Just as 2007 and 2008 were the years of subprime woes, 2010 will go down as the year of option adjustable rate mortgage (ARM) resets. This crisis is about to unleash a fury no one’s prepared for. It won’t be as bad as subprime — it wll be worse! Words: 557
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Ian Cooper’s (http://www.energyandcapital.com/) original article* for the sake of clarity and brevity to ensure a fast and easy read. Cooper goes on to say:
Teaser Features Ending
Why is that? Because lenders created these ARMs with “teaser” features for borrowers – features that included making lower minimal payments for the first few years before the loan reset to a higher payment schedule. If that weren’t bad enough, there was another feature called “negative amortization,” which meant you weren’t paying back any principal. In fact, with negative amortization loans, your loan balance increased over time. Incredulously, every time you made a payment, you owed the bank even more. These are the loans that allowed consumers to buy houses they couldn’t otherwise afford.
About $750 billion worth of option ARMs were issued between 2004 and 2007 and will begin resetting shortly. Institutions like Bank of America (BAC), JP Morgan Chase (JPM), and Wells Fargo (WFC) are in for a rough ride, given their exposure to option ARMs.
Ramification of Resets
When the resets happen monthly payments on a $400,000 mortgage, for example, might well jump from $1,287 to $2,593 which will result in a larger number of foreclosures than did the subprime debacle. In addition, higher unemployment will cause many “homeowners” to strategically default on house payments, as it will be easier for them to just walk away, and the financial community will be left holding the bag.
Currently, according to CoreLogic, “underwater” mortgages account for +25% of all “homeowners” with a mortgage – that’s about 11.3 million “homeowners” – and according to the AP, more than 4 million “homeowners” (i.e. 8% of all Americans with a mortgage) are at risk of losing their homes. The fact that another dip in home prices is on the horizon as more glut hits the market can only exacerbates the situation. On top of that 60 Minutes found that at least another million Americans, who can afford to stay in their homes, have already walked away.
Foreclosures and Gold
History shows us that market panic sends smart investors to the ultimate safe haven of gold:
– the credit woes of the 1903s sent American investors to gold
– the U.S. subprime chaos that began in 2007 was responsible for rocketing gold
– the European debt contagion alone is partially responsible for pushing gold up more than 10% this year already.
The current mortgage crisis – and the impending option ARM crisis that is about to be unleashed – will to be a major drag on the economic recovery and will send gold higher than it is today – much higher. This means you should be buying gold — or buying more gold — right now.