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Everyone should have watched the second segment of 60 minutes last night. If you missed it, you have a chance to see it by clicking on the above embedded link.
I have been following Whitney Tilson for some time now. He is one of the few analysts that had this subprime mortgage crisis right. In my posting Fixing the Financial mess in four easy steps, I quote Whitney Tilson of Tilson Funds from an email he sent me:
We've been very bearish on housing for a number of years, but after all of the recent terrible news, we had thought that we might be in the 6th or 7th inning of this unfolding debacle and perhaps it might be time to start buying some of the stocks that have been obliterated, in anticipation of a bottom and then recovery. But then we were introduced recently to the CEO of Amherst Securities Group L.P. Sean Dobson, who has collected extensive data on every mortgage that was securitized in the United States this decade. He was kind enough to share some of his data with us, which shows that we are still in the early innings of the bursting of the housing bubble. Believe it or not, as bad as things have been to date, we have only seen the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is about the hit the United States. We believe it will get so bad that large-scale federal government intervention is likely.
Tilson made this prediction before all the talk of government bailouts.
Tilson says there is a second mortgage shock coming. Tilson has teamed up with Amherst Securities. Amherst Securities ran the numbers on higher quality mortgages, and it is not a pretty pictures. Tilson believes we are only half way through this crisis, and the more exotic mortgages such as Alt-A and option arms will begin to reset. Option arms lured investors in with ultra low interest rates as low as 1%, and when these reset, individuals may see their mortgages rise from a possible 800 dollars to 1,500 dollars. According to Tilson, 50% of these mortgages will default, and many will default even before they reset. "The defaults are incredibly high right now, and there is no evidence they are tapering off." Stated Wilson. Tilson believes it will take 3, 4, or 5 years to work itself out. This does not take into account commercial real estate, credit cards, and the like.
The irony is the preceding segment on 60 minutes was about the charlatan, Barney Frank who should be in jail not leading the bailout charge. 60 minutes called him, "the smartest man in congress". Frank says by the end of 2009, the economy will be back on track (paraphrased.) Seems to me, he said the same thing about Fannie Mae and Freddie Mac before they tanked. 60 minutes showed Barney Frank running around with his shoes untied in an effort to demonstrate he was so busy working for the American people he didn't have time to tie his shoes. I don't know about anyone else, but Barney Frank running around with his shoes untied does not instill confidence.
Tilson also stated we may be half way through this mortgage bubble but we may be only through the third inning of the real estate bubble. We will continue to see blows in the financial system. So, fasten your seatbelts. I sure hope those in power know what they are doing. Somehow, I doubt it.