I get the sense that the press is becoming a bit too sanguine about the economy’s prospects, something that could come back to bite it.
True, no big shoes have dropped recently. The stock market has soared, and is even for the year. Some economic indicators have been, well, less bad—and you’ve heard all about those “green shoots” sprouting. I’ve even read stories brave—or foolish—enough to wonder if the corner has been turned on the housing market (Mark Gongloff of the Journal rebutted this recently).
But again, we shouldn’t lose sight of the big picture here. The first wave of this crisis was caused in large part by the subprime earthquake, with Alt-A and prime borrowers contributing to a lesser extent.
That blew a giant hole in the financial system’s levees, which have now been plugged with all the Fed’s trillions of dollars in bailouts and backstops. They appear to be holding for now.
Problem is, there’s a second wave of mortgage problems coming and it’s a big one.
Check out this excellent chart from Credit Suisse—one Agora Financial’s The Daily Reckoning calls a “cult classic”:
It shows subprime mortgage resets tapering off, coincidentally enough, during the first half of 2009. Do I have any water metaphors left? Oh yes I do: This looks awfully like the eye of one helluva storm.
Because the second wave is a-comin’—batten down the hatches. This one’s gonna dump a pile of option ARMs on the beach, and with it, another surge in foreclosures.
But it’s worse than that. Because as Daily Reckoning notes, Credit Suisse has now updated that chart:
Credit Suisse added an “unsecurtized ARM” category to the coming wave of resets, a move that bumps monthly loan resets up $2-5 billion. Monthly resets are now larger across the board.
What’s more, the “second wave” crisis that was thought to be over in late 2011 is now crashing down well into 2012.
See for yourself:
You’ll notice that there are plenty of other mortgages resetting at the same time, including Alt-A and prime mortgages. We’re focused on option ARMs because those loans allowed borrowers to pick their payments. They include interest-only loans, which are negative amortizing, and low-interest teaser rates among other “features.”
They’re disproportionately held by people who couldn’t really afford how much house they were buying. Homeowners with prime mortgages have been paying down principle, and will reset into whatever present-day interest rates are. Right now, that’s fine because interest rates are very low. If they skyrocket in the next year or two (with inflation, even if not quite Marc Faber’s Zimbabwe-style levels), these folks could be in big trouble, too.
The option-ARM resets mark the end of the salad days for their holders. The principal has to be paid off sometime, after all. So interest-only payments will reset to amortize in many cases will be an even bigger amount owed than when they first purchased the house. Low-interest teaser rates will reset to presumably higher rates.
Now, the question that raises for me is: How many of these option ARMs have been written down by the banks? If they haven’t been, then the capital holes are going to be blow out again.
On a broader level, it spells more trouble for the housing market, which is already down by a third nationwide (remember those jokers who said it could never decline even 1 percent?), and which, as the Times wrote the other day, is just now getting fully hit by the pain of prime-mortgage holders.
This will be, uh, bad for the economy. That’s not even mentioning the still-to-come crash of commercial real estate loans, credit cards, car loans, etc.
The press doesn’t need to be cynical about a potential recovery, but after all it’s been through in the past few years, it sure doesn’t need to give readers false hope.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.