February 10, 2009
You thought the subprime mortgage collapse was bad? Well, another mortgage tsunami is heading our way, and it could be just as devastating as the one that already crashed over the U.S. economy.
The leading edge of the new wave is made up of over $300 billion of Alt-A and Option ARM mortgages, all of which are scheduled to reset by this summer, according to data from Credit Suisse. The wave swells to $1 trillion worth of mortgages when one incorporates mortgages due to reset by mid-2011 (see graph below). As the wave crashes ashore, defaults are expected to soar — a process that’s actually already under way as recession and a collapsing home market have sent borrowers fleeing their mortgages.
Data as of Nov 2008
According to Inside Mortgage Finance, a trade publication based in Bethesda, Maryland, the $1 trillion of Alt-A exposure consists of approximately three million outstanding loans (approximately the same amount as was issued in subprime mortgages). Alt-A loans represent 20 percent of the current mortgage market, encompassing many borrowers who fall between subprime and prime status.
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