Let’s say there’s a hole in the dike. Sea water pours through the hole and onto the land and, since water seeks its own level, flows everywhere. There are several possible approaches to dealing with this problem:
- You can patch the entire dike.
- As the water rises you can build everything in the land protected by the dike higher.
- You can learn to breathe underwater.
Or, you patch the bloody hole.
Once the dike has been completely breached, it’s too late. Then you’ve got to retreat to higher ground and, eventually, rebuild.
The financial crisis that’s been precipitated by the default of mortgages, particularly subprime mortgages, is a lot like having a hole in the dike and I’ve seen every one of the approaches above suggested in one form or other except patching the hole. More about that later.
The problem of mortgages defaulting is actually getting worse:
interviews and a Washington Post analysis of available data show that the foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up. They don’t have subprime loans, the lending industry’s jargon for the higher-rate mortgages made to borrowers with shaky credit or without enough cash for a down payment.
The wave of subprime delinquencies appears to have crested. But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post’s analysis.
This trend shows up most acutely in California and other high-growth regions, such as Arizona, Nevada, Florida and pockets of the Washington region, most notably in Prince William and Prince George’s counties.
The coverage that this problem has received in the media and the way that the leaders in Washington are responding to the problem has one serious defect: although the consequences in the form of the credit crunch and the economic slowdown (when prosperity is fueled by credit that things slow as credit tightens stands to reason) are felt nationwide the problem of mortgage foreclosure is not spread evenly throughout the country in every state and every county. All of the twenty zip codes with the highest proportion of underwater mortgages (which are at the highest risk of defaulting) are in just four states, eleven in southern California alone. All of the top ten are in just three states, California, Nevada, and Florida, and only one of those is in Florida. Nearly all of the problems with foreclosures are in just seven states: Florida, California, Michigan, Nevada, Arizona, Georgia and Ohio.
Treating the problem as though it had nationwide causes is, frankly, a waste of time and money. We’ve got to concentrate our attention where the problems actually are, namely California. Get California’s house in order and you’ll ameliorate the problems of the banks, ameliorate the problems of the banks and credit will loosen, loosen credit and you’ll reduce the problems of corporations and individuals, reduce the problems of corporations and individuals and the the economy will perk up.
The dike hasn’t been breached yet. Fix the bloody hole.
My previous post today on California’s problems might have been interpreted as an exhortation for the rest of the nation to forget California. Not so. But we can’t help California solve its problems without cooperation from California and part of that cooperation should be putting the state government back on the road to solvency.
And let’s not be under the misapprehension that things will return to the way they were before 2006 with California’s housing prices skyrocketing. A return to normalcy needs to recognize what normal is and what the aberration was.