Remember the U.S. subprime crisis? Lombard Odier thinks the crisis is not over, and worse, a second wave is just ahead of us.
Paul Marson, chief investment officer at the investment firm, thiknks that Alt-A and Option ARM (Adjustable Rates Mortages) mortgages are due for resets in 2010/11.
Alt-As sit somewhere between prime and subprime mortgages. Option ARMs are mortgages which required little or no documentation, where borrowers had the option of making minimum monthly payments lower than the accruded monthly interest on the loan. Given the shocking borrower quality, the hope was that house prices would continue to rise and homeowners could simply “flip” the property when the mortgage came to reset.
Lombard says there are almost $200 billion of Option ARMs to reset in th years aset and the delinguency rates are already running at close to 40 percent and the reset time-bomb is equal in magnitude to that of subprime in 2007/2008.
“Whoever said the credit crisis was over (probably Tim Geithner!) is severely misguided,” Marson said in a note to clients. “The consequence of ‘subprime the sequel’ is that further substantial losses will be taken by the government purse and the financial sector is a long way from being able to function normally.”