Cruel Jokes, and No One Is Laughing

While other economic crises over the last decade were resolved relatively quickly and cleanly — the Mexican peso mess, the Russian debt debacle and the dot-com implosion — the unraveling of the great home mortgage boom is significantly more complex. There are infinitely more moving parts to this problem, and it will take far longer to right.

For example, while it is widely known that a wave of subprime adjustable-rate mortgages, or A.R.M.’s, will reset this summer — raising the specter of further foreclosures — an even more troublesome mess involving pay-option adjustable-rate loans lies well beyond that. These are the kooky loans that allowed borrowers to make payments that were a fraction of the interest owed, without paying back any principal.

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“As difficult as the rescue prospects are for subprime borrowers, they are even worse for most pay-option A.R.M. borrowers,” said Michael D. Calhoun, president of the Center for Responsible Lending, a consumer advocacy group. “Three-quarters of pay-option borrowers are making the minimum payment based on 2 to 3 percent interest typically. The payment shock is so huge that a refinance is virtually impossible.”

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Indeed, the agents in the survey said short sales take place at prices that are 16 percent, on average, below the amount outstanding on the mortgage. Not ideal, but better than the losses of 20 to 40 percent that lenders typically incur on homes put into foreclosure and sold.

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The nation’s housing market is in a world of hurt, as everyone knows. If it is to recover quickly, transactions must clear. Frozen markets help no one. And it’s way past time to face up to the losses that the subprime lending spree has created.