Although they've been obscured by bailout money, banks still have plenty of bad loans on their balance sheets.
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John Hussman on the Mortgage Problem
Ryan Leggio: We’ve definitely been hearing and reading in the popular press some of the issues that you are alluding to the debt situation in the United States, the deficit situation in the United States, obviously the European issues that are going on right now and so, maybe the one glimmer of hope is long-term treasuries and that relates to one concern you’ve had which is mortgage resets and the huge wave that really is starting about now and is going through 2012. I guess my question is, isn’t -- the deflationary concerns and the flight to quality going to really help the situation over the next coming quarters as the resets work their way trough the system?
John Hussman: Well, yes and no. Yes in the sense that if the mortgage reset actually is at a relatively low rate then the payment strain is not as high but a lot of these option arms and interest only of mortgage. I hate to say the word “product” but that was the way that they were introduced into the world.
A lot of these products didn’t demand payment of principles even. So, you’ve had these loans negatively amortizing which is a fancy word for saying that the principle actually was increasing month by month rather than being whittled down and you’ve got a lot of these homes that have gone into delinquency or foreclosure that have not been liquidated. So, financial intermediaries are holding an enormous amount of mortgages that have not actually hit the market. And so, you have got these things that are underwater and the question is “Do people hang on to these mortgages and continue to -- now that principle payments are actually required of them? Are they actually going to hold on to these mortgages on homes that are underwater?” And so, that’s part of the concern.
I think the bigger concern is the fact that we haven’t fixed the problem. What we did is we threw a lot of money to obscure the problem but banks still have these assets on their balance sheets. They’re just not required to report them at market value because of some of the FASB changes that we saw last year.
Fannie Mae, Freddie Mac are still running huge loses but those don’t appear because the U.S. treasury, at least through 2012 is plowing billions, tens of billions of dollars in of these in a quarterly basis to allow those things to settle.
So, we really have a dead situation that has not been worked out by the two methods that you really need to work it out through which is either payment restructuring or default and essentially, there are obligations that people aren’t meeting and that will be a problem until we figure out how those are going to be met.