Saturday, May 02, 2009


I do worry that our policymakers think the foreclosure problem underlying the financial crisis is basically over. If so, they're wrong. Very wrong.

Tanta, who is sadly no longer with us, in an old post reminds me to use the correct terminology to describe the problem. Option ARM rates are going to be recasting soon and in increasing numbers. That's the magic moment when people can no longer make minimum payments, when they can longer make interest-only or neg-amortization payments.

When that magic moment comes, all of those people are going to look at how high their now unaffordable mortgage payments are. Then they'll look at how much their house is actually worth relative to how much though owe. Then, maybe, they'll try one of the various initiatives to modify their mortgage terms. And then, quite likely, they'll jut walk away.

This is why cramdown legislation was so important. It had the benefit of potentially helping people stay in their homes, but it's also necessary to help ease the pain of the next foreclosure crisis wave which, as the chart tells us, hasn't even really started yet.