The Large Black Cloud on the

There is some very startling evidence that the housing bubble has not even reached the half-way point yet. While the cause of the current stage of the collapse is mostly due to risky subprime loans falling into default, the misery will likely spread to the larger Alt-A and prime markets very soon. This includes Option ARM loans, which combined with Alt-A products, went to better credit risks than the subprime loans, but commonly with no income (and sometimes no asset) verification.

We have already passed the point where most subprime loans reset, thus most that were going to fall into default have. That’s why we are where we are today.

But the amount of Alt-A and Option ARM loans that are just now beginning to reset is absolutely staggering.

Here’s a chart that should scare even the most optimistic housing expert.


















I added the red line to show where we are now. As you can see, the subprime resets are waning, and the Alt-A (and even prime loans) are slowly growing.

Next year a growing amount of Alt-A loans begin adjusting, but the stuff really hits the fan in 2010 when the Alt-A and Option ARM adjustments explode.

Here’s the sobering part:

Looking at the chart for this year, when the housing market imploded, approximately $30 billion subprime loans reset, and about $25 billion of the other loan types during any given month.

During 2011, the projections are for approximately $30 billion in Option ARMs, $20 billion in subprime, $20 billion in Alt-A, $10 billion in prime, and $10 billion in agency loans to reset every month. That’s nearly double the amount of this year.

So if this year was bad, 2011 could be catastrophic.

If there is any difference between the two years, it could be in quality of borrower. The ones who got the subprime loans a few years ago simply couldn’t qualify for a new loan, and when the rate adjusted, simply couldn’t afford the payment and the house went into foreclosure.

The types of loans that are about to reset went to better quality borrowers, so there may be a lower default rate because these borrowers should be able to qualify for a new loan when the times comes.

That of course is a large assumption, but one that I think will play out.

By Christian Hill

Posted 24Dec2008

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