According to a recent study by Lender Processing Services, foreclosure starts continue to be dominated by GSEs (Government Sponsored Enterprises). However, GNMA (or Ginnie Mae, Government National Mortgage Association) activity is almost negligible. GNMA is a government-owned agency which acts as a secondary market conduit for FHA and VA loans.
Second lien holders will be facing big trouble once foreclosures gain steam again. If the problem spreads, your bank deposits could be in jeopardy.
While both the S&P/Case-Shiller Report for August and September 2010 Existing Home Sales Report by the National Association of Realtors are painting a gloomy picture of the real estate market, the Fed is embarking on a large-scale purchase of long-term government debt, presumably in an attempt to keep long-term interest rates lower than they would otherwise be. This entire operation has been dubbed QEII (quantative easing part two).
Why don’t we feel like the Fed is doing us a favor?
The purchase of long-term debt of the U.S. federal government is being paid for with short-term debt issued by the Fed. Does it make any sense to you?
If the Fed is desperate enough to pay with short-term debt for long-term debt in hopes of reducing effective long-term interest rates, it could only mean one thing: China may have reconsidered its role as the lender of last resort. It doesn’t take a rocket scientist to figure out that any uptick in mortgage rates would have a devastating effect on home sales.
One major reason the Fed cannot afford to allow for interest rates to go up are ARM loans, which are a time-bomb waiting to go off.