Want some more bad news?  Well sorry about that because London's Financial Times says we ain't seen nothing yet.

According to an article written last week by Eric Uhlfelder, Credit Suisse maintains that about $1 trillion in Alt-A and option payment mortgages are scheduled to have rate resets in the next 30 months.  These resets, the bank says, could cause as much future damage as the subprime crisis has already inflicted.

If these resets and the resulting increased monthly payments send defaults soaring, and given other factors such as job losses and falling home prices there is every indication they will, the bank projects that foreclosures over the next four years could reach nine million or 18 percent of all mortgages.

The newspaper estimates that there are approximately three million Alt-A loans outstanding with a value of $1 trillion.  Fannie Mae, which owns or guarantees about 30 percent of them has called them loans with a higher risk of default than non-Alt-A loans.



At the time they were issued they weren't viewed as particularly risky.  They were primarily given to borrowers with reasonable credit scores who would have been prime prospects except for an inability to document sufficient income.  No one seemed to much care whether this indicated a lack of documentation or a lack of income.  As many of these loans carried introductory or teaser rates, the amount that borrowers owe each month (and in the case of option payment loans the amount they owe in total) has increased as home prices have fallen.

Whitney Tilson, a partner in T2 Partners an asset management firm, told The Times that he expects the reset in rates to accelerate default rates, further flood the housing market, and put even more downward pressure on housing prices preventing establishment of a price floor which is viewed as critical to ending the current economic crisis.  And he projects an even more grim scenario than Credit Suisse - a 50 percent default in both option ARM and Alt-A loans.

As these defaults happen it will spill over into the securities market where a T. Rowe Price spokesperson estimates some $800 billion in securities are backed by Alt-A mortgages.  As these securities fall in value, perhaps to pennies on the dollar, there will be a further tightening of credit markets.

Most of you reading this are mortgage professionals and all of this brings me to a question.  I know full well that I am not the only one asking it, yet I have yet to hear a reasonable answer.   Why don't the powers that be, the wizards behind the screen, waive these resets?  For that matter, why don't they lower rates across the board at least temporarily so as to reduce payments for everyone.  I know about securitization and all of the nameless and faceless investors that supposedly won't allow this to happen.  But wouldn't they rather be collecting 4 percent on their investment rather than not collecting 9 percent?

It seems like such a simple thing to do.  Or am I just simple for asking?  DISCUSS THIS TOPIC HERE