama has nominated Ben Bernanke for a second term as Federal Reserve Chairman. The speculation is that this a resigned move from Obama because he doesn't want any market turmoil if he were to nominate another person for the job.

Mr. Bernanke has taken a lot of criticism from both sides of the aisle. And armchair Fed chairmen could always find fault with the job any Fed Chairman does. Mr. Greenspan, in our opinion the best of all time, took lots of heat over the years, and was blamed for every bubble during his tenure.

What's our point. Mr. Obama, socialist or not, is a politician. Despite any ideological bent, he does have access to data, and is by nature an academic. That means that it's very likely that he understands the situation in the mortgage market, at least to the degree in which a second collapse could affect his chances of getting re-elected.

In other words, Mr. Bernanke, like him or not, knows the drill around the Fed pretty well by now. We wouldn't be surprised if this potential second dip in housing had something to do with Gentle Ben's reappointment.

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