Changing Attitudes

It is now well known that the models used by those clever and highly-paid rocket scientists on Wall Street to predict homeowner mortgage default rates were deeply flawed. Not only did they not take into account data covering, for example, a long enough period of history (which might have included an economic downturn or two), they assumed that various aspects of human behavior, including long-standing attitudes about how important it was to remain up-to-date with monthly mortgage payments, were fixed in stone.

Now, though, with everyone well aware that bankers, regulators and others threw in the towel long ago on treating mortgage lending as a disciplined financial activity and that many of today's hard-charging financiers dismissed this product with a wave of their hand as the basis of a long-term financial relationship with a key local customer, is it any surprise that homeowners whose loans have suddenly turned upside-down have a new perspective on this particular obligation?

In "New Trend: 'Intentional Foreclosure'," Calculated Risk, another one of my favorite blogs, highlights what seems poised to become a popular feature of the new economic morality.

From CBS: New Trend In Sacramento: 'Intentional Foreclosure' (hat tip Shawn)

Linda Caoli helps lots of families on the verge of losing their homes, including a single mom working two jobs to pay her mortgage.

"She says Linda the house across the street, same model, with more upgrades sold in foreclosure for $315,000!" explains Linda.

Her client isn't the only one thinking about ditching her house to buy the better deal across the street. A number of realtors CBS13 talked to say it's already happening.

This is similar to Peter Viles' story in the LA Times: A tipping point? "Foreclose me ... I'll save money".

Wachovia is seeing this too (from their Jan 22nd conference call):

“... people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity ...”

And from BofA CEO Kenneth Lewis in December:

"There's been a change in social attitudes toward default. We're seeing people who are current on their credit cards but are defaulting on their mortgages. I'm astonished that people would walk away from their homes."

This change in social attitudes could lead to a flood of foreclosures. The following is from my post last December: Homeowners With Negative Equity

The following graph shows the number of homeowners with no or negative equity, using the most recent First American data, with several different price declines.

At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

By the end of 2007, the number will have risen to about 5.6 million.

If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

The last two categories are based on a 20%, and 30%, peak to trough declines. The 20% decline was suggested by MarketWatch chief economist Irwin Kellner (See How low must housing prices go?) and 30% was suggested by Paul Krugman (see What it takes).

Intentional foreclosure. Jingle Mail. Negative Equity. All terms that could be common in 2008.

Comments

[dano]

Hi Mike,

I was the one who asked you to add Calculated Risk to your
blog list. Glad you like it as much as I do! One of the
best on the web! Wish I were that good.

[Pier Johnson]

If bankers were smart, they would negotiate downward on the amount of cash they rented to mortgagees in order to keep folks in their houses, paying over many years.

As it is, bankers earn a silly amount of cash over the life of a working mortgage.

A short-term cash rebate reflecting changes in house prices could be far cheaper than the lost cash that could accrue from repossessed idle houses with no buyers.

If only bankers were smart ...

[Rocky]

If you default on your mortgage, wouldn't that lower your credit score quite a bit, making it almost impossible to qualify for another mortgage anytime soon?

[Rocky]

If you default on your mortgage, wouldn't that lower your credit score quite a bit, making it almost impossible to qualify for another mortgage anytime soon?

[The Nattering Naybob]

Excellent work, but most analysis seem to miss the point on the stimulus package being proposed. The business tax incentives and tax payer rebate checks are a diversion.

Lets mail the working stiff a one time $300 check, while we give $150K and a hall pass to the buyers and banks that got us into the mess.

Where's the beef? The pea is under the pod called the GSE loan limit increase from $417K to $729K.

The more stringent FNMA, FHLMC limits are raised for one year, while the less stringent FHA limits are raised, permanently.

According to California Sen. Barbara Boxer's office:

On the average $650,000 jumbo loan balance, a 30-year fixed rate mortgage, the lower rate (-1%) on the "conforming" GSE jumbo would result in an average $417 per month savings, every month for 30 years!

Thats a $150K subsidy which amounts to white collar welfare for rich homeowners and speculators.

As you clearly state Mike: U.S. homeowners with no or negative equity 2006 3.5 million (7% of the 51 million households with mortgages).

With the 10% decline in housing prices at the end of 2007, 5.6 million or 11%. If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million or 20.9%.

Millions of 1, 2, 3 & 5 year interest only & teaser jumbos will be reset this year. Conserative calculations estimate if only 1 million default after a FHA refi, this will result in a $260 billion cost to the taxpayer within 2 years.

There is nothing preventing Countrywide and other lenders from refinancing their delinquent and defaulting "liar loans" with the GSE's under this program.

In effect tax payers will be subsidizing the banks and borrowers with non conforming jumbo loans: California 35%, New York 19.5%, New Jersey 13,5% & DC 21.5%

This stimulus package is despicable, digusting, a disaster and a disgrace. Should it pass and be signed into law as currently drafted, its constitutional legality needs to be tested.

At a minimum, it is a violation of the GSE charters infringing into the "primary" mortgage markets. I urge you to contact your House & Senate reps to have the loan limit increase provision stricken from the bill.

http://naybob.blogspot.com/2008/01/barney-frank-hr-1852-sb-2338-economic.html