60 Minutes recently ran a piece about the next wave of loans that will soon go bad. The orange peak to the left above above are the subprime mortages that have reset recently and forced many into bankruptcy.The greenish peak to the right are the Alt-A and Option loans that are starting to reset.
Portland has a number of these loans, which were used to buy all sorts of property, including high end property. These aren't buyer's with bad credit, but rather buyer's who bought more house that they could afford assuming they could refinance into 30 year fixed loans once their home value appreciated another 20% in a year.
Some of these loans had options that didn't pay off any of the principle, these are now starting to reset as they typically contain a clause (that most didn't read) that says that the principle must be paid down when it reached 110% of the original amount.
Other loans had low teaser rates (as low as 3% for some) that are now resetting to 6% or higher, doubling the payment.
I remember a Portland couple was featured in Money magazine last year. They had just bought a 700k house, on about $100k income, using one of these loans. (If they had used a conventional 30 year fixed at 6% their PITI would be about $3700 a month, or 44% of monthly income for someone earning $100k a year. So no they really can't afford this house) One of them was staying home to raise their child, the other worked. They had planned to refinance once the value went up, I assume now that they will be defaulting, or the second person will be going back to work soon.
It's only going to get worse here folks, and according to the recent RMLS data it is already getting worse quickly.
Click here to watch the full piece.
Thanks to Greg for the tip.
