The coming crisis that 'no bailout will solve'

We're at a point in the housing crisis where some stories have been written again and again and again (The Coming Option ARM Reset Crisis!). Sometimes, though, a new and compelling version of an old story comes along that is worth reading -- and this particular version of the "coming Option ARM crisis" story, from Slate.com, is worth the effort.

We all know of the massive pile of ARMs due to reset, with bad consequences. The Slate story stresses a new angle: The biggest, baddest, stinkiest pile of ARMs due to reset is in California, and home prices in California are dropping rapidly. Do the math: resetting mortgage payments plus recession plus falling home values equals... a potentially huge wave of homeowners walking away from their mortgages: "Unfortunately, the crisis in California is going to get much worse, and there is no bailout that will solve it. Why? Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages."

More from Slate.com's Mark Gimein: "Over the next several months, we're going to be subjected to a chorus of hand-wringing about the moral turpitude of people who walk away from their mortgage..."

We've discussed this issue at length here, and many of you have argued that this is an economic issue, not a moral or ethical one. The lenders knew the risk when they made these loans that one day they might end up owning the house. That day is coming: "Lenders had no reservations about selling borrowers loans with rising payments that would be poisonous in a rising market. Now it seems borrowers have no reservations about leaving those lenders with the risks they begged to take."

This is the wave of jingle mail that scares Washington and Wall Street and is motivating federal policy discussion right now.

Worth reading. Your thoughts? Comments? Email story tips to peter.viles@latimes.com.
Hat tip: PS via email, others via comments.
Photo Credit: LATimes

Comments

[Ace]

Rear view mirror,

You claim to have 'lost your shirt in LA real estate' and now you say that you bought for $450k and the house is now worth $540k. How did you lose your shirt? You made $90k before you walked away.

[Jonathan]

"I didn't buy an $800K house. I bought a $450K house several years ago, full-doc with a down payment, and did a refi at $550k almost three years ago"

So technically, your house had still increased in value from its original purchase price. Your house wasn't really worth $800k, it was just a bubble. What did you do with the extra $100k? Hope you invested it wisely.

[Still Rentin]

Rear View Mirror-

Its exactly people like you that caused this bubble but yet still feel they are the victim. the fact that you actually think the house was worth 800k is laughable. My pets.com stock was worth 300 bucks in 99 when they had never made a dime also.

[Uncle Billy]

MLTPB: At least once a day as I read about people walking away, I hear Monty Python in my head: "Run Awaaaaay! Run Awaaaaay!

JED: It's not that the article is bad, it's more that Tanta likes to be the smartest one on any issue (she usually is). She makes some good points, but the bottom line remains: there *is* a difference between people who get foreclosed on and people who *let themselves* get foreclosed on. If, instead of toughing out ugly mortgages when able, people give back the keys, the bubble, it seems to me, deflates much more rapidly.

Whatever political fodder others are making of this distinction is another issue altogether.

[Hogan]

What kind of article is this?!? Peter Viles just simply barfs up a few bits from the original Slate article.

I believe the looming option ARM reset for prime borrowers is a huge factor to take into consideration, but I think Slate was a bit dramatic in the doom-and-gloom in spitting out numbers of the hardest hit California areas (Sac, San Bernardino).

Rather than reading these articles where everybody is screaming rapture, wouldn't it be nice to see some numbers (percentage of option ARM resets, concentrations, past history of prime option ARM resets, etc) and have some real analysis done?

As if the real estate industry isn't driven by emotions enough, we have these stupid writers just adding to the fire.

[LA in my rear view mirror]

still rentin: I am NOT a victim. I'm a grown-up and went into it with my eyes open. My timing sucked. I'm taking the hit and starting over.

[LA in my rear view mirror]

Still rentin: BTW, I wasn't the one who valued the house at $800K.

The bank did. Last year.

You know what "they" say about assuming.

[Cal]

LA in my rear view mirror,

I'm with the others. I'd feel your pain a bit more.. but a cash-out refi is curious.

Regardless. I wish you the best of luck with your new endeavors.

[LA in my rear view mirror]

Cal: Nothing curious about it -- the bank happily gave me a HELOC based on the nicely increased property value they came up with in 2006 (I didn't take as much as they offered). I invested the money in one business (that unfortunately failed in 2007) and in rental properties outside of California and one rehab and resell. Made money on some; lost money on some, broke even on one. That's the way it goes sometimes. Never bought any toys, however.

And I really don't care what you all feel or don't feel. I sleep fine at night. I was responding to the question of whether walking away was a business decision or a moral one.

It was a business decision made to protect the family.

[NoWayinLA]

Good Slate article. I think we've finally answered the question that has driven so many of the readers here insane: "Why am I not seeing much, if any, price decrease in desirable neighborhoods with good schools?"

Because that's option-ARM country.

[tew]

IMO that Slate article was pretty poorly written. That is to say that it was pretty good compared to most articles that attempt to communicate anything touching finance. Most are pure rubbish.

[Adolfo]

If somebody wants to walk from the mortgage then walk as long as it works. The credit score doesn't mean much. Don't you think the car dealer doesn't want to lease that car to you? They will feel the slow economy as well and will make every effort to keep their sales up.
By the way, the banks signed a contract and lent the money. They used their own appraiser to appraise the value of the home. Tough luck if exactly that piece of real estate doesn't back the mortgage anymore. The banks should have thought twice before just lending the money. This would have also prevented the actual situation. I am actually happy that this system finally fails.

[Rick]

Amazing ... greedy lenders want your money in the form of interest and exhobitant fees and the masses come running ... because we all should live in over-valued $750k 40 year old 3 bedroom homes, right?

And we should all be able to treat them like ATM's and pull out equity that isn't really going to be there in a few years.

Did people not really see the bubble getting ready to pop ... or are they just as greedy as the lenders?

If you didn't LIE on your mortgage application about your income, you wouldn't be in trouble for chasing and grabbing the vapor cash for SUVs, Vacations, College Tuition, etc ... Money you clearly could never pay back when the time came.

Real Estate is only a short-term investment by saavy long-time market professionals who have been active in the market for years. For people who can sustain the bad times - not just consume during the good times.

If you don't earn the amount needed to buy something from your job or your financial investments - YOU CAN'T AFFORD IT. No, real estate is not an investment or a nest egg. Unless you plan on living in a cardboard box when you retire. It is long-time security of a roof over your head.

I am not a global economist and all of this was clear as day to me. I bought a place I could afford. I bought cars I can afford. I draw an average salary and I don't over-indulge (there's a word).

Nobody - not borrowers or lenders - has the right to be upset and regretful now (barring medical issues or job loss) nobody held a gun to your head ... You picked it.