Why Things Will Get Worse in SoCal
Great, insightful article from Slate about the state of the housing market in California and why prices are likely to tumble much further.
California should be the poster child for a mortgage-loan bailout. In few other places have so many taken on such onerous debts with so little equity. Unfortunately, the crisis in California is going to get much worse, and no bailout 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.
The story warns of “a coming wave of interest-rate resets in prime loans given to people with good credit that are just as bad as or worse than we’ve seen in subprime.”
Prime borrowers, too, got loans that started out with low payments; if you bought or refinanced your house in the past 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 when the payment resets to close to twice where it was on Day 1. The exact point varies with the lender; with Countrywide, it’ll come after about four and a half years.
Just two banks, Washington Mutual and Countrywide, wrote more than $300 billion worth of option ARMs in the three years from 2005 to 2007, concentrated in California. Others, including IndyMac and Golden West (the creator of the option ARM and now a part of Wachovia), wrote many billions more. The really amazing thing is that the meltdown in California is already happening and virtually none of these loans has yet reset.
And a bailout will be of no help to these people:
In expensive locales such as San Diego, tens of thousands of people with 100% loan-to-value mortgages and option ARMs are living in homes in which they have no equity and on which they owe a lot more than the house is worth.
In these places, accepting a government “bailout” that pays them, say, 90% of the value of the house to keep from foreclosing will be very tough for lenders, who (if the appraisers don’t fudge the numbers) could be forced to take 36 cents or 45 cents on the dollar for their loans. On the other hand, any plan that makes them pay more if they can afford it is hugely disadvantageous for the borrowers, who have option ARMs about to reset and are much better off handing the keys to bank — and maybe even scooping up the foreclosed house down the street.
The fact is, prices in Southern California are still way, way too high and out of reach for too many people. Just about everyone who purchased in the last three years is upside down and getting more so by the day. And tens of thousands of homes changed hands in the last three years. It’s going to take a long time for this mess to straighten itself out.
Recent Redfin posts:
Home Renovations: What Project is Actually Worth the Expense?
Legislators Just Can’t Let Go of the Bailout
