With all of the talk in the news lately about how higher sub prime ARM payments are pushing people into foreclosure, the 800 lb gorilla in the room goes largely ignored.
But huge, hairy and mean, there he sits. And he’s getting hungrier by the minute.
That’s because the much bigger problem here-for borrowers of all stripes-is actually the continuing decline in values that could reach as high 15-30% according to Goldman Sachs.
So sure, while the Paulson Plan may save some homeowners from becoming renters, it will also chain a fair share of them to that big gorilla–an asset whose value is dropping like a rock.
And for those willing to take on those heavy chains, the price of "ownership" is that they will find themselves hopelessly upside down as prices continue to slide.
That, of course, is a no win situation and it’s the big reason why falling prices drive more foreclosures than higher payments ever will.
After all who wants to be chained to a gorilla?
Because sometimes the best move is no move at all. And that in the end is what the lenders are really scared of–keys..lots and lots of keys. It’s called "jingle mail" in the business and it has guys like Angelo Mozillo and his pals afraid to check the mailbox every morning.
They don’t exactly want to be chained to those homes either you know.
Here’s a story that describes what I’m talking about.
From the Boston Globe by Binyamin Applebaum entitled: Falling prices driving crisis
"The recent spike in home foreclosures in Massachusetts is caused primarily by falling housing prices, and not by rising mortgage payments, according to research released yesterday by the Federal Reserve Bank of Boston. The contrarian report suggests the common understanding of the foreclosure crisis is somewhat mistaken. Unaffordable loans don’t cause foreclosures directly."
"Even as subprime lending became more common, even when people fell behind on mortgage payments – during the economic downturn in 2001, for example – foreclosures were rare because house prices continued to rise. In part, people were able to escape trouble by selling their homes at prices high enough to cover their debts."
"But the research also suggests that troubled borrowers tried harder to make the necessary payments, in the expectation they would profit eventually."
"Conversely, when prices started falling, people struggling to make payments had less incentive to find the money. Housing price movement ‘plays a dominant role in generating foreclosures,’ the report concluded."
"One implication of the report is that current attempts by local and federal officials to help borrowers may be ineffective."
"The number of foreclosures will be determined mostly by ‘how far housing prices fall,’ said Boston Fed president Eric Rosengren, who introduced the report yesterday."
The bottom in housing is nowhere in sight
The time to act was before the lenders took 40 years of underwriting wisdom and threw it away.