By Donna Robinson - TREA Director

The big news of the week is the meltdown of the Bear Sterns Hedge Fund containing subprime mortgage debt. While this news seems to be taking wall street by surprise, the only surprise I have is the fact that no one on wall street seems to realize that this is only the symptom of a much more serious problem. One that may take several more months to manifest, but none the less, a major problem.

After being "on the streets" full time in the real estate investing business for the past 8 years straight, I know first hand what a high percentage of bad loans there are out there. Just this week I listed 4 properties that all belong to a single owner who may be heading for 4 foreclosures. I've listed 5 in the past 30 days, belonging to just two owners. These owners are good people who got sucked into sub prime loans on investment properties. The loans simply won't cash flow for the owners. Therefore, they stop making payments and let the bank foreclose on the investments rather than risking losing their own home in the process.

I have had so many cases like this in recent months, and have analyzed so many properties with 80/20 piggyback loans that can't possibly be cash flowing positively. I believe that the foreclosure rates among owners of investment properties could reach 25% or even 40% in this market. These small investors are saddled with interest only payments, prepayment penalties, and rising APR's. It's just a mathmatical formula for disaster. These loans virtually guarantee that the investors will not be profitable. Some are frantically trying to sell these properties but if their efforts to sell fail, as many surely will, foreclosure will become a very real possibility.

Many of my current clients have "perfect" credit - but most are on the verge of taking a foreclosure hit because they can't pay for rental houses and keep their own house mortgage paid.

My advice - watch for a major meltdown in the secondary mortgage market and in particular in mortgage backed securities somewhere in the fall to late 2007. By then the numbers of subprime and alt-A investor mortgages will be escalating. In turn this is likely to force mortgage rates up, as capital flees the mortgage markets for safer investments. Bear Sterns may only be the first of many such stories to come.