Tuesday, August 07, 2007

And my son was right, too.

The Fate of Subprime Debt: More Than Half of US ARMs to Go Bad

The Daily Reckoning: Posted by Bill Bonner on Aug 3rd, 2007

...It will take years for the housing slump to end, says a New York Times article. Many house buyers apparently didn’t even realise that their mortgages had adjustable rate clauses. Now, they’re finding out…and finding it difficult to cope.

Economist Gary Shilling thinks as many as half of all subprime ARMs will go bad - meaning, about 1.7 million homeowners will be forced to give up the roofs over their heads. So far, house prices are down about 3% coast-to-coast, according to the Case-Shiller index. JP Morgan (NYSE:JPM) predicts that the index will go down 15% to 20% in the next two or three years.

“The worst is still ahead,” says the NYT piece. ARMs really caught on in the spring of ‘05. The peak in adjustments will hit in October of this year - with about US$50 billion in mortgages up for reset...

..How will consumers make the higher payments? Won’t they have to cut back elsewhere? Won’t lower consumer spending have an effect on the rest of the economy? And what about all those housing-related jobs…what will those people do? Aren’t these follow-on effects also right in plain view?...

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No kidding - they sure are, unless you're blind as a bat. So when you see those smiling morons on FOX, NBC, CBS, ABC, or CNN telling you this isn't going to be a big problem, isn't going to affect you in any way, and shouldn't cause any trouble to the stock and bond and currency and commodity markets - well, you should wonder what those guys have been smoking, because reality is far from them.

And by the way, "half" is a conservative estimate. How many of you, exactly, could afford for your mortgage repayment rate to go from about 3% to about 11%, which is the cap on many of these loans (though some go up to the mid-teens!). Could you afford to pay 10% interest on your $200,000+ loan? If you're like most people, that's over half of your take-home pay. Can you live on less than half of what you bring home? No? Well, neither can MOST other people, not "half." Think about that, class. We're not only not near the end of the tunnel, we don't even see the light at the end of it yet. We're still deep in the darkness, class, without a flashlight.

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