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A 2nd Wave of U.S Mortgage Defaults?

Not much needs to be said about how gruesome things have become in the U.S real estate market.  On the other hand, there’s been talk about things getting better lately.

T2 Partners LLC, a U.S. research firm, says, “Hold that thought.”  There is good news and bad news.

The good news…American subprime rate resets are done with.

Subprime-Rate-Resets The bad news…Alt-A rate resets aren’t.

Alt-A-ResetsThe worse news…Alt-A delinquencies are soaring.

Alt-A-Delinquencies Worse yet…Prime mortgage delinquencies are soaring.


Will this lead to a second wave of U.S. mortgage defaults? 

Many think it will (Here’s an interesting story from an unlikely source).  If a 2nd wave does materialize, its side effects could depress Canada’s economy further. 

The tie-in with Canadian mortgages is, of course, with interest rates.  There are two theories of how this could affect rates.

1)  Economists expect Canada to start recovering late this year or next.  However, if the U.S. gets bombarded by defaults again, and it impairs our economy, the Bank of Canada may be more cautious than expected in raising rates.

2)  Then again, if central bankers continue printing money, inflation could become a dangerous threat.  Moreover, if governments keep issuing new debt to pay for economic stimulus, this new supply could further drive up long-term rates.  (A story on this)

How much these two theories offset each other is anyone’s guess.  Perhaps, for the foreseeable future, short-term rates (and variable/1-year mortgages) will remain lower than normal while long-term rates (e.g., 5-year fixed mortgages) drift higher.

(The above charts are from T2 Partners LLC.)


Sidebar:  U.S rate resets are but one factor that could affect Canadian interest rates over the next 3-4 years. The global economy, supply of new government debt, and commodity prices are examples of the countless other factors. It is this endless and unpredictable array of economic variables that make forecasting mortgage rates near impossible.