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August 28, 2007

Today's Housing Bubble Post - The Tip - JUST the Tip of the Iceberg

-- by Dave Johnson

An "ARM Reset" occurs when an adjustable loan (ARM) changes (resets) from its initial "qualifying" rate, and goes up to its real interest rate. This reset can cause the monthly payments on the mortgage to as much as double.

Much of the trouble we are seeing now in the mortgage markets now is coming from people not being able to meet their payments. But the problem of this rise in payments has only just barely started! Many, many more mortgages reset through the rest of this year -- and then the number really takes off next year.

How many more mortgages reset next year than this year? Go look at the chart of upcoming ARM resets: Calculated Risk: ARM Reset Charts. This is huge. We have only seen the smallest beginning of the problem. This is going to be really, really big next year. A really bad problem.

And the reason there was a "qualifying" rate? The buyer couldn't afford to buy the house and needed something to get around this limit. So they used a "qualifying rate" to accomplish this - to make it look like the buyer could afford the payments. In other words, after an ARM reset, people can't afford to make their monthly payments. Se can talk about the reasons loans were given to people who can't afford to make the payment in another post.

Update - Bonddad shows the same graph with some explanation, in this post.

Posted by Dave Johnson at August 28, 2007 2:22 PM

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Comments

I had predicted a recession caused by the bubble collapse to occur by winter. And thought it'd help propel Edwards' campaign.

Little did I know he'd be done in by a scream... er, haircut.

Meanwhile, those homeowners can't declare bankruptcy under the new law, but the central banks scurry artound the globe, pumping bazillions in to save the lenders and the stock market.

Which costs more than a haircut.

Median income has never recovered what it's lost under Bush. About 7 million more Americans lack healthcare under Bush.

Thankfully all those voters hurt can vent their wrath against the guy with the haircut. And blame it all on the real culprits: illegal immigrants.

Posted by: Kevin Hayden [TypeKey Profile Page] at August 28, 2007 11:06 PM

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