Who's on third? Or better, what inning is it in mortgage resets?

[Jim Nickerson]

From John Hussman 3/30/09 http://www.hussman.net/wmc/wmc090330.htm

Unfortunately, the reset schedule above depicts only sub-prime mortgages. As the recent housing bubble progressed, the profile of mortgage originations changed, so that at the very peak of the housing bubble, new originations took the form of Alt-As (low or no requirement to document income) and Option-ARMs (teaser rates, with no required principal repayments).

A broader profile of mortgage resets is presented below (though even this chart does not include the full range of adjustable mortgage products).

This reset profile is of great concern, because the majority of resets are still ahead. Moreover, the mortgages to which these resets will apply are primarily those originated late in the housing bubble, at the highest prices, and therefore having the largest probable loss. Though many of these mortgages are tied to LIBOR, and therefore benefit from low LIBOR rates, the interest rates on the mortgages are typically reset to a significant spread above LIBOR, and this spread remains constant as interest rates change. Undoubtedly, some Alt-A and option-ARM foreclosures have already occurred, but the likelihood is that major additional foreclosures and mortgage losses lie ahead. If we fail to address foreclosure abatement during the current window of opportunity (early to mid-2009), there may not be time for legislative efforts to contain the resulting fallout.

JN here; So it appears to me that we are nearing the end of the top half of the third inning (that is 2 1/2 innings have been played) and about 40% of all mortgages have reset, and there is much still ahead.

Hussman also:

In short, attempting to avoid the need for debt restructuring by wasting trillions in public funds increases the likelihood that the current economic downturn will be prolonged, places a massive claim on our future production in order to transfer our nation's wealth to the bondholders of mismanaged financial companies, and raises the likelihood that any nascent recovery will be cut short by inflation pressures. We are nowhere near the completion of this deleveraging cycle.

[ThePythonicCow]

Re: Who's on third? Or better, what inning is it in mortgage resets?

We are nowhere near the completion of this deleveraging cycle.

So ... oil spikes up again and a second residential real estate crash hits us, not to mention the impending crash of commercial real estate (vacant strip malls and such).

Oh joy!

[jtabeb]

Re: Who's on third? Or better, what inning is it in mortgage resets?

From John Hussman 3/30/09 http://www.hussman.net/wmc/wmc090330.htm

Unfortunately, the reset schedule above depicts only sub-prime mortgages. As the recent housing bubble progressed, the profile of mortgage originations changed, so that at the very peak of the housing bubble, new originations took the form of Alt-As (low or no requirement to document income) and Option-ARMs (teaser rates, with no required principal repayments).

A broader profile of mortgage resets is presented below (though even this chart does not include the full range of adjustable mortgage products).

This reset profile is of great concern, because the majority of resets are still ahead. Moreover, the mortgages to which these resets will apply are primarily those originated late in the housing bubble, at the highest prices, and therefore having the largest probable loss. Though many of these mortgages are tied to LIBOR, and therefore benefit from low LIBOR rates, the interest rates on the mortgages are typically reset to a significant spread above LIBOR, and this spread remains constant as interest rates change. Undoubtedly, some Alt-A and option-ARM foreclosures have already occurred, but the likelihood is that major additional foreclosures and mortgage losses lie ahead. If we fail to address foreclosure abatement during the current window of opportunity (early to mid-2009), there may not be time for legislative efforts to contain the resulting fallout.

JN here; So it appears to me that we are nearing the end of the top half of the third inning (that is 2 1/2 innings have been played) and about 40% of all mortgages have reset, and there is much still ahead.

Hussman also:

In short, attempting to avoid the need for debt restructuring by wasting trillions in public funds increases the likelihood that the current economic downturn will be prolonged, places a massive claim on our future production in order to transfer our nation's wealth to the bondholders of mismanaged financial companies, and raises the likelihood that any nascent recovery will be cut short by inflation pressures. We are nowhere near the completion of this deleveraging cycle.

Thanks JIM, for a KICK-ASS head's up!

[Sharky]

Re: Who's on third? Or better, what inning is it in mortgage resets?

It seems to me that with the continuing torrent of foreclosures and the resulting destruction of bank capital, that it's going to be very difficult for inflation to take hold in any meaningful way. Not impossible, but definitely "challenging." I'm sure the banks and the Fed understand that -- which is probably why Geithner's plan came together looking like it did: as a last ditch desperate effort, probably driven by semi-panic.

It's also worth noting that there's a significant lull in resets this year. They really pick up in earnest next year and the year after.

[FRED]

Re: Who's on third? Or better, what inning is it in mortgage resets?

See: Next Wave of Mortgage Defaults

[FRED]

Re: Who's on third? Or better, what inning is it in mortgage resets?

It seems to me that with the continuing torrent of foreclosures and the resulting destruction of bank capital, that it's going to be very difficult for inflation to take hold in any meaningful way. Not impossible, but definitely "challenging." I'm sure the banks and the Fed understand that -- which is probably why Geithner's plan came together looking like it did: as a last ditch desperate effort, probably driven by semi-panic.

It's also worth noting that there's a significant lull in resets this year. They really pick up in earnest next year and the year after.

Massive defaults, massive stimulus, massive inflation. All still according to forecast.

See also: Inflation a boon for gold, but frenzy unlikely - Reuters, Mar 31 2009 9:18AM

[we_are_toast]

Re: Who's on third? Or better, what inning is it in mortgage resets?

Massive defaults, massive stimulus, massive inflation. All still according to forecast.

See also: Inflation a boon for gold, but frenzy unlikely - Reuters, Mar 31 2009 9:18AM

Hmmm, the article doesn't seem to talk about massive inflation, in fact the opposite.

"When the Fed sees inflationary pressure, it will start selling bonds and suck the money out of the system, and we probably will be able to avoid hyperinflation,"

This ability of the Fed to sell all the stuff that it is buying has me wondering about POOM. If the housing market can't be reinflated and unemployment can't be brought down for a long time, can we have POOM?

POOM really becomes a pure political decision in the above conditions. An inflationary period with unemployment in the mid teens would be abolutely disastrous to the unemployed. It would mean millions living on the streets and 10's of millions of underemployed getting poorer by the day while others ride the POOM wave to new heights.

To decide to do this would be to decide to turn the country into a 3rd world country for years to come. That would not be a decision to be made lightly. A Japanese style stagnation might be far more polliticaly acceptable.

[jk]

Re: Who's on third? Or better, what inning is it in mortgage resets?

Hmmm, the article doesn't seem to talk about massive inflation, in fact the opposite.

This ability of the Fed to sell all the stuff that it is buying has me wondering about POOM. If the housing market can't be reinflated and unemployment can't be brought down for a long time, can we have POOM?

POOM really becomes a pure political decision in the above conditions. An inflationary period with unemployment in the mid teens would be abolutely disastrous to the unemployed. It would mean millions living on the streets and 10's of millions of underemployed getting poorer by the day while others ride the POOM wave to new heights.

To decide to do this would be to decide to turn the country into a 3rd world country for years to come. That would not be a decision to be made lightly. A Japanese style stagnation might be far more polliticaly acceptable.

my understanding has been that poom will not be the decision of u.s. decision-makers. it will arise from the decisions of offshore dollar holders to try to cash in their dollar chips for other assets.

[LargoWinch]

Re: Who's on third? Or better, what inning is it in mortgage resets?

my understanding has been that poom will not be the decision of u.s. decision-makers. it will arise from the decisions of offshore dollar holders to try to cash in their dollar chips for other assets.

Maybe there will introduce an ETF for SDRs? :p

[Slimprofits]

Re: Who's on third? Or better, what inning is it in mortgage resets?

JN here; So it appears to me that we are nearing the end of the top half of the third inning (that is 2 1/2 innings have been played) and about 40% of all mortgages have reset, and there is much still ahead.

Hussman also:

In short, attempting to avoid the need for debt restructuring by wasting trillions in public funds increases the likelihood that the current economic downturn will be prolonged, places a massive claim on our future production in order to transfer our nation's wealth to the bondholders of mismanaged financial companies, and raises the likelihood that any nascent recovery will be cut short by inflation pressures. We are nowhere near the completion of this deleveraging cycle.

this is the anti "green shoots and mustard seeds" post.

[billstew]

Re: Who's on third? Or better, what inning is it in mortgage resets?

Can someone tell me how to tweak this model to mention the reset problem.

Mortgage resets were not considered in the beginning. A table of reset data might add more weight to this credit crisis ending [2021 ... 2026].

http://hireme.geek.nz/model-US-EU-cr...epression.html

[grapejelly]

Re: Who's on third? Or better, what inning is it in mortgage resets?

there is interesting news on inflation...just little things. Price of tea at all time highs, oil moving up in price, little things creeping up in price, just an inkling of what is ahead.

[GRG55]

Re: Who's on third? Or better, what inning is it in mortgage resets?

Maybe there will introduce an ETF for SDRs? :p

Just one? :rolleyes:

[GRG55]

Re: Who's on third? Or better, what inning is it in mortgage resets?

...This ability of the Fed to sell all the stuff that it is buying has me wondering about POOM. If the housing market can't be reinflated and unemployment can't be brought down for a long time, can we have POOM?...

If the housing market cannot be reflated, and unemployment remains elevated, what do you think the Fed's chances are to contract the money supply and raise administered interest rates when it needs to?

POOM, once it gets underway in earnest, is going to be sustained this time precisely because the political will to counter inflation will be completely lacking in a world of slow economic growth and high unemployment.