OptionARM Loans and Mortgage Re-Sets Are Cause for Concern

No More Mortgage is very concerned about the chart below, which shows the second wave of mortgage re-sets coming down the pike, starting in summer 2010.
It is noteworthy that we are in a “lull” which may have allowed confidence to push up US equities over the past 6 months.
Note that the first wave of mortgage re-sets was largely comprised of sub-prime mortgages that came due during 2007. This second wave is mostly comprised of OptionARM loans, which were the mortgage vehicle “du jour” in California, Arizona, and Florida during 2005-2006, and which will begin impacting the economy next year.
In these sun-belt markets, high real estate prices drove home buyers into using these low-ball loans, which allowed borrowers to pay below-market monthly payments. The re-set period is 5 years on these loans, and many of the collateral properties are well under water in value.
It was the first wave of mortgage defaults which led to the fall of Fannie/Freddie and the market break in the fall of 2007. It remains to be seen what this next wave will do when it begins to hit over the next few months. No More Mortgage believes that the risks for the US economy are serious.

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