The Consequences of Euphoria

Here's the start to a NY Times article by David Streitfeld on the upcoming new wave of housing forclosures:

Edward and Maria Moller are worried about losing their house — not now, but in 2013.

That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

...

Experts predict a steady drumbeat of defaults over much of the next decade as these interest-only loans mature. Auctioned off at low prices, those foreclosed houses could help brake any revival in home prices.

...

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

The problem is that starting with the Baby Boom generation the lessons of the Great Depression generation and the conservative 1950s types, a new ethic of "have it now and pay for it later" took hold. That works in real estate so long as prices are increasing. But they haven't and they won't. Unfortunately a lot of people got caught up in the euphoria of buying more house than they could afford as an "investment". Many of those "investors" can see the writing on the wall.

All of this was foreseeable. In fact, as I read through Gillian Tett's book Fool's Gold, many of the financial engineers behind the CDOs, CDSs, and MBSs knew as early as late 2005 that something bad was coming. The smart money started taking their profits and fleeing. Sadly, they left the problem they created in place, so the economy cratered, and now everybody is paying the trillions it will take to recover from the greed and insanity that these financial engineers leveraged into a disaster. They get to keep their money. Everybody else is paying via lost retirement money, reduced house "wealth", and the inevitable taxes required to pay off the costs of reviving the economy.

The tragedy is that a few propered at the expense of the many. And when their house of cards collapsed, they called for the government to "save the system" so their bets were covered and the taxpayer was left holding the bag. It is a crime of unfathomable proportions. And Obama -- the one who refuses to "look backwards" and deal with torture and malfeasance by the Bush administration, refuses to look back and deal with those who created this great crime. Worse, Obama seems not really engaged in even preventing this crime from being repeated since he has not put in place any real finanicial regulation to stop a repeat of this. Meanwhile, both the Bush administration and now the Obama administration are paying hundreds of billions to bail out the miscreants.