There are four looming threats to the U. S. economy. The first two, which I described yesterday, are national in scope, concerning the Federal Reserve balance sheet and the government budget deficit. The others are centered in California. One is what we could call Subprime Round II. So-called "Option-ARM" mortgages gave borrowers an interval during which they paid no equity, and less than the full interest, with the unpaid amount accumulating on the principal. When the reset date hits, borrowers must start making full payments, with payment increases often reaching 50% or more.
These mortgages were popular at the height of the property bubble, with 75% of them written in four states: California, Florida, Arizona and Nevada. Many borrowers expected that house prices would just keep rising, so when the reset date approached they could simply sell the house, pay off the mortgage and pocket the difference.
But housing prices in places like California have collapsed. Homeowners are now facing payment hikes on houses worth far less than the loan principle. According to a recent Credit Suisse analysis, by fall 2011, the volume of Option-ARM (and related Alt-A) resets will have risen from $2-billion per month to $25-billion per month, dwarfing the size of the subprime wave. And according to data from T2 Partners, 30% of Option-ARM mortgages are already 60 days or more in arrears. A new wave of defaults could bring a new wave of bank failures.
Read the full article here.
These mortgages were popular at the height of the property bubble, with 75% of them written in four states: California, Florida, Arizona and Nevada. Many borrowers expected that house prices would just keep rising, so when the reset date approached they could simply sell the house, pay off the mortgage and pocket the difference.
But housing prices in places like California have collapsed. Homeowners are now facing payment hikes on houses worth far less than the loan principle. According to a recent Credit Suisse analysis, by fall 2011, the volume of Option-ARM (and related Alt-A) resets will have risen from $2-billion per month to $25-billion per month, dwarfing the size of the subprime wave. And according to data from T2 Partners, 30% of Option-ARM mortgages are already 60 days or more in arrears. A new wave of defaults could bring a new wave of bank failures.
Read the full article here.