Mortgage timebomb about to explode

Source: The Daily Reckoning [dailyreckoning@electricmessage.co.uk], Bill Bonner
28/06/2007 19:20

“A recent research piece by Bank of
America estimates that approximately $500 billion of
adjustable rate US mortgages are scheduled to reset
skyward in 2007 by an average of over 200 basis points,”
says Bill Gross. “2008 holds even more surprises with
nearly $700 billion ARMS subject to reset, nearly
three-quarters of which are subprimes.”

Here in the UK, one million home-owners
will meet the end of their fixed-rate deals in the next
12 months, says the Financial Times – your correspondent
amongst them. The trouble has barely begun, in short. “It
is only since last month that those whose fixed rates
were expiring found themselves facing a bigger bill for a
new fix,” notes Gary Duncan in today’s Times. “Now ever-
rising numbers of people with expiring fixed-rate loans
will face an unappetising choice between a more expensive
variable rate, or a new, more costly fixed offer.”

None of this would need to cause trouble beyond a mere
house-price crash and consumer slump – if only it weren’t
for the credit derivatives issued against so much of the
world’s outstanding housing debt. Running up debt – a
promise to pay in the future – can only last as long as
the promise comes good. Squaring that promise by issuing
a derivative against it only increases the chance – and
the cost – of it failing.