The Second Wave

Uh oh…

File:U.S. Home Ownership and Subprime Origination Share.png


Subprime mortgages rose from only 8 percent of originations in 2003 to 20 percent in 2005 and 2006, while the interest-only and payment-option share shot up from just 2 percent in 2003 to 20 percent in 2005.

Now look below at (1) where those subprimes reset, and (2) where all the prime ARMs and Option ARM mortgages are scheduled to reset:


Any guesses as to what the bankruptcy rate was doing in 2007 and 2008? Yep. 


The peak in 2005 and the large drop immediately thereafter can arguably be attributed to bankruptcy reform in 2005 (the reform made it harder to file chapter 7 – liquidation – so the peak in 2005 is seen as the “rush” to get those filed before the act became law).

While I don’t have the data to prove it, I have to believe those rising mortgage rates/payments were at least one factor in the increase in bankruptcy filings from 2006 – 2008.  Another was undoubtedly unemployment:



Now this:

Bankruptcies soared 32% in 2009

Jobless rates seen high for many more years

1.7 Million Bankruptcies Estimated for 2010 (a 20% increase over 2009)

A lot of people who are already in tough economic conditions are about to have their mortgages reset at higher rates/payments.

What do you think is going to happen in 2010 and 2011 as those rates reset?  What happens to the banks, retirement funds, insurance companies and other institutions holding those securitized mortgages when people begin to file bankruptcy and walk away from them?

Hang on boys and girls…



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