Here Comes the Next Mortgage Crisis

I just read a great article by Mark Gimein. Below are some highlights.

The foreclosure rate across California is twice the national average and going up fast. Riverside County, outside Los Angeles, may be the foreclosure capital of the country, with a rate close to six times the national average. And housing prices are in freefall.

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.

California homeowners, in the next year or two, are going to find themselves with a huge new wave of interest resets and a historic decline in the value of their homes – will they simply walk away?

Last month, the California Realtors’ association reported that California house prices in February fell 26 percent from a year ago. In the places where the foreclosure boom has hit hardest, it’s worse.

A quick, almost random survey of some foreclosure prices in Southern and Central California:

• In San Bernardino, a house bought for $310,000 in 2005 is now being offered by the bank for $199,900.
• A 2,000-square-foot ranch house in Rancho Santa Margarita is down from $775,000 to $565,000.
• A starter home in Sacramento, sold for $215,000 in 2004, is now down to $129,900.

These are not sale prices. They are asking prices. Don’t doubt that they are negotiable.

The most common subprime loans were known as “2/28” in the industry: 30 years, including a two-year teaser rate before the interest rate rose. Now these loans have reset, and we’re seeing the fallout.

Prime borrowers, too, got loans that started out with low payments; if you bought or refinanced your house in the last few years, it’s not unlikely that you have one. With an “option ARM” loan you have the “option” (which most borrowers happily take) of paying less than the interest; the magic of “negative amortization.” The loan grows until you hit a specified point-the exact point varies with the lender; with Countrywide, it’ll come after about four and a half years-when the payment resets to close to twice where it was on Day 1.

The really amazing thing is that the meltdown in California is already happening and virtually none of these loans have yet reset.

When prices fall 40 percent to 60 percent, in expensive locales like San Diego, tens of thousands of people with 100 percent loan-to-value mortgages and option ARMs will be living in homes in which they have no equity and on which they owe a lot more than the house is worth.

If you’re one of the “homedebtors” in this position, you might start thinking very seriously about just how attached you are to the wisteria vine snaking over the basketball hoop on your garage. That’s what a lot of other California borrowers will be doing.

Those who used option ARMs to buy a house, walking away is easy: Their loans are “nonrecourse,” and the lenders can’t go after them for more than the value of the house.

Going through a foreclosure kills your credit rating and makes it a lot harder to buy a new house-but as more and more prime borrowers go into foreclosure, it’s perfectly possible that buying a new home a year later will, in the near future, be as routine and unsurprising as the once inconceivable idea that you can get a whole batch of new credit cards two years after a bankruptcy.

If you would like to read the entire article: http://www.slate.com/id/2188982