The doom and gloom fortune tellers are saying that we are not out of the woods quite yet in the mortgage market.  Millions of adjustable rate mortgages (ARM) are due to reset in upcoming months, forcing homeowners to a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Analysts are concerned that the losses of already battered banks may leach over into the general market, leaving us with a worst-case scenario of another depression.

Bill Gross, chief investment officer of PIMCO, said “”We haven’t faced a downturn like this since the Depression.” Mr. Gross is someone to listen to - he is a world authority on the global credit crisis. “Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth,” he said.

Over 2 million homeowners hold $600 billion of sub prime adjustable-rate mortgage loans.  During the next 8 months, they will reset, leaving many homeowners with monthly mortgage payments they cannot pay.  Not all of these people are in trouble, but the indicator here is that these mortgages are all lent to people with less than perfect credit, setting us up for a downslide of epic proportions.

This slump in the market leads to what we could possibly see as a 40% drop in home prices, hurting people with a lot of equity in their homes.  California, Nevada and Florida would be the worst hit. Builders would be in a lot of trouble.  Chicago’s Neumann Homes, which filed for bankruptcy protection this month, could go under.  The top ten global banks, which have converted a great deal of these mortgages into CDO’s, would be in hot water.  They have already written off $75bn this year.

There has been talk of allowing Fannie Mac and Freddie Mae raise their current ceiling of $417,000 to $ 1 Million.  To me, that just seems like throwing good money after bad.  Both companies have shown extensive losses, and are subject to federal investigation.  The outlook?  Things just don’t look so good…