$1 Trillion Mortgage Bomb Still Ticking Away

How close are we to being back to square one with impending mortgage meltdowns? According to SNL Financial, much closer than anyone would like to think. It has gotten a hold of an updated version of the original 2007 Credit Suisse chart that such caused a stir at that time. It’s reprinted below along with a few of SNL’s thoughts on the matter.

From SNL Financial:

“Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period…

“… [Greg McBride, senior financial analyst at Bankrate.com] told SNL he is more concerned about ARMs that do not even show up on Credit Suisse’s chart.

“Borrowers who already have seen their ARMs reset might be sitting on their hands and not refinancing into fixed-rate products, McBride said. Because mortgage rates have been so low recently, resets can actually lower, not raise, monthly payments.

“When that happens, borrowers might feel little urge to refinance into a fixed-rate product that would cost more per month. Alternatively, ARM borrowers might simply struggle to qualify for a refinance because of low or negative equity.

“The problem, McBride said, is that when interest rates increase — which many analysts expect to happen over the next year — borrowers’ monthly payments might increase beyond what is affordable for them.”

The situation appears to be a classic Catch-22. Eventually the Fed must raise interest rates in order to slow the growth in money supply and attempt to return the economy to some state of normalcy. Ironically, that step is likely to come during the period in which these ARMs will reset. The combination of rising interest rates and resetting ARMs would cause higher mortgage payments and potentially spawn a second mortgage meltdown… we’ll be watching closely.

You can read the post on $1 trillion worth of ARMs still facing resets in its entirety at SNL.


Rocky Vega,
The Daily Reckoning