A month from now, $50 billion worth of adjustable rate mortgages will "reset" from the low interest rates at which they originated in October 2005 to much higher rates that will be due for the next 28 years. Hundreds of thousands of people are about to be hit with 30 to 40 percent increases in their monthly payments. Since house prices are falling and October's resets are just the first of many, a long wave of foreclosures seems inevitable.
A fifth of all subprime mortgages made in California since 2005 are headed for foreclosure.
Also, from this week's Economist:
Not surprisingly, Wall Street's seers are chalking down their projections for construction and house prices. Economists at JPMorgan, for instance, now expect the pace of new-home building to fall by a further 30%, while they expect average house prices to tumble between 7.5% and 15% by the end of 2008. Jan Hatzius, an economist at Goldman Sachs, thinks that house prices could drop by between 15% and 30% over the next few years.
Also, from Bloomberg via Marc Andreessen:
Suppose regulators decide to play hardball on how the financial community marks to market, imposing rules that outlaw the existing freewheeling approach to how over-the-counter derivatives are assayed.
Moreover, suppose those new decrees come just as much of the underlying collateral is so tarnished as to be almost worthless compared with its initial valuation.
The ensuing carnage in the balance sheets of every financial-services company in the world would dwarf the damage wrought in the securities industry by the subprime crisis so far.
Rescuing Mortgage Holders