Despite popular belief to the contrary, we haven’t seen the worst of anything yet:
One of the more brilliant innovations in the mortgage industry in the last four years — the option ARM — allowed homeowners to pick their payment each month for a few years. As the borrower, you decide how much to pay each month… bare minimum, interest only or — gasp — interest plus part of the principal.
Great while you get to choose. But when the option expires, the bank resets your ass with a hefty fixed rate.
That second wave of adjustable-mortgage resets won’t even begin until next year. And as you can see from the chart above, the quantity dwarfs the amount that caused Wall Street, the Fed and Congress to vomit in unison already this year.
“The credit crisis will extend well into 2009,” opines Oppenheimer analyst Meredith Whitney, “and perhaps beyond.”
Whitney became somewhat of a contrarian demigod last year when she brazenly forecast Citigroup’s massive write-downs before the crisis dominated headlines. Her report yesterday had “investors” racing for the exits.
“Multitrillion dollars of loans were underwritten,” writes Whitney characterizing the root of the problem, “with the false assumption that home prices would go up in perpetuity on a national basis.”
Unfortunately for many… the assumption was false.
“We see no near- or medium-term comeback,” she says of the firm’s outlook. “We believe losses will only accelerate further and be far worse than even the most draconian estimates. Due to continued deterioration in consumer liquidity, we are raising our loss expectations significantly for the group and lowering our earnings estimates significantly.”