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U.S. Housing Cannot Recover

Just think of the damage that has been done to the housing sector, as well as the national and global economies and financial markets, with only 3% of the probable foreclosures required as a result of the U.S. housing crash having been completed to date. Can you hear me now?

This is the biggest financial and economic disaster in U.S. history -- nothing else even comes close by comparison.

At the end of the fourth quarter of 2011, the outstanding value of mortgage loans tied to residential foreclosures already in OREO as a percentage of all loans outstanding at JPM, BAC, C, and WFC were 0.29%, 0.45%, 0.15%, and 0.35% respectively; very low and easily absorbed. However, the value of non-performing residential loans at these same institutions are 2.14%, 3.55%, 2.24%, and 3.10%, respectively.

If the probable losses associated with these loans had to be absorbed quickly by way of foreclosure and resale of the collateral property, the losses would almost certainly render all of these institutions insolvent and pummel housing values, the economy and global financial markets in the process.

Until there is a known plan for how to deal with this issue, I will remain negative on housing. Pretending the issue does not exist simply by not foreclosing and hoping that the economy will rebound to the extent necessary for housing values to increase and mortgagors to start making payments again is ludicrous.
At the time of publication, Arnold held positions in JPM bonds.

Roger Arnold is the chief economist for ALM Advisors, a Pasadena, Calif.-based money management firm specializing in income-generating portfolios. Concurrent with his other business responsibilities, Arnold was a radio talk show host for 15 years. He focuses on behavioral economics and chaos theory, better known as the "butterfly effect." He explains the relationships between political, economic and social systems, and how they are all reflected in the financial markets -- stocks, bonds, commodities, currencies and real estate.

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