If you’re a lender, getting payments from a borrower, and suddenly it’s time to reset, but you know that if you do, then your borrower will stop making payments, what are you going to do? You’d be particularly stupid to just go ahead and do it anyway wouldn’t you? These problems are being worked out now. They aren’t waiting for the magic reset date to deal with them. And borrowers who know that they won’t be able to make the payments in 6 months aren’t waiting for 6 months before they stop making the payments. So if there is going to be a problem, you’re seeing it now for the most part.
Of course, it is true that lenders could be doing more than they are doing, but don’t assume that they are all a bunch of fools who wait until they are already falling off a cliff before making adjustments. If they were really smart, they would figure out what the borrower CAN pay and write down large portions of the debt, if need be to keep the payments coming. In fact, institutional lenders are selling mortgages at discounts to companies who specialize in precisely that kind of negotiation. While the economic adjustment is taking place, there will obviously be dislocations and reallocations of resources that will involve unemployment. But in the end, the machinery will be moving forward at the same speed it has been moving. We may have less accumulated wealth to show for it, but wealth is one thing, and income is another.
You are forgetting that the lenders don’t own most of the paper—it’s been sold as CDOs. They just process it on their behalf. Plus you have to assume that they will require these people to start paying prinpical. Of course, the other statistic that came out recently was that over 50% of modified mortgages are back in default land within 6 months. Just today CNN Headline news had a lady on from Zillow.com talking about how there are currently 4+ million homes on the market vs around 1 million 3 years ago with an estimate 2-3 million foreclosures this year. This is all BEFORE the option arm/alt a reset. We’re going to have housing problems for years. I strongly suspect we’re about to have our “lost decade” Japan style (which of course is now turning into 2 lost decades)
I tell you what—find me one economist who correctly predicted the housing collapse, stock market plunge, and the banking industry effective collapse that thinks we’re due for a turn around in Mid 2009 and I might change my mind.