Is the mortgage crisis ending?

A few days ago I posted this AP article to AustinMarketInfo.com:

Report: Fewer people falling behind on home loans

It is interesting, and seems accurate as far as it goes.  These “in the rearview mirror” statistics are encouraging.  The article does mention, correctly, that continuing foreclosures will exert ongoing downward pressure on property values.

Another concern remains, however, that is not mentioned in that article:  Are we really over the crest or just in a trough between waves?

I picked up this chart from a presentation I attended recently:

Monthly Mortgage Rate Resets

What is clear in that graph is that most or all of the “subprime” mortgage problem is behind us.  It is also clear that the bulk of two other crises are still ahead.

Those of us in the industry are familiar with a category of loans called “Alt-A” — mortgage loans to borrowers who were considered higher risk than “A” paper, but not as risky as “Subprime.”  Alt-A loans have been part of the mix of mortgage defaults throughout the past couple of years, but the bulk of those interest rate resets will happen in 2010 and 2011.  Since these borrowers were better qualified for their loans than subprime borrowers, perhaps the default rate will be lower.  Time will tell.

There is another category that merits serious concern, though:  Option ARM loans.  These were marketed variously as “Smart Loans” or as “Pick-A-Pay” or other labels that made them easy to sell to homebuyers who were determined to overreach.  In simple terms, these homebuyers were able to pick a payment that was comfortable in the early years of the loan term — interest only or some other minimum payment defined in the loan contract, including the possibility of negative amortization.

For consumers who haven’t encountered the term “negative amortization” before, consider a world in which the outstanding balance on your loan goes UP every time you make a payment — i.e., the interest rate you pay is lower than the interest rate that is actually being charged against the outstanding balance.  Now, picture that situation in a market where you home has lost 20% to 50% of its value in the past two years.  Clearly, we should anticipate a substantial default rate on these loans.

Fortunately, Option ARMs were not a prominent part of the loan mix in the Austin/Central Texas market, but that are present.  We are also fortunate that average and median prices are almost unchanged over the past two years, so alternatives to default and foreclosure will be more viable here.  This issue will likely be worst in the 5 states that have already suffered so badly through the mortgage meltdown and housing crisis, but our area will feel it, too.  Like the Alt-A portfolio, the bulk of Option ARM rate resets will happen in 2010 and 2011.

Now, I have been a consistently optimistic voice for the Greater Austin real estate market, and I remain optimistic.  However, with industry data like this readily available it seems premature for a major news service to suggest that we may be on the downhill side of the mortgage mess.  One quote in the AP article about the market recovery is particularly worth attention:  “It’s going to be a very long, gradual process.”