Here Comes the Next Mortgage Crisis
The Slate.com, April 15, 2008
Subprime was just the beginning. Wait until California's prime borrowers start handing their keys to the bank.California is to mortgage lending what Chicago is to pork bellies.
For years, that meant it was a place with soaring house values; today,
the foreclosure rate across the state 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.
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
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.
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 mortgages and
pronouncements like last month's warning
from Treasury Secretary Henry Paulson that people should honor their
mortgage obligations. The problem with finger-wagging on what you
"should" or "ought" to do is that, when it comes to money, you're
usually given the lecture only when it's in your interest to do the
opposite. Certainly, that's the case for all the California homeowners
who in the next year or two are going to find themselves with the
choice of whether, faced with a huge new wave of interest resets and a historic decline in the value of their homes, they will simply walk away.
First,
those home prices: For a weird few months of the mortgage crisis,
statisticians came up with peculiar numbers about home values, rolling
out comforting stats showing single-digit declines. Well, that's over.
Last
month, the California Realtors' association (folks who in October
managed to "project" that prices would fall 4 percent in 2008) reported
that, actually, 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.
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