As of today, roughly 34 percent of all option ARMs are not even current. These are toxic waste products. Why the big drop? Many of these ended up as foreclosures but many got pushed into interest only loans that buy a few more months (maybe a year or two) but these will default as well.

The combination of expiring tax credits, the failure of HAMP, the conclusion of the Fed buying dodgy MBS, the growing shadow inventory of foreclosures, Option ARM and Alt-A resets, and rising interest rates will result in a further fall in home prices of at least 20% in the next two years.

We have managed to obtain the opposite of what we desire, and we are paying a huge amount of money to do so. We would be better off to do nothing. The money we spend as a society to encourage home ownership actually diminishes it.

Things are so bad in the system that I have now heard from many readers about people having loan modifications that effectively allow home borrowers to stay in their homes at below market rents. In other words, another subsidy to an already incredibly subsidized market.

If prices continue to stabilize and loan modification programs can find ways to perform better, there is a chance that there won’t be too many high-end defaults here in the East Bay. But, if prices continue to fall and modifications continue to fail at alarming rates, then those considering walking away will have more reasons for doing so.

If, as the Times suggests, the wealthy really are more prone to walking away, then social mood could darken very quickly. If strategic default ever becomes socially acceptable in million-dollar neighborhoods, then look out below.