I've been busy reading and such, trying to catch up on run-of-the-mill business stuff. I didn't post this past Monday, and I'm glad. A new piece of information I've been looking at comes from my friends over at Casey research and Agora Financial:

What this chart shows is that, essentially, we're not out of the woods yet. Yes, I know Obama and his people are giving you a different story. But, let's look at a more plausible story. There are a second wave of option arm mortgages on the market that haven't reset that are about to reset in 2011.

What is an option arm mortgage? I'm glad you asked.

Several years ago, I remember when many of my colleagues were selling these as part of their financial plans to their clients. Many mortgage brokers loved these mortgages too. I even had a local guy who was selling them in my area, occasionally, despite the fact that most people around here really shouldn't be messing with such a complicated financial product. His attitude was that he'd worry about that when the time came to refinance.

Anyway...the way that the option arm mortgage works is that you have a choice of 4 payment options every month on your mortgage. Option 1, which is the most popular, is called the "minimum payment". It works kind of like a credit card. Your minimum payment isn't enough to pay all of the principal and interest on the loan, so what happens is that some of the interest gets tacked onto the backside of the loan. Your loan is actually scheduled to grow over the first 7 or 10 years.

Now, after 5 years, these loans reset. This means that you have to start making the fully amortized payment which has been sitting and growing for the first 5 years. So, on top of making a normal 30 year payment, your mortgage is growing to boot. It's not a nice scenario.

Normally, this is not a problem if you can refinance into another loan and the value of your home is increasing. The loan lets you speculate on the value of your home's value into the future. The problem is that home values aren't going up, necessarily. And, people are either losing their jobs or are afraid that they will be.

On top of this, banks aren't lending as much money as they used to be. Where the money used to be free flowing several years ago, it isn't anymore. 

This makes it harder and harder for people to refinance out of these loans, which answers the next question that comes up: "why don't people just refinance out of these loans before the loan resets?"

The short answer is: THEY CAN'T.

If you owe more on your home than what it's worth (because your home value has gone down or appreciation has stalled while your mortgage has been growing), then you aren't getting a loan. If you can't get a loan, then you can't refinance out of that mortgage. If you can't refinance out of that mortgage, then.....guess what?

Chances are, you will see another wave of mortgage defaults and subsequent bank failures as people up to their eyeballs in debt struggle to make the full payment on their mortgage.

This time, subprime mortgages won't be to blame because option arms were generally given to people with great credit. This creates another problem: lots of people won't be able to get a loan for much after they default on their mortgage. So, Obama's plan to spend our way to prosperity through loans just won't work (not that it could under normal circumstances, but this compounds the problem).