Recent signs of stabilization in the US housing market are “likely to be the mother of all head fakes,” say Whitney Tilson and Glenn Tongue of value hedge fund T2 Partners. They say the signs of ‘stabilization’ are due to two short-term factors:

 1) Home prices and sales are seasonally strong in April, May and June due to tax refunds and the spring selling season.

2) A temporary reduction in the inventory of foreclosed homes. Team Obama’s Homeowner Affordability and Stabilization Plan has stemmed the tide of foreclosures. But even if it is hugely successful, Tilson and Tongue estimate that it might only save 20% of homeowners who would otherwise lose their homes.

Not only is the US housing still unstable, it is also setting up for three more waves of mortgages meltdown. According to Tongue and Tilson, the first wave of the mortgage crisis happened in late 2006, when speculators began to default on mortgages and borrowers began to commit (or became the victim of) fraud. The second wave happened in early 2007 when borrowers began to default due to mortgage resets. 

Despite the severity of these two waves of default, Tongue and Tilson reckon losses are “mostly ahead of us.” This is how they describe the next three waves of mortgage defaults: 

Wave #3: Prime loans (most of which are owned or guaranteed by the GSEs) defaulting due to job loss and home price declines (i.e., underwater homeowners). Timing: started to surge in early 2008 to the present.         

Wave #4: Jumbo prime, second lien and HELOCs (most of which are on banks’ books) defaulting due to job loss and home price declines/ underwater homeowners. Timing: started to surge in early 2008 to the present.         

Wave #5: Losses among loans outside of the housing sector, the largest of which will be in the $3.5 trillion area of commercial real estate. Timing: started to surge in early 2008 to the present. 

Tilson and Tongue are hedge fund managers with “skin in the game,” and they have no interest in promoting Washington’s green shoots agenda – two reasons why we listen when they speak.

They also correctly predicted in early 2008 that the housing crisis would get so bad that it would require large-scale federal government intervention – a call precious few in Washington or the mainstream press got right. 

In summary, Tilson and Tongue say we are only “in the middle innings of an enormous wave of defaults, foreclosures and auctions.”  

If they’re right, it means more pain ahead for banks and the muting of green shoots optimism as waves three, four and five of the housing crash impact the wider economy.

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