Things are proceeding just about the way I expected them to. Don't know about nation-wide, but San Diego's (real) crash will happen when exotic loans disappear (and they will).
It starts with the education of the general public about just how bad these loans are. The "main-stream" media finally catches on to the market and shows stories about foreclosures caused by mortgage resets on exotic loans (like Channel 8 news just did last week). Then it continues when opportunistic lawyers plaster ads all over the place about suing over these loans (further putting it in people's minds that these loans must be "bad"). That will cause many people to reconsider when the lender plunks down that "only option" in front of them. The water cooler talk changes from "My friend made $60k in 6 months on their Carlsbad condo" to "My friend has to sell because she can't afford the mortgage payments, but her condo isn't worth what she owes on it anymore, so she can't refi like the lender said she could when she first got that IO loan and she doesn't have the extra cash to pay off her mortgage when she sells, so she might lose her home".
Then finally, the lenders themselves, with pressure of lawsuits from "uninformed" borrowers, scams that finally come to light, and the inability to sell the loans as securities due to their terrible performance, will withhold these loans entirely except for those for whom they were originally created… the wealthy; who properly use them as a leverage tool, not a sole means to "afford" a primary residence.
When these loans finally disappear as a mortgage tool for the masses, we are left with the good old standbys. Standard ARM's and Fixed rate mortgages. Then the nightly news will get to bust out the long forgotten "Affordability Index". That index indicated what percentage of people in the city could afford a median priced home using a fixed rate mortgage at current rates.
Hmmmm… The last time I heard from that index, we were somewhere around 9%… In 2003! (I think prices have gone up just a little bit since then) My guess for today would be around the 5% – 6% range and getting worse if interest rates go up any more.
So, unless someone from La Jolla or RSF is interested in buying your "median" priced Clairemont 3 br 1 ba house, I think you might just be screwed for a while.
