Tuesday, March 21, 2006

$2 Trillion in Mortgage Resets in 2006...

Yeah that's not a typo - there are estimated to be roughly $2.0 trillion worth of adjustable rate mortgages which will experience an interest rate adjustment in 2006.

This is a bad news - really bad news scenario for the economy. The bad news is that the new interest could amount to $15-$20 billion of additional interest payments for borrowers. Some view this as a minor issue given the scope of the economy but my read is different. If these borrowers represented a standard distribution of good, average and poor credits than I might view this as little more than a bump in the road. However, the overwhelming majority of these borrowers will be poor credits and the individuals least likely to be able to absorb a 10%-30% increase in their mortgage payment. I believe that this will cause a disproportionately high number of new homebuyers to default in 2006 and more likely in 2007.

But wait it gets better!! Remember all those home equity loans taken out by your cash poor, house rich neighbor so he could buy two new BMW X-5's? Well, he wasn't alone.
Over the past 2 years there were more than $1.4 trillion in home equity withdrawals. Consider this analogy. This is like everyone who had a banging E-trade account in Feb 2000 borrowing $1.4 trillion against their new found stock market gains. When the stock market collapse everyone just lost paper gains. It was painful, but the gains were never realized. If the housing market stalls or tumbles (see Las Vegas, San Diego or starting in NJ/Boston) - you have assets falling against a fixed debt that was inflated by home equity withdrawals.

There is a 20% chance that you will hear this phrase over and over in 2007-2008. "It was the perfect storm of economic events."

Stay tuned.

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