A Nightmare Schedule

December 4, 2009
I have in front of me a most depressing chart. It shows the value of adjustable-rate mortgage (ARM) resets. The chart runs from 2006 to 2012 and has two peaks-almost like the back of a camel. The first peak was in early 2008. The second peak is in 2011. Guess where we are today in the ARM-reset schedule? That’s right, smack in the middle of the two peaks. The low point for ARM resets was 2009. Starting in the spring of next year, ARM resets will ramp up. The first batch of resets in 2008, which of course triggered the credit crisis, were dominated by subprime loans. The upcoming batch of resets is dominated by option ARMs. These mortgages were underwritten at the peak of the real-estate bubble with low teaser rates. The folk who bought houses with the mortgages are likely seriously underwater. There is little doubt in my mind that when these mortgages start to reset, you are going to see another wave of foreclosures and a downdraft in economic growth. Look out.