As housing-market observers fight about whether we’ve hit the bottom or are just seeing the “mother of all head fakes,” it’s worth remembering that we’re approaching the second wave of mortgage resets.
What’s a “mortgage reset”?
It’s when the homeowner who bought a house with a low “teaser rate” and planned to refinance as soon as the house price went up suddenly gets a new payment that is far higher (not always, but usually). Often, homeowners can’t afford these resets.
The first wave of resets, as you’re recall, was subprime. As this chart from Whitney Tilson shows, that’s basically done with:
So subprime is pretty much done. But Alt-A is actually a much larger category of mortgages. And the big Alt-A reset boom is just around the corner:
As Karen Weaver of Deutsche Bank observes, Alt-A mortgages are already mostly underwater. The combination of resets plus severely underwater status will likely exacerbate defaults and foreclosures.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.