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By Dr. Housing Bubble | 25 October 2007
You really have to pause when you hear certain housing pundits state lucid thoughts such as, "we never saw this mortgage mess coming" or "all indications pointed to a stable market." Just like earthquakes sometimes give way to tsunamis out in the ocean, we’ve had a window of warning that this mortgage mess was going to happen. So what did people do in the housing industry with this information? They simply rolled out the beach blanket, opened up the picnic basket, and idly stared at the quite ocean expecting that the oncoming tsunami would somehow stop by serendipity. I’m sure all of you had seen and digested the chart below at some point in the past year— we have a near perfect picture of what was going to happen in the mortgage markets. But, rather than scale back, lenders stepped it up a notch and started funneling out even more absurd mortgages. In fact, Countrywide in May of this year was talking about 50 year mortgages, expanding their subprime unit, and even adding 2,000 jobs! Of course, instead, they will soon take the axe to about 10,000+ people. An amateur economist can see with this chart that even a mild pull back in housing prices was going to lead to what we are now living through:
Click Here, or on the image, to see a larger, undistorted image.
We are only in first stages of this mortgage mess. We are at point 10 on the horizontal axes. We’ve all been hearing about people refinancing and getting out of these risky mortgages trying to buy extra time. Well the IMF has come out with another reset chart and a fantastic paper that gives you an idea of the overall world credit markets. What does this new chart show us? Well take a look below:
First, you’ll notice that the subprime market will keep on having problems up until 2009. But an interesting new wave emerges with this new data. Now we are seeing a growth in Option Adjustable mortgages; that is, mortgages where you can pay even less and have your mortgage balance grow! So clearly if you can put 2 and 2 together, many people refinanced out of toxic subprime mortgages (if they could) into option mortgages and all those late comers to the housing party substituted option mortgages for subprime loans. Jumping from one frying pan to another! An option mortgage is just as bad as a subprime loan, possibly even worse. First, these loans give you various payment options. At the bare minimum, you have the ability to pay less than the interest on the loan. How can that be? Well, any interest shortfall is simply tacked onto your balance so when your mortgage fully amortizes, you will have a larger mortgage. Call it mortgage appreciation. It is another wonder of the financial engineering that we are now living through. As you can see from the chart above, this wave doesn’t fully expand until 2010 through 2012.
The two waves of the future. If we are already having trouble dealing with the ramifications of stage one of the subprime reset bomb, what do you think will happen in Q1 and Q2 of 2008 when we hit the peak subprime stages?
Normxxx
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