Monday, September 27, 2010
The other shoe is about to drop
This is a graph of the Alt-A loans. Those are loans just a bit better than subprime. These loans were from people who had good credit but had difficulty proving their income like a sales professional who's salary varied due to commissions or investment income. Banks don't want to refinance because in most cases the value of the asset (the house) is below its original value and the current economy doesn't help either.
The other part of the time bomb is the option adjustable mortgages. Home buyers took them out not looking past the teaser rates. Even though the mortgage rates are at an all time low they are due to go up in the next year or two. If they start to rise by next year which should be the case borrowers are in for a rude awakening at their next reset.
From Money Cafe.com:
There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."
As you can see the ARMs are due to adjust about mid 2011. So the Bush legacy continues. He was the one who wanted everybody to own a house whether they could afford one or not.