Recent Monthly Adjustable Mortgage Reset Values and a Look Ahead

A reader left a link to an article by Gary Kaltbaum that included this table. It shows the dollar value, in billions, of the adjustable mortgage resets of recent months and what is coming down the road month by month.

I didn't see where Gary got the info from (apologies if I missed it). In his article Gary spells out a logical case for how big of a problem this could be, as I read the article he is certain this is bad and has gone 100% cash in client accounts.

Looking at next March the $110 billion might work out to 366,000 households if mortgages average $300,000. Using that dollar figure and adding up all of the months greater than $50 billion I get close to 2.75 million households impacted.

If that number is close to correct, how many of those households will have to severely alter their spending habits? If that number turns out to be large, then what does that do to the economy? While I don't have the answers, I suspect that, despite one reader's comments, it would not be 1929 all over again.

Comments

[Malkiel]

To refine what Willjrd said, I think it accurate to describe what happened as mortgage refi's postponing the day of reckoning for maxed-out credit card borrowers. The mortgage refi wave of the last 3 years transmuted what should have been a consumer retail debt crisis into a real estate crisis.

The way for the small retail investor to profit from this is to buy a good house next year. If you choose well your house will have lots of appreciation built in for the next real estate cycle and those $100,000+ equity boosts are usually more profit than us small investors manage to ever squeeze out of our stocks and mutual funds in retirement accounts...

[streambuilder]

Well said, Malkiel. Crisp and clear. Don't know hay there has been so little recognition of this phenomenon. I wonder if we are beginning to see a similar result with gasoline prices at the pump? So many people seemed to be totally ignoring the increased prices, and just "putting it on the plastic"... which will soon come home to roost, as part of the over-extension of credit to card holders. Maybe this will be what triggers the real crunch time...

Tom

[David Lentz]

This data looks similar to in trend, but significantly different in magnitude, from the Credit Suisse ARM reset schedule chart that is tossed around on several web pages ...

example -- attheselevels.com/uplo...

[David Lentz]

I believe that the impact of the "bad loans" is amplified by the fact that we are unable to tell which loans ARE bad, and must wait until the payments cease to roll in. This is a consequence of the lack of credible loan documentation regarding the earning power of the mortgagees and the market value of the property being mortgaged.

All the data we have on what fraction of ARMs have failed is only historical experience, and one must anticipate that as the ARM rate hikes continue, the fraction of ARMs going bad will increase.

The practical impact of not being able to identify which mortgages are suspect is that ALL of the ARMs (and to a certain degree, all mortgages) are downgraded in the marketplace. It also makes any corrective action -- other than suffering through it all -- extremely difficult to implement.

It's going to take quite a while for this to unwind. Certainly well into next year.

[jsmith]

2.75 million households is a lot of households. It equals 2.5% of US households. Adding all resets between Jan 07 to Dec 08 (if mortgages average $300,000) results in 4 million households experiencing resets. This is 3.6% of all US households. What portion of consumer spending does this segment of the population contribute? J. W. Smith

[RogerNusbaum]

Obviously I am not sure but the variable is how many of the 4 million, which seems like a reasonable number, will be hurt on a month to month basis; it won't be be all of them but it may be a lot.

[thannagan]

Good credits with reasonable equity or downpayments can and are refininacing into reasonably priced fixed rate mortgages. How many of these ARMS coming due are "subprime" borrowers - and will presumably be unable to afford the adjustment or to refi in the current/tighter credit market?

[ThomasMelillo]

Again looking at $110.Billion for March 2008 is an increase from February 2008 of $22 Billion.
Now looking at $80.Billion for January 2008 is an increase from December 2008 of $22.Billion
Since the subprime problem seems to have appeared somewhere in August-July 2007 with only a $9Billion increase month over month, and to lesser amounts as the year 2007 progresses. the recent market volatility we went through before the Fed made the correction to the discount rate was just a speed bump. It would seem that December 2007-January 2008 is the grand canyon for the subprime market and the financial markets. Even if the Fed comes out in Sept. with a reduction in the prime rate it will only have a temporary effect. This reminds me of the history of the 1929 crash and the cause was traders buying on margin with next to nothing up front, when the market started to drop and the margin calls started to come in, traders simply did not have the money and resulted in a snow ball down hill. Im probably all wrong about this, Please tell me Im wrong.

[joyofyoga]

The problem is not identifying which loans are "good" and which are "bad". If good paying borrowers cannot refinance into at least the same rate or better than they are currently paying when their rate resets they will invariably turn bad. Unfortunately the programs are gone that put the good paying borrowers into good loans. Most borrowers can't qualify as new guidelines have become prohibitive. Balance needs to be legislatured into this market. And Congress needs to increase the lending limits for Fannie, Freddie and FHA, as jumbo loans are priced out of the ballfield.