Are smart players shorting mortgage bonds?

Author: Giles Coghlan | Category: News

Dave Burt is

This article was inspired by one of our valued long term readers who sent me a fascinating article on a growing risk developing in the US mortgage market. It was too good not to share. 

It is the risk from defaulted mortgages and it is being sounded by one of the traders who shorted the subprime bond market and made millions during the mortgage bubble of the early 2000's. According to the CNBC article I was sent Dave Burt had great information to inform shorting subprime bonds. He knew what was going to happen in terms of mortgage loans zip code by zip code. So, he knew his onions. Well, Burt's back.

Burt's nose for trouble in the housing market is back 

This time he sees another problem with the US housing market and it is to come from two sources:

1. Climate change
2. COVID defaults

Climate change

Mortgage bonds

Burt's take is that flood, fire and wind risk all add to a home's cost. Higher insurance, taxes and uninsured losses. As these costs rise the value of the home goes down and the homes are at higher risk of default. Who wants a negative equity situation? It's is easier to simply default and walk away. Burt sees about 33% of US homeowners vulnerable to big losses in the value of their homes. 

COVID-19 risk 

About 3 million mortgages are in Gov't or private sector COVID bailout programmes and there is no guarantee these borrowers will catch up on their loans. If these homes start defaulting then the current high home prices will start to fall. Defaulting mortgages causes property prices to drop in surrounding homes too. According to Bloomberg around 5.8 million Americans expect to potentially face eviction by the end of this year. They consider themselves somewhat or very likely to face eviction.  Around half of households behind on rent or mortgage payments in Arkansas, Florida, and Nevada think there is a strong chance of eviction by early January. The CDC's temporary suspension on evictions is due to end December 31. 

Dave Burt
You can read the full CNBC article mentioned in the article here

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