“The more precariously positioned ARM borrowers are very much on the minds of economists, some of whom fear that masses of consumers will not be able to afford the new higher payments, setting off a recession. According to Christopher Cagan, an analyst with First American Real Estate Solutions, a housing consultancy in Santa Ana, Calif., about 19 percent of the 7.7 million ARM’s taken out in 2004 and 2005 are at risk of defaulting.”
Cagan’s statement is in support of the argument for recession risk in the first sentence. The reason I did not change my mind about what Cagan meant, is because I still think he meant to say 1.5 million ARMs will default, leading to recession. How else can we have “masses of consumers not able to afford the new higher payments, setting off a recession”?
These types of articles are getting more common. Warnings about Option ARMs, and the risk of foreclosure are popping up all over the media. Interestingly, Cagan seems to be one of the only sources of information on how widespread they are. One of the Senate hearing panel members (non-traditional mortgages) quoted him, when asked about exotic loans. None of the panel members quoted a government or banking report. We just don’t have sufficient information on these loans, since most are made in the private market.
