THIS IS A MESS

The banks which have received bailout money aren't too keen on making loans and I can't say that I blame them. It looks like we're in for a lot more bad housing news and the banks want to hold on to capital to weather out the storm. This is from the WaPo:

The foreclosure crisis hasn't played itself out. The next wave looms in the form of a new batch of adjustable-rate mortgages scheduled to reset over the next two years. ...

Initially, Alt-A loans catered to financially sophisticated borrowers with strong credit scores and hefty down payments who would not or could not document their income or assets. People who were self-employed or whose income fluctuated paid higher rates to take out these no-hassle loans.

For years, Alt-A loans performed as well as prime ones, reinforcing the idea that income hardly mattered if a borrower had good credit, said Dave Stevens, a former Freddie Mac official and now president of Long & Foster.

Most borrowers who took out these option ARMs from 2004 to 2007 chose to pay no more than the teaser rate. They can keep doing so until their interest rate adjusts or they reach a certain percentage of the principal (10 to 25 percent, depending on the lender).

The excess money they owe is added to their balance so that they owe more than they borrowed on the house. Fitch Ratings expects monthly payments to jump 63 percent on average (or $1,053) on loans adjusting in 2009 and 2010, which will undoubtedly cause a rise in defaults.

Already, 24 percent of option ARMs were at least two months late in September, up from 5 percent a year ago, said Mahesh Swaminathan, a Credit Suisse mortgage strategist.

"We're seeing delinquencies rise even before the recast date has hit," Swaminathan said. "After the recasts, the weakness will increase. In 2010 and 2011, the recasts will peak."