More Credit Crisis to Come
The financial crisis is not over. The mortgage bubble infected a number of areas beyond just subprime. The subprime crisis was the first to drop, like a marathon dancer that falls to the floor exhausted. But there are still other dancers on the floor ready to topple over too.
Take a look at this next chart, which has gained some currency in the worried circles of financial people. It’s worth a bit of study. It shows you the other dancers on the floor.
Subprime is only one slice of low-grade bologna. It sits at the bottom. Alt-A is the next riskiest slice of mortgages above subprime. Alt-A are mortgages to people who are better credit risks than subprime, but still not prime. Documentation is still spotty as far as verifying income, and loan to values are high. Plus, about a quarter of these mortgages went to nonowner-occupied homes — which were subject to even greater speculation.
The scary thing is that this mortgage market is 50-100% bigger than subprime.
Unlike subprime, Alt-A loans typically have five-year resets — meaning, the interest rates adjust to higher rates. The Alt-A reset surge doesn’t really get started until 2010! It continues through 2012. You’ll also see something called ‘option ARMs’ on that chart. These loans usually have ultra-low teaser rates and often were interest only. Again, the reset surge for these loans only starts in 2010.