Alex’s notes: For the second time in two months a good friend of mine has taken the time to email me and let me know that we are going to be ok, that the economy is fine.

Funny thing is, this was based on the research of a local martial arts instructor, who spent a few hours studying the economy, found a few reports saying that retails sales are the highest they have ever been in history, and that people are doing great because income is pacing inflation.

All I have to say is, wow. If all of America has our collective heads this far up our kiester’s, then we are indeed doomed.

Please find below, how we are merrily headed for more fun. Lots of wonderful charts depicting the worst of the mortage resets are yet to come. Enjoy.

Many of the mortgages issued during the boom years of 2000 to 2005 offered fixed rates for three or five years, after which they would “reset” to a floating rate. Most of the pre-2005 vintage of adjustable rate mortgages (ARMs) will reset to a much higher rate of interest, thereby forcing the borrower to pay much larger monthly payments].

The peak for sub-prime ARMS re-setting is going to be in November of this year. This wave of resets could cause a lot of pain for borrowers. But there’s going to be almost a six-month lag between that [reset] peak and when loans actually start to go delinquent and into foreclosure. But the peak for ARMs resets is around November of this year. [The number of subprime resets] remains high for a few more months after that. That’s why I’m talking about this two-year selloff.

Then there’s a substantial decline in the amount of ARMS that reset for a period of three or four months. So that’s my possible false rebound in there. Then what happens is that there’s a lot of Option-ARM resets…that start kicking in about two and a half years down the road. So there will be a second impact on the housing market.

Obviously, things can change between now and two years from now, as far as what interest rates are doing etc. But these resets are still going to pose some problems to people that right now only have to make minimum payments and some spot down the road, have to start treating these things as if it were a real mortgage.

So there will be a second decline at that point.

http://www.agorafinancialpublications.com/RudeAwakening/RAissues/2007/MarApr/RA032207.html

“…Indeed, as MacroMavens’ Pomboy has posited, a Fed rate cut that sends the dollar tumbling could have a perverse effect. The influx of foreign capital has kept U.S. interest rates low and provided a flood of credit for everything from leveraged buyouts to, of course, subprime mortgages. If there’s an exodus of foreign capital fleeing a declining dollar, credit could tighten even as the Fed eases. Be careful of what you wish for…”

http://online.barrons.com/article/SB118679446255694852.html?mod=googlenews_barrons

EXPECTED VALUE OF ARM’s RESETTING IN 2008

Subprime – Aprox. $260B of loans set to reset into higher rates

Alt-A – Apox. $30B of loans set to reset into higher rates

Prime – Aprox $15B of loans set to reset into higher rates

Fannie/Freddie Backed – Aprox $50B of loans set to reset into higher rates

TOTAL VALUE OF HOME LOANS SET TO RESET TO HIGHER RATES —> Aprox $355B

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This entry was posted on Monday, February 4th, 2008 at 1:23 pm and is filed under Charts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.