Another foreclosure tsunami coming.


On the heels of a GDP report riddled with ominous signs of a government taxing more, wages falling and personal savings shrinking there is yet more reason to fear the economic future.  Now that the subprime implosion is wearing off and people have understood the implication of issuing loans to people incapable of paying another implosion is scheduled to begin.  This is the option ARMs market and it's arguably even more dangerous than the subprime market.  Main difference between these two loans is that a subprime is simply a risky loan given to people whose income, eligibility, down payment, etc is not up to par.  Option ARMs instead offer teaser rates and an option to only pay interest, without actually paying down any of the principal.  In California for example this was a very popular choice because buying half a million dollar homes was extremely difficult and most were looking for a quick flip anyway.  Now that the bubble popped and values plummeted people are stuck holding loans where the teaser rates have expired and their monthly payments are 4-6% higher than they were used to paying!  While some people may have understood the implication of paying more after the teaser expired they sure as hell did not plan on their properties falling in value by 30-50%.  Final result?  Most will default and who can blame them?  Do you want to pay thousands each month for a house that is worth half than the loan suggests?
Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy

Click on the picture in the top left corner and observe the schedule.  This illustrates that subprime damage has peaked (the realization of it at least), but the majority Option ARMs will be resetting starting at the end of this year and continuing through 2011.  We can estimate that at least half of these loans will be defaulted upon.  Read the Reuters article for more information.

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