Bank profits are bad, right? Banks are greedy, right? No and somewhat. My populist friends and recent rhetoric coming from the White House want the government to crackdown on all these greedy banks.
Let us focus on interest rates for now. The handy dandy graph below from Calculated Risk shows performances and projections of mortgages of various types (Prime, Alt-A, ARM's, and Sub-Prime). It looks like two mountain ranges. The mountain range on the left what happened in the current situation. Also, notice that we are currently in a lull.
The mountain range on the right show future trends of loan performance. The primary driver of this second wave is performance of ARM's that were created at the peak of the real estate market during the mid 2000's. ARM's have interest rates that reset based upon current interest rates. If these rates were to rise, I believe the projected second wave can be higher and longer.
Two things to consider. One and four mortgages are underwater, or more is owed to a mortgage than the house is worth. How many people file for bankruptcy rather than fulfill their fiduciary obligations? How many more people bite the bullet if interest rates will compound the problem?
