Housing Crisis: Not out of the woods yet

The Next Housing Catastrophe Waiting to Strike

Excerpt:

It seems that the majority of investors, economists, and governmental leaders are overlooking a very important right hand side of this mortgage rate reset graph. The subprime loan reset period (represented by the green bars) may be nearing the end, but the lightly-shaded yellow bars represent $500 billion worth of option-ARM loans expected to reset from mid 2009 through 2012.

In other words, the subprime mess was the earthquake and the next wave of option-ARM resets will be the aftershock no one saw coming.

So what's an option-ARM?
Everyone was entitled a home during the housing boom, right? No one could be turned away if they wanted to become a "homeowner." Alas, shady lending practices of our savvy mortgage brokers didn't stop at subprime lending. Borrowers who wanted to purchase a home but couldn't even afford the already low teaser rates of conventional ARM loans needed a way to finance their dream piece of real estate. The option-ARM fulfilled that need perfectly. It offered borrowers the chance to pay a minimum payment on the balance, which in many cases didn't add up to the full amount of the interest owed, let alone any portion of the mortgage balance.

When borrowers pay the minimum payment on their mortgage balance, the difference between the minimum payment and the full obligation is tacked on to the total mortgage balance. And while option-ARM loans aren't actually set to reset for five years following the origination of the loan, the structure of the loan only allows borrowers to drown in a specified amount of negative equity – to the tune of 110% to 125% of the original balance – until a surprise reset rate is triggered. To make a long story short, option-ARM borrowers will face significantly higher monthly payment increases in comparison to their conventional counterparts because the mortgage balance is now greater than the initial loan.

Comment: Article has full sized graph. Worth pondering. The economy will not recover until this housing crisis passes - and it looks to be several years out!