Six months ago at about the time the housing market in America peaked, we learned that subprime mortgages represented 13% of the total of their mortgage stock – quite incredible!
Financial institutions knowingly lent, at artificially “low start” rates of interest, 100% mortgages to people with bad credit records; not checking on anything, accepting the word of the applicant about income and all other financial matters. Given the figures quoted above, they did this on a massive scale. This would be understandable if it was the result of rogue bankers but it was not. It was a deliberate thought through business plan!
The rates of interest initially charged for many of these loans were not the correct rates but “teaser” rates - in other words, a lower rate of interest, well below the market, was charged with the unpaid amount accumulating to the debt. At a certain predetermined date, these mortgages are reset from when the full payment has to be made, not just on the original loan but also the accumulated amount of any unpaid interest.
The fact that these loans were unaffordable in the first place and even more unaffordable following the resetting, should come as no surprise. Huge numbers of these loans are still scheduled to be reset over the next few months which must lead to massive additional delinquencies. Listed below are figures indicating the size of the potential fold-up, starting from the current month of August and the numbers are billions! If you want to know why the market is running extra scared, one reason is the knowledge of this huge poisonous cloud hanging over it. Here we go:
August 2007 - US$52bn
September - US$58bn
October - US$55 bn
November - US$52bn
December - US$58bn
January 2008 - US$80bn
February - US$88bn
March - US$110bn
April - US$92bn
May - US$76bn
June - US$75bn
July - US$50bn
I suggest we adhere to a well-trusted motto from our good-old scout friend: "Be Prepared"!
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