Rise of the Mortgage Walkers

[SHELLY]

Interesting article from the WSJ as to why "todays" Americans are more apt to "walk away" from morgages than Americans of yesteryear:
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The Rise of the Mortgage 'Walkers'
February 8, 2008

By NICOLE GELINAS

Fitch Ratings, while telling investors last Friday to expect additional "widespread and significant downgrades" on $139 billion worth of subprime loans, has cited a new factor in their "worsening performance."

"The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.

Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren't so dumb. They're perfectly capable of acting rationally without political interference.


While mortgage fraud has abounded in recent years, voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans' part. To be sure, until recently, mass-scale voluntary foreclosures were unthinkable. But markets have changed, and people are changing their behavior in response.

A decade ago, most people started off with enough equity in their homes to make foreclosure irrational from a financial standpoint. Consider: If you made a 20% down payment on a house, prices would have to fall by 20%, almost immediately, before you lost all your money and had much incentive to walk away. This scenario was unlikely, particularly since an independent appraiser had assigned a clear value to the home. Foreclosure was remote, absent a personal financial crisis, for another reason: Every month your mortgage payment would reduce your debt and increase your equity, giving you more room for prices to fall.

But over the past few years—until last spring—banks and the mortgage-backed securities investors ...................

http://www.manhattan-institute.org/html/_wsj_the_rise_of_the_mortgage_walkers.htm

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[YoungFT]

Great article. Provides a few of the explanations as to why so many are willing to walk away.

On a related note, I've been curious why bank's credit card portfolios seem to be performing so well relative to mortgages. In past cycles you would have seen the first indications of credit issues showing up in credit card portfolios. Consumers would stop paying their Sears card before they stopped paying for the roof over their head.

The data suggests that is not the case - credit card portfolios while deteriorating somewhat are not heading south as fast as mortgage loans.

My sense is that many people, until recently, have been using their credit cards to pay for gas, groceries, etc. - and being encouraged to do so because "they earn 5% cash back" when they use credit cards with rewards.

Consumers have been happy to oblige knowing they could always tap into a home equity line of credit or refinance and consolidate their debt. It was a shell game that has only recently come to a screeching halt.

The Federal Reserve reported that the total level of credit card balances was up over 10% in the months of October and November but only grew at 2.7% in December. Consumers are scaling back on their credit card debt because 1) most people are preparing for a tough 2008 and 2) banks are tightening lending standards.

All of this to suggest that if anyone thinks we will see the bottom in the 1H2008, you may want to adjust your forecasts based on the following:
- Consumer spending will contract further as confidence is low and we slip further into a slow down (BTW, definition of a recession is 2 consecutive quarters of contracting GDP)
- Retailers as a result are seeing lower sales and cutting sales forecasts (see WalMart's January sales)
- Wholesale inventories building while consumer sales slowing is cause for concern if it continues (producers will slow down production until inventories are sold)
- Lending standards (according to the Fed) continue to tighten
- Credit card delinquencies are also just now beginning to show signs of deterioration indicating that the consumer is working from a weak position

Too early to tell what 2008 holds but indications are that if you're not in a strong equity / cash position you have some work to do to survive this cycle.

[dude]

folks also need to keep in mind that just b/c you walk away & get foreclosed upon does not necessarily mean that the bank is going to give up on the short fall. you remain responsible for the shortfall & many banks will insist on holding you to it. particularly when you show the capacity to repay but not the willingness.

a bank does not have to pursue foreclosure & has a number of options in mitigating any of their potential losses...they can also sue your deadbeat arse.

i certainly sympathize for those individuals who were duped into a less than advantageous mortgage or are suffering from the current economic plight....but those folks who got into flipping property & speculative investment in real estate who now do not want to pay their mortgage b/c their is no longer any upside potential disgust me! you can not & should not expect reward without risk!

what kind of example are you setting for your children? "Ya, I made a promise to repay this debt but I've changed my mind now since i can't make any money; so here you go, these are the keys to the bank's new home"....deplorable, disgusting, repulsive, just plain crappy.

on 60 minutes a couple of weeks ago they were interviewing a couple who had bought a home on an adjustable rate mortgage. well, after the rate adjusted & prices fell they were feeling a little pain. However, they had the audacity to say that they were fine with their mortgage payment & rate adjustments while home values were rising but now that they are declining they said it was no longer worth it to them to make the payments.

sad, sad, sad

hopefully this will be a small segment of the population....but i begin to wonder???

[SHELLY]

On a related note, I've been curious why bank's credit card portfolios seem to be performing so well relative to mortgages. In past cycles you would have seen the first indications of credit issues showing up in credit card portfolios. Consumers would stop paying their Sears card before they stopped paying for the roof over their head.

The data suggests that is not the case - credit card portfolios while deteriorating somewhat are not heading south as fast as mortgage loans.

My sense is that many people, until recently, have been using their credit cards to pay for gas, groceries, etc. - and being encouraged to do so because "they earn 5% cash back" when they use credit cards with rewards.


Credit card portfolios are the next shoe to drop. Heretofore, folks have been paying off their credit cards by cashing out their homes' equity--that's now history.

Home prices are declining, so refi's with cashouts are near impossible to get. Some banks have begun reducing or eliminating active HELOC accounts that owners had intended on using for emergencies or "extra" cash. Homeowers are now becoming aware that their home ATM has run dry and are concentrating on keeping their credit cards in good standing--forsaking the mortgage in order to keep the utilities up and running and paying the credit card minimums on time. But they might not be able to rely on credit cards much longer.

Banks, who've previously relied on mortgages for fun and profit, now have to look for other income streams--they've set their sights on credit cards. They are increasing the fees and interest rates and reducing credit limits.

Check out this article from Business Week about what Bank of America has been doing to "good" credit card customers:

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http://www.businessweek.com/print/bwdaily/dnflash/content/feb2008/db2008026_105146.htm

Analysts also say they are surprised by the magnitude of the rate raises Bank of America is imposing on affected cardholders. Michael Jordan, 25, a software developer who lives in Higganum, Conn., says he received a letter from Bank of America in late January advising him that his card rate would rise from 9.99% to 24.99%. The software developer, who earns $80,000 per year, says he was "shocked" because his payments had been on time and his credit score hadn't changed in the last year. In fact, Jordan says, he has only $4,500 in overall outstanding credit-card debt on two cards and that, on the Bank of America card in question, he had paid down his balance to $3,000 from $3,700 last August. "His rate increase seems unjustified based on his credit profile," says David Robertson, publisher of The Nilson Report, a credit-card industry trade publication.

When Jordan called Bank of America about the higher rate, he says, the bank representative couldn't explain why his rate was going up. On a second call, he adds, the individual told him the reason for the increase was that he hadn't been paying down his balance fast enough, though he had lowered it by 19% in the last six months and was only now utilizing 54% of his $5,500 credit limit. Riess, the Bank of America spokeswoman, declined to discuss individual rate increases or to list all the criteria the bank was using as reasons to raise rates on existing cardholders.

Analysts say the bank's move is obviously aimed at shoring up profits. On Jan. 22 Bank of America reported a 95% decrease in fourth-quarter earnings due mostly to increases in loan-loss reserves for consumer credit, including rising card charge-offs and write-downs in mortgage-related securities. Bank of America faces another profit sinkhole with its pending acquisition of troubled Countrywide Financial (CFC). Portales' Ryan notes that boosting rates on existing credit-card holders is one of the quickest levers a bank can pull to try to boost earnings.

Anticipating Charge-Offs
Bank of America hasn't made it easy for consumers to reject the new rates. The letters require that consumers write Bank of America to agree to no longer use the card and pay off the existing balance at the old rate—they can't telephone to do so, nor does Bank of America provide a form or a return envelope. Moreover, consumers don't have much time to respond. Cardholders say they got the letters in the latter half of January: four of the letters obtained by BusinessWeek require a written response by Feb. 19, while the fifth requires a response by Feb. 29. If the company doesn't get a response by those dates, rates automatically rise. A response, of course, assumes consumers read the letter from Bank of America as they sort junk mail. "It's a reasonable assumption that most don't," says Karen Gross, a legal scholar on consumer credit and president of Southern Vermont College.

Bank of America also benefits from consumers who do write in an agreement to pay off balances at the old rate and not use the card again, says Nathan Powell, a credit analyst at New York-based research firm RiskMetrics Group. The bank, he says, is clearly trying to protect itself from worsening credit-card charge-offs ahead, something analysts widely expect in the card industry as the economy deteriorates. Powell says the bank must have identified a list of other credit criteria besides FICO that it is using to screen cardholders and determine it's no longer worth new business if they don't accept the higher rate. So far, Bank of America's charge-off rates have risen in line with the credit-card industry, up to 5.08% of receivables at the end of the fourth quarter from 4.57% a year ago. "The bank doesn't want to get behind the curve," Powell says.
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This credit mess is just beginning to unwind--securities backed by car loans and credit card receivables are next in line to collapse.



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