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Second US sub-prime crash on its way, says private bank

Another round of sub-prime mortgage repossessions could be on the way over the next two years, which may lead to a second crash in the USA.

According to Lombard Odier another crash is around the corner as Adjustable Rate Mortgages – cheap fixed loans that revert to huge variable rates – become too much for many US households.

The Swiss private bank says almost £462bn ($750bn) of resets – where the rate reverts to its high default – are likely over the next two years, concentrated this time in the ‘Option ARM’ sector. Option ARMs are adjustable loans that required little or no documentation, where borrowers had the option of making monthly payments with the interest rate negatively amortising on the mortgage.

Lombard Odier chief investment officer Paul Marson says the lull in ARM resets has hit its low point and the surge of second wave resets are set for 2010 as many of the loans sold after 2005 finally revert to the higher rate. This could lead to a second spike in repossessions as homeowners struggle to keep up with the inflated rate.

Marson says: ”At the peak in 2006, a record 50 per cent of total mortgage applications were for ARMs, which usually had a very low teaser rates would generally reset five years forward.

“There are almost £120bn ($200bn) of Option ARMs to reset in the years ahead and, given that delinquency rates are already running near 40 per cent, the scale of this reset time-bomb is equal in magnitude to that of sub-prime in 2007 and 2008. Whoever said the credit crisis was over is severely misguided.”


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Dose it mater?
    I here’d the banks are not foreclosing on people because they can use the house on the books as an asset to continue lending money. Foreclosing hurts the Bank’s business model.
    The market will look solid but will be hollow.
    Tell me if I’m off the mark, I would like to know what’s going on in this world.

  2. Chuck, nice idea, but the “asset” Wouldnt survive mark to market. Anyways, at some stage, they will have to realise the asset, which is going to supress the market for years and years.

  3. Paul, mark to market is essentially history here in the US (not sure what is going on in the UK). We’re in the age of MOPE – Management of Perceptions Economics. It’s all about convincing people that things are ok…then they’ll be ok. However, reality will ultimately have the last word.

  4. The credit crisis seems to be over, but credit problems will continue to linger for another few years as the country (and most of the world) continues to deleverage.
    Banks know that it is in their best interest to ensure home-owners do not default. The Gov will do all it can to ensure another wave of foreclosure is avoided. This is one reason it is not yet winding down its expansionary stance. In my opinion, eyes should now watch for any new inevitable bubbles forming in the emerging markets, particularly China.

  5. ARM – America Return Money

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