Post-holiday mortgage mess

A proverbial “You ain’t seen nothing yet.”

Two views of the “upcoming” mortgage crisis, via Barry Ritholtz and Paul Kedrosky.

If you say the words “sub” and “prime” in tandem enough (like the media has), people might just begin to think it’s an isolated issue. But nobody can reject the fact that Alt-A, Jumbos, HELOCs, etc. play into this, as the linked-to illustrations suggest. In addition, the resets of non-subprime loans continue hitting peaks well into 2009 and at levels that significantly exceed those of the subprime component in the second and third quarters of 2007.

If the Fed lowers rates enough will everything be okay? That’s hard to say, particularly if you talk to the Japanese – I’m not sure anyone can fully agree that zero percent interest rates made any difference in the face of massive overvaluing of assets. Some folks will get refinanced at affordable payments, but I suspect that’s just the lesser evil. Regardless of where rates are, no amount of underwriting wizardry is going to get someone a loan of say $500k if their house appraises at $480k, that is unless they show up to closing with a check for $100k plus.

The finance sector has been waiting for “the next shoe to drop.” Valuation in the face of non-subprime resets (which ramp up in Q2/08) might just be it.

UPDATE: A telling summary:

Simply put, we haven’t hit the high-water mark of ARM distress yet. Data from Banc of America Securities suggests that ARM resets in the first four months of 2008 may exceed the value of ARM resets for the first eight months of 2007 combined.

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