The Second Wave is Already Ashore

The second wave of ARM resets and foreclosures might come sooner than you think. According to Whitney Tilson and Glenn Tongue of T2 Partners, the experts on this subject, about 80% of option ARMs are negatively amortizing. Meaning these so-called top-tier borrowers are heading further into the hole. Once their rates reset, they could be in serious trouble.

And that could be happening very soon:

Subprime ARM Resets

The chart above, which should look familiar, shows the two peaks in this long-term housing conundrum. The first mountain is comprised of subprime ARM resets. And the second is mostly constructed of option ARM resets. We appear to be in the eye of the storm.

That alone shook our nerves when we first discovered it. But it was a different chart in Tilson and Tongue’s most recent presentation that really got us startled… It’s also the reason I’m predicting the dollar spike in 2010.

Early Option ARM Resets

Instead of resetting as expected after the first five years, many option ARMs are so negatively amortized that they are hitting their automatic reset cap.

That means they are resetting early…like right now — with unemployment reaching quarter-century highs every month, and a massive number of homeowners about to receive mortgage bills for two-three times what they are used to paying.

It takes anywhere between three-12 months for most homes to actually go into foreclosure. It’s tough to say exactly when the storm will come. But my guess is the second half of 2010.