Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

If you think it's bad now, wait a year or more. The subprime adjustable rate mortgages have already peaked and bottomed. That's good. However, due to the longer initial low interest periods inherent in these groups, prime, Alt-A, and option ARM resets just started ramping up in April.
For the next couple of months, these will rise and reach an intermediate plateau in June. This plateau will last for about a year and then will start rising again in May of 2010 peaking in August of 2010. They'll then tail off a bit until May of 2011 where they'll ramp up again but not as high as the 2010 peak. Finally, in October 2011, they'll start moving down again to hit bottom rates in early 2012.
Contrary to what the pundits are saying, this has a long way to go.
The number of ARMs among prime, alt-a, unsecuritized, and options are higher overall than subprime however, it's also more likely that prime and alt-a would have been able to refinance into fixed mortgages at the recent low rates. If they weren't able to, with rapidly rising mortgage rates, those ARMs are going to reset to much higher rates and defaults among those categories are likely to rise signficantly.
Alt-a mortgages are better than sub-prime but worse than prime.
Unsecuritized mortgages are a mixed bag. Some are so good that the mortgage originator wanted to keep them and didn't sell them into the securitization market (MBSs). The others though, are so bad that no one wanted them. Consider that at the time, the standards were pretty low for what the securitization market wouldn't buy.
Option ARMs are a scary mix of mortgages and likely to suffer really high default rates. They're composed of those exotic mortgage types such as "interest only" mortgages and even those where the initial low payments were less than what the interest amounted to so the amount owed after several years is guaranteed to be more than what the home is worth even in cases where the home prices didn't go down.
Sad times and we're paying the piper for the multi-year banquet and spending spree that the country just binged upon.