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Uh, oh

Well, as I’ve been saying, things seem to be getting better (or at least getting worse more slowly). But it looks like we could be in for another meltdown in a year or two. Adam Levitin shows how this time it won’t be subprime mortgages, but “option ARMs.” Option ARMs give consumers the choice of how much to pay in a given month, and the low option is typically less than the accrued interest that month (so the mortgage grows). Like subprime loans, these seemed like good ideas when every moron in finance (which is to say, pretty much everyone in finance) “knew” that real estate prices would rise forever. After all, if you buy a house with a $200,000 mortgage, it’s okay for the mortgage to grow to $220,000 if the house’s value rises to $400,000. But of course, today that $200,000 house will bring only $100,000, and these mortgages generally have provisions where they reset–that is, the minimum payment shoots up–if they go too far underwater. The tiny little chart in Levitin’s post is worth clicking on–it shows how many option ARMs will be resetting in the next few years. Summary for the very busy: it’s about as many as the number of subprime loans that reset in 2007-8, which triggered the whole meltdown in the first place. Joy.

(Creditslips via Consumerist.)

EDIT in early 2012: Well, that didn’t happen.

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