Deflating The Housing Bubble: 25% of Mortgages To See Payment Rises in 2006/7

Deflating The Housing Bubble: 25% of Mortgages To See Payment Rises in 2006/7
The Big Picture points to the following Wall Street Journal article, detailing the world of hurt the housing market is in for.

Because of the Journal’s asinine walled garden, I’ll paste the key findings below:

More than $2 trillion of U.S. mortgage debt, or about a quarter of all
mortgage loans outstanding
, comes up for interest-rate resets in 2006 and 2007, estimates Moody’s, a research firm in West Chester, Pa.

A recent study by First American Real Estate Solutions, a unit of title
insurer First American Corp., projects that about one in eight households with
adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans

For a study released in February, Dr. Cagan examined adjustable-rate first
mortgage loans made in 2004 and 2005, including refinancings. He figures about
7.7 million of these loans are outstanding, representing $1.888 trillion of

About 1.4 million of those households face a jump of 50% or more in their monthly payments once their initial low-payment periods run out, Dr. Cagan says, and an additional 1.6 million face smaller increases that are still likely to
strain their finances.

Assuming that home prices stay around current levels and interest rates don’t rise sharply, Dr. Cagan figures about one million households eventually will default and lose their homes to foreclosure. That would cause about $110 billion of losses for lenders, he says.

Such wild cards as interest rates and home prices could throw off the
projection. If interest rates shoot upward and home prices fall, the number of foreclosures could be much higher than Dr. Cagan’s scenario foresees. If interest rates decline and home prices surge, the damage would be less.

I find it hard to add any value with commentary, other than to note that anyone who bought a house using a mortgage that was likely to jump payments by 50% or more was either misled or brain dead. Buckle up folks, it’s going to be a bumpy ride.

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