Gyroscopic Investing

In case you haven't heard, it turns out that we are on the verge of a prime mortgage crisis.... and it could be worse than the sub-prime mortgage crisis was. Expect to start hearing the phrase "PrimeX" a lot.

Here's a good video that explains the problem:

FT: Prime sub par threatens [VIDEO]

And here are two more good resources to bring you up to speed:

Is U.S. on the Verge of a Prime Mortgage Crisis?

A PrimeX primer, also featuring ABX

Asset bubbles fueled by borrowed money are not pretty when they pop.

Over time, the market will reach whatever equilibrium is dictated by supply and demand and the ability of people to pay for housing.  In some markets, this equilibrium will continue to support high prices.  Places like New York City and Washington, DC have not seen the huge declines that other areas of the country have.

Until we are realistic with ourselves about the inevitability of this development, we are going to continue with these silly half-measures premised upon the belief that 2007 housing prices are about to return.

This development is one more reason that I would expect interest rates to stay low for a LOOOOONNNNGGGGGGG time.  What would make them rise?  If they ever did start back up, it would instantly kill the housing market, which would likely tip the whole economy back into recession, which would tend to push rates back down.

I belong to this group of underwater prime mortgage owners having bought a house near the peak of the bubble in 2006. At one point the value of my home dropped to less than half of what I paid for it. The only good thing about it is that my property taxes went down by the same percentage.

I am a long way from even considering it seriously but I have to admit that I occasionally find myself googling the words "strategic default".

As for this being "morally problematic" as the article says, I suspect my thinking on the subject is evolving a lot like others in the same predicament. I have always paid my bills on time and maintained impeccable credit but I'm feeling more and more like I was the dupe left holding the bag in an elaborate con game known as "bailout".

I'm a few years away from retiring and I'm still sticking with my "buy and hold" strategy for the time being, hoping I can at least break even when the time comes. One thing that would definitely help would be having the ability to reset my mortgage at current interest rates. Unfortunately, I would have to take about 80k out of my PP to meet the equity lending requirements and I would rather not. I have heard some proposals for the government to do something along these lines but I suspect that like all other tinkering with the free market, this would have its own unintended consequences and is probably a very bad idea.

From 2002 to 2007, I accumulated about $50,000 in student loan and credit card debt. Then at the end of 2007, I put myself in a budget and made a committment to pay back this loan of $50,000 from 2008 to 2012. During this span of 5 years, I set aside of $1,000 per month to pay back the debt and by the end of 2012, I should pay it off. As of now, I use mostly cash to pay for stuffs when I buy them and rarely use credit cards any more.