The Next Wave of Foreclosures

The first wave of home foreclosures is over, but the next wave is going to be even bigger. The next wave will begin early in 2010 and continue well into late 2011. The culprit for this second wave will be the resetting of adjustable rate mortgages. Individuals who took out ARM's did so because they offered a low rate of interest for the first few years and then would be reset. I imagine many of these people intended to re-sell their house before the mortgage was adjusted, but they never got the chance. This graph shows the reset schedule for ARM's-

Zimbio

ARM

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You can see that the number of ARM's scheduled for reset through 2010 and 2011 are less during 2007 and 2008. The reason I say the second wave will be much worse is because when the first wave occurred our economy was in better shape with regard to unemployment numbers.

Mish

Unemployment Rate

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Unemployment stood at near 5.0% near the end of 2007 when the first wave of resets were happening. It's safe to say by the beginning of 2010 unemployment will be at or above 10%, double what it was in 2007. Also, these ARM's will not be reset to a lower rate, but raised to offset to reflect reality. With higher interest rates, people struggling now to make payments and those unemployed (if they haven't already) will be forced to walk away or declare bankruptcy. This forces banks to declare massive losses on their bottom lines resulting in their failure. The talk of green shoots is nothing more than lunacy, nothing has changed since this recession started; the fundamentals are still flawed and the malinvestments made during the boom still exist. In all of their efforts to fix the economy, all government has done is cover up the problems with massive injections of new money. If you don't believe the FED has injected massive amounts into the economy to prop it up, look at this-

NY Times

Fed Balance Sheet

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The FED has doubled their balance and this is only what they are required to report. The United States is in for a rude awakening when the consequences of the actions taken during the past year come due.