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Outright, consumers have thought of their houses as being something equivalent to credit cards. As the value of houses and properties increased during the early 2000’s money was withdrawn through home equity loans, meaning that there was no equity margin left whatsoever when prices started to decline in 2006.
The withdrawn money was in most cases used to excessive consumption. The downward spiral in the U.S housing market has picked up lately, yet there is more to come. After having seen the first wave of delinquencies and foreclosures mostly related to subprime mortgages, option ARM’s and Alt-A mortgages are next on turn and we expect a steep rise in delinquencies and foreclosures during the second half of 2009 as unemployment continues to climb.
In the report you can see a “snapshot” summary table calculating the estimated total losses for different types of mortgages. Based on the arguments throughout this report, the estimated total loss for the five types of loans will climb to over $1.2Tn when reset periods for option ARM’s and Alt-A mortgages kick in later this year. Important to note is that this amount is volatile with regards to changing delinquency rates and recovery rates.