This housing market is about to be crippled, as two waves of foreclosures hit our economy over the next few years, according to Rob K. Blake at The Mortgage Insider.  He's got some tough warnings for anyone with an ARM, and those of us who think we'll be okay just because we don't have one.  Those ARM resets will cripple the housing market.  Note that this chart doesn't even consider all those interest only loans. 

You’ll notice that starting in May, reaching a pinnacle in September, and staying consistently high for the next 24 months, recasting ARM mortgage rates has yet to really even begin. The worst is in fact yet to come.

And once the wave of subprime ARM recasting subsides about 24-27 months out another wave of Option ARM recasting all the way out to 59-60 months. If you don’t remember what an Option ARM is I have an article calling it the dumbest home loan in America.

Now it will take a few months for a borrower once his payment spikes up to realized he can’t make it and then it takes the lender 6-12 months to actually foreclose. So my estimation for a glut of foreclosed houses to return to an already sluggish market about September of 2008 extending for about 18 months. Two years later when folks think it can’t get any worse, the Option ARM defaults will start the next wave creating even more depressed prices all the way through 2012.

So What Do I Do Now To Protect Myself?

First, make sure you are NOT one of those folks with an ARM loan, hybrid ARM, or Option ARM. Refinance now into a fixed rate loan.

Second, if you can’t afford the fixed rate loan on your current home for the next 6-10 years even under the worst of times…downgrade to a home and mortgage amount that you can afford. If you are already in a low priced home, sell it and rent. The average home owner today spends $1800 on housing and the average renter spends $900…renting may cut your housing expense in half! If so, do it. According to Jim Rogers, you’ll be able to buy back your house in a few years for 50 cents on the dollar.

Third, plan for a layoff or reduction in income. Put 12 months of living expenses in a savings account just in case you find yourself in an extended job hunt. You may even want to start looking for a new job now especially if you are in a housing related industry. Why wait to get laid off?

We had one of our wholesale lenders this week call all their employees at noon on Tuesday and tell them all they are out of job! No warning, no nothing! Pack your desk and hit the road. When I called to say “We’ve a loan that’s scheduled to close Thursday. What now?”. The receptionist who had obviously just been crying said, “Sorry, you’ll need to take to another lender”.

Lastly, pay off all your credit card debt, turn in your leased car replacing it with a free and clear used car, and cancel all recurring expenses that aren’t absolutely necessary.

 The dumbest loan in America is the Option ARM.  Read Rob Blake's entry on that one here.