Cnn Finance Expert

Expert Says US Economy No Longer "Depression Proof"

Cnn Finance Expert With trillions of dollars tied up in the crumbling mortgage and mortgage securities market, the nation's economy is not as strong as some claim it is. Once the backbone of the economy, long-term investments in mortgages and mortgage backed securities have become toxic enough to threaten the stability of the nation's economy.

Mortgage lending, the backbone of the banking economy, has become increasingly toxic and poisonous, tainting thousands of banks, pension funds and investment houses, as adjustable rate mortgages (ARMs) put the bite on consumers who can no longer afford their homes at the old mortgage rate, let alone an upwardly adjusted one.

Thanks to the busted real estate bubble and the accelerating foreclosure rate, home prices have been dropping like a rock. The increased devaluation of homes has put many people in the dangerous position of owing more on the property than it is worth.

This situation has motivated many to simply walk away from their mortgage and abandon home and loan altogether. According to CNN and Moodys,

Almost nine million (9, 000, 000) homeowners owe more on their mortgage than their home is worth. This represents the largest share of homeowners since the Great Depression. (Moody's Economy.com)

Analysts say the bottom hasn't dropped out yet. Several think the market will continue to fall, with depressed housing prices the norm for some time to come.

"In terms of prices, I don't think they'll bottom out until the end of next year and I don't think they're going to bounce back. They'll crawl back, " chief economist for ratings agency Standard & Poor's, David Wyss, told Agence France-Presse (AFP)

With falling values, more homeowners will find themselves owing more on their mortgages than their homes are worth. Many are and will choose to walk away and abandon the home, leaving banks and investors high and dry.

Abandonment, foreclosure and sinking real estate prices are devastating the long term investment market. From 401 k's to pensions, annuities and stocks in businesses that deal with real estate (banks, lenders, brokers, real estate companies, builders, etc.), the fall out has been severe and has yet to hit rock bottom.

Hence, the cross-exposure of various sectors of our economy to the falling real estate prices has long since passed the "danger zone". We're coming close to actual meltdown, as trillions of dollars in real estate value go down the tubes, taking investors, insurance companies, banks and mortgage companies with them.

The exposure is huge. One analyst notes that nearly $10 trillion dollars in real estate investment is at risk in both the private and public sector. Those investments include:

-- asset-backed securities issuers - $2.1 trillion;

-- non-bank finance companies - $426 billion;

-- credit unions - $332 billion;

-- state and local governments - $159 billion

-- life insurance companies - $62 billion; and more in

-- private pension funds, government retirement funds and households. (Stephen Lendman, "This Time It's Different", 10-22-08, Indybay.org)

The situation won't improve any time soon, many experts say. An analyst with a company that tracks real estate investment says, "We could be talking another year before we see a stabilization and that all hinges on whether the economy deteriorates to a great degree." (AFP)

With more than two million adjustable rate mortgages set to jump in 09, that "any time soon" may, indeed, be a long way off. And, that begs the question: "What do we do in the mean time?"

By Monica Davis - Columnist for ethnic newspaper. Author of 4 books, main research interest: black farmers and intellectual property rights

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