This is just a heads up, payment option adjustable rate mortgages (PO ARMs) are about to reset. They begin this month, then ramp up in October then go full monkey by Christmas. What are PO ARMs?
And why is this the hammer in the coffin of a double-dip recession?
See me below the fold!
First off, you need to know what exotic instrument Wall Street created:
http://www.reuters.com/...
The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan's principal.
When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan's interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.
Because the new monthly payments can be five or 10 times what borrowers are accustomed to paying, they "threaten a much greater hit to the consumer than the subprimes," Goddard said, referring to the mortgages often extended to less credit-worthy.
These magnificent beasts only started appearing in 2002, when Bush deregulation allowed for such predatory instruments like PO ARMs, to exist. Before that time, people usually went to jail for these type of antics.
Now follow me into the rabbit financial hole!
Now of course these predatory loans are not exactly AAA bond worthy, which is why Wall Street once again has bundled them into AAA-rated Mortgage Backed Securities (MBSs). This is what caused the idiocy last year, because once these timebombs were packed into the MBSs, they where then re-securitized into the sad unicorn known as Collateralized debt obligations (CDOs).
So basically, we are back at the beginning of the tomfoolery of last year, because you know what Wall Street offers as a counter-part to CDOs?
Credit Default Swaps! The CDSs!
That's right, that bullshit is still legal! Way to be on the ball Congress!
So here is how it is going to go down:
- PO ARMs collapse due to reset of payments homeowners will have little to no chance of paying
- The MBSs that contain these PO ARMS will default
- The CDO that contain these MBSs will default
- Wall Street will benefit by not only getting bailed out again, and they will be, they will also make made crazy clown bank with the CDSs that were counterparty to the CDOs!
Just like last time, because for some reason this is all still legal.
Maybe Congress can get on this before it happens again.