Monthly Mortgage Rate Resets, 2007-2016 and what it means to the housing market.

The current home mortgage crisis is often referred to as a "subprime" crisis. That's useful shorthand, but it really isn't accurate and unfortunately obfuscates the scope of the problem. The mortgage problem isn't just limited to subprime. It extends beyond it in (at least) two ways.

First, as the Wall St. Journal has reported, many of the subprime loans were not made to subprime consumers. That is, the borrowers had FICO scores above 620. Not only does this indicate that something is seriously amiss in the mortgage market (yield spread premiums encouraging brokers to push consumers into costly loans, perhaps?). It also tells us that the problem isn't just subprime.

Second, it's worth remembering that only 14% of mortgages outstanding are subprime. Most mortgages aren't subprime. To be sure, a disaster in 14% of the market is a huge problem in and of itself. But this graph from Credit Suisse is the most sobering thing I've seen in a while. It shows that most of the interest rate resets ahead aren't subprime, but are instead Alt-A and option-ARMs. Alt-A is the category of loans made to consumers with FICO scores just above the subprime threshold. Option ARMs give borrowers several payment options, including making a minimum payment that does not even cover the interest that accrued in the last month. This means it's pretty easy for an option ARM to end up underwater, even in a market where prices are holding steady. If real estate prices are dropping, it is even more likely that an option ARM will end up upside down, which makes refinancing near impossible. The bulk of the Alt-A and option-ARM resets are coming in 2010-2011. A lot of things could change before then. But we might just be seeing the tip of the iceberg in the housing market.

Credit Slips. 12.31.2007.