Underwater Mortgages

Quote of the day:
"It is much easier to make war than peace."
--Former French Prime Minister Georges Clemenceau

23 percent of adjustable-rate mortgages are in negative equity, according to Alan Abelson in today’s Barron’s. That compares with 17 percent one year ago.

The question of the day is, will the other shoe drop?

Let’s take a journey back in time. To 1999. That’s when the stock market, led by technology stocks, was red hot. It had been red hot for four years.

Many people had avoided the market for those four years, either because they thought it was too risky or because they didn’t understand it, or both.

After watching the market make 20+ percent gains every year for four years, some of these folks threw in the towel (more precisely, the trowel--because hole-digging is involved) and jumped into the stock market. That was the first shoe dropping.

Then came 2000, and the market headed south in a hurry. Some of those who had gotten in a year earlier panicked and got out. They lost a lot of money. That’s the second shoe dropping.

Many others stuck with it. And now, seven years later, most of them are doing just fine. They’ve bought new shoes.

So. Almost one-quarter of those with ARMs now look at their mortgage debt and the selling prices of homes around them and see that the first is more than the second. Many of them purchased in the last year of the “boom.”

Will they be able to hang in there? Or will the second shoes begin dropping?