Next wave of defaults to come?

November 8th, 2009

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Is the worst of the mortgage crisis over in the US? This chart below shows that the next wave of mortgage defaults is yet to come:

Upcoming surge of mortgage loan reset

Upcoming surge of mortgage loan reset

For our Aussie reader, the options ARM mortgage is similar to a variable rate mortgage with a few twists, including the ability to choose the payment options. Typically, option ARM mortgages have a very low teaser rate, after which it will reset after a certain period of time (see this Wikipedia article for more information).

The above chart shows that there will be a growing wave of interest rate resets in the coming months, peaking at around September 2011. If the US economy is still mired in higher and higher unemployment by then, then this will mean even more bad debts in the financial system.

This ought to be deflationary (in terms of asset prices). But the Federal Reserve will be stepping up its printing press and the government will step up more ‘stimulus,’ bailouts and so on. The Federal Reserve will be saddled with more dodgy ‘assets’ as well. So, what will happen to asset prices?

No one knows.

But we suspect that we will get to see more and more contradictory news like this:

Newspaper photo cut-out

Newspaper photo cut-out

Thank you, David for kindly emailing this recent photo cut-out on the business section of The Australian.