Will another US mortgage crisis hit the markets in 2021?

Dave Burt thinks it’s possible

There is a growing risk of US mortgage default and the alarm bells are sounded by one of the traders who shorted the risk bond market and made millions during the US mortgage bubble from the early 2000s. Around this time, US citizens were taking out cheap mortgages, but not paying them off, ultimately causing the US real estate market to collapse. The ripple effect was felt all over the world.

At that time, Dave Burt was credited with having excellent information to inform the short sale of risk bonds. He knew what was going to happen in terms of zip code by zip code mortgages. Dave Burt now thinks the risk is on the rise again.

Burt can see two problems coming up

What he sees coming from two sources: climate change on the one hand and COVID flaws on the other.

Climate change

Dave Burt’s take is that flood, fire, and wind hazards all end up increasing the cost of a home. Higher insurance, higher taxes and uninsured losses add up over time. As these incremental costs increase, the value of the home decreases and the homes are at a higher risk of default. Previously, “solid” mortgages seemed weaker. Who wants a negative equity situation? It’s easier to just default and walk away. Burt now sees about 33% of US homeowners vulnerable to large home equity losses due to climate change. If that’s true, that’s a huge number.

COVID-19 risk

About 3 million mortgages are currently under government or private sector COVID bailout programs. There is no guarantee that these borrowers will be able to maintain their loan repayments. So, if these homes start to fail, current high home prices will start to drop. Defaulting mortgages drive down the prices of other properties in surrounding homes. According to Bloomberg, about 5.8 million Americans are expected to be deported by the end of the year. They see themselves as little or very likely to be deported. In addition, about half of households in arrears on rent or mortgage payments in Arkansas, Florida and Nevada believe there is a good chance of eviction by early January. The temporary suspension of evictions by the CDC is due to end on December 31. Problems could arise in the US real estate market and this is a theme to watch.


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