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America's economic future, revealed

Robert Niles
By Robert Niles
Published: July 10, 2008 at 4:26 PM (MST)
Wish you could see into the future of the American economy?

Well, here it is:

Credit Suisse Mortgage Reset Chart

It's a chart from Credit Suisse last year that shows how many billions of dollars in mortgages will reset to higher interests rates in upcoming months. It also breaks down the resets by mortgage type.

[A simplistic vocabulary lesson:

  • "Subprime" basically means mortgage borrowers with lousy credit and poor, or nonexistent, proof of having enough income to repay the loan.
  • "Alt-A" means people with one or the other problem, but not both.
  • "Prime" borrowers have neither problem.
  • "Agency" loans are those backs by Fannie Mae or Freedie Mac, which are having their own problems these days.
  • "Option adjustable rate" mortgages are ones where people can choose to pay less than the interest charge on the mortgage for any given month. With those loans, the amount you owe on your house goes up each month, as opposed to a traditional mortgage, where you pay all the interest, plus some principal, each month, pushing the amount you owe down.]

    As home prices fall throughout the country, many borrowers facing higher monthly mortgage payments (thanks to a reset) will not be able to refinance into another loan, and, thus, another low-interest, affordable, introductory rate. That's because banks won't refinance your loan if your home's value has fallen to or below the amount you owe on your current mortgage.

    So if those borrowers cannot make the higher, reset payment... foreclosure, here they come. That's why the number of resets correlates with the number of foreclosures.

    The chart shows that the much-hyped "subprime" mortgage problem all but ends this year. Look for analysts to call a bottom to the real estate market when the number of subprime foreclosures falls later this year. Real estate salespeople will urge everyone to jump in and buy since, they will say, the worst will be over.

    They will be wrong. The chart shows that resets among prime borrowers will surge next spring, glutting the market in more expensive, desirable communities and forcing down prices there. Then, the pain builds in 2010, leading to a peak in foreclosures in 2011.

    Remember, with big mortgage lenders like Countrywide and IndyMac out of the picture, and the Fed restricting the types of mortgages that lenders can write, the housing market will not have the massive amount of easy money available to it that fueled the recent bubble in prices. Even after the damage is done, there will not be enough mortgage money available in the market to reinflate home prices.

    So when we do hit bottom, we're going to stay there for a while.

    Clearly, no one ought to be expecting the housing market to help the economy over the next several years. If there is to be any significant housing recovery, it will need to be helped by getting would-be home buyers money from other sources, such as wage increases or increased savings. You know, the old-fashioned way that people got money to buy things.

    I also suspect that Republicans will use the reduction in subprime mortgages as the election approaches as "proof" of an impending economy turnaround as they appeal for votes. Then, whichever party loses the election will use the 2010 meltdown to blame the winning party for botching the economy. But what happens then to mortgages will not be the new administration's fault. That egg already has been laid, even if it will not hatch for another two years.

    My kids recently have discovered the "Back to the Future" movies. The key plot point in the second film is a sports almanac, which is taken back in time so its owner can make a fortune betting the winners.

    Consider this chart your version of Biff Tannen's sports almanac. Bet/invest accordingly.

    Robert Niles also can be found at

  • From a reader at on July 11, 2008 at 10:42 PM

    Am I prime?
    Here's the deal: My old Texas Gran'pa (God rest his soul) told me: 30-year fixed mortgage.
    We were able to get a house in '03 (right before the spike in Phoenix) for about $100 more than we wanted, with the REQUIREMENT that we refinanced in 2005.
    By god we got that re-fi in '05 for a fixed 30-year at 6 and 1/8. Totally affordable because we counted what we PAID for and ignored what every realtor said the house was worth. OMG
    Needless to say - we count our blessings every night we watch the news.
    I wish people knew how to read that gd fine print. Really - the things "they" tried to get us to sign ...
    OMG if only we could help everyone else.

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