"This recession might linger for years. Our economy will lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink deeper into a crisis that, at some point, we may not be able to reverse."
—President Barack Obama on dangers of not passing stimulus
But stimulus or not, we’re still in trouble. Option ARM resets are just around the corner and will mark the beginning of the second half of our crisis. But this is nothing new. We’ve been warning about these resets (just as we did with subprime in February 2007) for months.
It’s the reason I remain bearish on the market medium-term.
Take a look at some of these charts pulled from Dr. Housing Bubble, for an idea of just how bad the resets could get.
Worse, about $750 billion of Option ARMS were originated between 2004 and 2007. And a reported 55% on those that took out an Option ARM owe the bank more than what their homes are actually worse.
As of December 2008, 28% of Option ARMs were already delinquent or in early stages of foreclosure. We haven’t even begun to see massive resets, and already one in four is a disaster. Guess what happens when $30 billion of Option ARMs reset this year, and another $67 billion resets next year?
Even worse, according to Dr. Housing Bubble, "the average Option ARM monthly payment is going to go up by 63 percent or $1,052." And this will happen to all of these loans, regardless if the loan holder loses their job.
You’ve been warned. Option ARMs will be the next leg of the credit crisis. No one can stop this from happening. Again, this is the reason we remain bearish medium-term, and why we’ll continue to load up on put options, especially on the likes of Wynn and Royal Caribbean as discretionary income disappears.
