Two More Years of Pain


Amherst Securities senior analyst Laurie Goodman, last seen in these parts disproving the link between unemployment and defaults, has some discoveries on adjustable rate mortgages (ARMs) that Calculated Risk helpfully summarizes:

• Option ARM borrowers were a self selecting group: "option ARMs were the ultimate the ultimate affordability product, and borrowers who took them were a self-selected group."

• Option ARMs have performed almost as poorly as subprime: "The cumulative default rate on option ARMs is higher than on any other category of loans except subprime. For 2006 securitized issuance, 61% of subprime loans have defaulted, as have 49% of the option ARMs, 39% of Alt-A loans, and 11% of prime loans."

• Option ARMs are no longer experiencing negative amortization (this is because of the low index rates, and the annual increase in the payment.)

• The two key problems for option ARMs are negative equity and the coming recasts (with payment shock). "Across all categories, option ARMs have more negative equity than other products." and "most of subprime pay shocks have already occurred, while most of the options ARM pay shocks are yet to come."

Take another gander at that graph up top and you can understand why nobody at Fed, Treasury or the destination media is willing to reply to the question of whether the recovery will not fail to decline to refuse to avoid kicking in this year with anything bolder than a definite maybe.

That looks to me like a lotta houses coming on to a market where demand has been pretty well tamed. And there is reason to expect interest rates will be increasing during the peak period for readjustments—which, barring magical government interference, will mean fewer buyers and more desperate sellers.

Household net worth hit a floor in the middle of 2009 of about $53 trillion. That's between $12 trillion and $14 trillion down from the 2007 peak, and according to back issues of the Fed's Flow of Funds reports, it puts us about where we were in 2003/2004. Stock market performance was the main support for last year's plateau. It's breathtaking: After a year in which the monetary base has been inflated faster than at any point in my lifetime, there still doesn't seem to be any scenario in which the American asset base can escape further deflation. We have such a strong, deep bench of deadbeats ready to take the field for at least the next two years, the rest of the world can only look on in wonder.