Foreclosures Could Plague Banking System For Some Time
While everyone wants to call an end to the recession, the banking system is still being plagued by a high number of foreclosures and could be for some time. While a number of homeowners took advantage lower mortgage rates this year to refinance into a more stable fixed rate mortgage, you still have quite a few people stuck in bad adjustable rate mortgages(ARM).
With rates as low as they are currently, there is little difference between the two mortgages rates. Once the Federal Reserve stops buying mortgage securities those ARMs are likely see their rates shoot up putting them in danger of foreclosure.
The Fed still plans to buy approximately $700 billion more in mortgage securities of it’s planned $1.5 trillion, so mortgage rates should remain fairly sedate for the next year or so. Most mortgage securities are still considered toxic assets and the banking system still really doesn’t know what to really do with them.
The Fed will likely be the major player in the mortgage securities market for some time and it will be awhile before private investors regain confidence in this market. Mortgage securitization plays a vital role in credit system by helping banks rollover loans and extend more credit to other borrowers.
When mortgage security markets broke down that threw a big monkey wrench into the entire credit system and until foreclosure rates start to fall off the banks will have those toxic assets weighing them down. The big banks will be fine no matter what, as the government will likely step in with a bailout as in the case of Bank of America and Citigroup.
However, smaller regional banks will be in for a tough time and the FDIC believes hundreds of them could fail in the next two years.
