Let's begin with option ARMs (Adjustable Rate Mortgages). In case you do not know what an option ARM is, it is an adjustable rate mortgage that for an initial period, before reset, allows the mortgage holder to take the option of paying less than interest. Also referred to as reverse amortization. In other words, the loan principal increases during the initial period before the reset, allowing people who cannot really afford a home get by for a few years paying minimal payments, but when it resets they need to pay interest and principal based on an amortization schedule for the remaining life of the loan. Translation - even with currently low interest rates their payments are going up significantly. Now add to this equation job losses, housing prices down up to 50% and more in certain areas and all the other stresses on our economy and you have more trouble on the horizon. You figure for yourselves how many of the option ARMs will get paid off or go into default. The linked site has a nice chart on how the option ARMs seem to be peaking in resets in 2010 and 2011 (near the end of the article). I did a post the other day on how we are in the eye of the hurricane here. It may be a big eye, but it is an eye.
By the way, the good news in the linked article is that other adjustable rate mortgages are probably - this year at least - resetting to lower rates, which is a very good thing. Those who have enough equity to refinance at a fixed rate are going to do well, but I suspect that is a very, very small percentage of those with ARMs. For the rest, if inflation takes off a few years from now, as some suspect, those rates will sky-rocket. Another eye-of-the-storm factor to consider.
http://globaleconomicanalysis.blogspot.com/2009/05/arms-reset-crisis-revisited.html
I am doing a footnote here on commercial real estate loans, which are now sucking wind and credit card defaults that are mounting. Just a couple of asides to consider in determining whether we are past this.
So Let's Look at Consumer Spending
Consumer spending is 70% of our GDP in the U.S. Government is 20%. How much can that 20% make up for deficits in the other 70% - not that much is my answer. And more importantly, the government is wasting its time and our money focusing on the financial sector as opposed to other stimulus for the guy on the street. Don't get me started but the government spending literally trillions on unfreezing credit seems to me a bit odd when our current problems are due to too much credit. The linked articles agree -please read them.
http://suddendebt.blogspot.com/2009/04/culprit-revealed.html
http://suddendebt.blogspot.com/2009/04/crisis-part-two.html
The good news (not for the government) is that U.S. citizens are deleveraging. The savings rate continues to climb despite job losses. The government should be supporting this and spending their trillions of our dollars for long term domestic sustainable job support (you know, like supporting new green technologies, college tuition support, infrastructure and the like) versus spending trillions on the *&^%$'s that got us here. Nonetheless, whether the government knows the right thing to do, individuals do. Saving rates are on the increase even while job losses continue.
http://suddendebt.blogspot.com/2009/04/culprit-revealed.html
Bottom line - the government is doing absolutely the wrong thing. They are supporting those that created this mess (with significant moral hazard) to prompt more credit when the root of our problems is too much credit. We need to flush the system and get rid of the credit spending but instead we are pushing for a new bubble. At best, if it works, we are kicking the problem down the street. Not a good plan - not at all!!
The other day I mentioned I do not like Geithner or Summers. That is not an understatement. Pleeeeeeeeeease Obama, put Volcker in charge. I truly implore you to do this. If you like Summers and Geithner, please take the time to read up on them. They are insiders on the banks we are supporting with obscene amounts of money, which makes me sick. These people need a public flogging, not taxpayer support.
And in case you missed it, here is my tribute to Dr. Seuss, were he alive today, turned 105 last month. It is on point and I think the Dr. would agree:
- I do not like Geithner,
- I do not like Summers,
- I do not like them,
- I do not,
- I do not.
- They spend my money,
- They give it away,
- They think that is funny,
- And I have no say.
- They like big banks,
- They like them a lot,
- They give them my money,
- They give all I got.
- I would not help banks,
- Not give them a dime,
- I would not help banks,
- Even give them the time,
- I would not help banks,
- With all the subprime,
- I would not help banks,
- Their mess is a crime.
- It is their problem,
- They made their own bed,
- It is their problem,
- Their stock price is so red,
- It is their problem,
- You heard what they said,
- It is their problem,
- Yet they score from the Fed.
- The TARP is bad,
- The TARP is sad,
- The TARP is making me,
- Oh so mad!
- PIPP PIPP hooray,
- I hear them say,
- PIPP PIPP hooray,
- And again I pay!
- We give banks money,
- So they will lend,
- We give banks money,
- So they will spend,
- But we give them the money,
- And they pay dividends,
- Please tell me Obama,
- When it all ends.
- The toxic assets,
- They must be bought,
- They must be bought,
- For a lot,
- And then the bank stocks,
- Will be so hot,
- And yet the economy,
- Still goes to pot.
- I do not like it,
- I like it - not!
- I do not like it,
- Please make it all stop!!
- I do not like Geithner,
- I do not like Summers,
- I do not like them,
- I do not, I do not!!!http://www.nakedcapitalism.com/2009/04/knives-are-coming-out-for-geithner.html
Disclosures: None.
1 comment:
I don't believe Volker would do any better than what we have in there now. I would suggest we put Elizabeth Warren in Geithner's place, Krugman in Summers place.
Ms. Warren, the chair of the Congressional Oversight Committee regarding TARP, appears to be honest, and straightforward. I think she is terrific.
Post a Comment