The Herald Tribune had a great piece on the wave of payment shock loans resetting in the next couple of years. We're just getting started folks. When this is all over, we'll be shocked at how far home prices dropped, and how many families lost their homes.
The mortgage meltdown has arrived at something of a turning point.
So far, the loans that have gone bad were among the worst of the worst. Some were based on outright fraud, either by the lender or the borrower. In many cases, buyers were never going to be able to make their monthly payments and were instead banking on a rapid appreciation in home values.
The peak month for the resetting of mortgages will come this October, according to Credit Suisse, when more than $50 billion in mortgages will switch to a new rate for the first time. The level will remain above $30 billion a month through September 2008. In all, the interest rates on about $1 trillion worth of mortgages, or 12 percent of the U.S. total, will reset for the first time this year or next. A couple of years ago, by comparison, only a marginal amount of mortgage debt - a few billion dollars a month - was resetting each month.
So all the carnage in the mortgage market thus far has come even before the bulk of mortgages have reset. "The worst is not over in the subprime mortgage market," analysts at JPMorgan recently wrote to the firm's clients. "The reason for our pessimism is that loans originated in late 2005 and all of 2006, the period that saw peak origination volumes and sharply decreased underwriting quality, are only starting to reset in large numbers."
It isn't hard to figure out what will happen when buyers who were already stretching to afford a house are faced with suddenly higher payments. Many will manage. They will cut back on spending, or refinance their mortgage and get a new one they can afford.
Others, like the buyer I interviewed two years ago, probably planned on selling their homes after a few years all along. For them, the artificially low initial rate was a no-lose proposition.
But there are also likely to be a shocking number of people who lose their homes.