Is a "perfect financial storm" more severe than 2008 brewing? "Dr. Doom" warns: $8.3 trillion in low-interest mortgages already carry $2 trillion in paper losses.

Title context: Is a "perfect financial storm" more severe than 2008 brewing? "Dr. Doom" warns: $8.3 trillion in low-interest mortgages already carry $2 trillion in paper losses. Text: Well-known American economist Peter Schiff, known as "Dr. Doom," believes that the low mortgage rate you locked in years ago may be one of the smartest financial decisions you ever made, but it could also become part of a "perfect storm of impending financial destruction." In a post published on X on October 15, Schiff warned: "In this brewing mortgage crisis, the losses of mortgage institutions will far exceed their losses during the entire global financial crisis (GFC)." He claimed: "Even without a single default, mortgage institutions have already lost more than four times on paper what they lost during the global financial crisis." He blamed the situation on the Federal Reserve's prolonged low-interest-rate policy and government-backed mortgages that allowed borrowers to lock in cheap financing for decades. "This planted the seeds," he wrote. If most of your wealth is tied up in your home, or you are counting on your portfolio to get you through retirement, this is a sobering forecast. But before you start imagining another foreclosure crisis, there is an important distinction: a mortgage losing value for investors does not automatically mean your home has lost value, your monthly payment will rise, or your lender will fail. Also keep in mind that if your loan or its servicing rights change hands, the new company taking over cannot arbitrarily rewrite the terms of your contract. Why Schiff sees trouble in low-rate mortgages Schiff wrote: "There are currently about $8.3 trillion in outstanding fixed-rate mortgages, with an average rate of 4.6% and 25 years remaining. Given that current rates are 7.5%, the mark-to-market losses on these mortgages are already about $2 trillion. When rates rise to 8.5%, losses will rise to $3 trillion!" For comparison, Schiff put the actual losses on mortgages that defaulted between 2007 and 2010 at about $450 billion. Note that these are all Schiff's estimates, and his assumed 8.5% scenario is not today's reality. The latest survey released by Freddie Mac on October 15 showed that the average rate on a 30-year fixed mortgage was 7.40%, up from 6.27% a year earlier. The basic pricing issue is this: if a newly issued mortgage carries a much higher interest rate, investors will usually not pay full price for an older loan with comparable terms but a much lower coupon. So the old loan needs to be discounted to be competitive. This decline in market value is what Schiff calls a paper loss. And homeowners may still be paying on time and in full. Paper losses are not mortgage defaults Schiff juxtaposes and compares two different types of lossesone is the cash loss caused by borrower defaults, and the other is the decline in the price at which performing loans could potentially be sold. A mortgage can lose resale value even if the homeowner keeps paying. That hurts the party holding the loan, but it is not the same thing as a borrower defaulting. Who holds the loan matters. Mortgages are often sold and packaged into securities, and investors in those securities collect payments from a pool of borrowers. Therefore, the institution that originated your mortgage is not necessarily the one that later bears its investment risk.