The trouble now is that the insanity didn't end with sub-primes. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.
--60-Minutes (12/14/08)Treasury Secretary Henry Paulson said Tuesday that he does not expect any more major financial institutions to fail during the current credit crisis.
--AP/MSNBC (12/16/08)
60-Minutes has again scooped the nightly news. Again they are first to present us the bad news, this time about a second wave of mortgage failures and foreclosures coming at us. Resetting now and in the near future are rates for two other groups of risky mortgages called "Alt-A" and "option ARMs." Why didn't someone tell us? The financial institutions knew, of course, and so did the government financial team of Paulson and Bernanke.
The experts interviewed on 60-minutes see the impact as continuing an unsettled, bottom-seeking housing and mortgage market through 2009, into 2010, and possibly longer. And, according to most experts, the economy will likely not recover until the housing market stabilizes. If you haven't seen the 60-Minutes piece, take a few minutes and view it now. It's not pretty.
The closest thing to good news is that two days after the 60-Minutes story Henry Paulson nonetheless tells CNBC he "does not expect any more major financial institutions to fail during the current credit crisis." I mean, the fear is that things could always get worse again, right? And there have been so many who have second-guessed the government recapitalization of some major financial institutions that in Bernanke's and Paulson's view could and should be saved. And while the discouraging news about new dimensions to the mortgage debacle is dispiriting, and so is the potential impact on the economy, at least there is reason to believe that the financial institutions that are the foundation of our market economy likely will not experience major new failures. Let's hope Paulson is right.
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