On April 12, I wrote about a potential second mortgage crunch, possibly beginning as early as this year. There are tens—possibly even hundreds—of billions in Option Adjustable Rate Mortgages (ARM's) and unsecuritized ARM's scheduled for reset between now and September 2012.
Option ARM's are mortgages where borrowers pay very little actual principal and interest, rolling unpaid P&I back into the loan. Once scheduled account caps are hit, the loan "resets," changing the terms and conditions of the loan and potentially forcing borrowers to either make higher payments, refinance completely or go delinquent. A large chunk of resetting loans are unsecuritized, meaning banks are servicing the loans with no backup from FNMA or FHMC (that’s Fannie Mae and Freddie Mac for those of you in Santa Barbara). But agency-backed loans are still a big part of the problem, and the ARM portion of the agency portfolios are performing about as well as the sub-primes were in 2007-08.
As Credit Suisse warned last spring, ARM resets and delinquencies are going to be a problem for several years to come. While the percentage of sub-prime loans in the future waves of resets are smaller than those in the 2008-2009 crisis, there are large numbers of shaky mortgages left on the horizon, and the horizon is closing quickly. From 2010 through 2012, more than $1 trillion in ARM's will reset. Pay particular attention to the proportion of agency and Option ARM's.
If large numbers of these loans go belly up—and many competent analysts think they probably will—Who's going to bail them out?
Doug Ross @ Journal has a MUST READ, IN-DEPTH review of the unraveling foreclosure scandal. There is compelling evidence of fraud on a massive scale—fraud that congressional oversight committees could have known or should have known about years ago.
The Money Quote from Doug:
Fannie and Freddie were raped and pillaged by connected Democrats like Franklin Raines, Jim Johnson, Jamie Gorelick, Tom Donilon, and many others. It was wracked by accounting scandals that mysteriously spawned generous bonuses for these executives. With the help of Democrats in Congress, it blocked eighteen separate attempts by the Bush administration to audit the entities and to implement traditional risk management controls.
Should the housing market collapse again, a large part of the blame must once again be assigned to the Democrat Party and its policy of wealth redistribution. The central planners' plans can't work, won't work and have never worked.
And you and I -- the beleaguered taxpayers -- are on the hook for their idiocy.
Barney Frank, Chris Dodd, Maxine Waters and the rest of the social engineering geniuses who protected Fannie Mae and Freddie Mac from regulatory oversight during the Democrat housing boom -- and their own outrageous and damning testimony can be seen here -- should be serving life sentences in Leavenworth.