The coming mortgage delinquencies and resets

Subprime delinquencies

I took me a little while to understand this chart. Here’s what it says. 14% of the total dollar amount of subprime mortgages in 2006 went into 60-day delinquencies. Most did so within the first six months, a staggeringly high number. 2007 is expected to be about the same. Some of this has to be fraud, with a straw buyer who had no intention of paying. But many are probably people who really had no clue what they were getting into, and then found they couldn’t get out. Implicit in the chart is a whole lot of pain.

Mortgage resets

More pain. Note the spike in 2011 for option adjustable rate mortgages, Calculated Risk says many of these homeowners are doing negative amortization and will be upside down when the reset comes. Was it not insane that mortgage companies offered and homeowners accepted mortgages where the balance increased over time instead of of the normal decreasing? The rationale of course was they thought housing prices would keep soaring and they could re-fi any time with ease.

The peak of subprime mortgage resets will happen next year, which will trigger a whole lot of foreclosures, creating big downward pressure on housing prices. Consumer spending will drop along with this, causing further damage to the economy.

It’s important to remember that these aren’t just abstract charts. Real people with real homes are represented here. Many will take financial hits they may never recover from. This will create problems within families like fights about money, increased alcoholism and drug abuse, people sinking into despair. What will millions of families do when they get foreclosed?
Charts from IMF “Assessing Risks to Global Financial Stability” (PDF)