The Double-Humped Camel

From Calculated Risk: Take a good look at this graph.

What the chart shows is that there is another wave of mortgage resets/defaults coming. Those are the "Option-ARM" five year mortgages, a class of mortgages that were almost as trashy as the sub-primes. Drop back five years from the peaks of the chart for the Option-ARM mortgages and you can see that those were the mortgages that were written at the very peak of the real estate bubble.

Which means three things:

• First, those are probably going to reset at a rate that the homeowners will have trouble paying.
  
• Second, and more importantly, the majority of those mortgages are now underwater (the homes are worth less than the mortgage balance). Banks will not re-finance underwater mortgages, not unless the homeowners can pay down the principal balance so that the new mortgage has a principal balance less than the loan amount.
• Third, and maybe worse, those Option-ARM mortgages were likely all "securitized" into more collateral-debt obligations. Which means that there is another huge pile of CDOs out there that are going to be going toxic in the next two years.

Which will, in turn, mean that the very same banks which are now in the process of handing out whopping-ass bonuses will be back down in Washington, pleading for another rescue.

And, oh by the way, there likely will be another bad recession before the recovery from this one has gathered very much steam. But that only has an effect on us, not the Villagers in DC nor the rich, so once again, we will basically be told to go fuck ourselves.