by Calculated Risk on 2/29/2008 09:06:00 PM

From the 2008 U.S. Monetary Policy Forum

"Leveraged Losses Lessons from the Mortgage Market Meltdown" by David Greenlaw (Morgan Stanley), Jan Hatzius (Goldman Sachs), Anil Kashyap (Chicago GSB) and Hyun Shin (Princeton).

Hatzius summarizes (via email):

Our story is as follows. While the mortgage credit losses still don’t look huge relative to the size of the economy or the financial markets -- the baseline assumption in the paper is $400bn in losses ... they are nevertheless responsible for much of the financial and economic turmoil of the past 6 months. We estimate that roughly half of the total losses are likely to be borne by leveraged US financial institutions ... Assuming that these institutions will aim to lower their leverage by 5%, our baseline estimate is that they will scale back their lending by close to $2 trillion in response to these losses, even if we assume that they manage to “replace” 50% of the lost equity via inflows of unlevered capital, e.g. from sovereign wealth funds. Further, we estimate that just under $1 trn of this credit supply hit is a “ Main Street ” event and will hit unlevered entities such as households and nonfinancial businesses; the remainder is a “Wall Street” event and will hit other leveraged institutions. Finally, we (very tentatively) estimate that the credit supply hit could shave 1-1½ points from real GDP growth over the next year, over and above the “traditional” hit from reduced homebuilding demand, a negative wealth/MEW effect on consumer spending, and the multiplier effects working via the labor market.

by Calculated Risk on 2/29/2008 04:49:00 PM

I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death abandoning my hope to give new meaning to the term “thinking outside the box.”
Warren Buffett, Feb 29, 2008

Here is Buffett's letter to shareholders.

I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about doubledigit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.

Numbers are fun. Let's see, 1.08 (8% price appreciation) for 92 years = 1188. Then multiply by 12,266 (today's close), and I only get 14.6 million on the Dow. Oh well ... underperforming Buffett again!

The actual number sounds huge, but much depends on the size of the economy - and that will be many many times larger in 92 years.

Buffett is always fun to read.

by Calculated Risk on 2/29/2008 03:47:00 PM

Last week, the NY Times mentioned the recent estimate from Dr. Mark Zandi, chief economist at Economy.com, of 8.8 million homeowers currently with zero or negative equity.

Here is an overview of the calculation from Zandi's Plan to Take Bolder Action on Mortgages (excerpted with permission from Mark Zandi):

By the end of March, an estimated 8.8 million homeowners, equal to 10.3% of the single-family housing stock, are expected to have zero or negative equity. This calculation is based on estimates of homeowner equity across more than 40,000 Zip codes nationwide. The amount of first and second mortgage debt outstanding, including both home equity lines of credit and closed-end second loans, is derived from credit file data. The estimates of housing values are based on repeat-sale house price indices from Fiserv Case Shiller, which are benchmarked to house prices available from the 2000 Census. In those Zip codes where repeat sales price data are not available, Moody’s Economy.com's estimates of county house prices are used. The current distribution of homeowner equity across Zip codes also highlights the risks posed by further price declines. If prices fall 20% from their peak to their expected trough next spring, some 13.8 million households will be under water by then, equal to 15.9% of the stock.

The following graph shows my estimates from last December of the number of homeowners with zero or negative equity based on several different price declines. This was based on data from First American.

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, I calculated the number would have risen to about 5.6 million. However, prices fell further than I expected in 2008, and this actually is very close to Zandi's estimate for the end of March 2008.

With a 20% price decline (peak to trough), I calculated 13.6 million homeowners with zero or negative equity; Zandi's updated numbers put that at 13.8 million.

Zandi didn't provide an estimate for a 30% peak to trough price decline, but my 20 million estimate is probably pretty close. Note: I calculated the percent of homeowners with mortgages with no or negative equity; Zandi calculated the percent of the total single-family housing stock.

by Calculated Risk on 2/29/2008 01:58:00 PM

From MarketWatch: S&P may downgrade 1,887 classes of Alt-A mortgage securities (hat tip crispy&cole)

Standard & Poor's said on Friday that it may downgrade 1,887 classes of mortgage securities backed by so-called Alt-A home loans. ... There's been a persistent increase in delinquencies on the loans underlying these securities, S&P said.

From Reuters: S&P may cut $14 bln of subprime debt, eyes CDOs (hat tip Barley)

Standard & Poor's on Friday said it is reviewing $14 billion of subprime-related debt for a ratings cut and may act on related collateralized debt obligations within "days," the rating company said.

S&P took the action due to rising delinquencies on higher quality mortgage loans known as "Alt-A loans," ...

by Calculated Risk on 2/29/2008 01:41:00 PM

From St. Louis Fed President William Poole: Panel Discussion on Balancing Financial Stability, Price Stability and Macroeconomic Stability: How Important Is Moral Hazard?

We have known for many years that moral hazard is a potentially serious issue. If a firm believes that it will be bailed out if it gets into trouble, that expectation encourages excessive risk-taking and increases the probability of trouble. There are two complementary ways to deal with moral hazard. First, firms in trouble ought not to be bailed out, unless the bailout takes a form that imposes heavy costs on managers and shareholders. Second, firms subject to government regulation ought to be compelled to maintain adequate capital to reduce the probability of failure. U.S. banks entered the period of turmoil last year pretty well capitalized and have been able to withstand large losses.

I am more skeptical of the financial strength of the GSEs, and believe that we could see substantial problems in that sector. According to the S&P Case-Shiller home value data released earlier this week, as of December 2007 average prices had declined by 15 percent or more over the past 12 months in Phoenix, San Diego, Miami and Las Vegas. We can add Detroit to the danger list as the home price index for that city is down by almost 19 percent over the 24 months ending December 2007. With house prices falling significantly in a number of large markets, many prime mortgages issued a few years ago with a loan-to-value ratio of 80 percent may now have relatively little homeowner equity, which increases the probability of default and amount of loss in event of default.

As I emphasized some time ago, GSE losses will depend on the variance as well as the mean of changes in national home prices. Losses in markets with home prices falling more than the national average will not be offset by gains in markets with price changes above the national average. I do not have a new message here; we have known for a long time that advance preparation and a strong balance sheet are the keys to riding out a financial storm. As I have emphasized before, the Federal Reserve can deal with liquidity pressures but cannot deal with solvency issues. I do not have any information on the GSEs that the market does not also have. Nevertheless, in assessing the risk of further credit disruptions this year, I would put the GSEs at the top of my list of sources of potentially serious problems. If those problems were realized, they would be a direct result of moral hazard inherent in the current structure of the GSEs.
emphasis added

Note that Poole is no longer a voting member of the FMOC. He concludes:

[A] financial firm cannot expect targeted aid for just the firms in trouble. An exception to this general statement is that, unfortunately, the GSEs probably can expect targeted aid. ... the GSEs ... might get assistance directly from Congress ...

by Calculated Risk on 2/29/2008 10:51:00 AM

From Bloomberg: MBIA Writing `Very Little' New Business Amid Scrutiny

MBIA Inc. is writing ``very little'' new bond insurance business as borrowers balk at buying a guarantee from a money-losing company without stable AAA credit ratings.

MBIA, whose AAA ratings were under scrutiny by Moody's Investors Service and Standard & Poor's until this week, said losses on mortgage-backed securities will probably increase this year and expand beyond subprime mortgages.

From the MBIA SEC from 10-K.

In the fourth quarter of 2007, the Company observed deterioration in the performance of several of its prime and near prime home equity transactions and established $614 million of case basis reserves for future payments. During the fourth quarter of 2007, the Company paid $44 million in claims, net of reinsurance, on seven credits in this sector. Additionally, in the fourth quarter of 2007, the Company established $200 million of non-specific unallocated loss reserves to reflect MBIA’s estimate of probable losses as a result of the adverse developments in the residential mortgage market related to prime, second-lien mortgage exposure, but which have not yet been specifically identified to individual policies. The Company expects that loss payments on its prime, second-lien mortgage exposure during 2008 will amount to a significant portion of its current reserves for such exposure.

by Calculated Risk on 2/29/2008 10:36:00 AM

More great analysis from Professor Jim Hamilton at Econbrowser: Bernanke's tightrope act

Some analysts are saying that Fed Chair Ben Bernanke is walking a tightrope-- if he does not drop interest rates quickly enough, the U.S. will be in recession, but if he goes too far, we'll see a resurgence of inflation. I am increasingly persuaded that's not an accurate description of the situation.

See Hamilton's excellent analysis. He concludes:

The Fed chief must be worried that a recession in the present instance would precipitate major financial instability, in which case perhaps the choice between paying now and paying later argues in favor of latter.

In any case, the tightrope analogy seems a misleading way to frame the issue, in that it presupposes that there exists a choice for the fed funds rate that would somehow contain both the solvency and the inflation problems. In my opinion, there is no such ideal target rate, and the notion that we can address the difficulties with a sagely chosen combination of monetary and fiscal stimulus and regulatory workout is in my mind doing more harm than good. Better for everyone to admit up front just how bad the problem is, and acknowledge that there is no cheap way out.

No, I don't believe that Bernanke is walking a tightrope at all. But I do hope he's checked out the net that's supposed to catch him if he falls.

I also think Bernanke has chosen a little more inflation: Inflation is Your (Ben's) Friend

by Tanta on 2/29/2008 07:18:00 AM

There has been some concern in our comments and on other blogs about this bit in Fannie Mae's 10-K published Wednesday:

Beginning in November 2007, we decreased the number of optional delinquent loan purchases from our single-family MBS trusts in order to preserve capital in compliance with our regulatory capital requirements. Although this change in practice may affect our cure rates, it has had no effect on our loss mitigation efforts and, based on current market conditions, is not expected to materially affect the “Reserve for guaranty losses.” We continue to purchase delinquent loans from MBS trusts primarily to modify these loans as part of our strategy to mitigate credit losses and in circumstances in which we are required to do so under our single-family MBS trust documents. Because we are continuing our loss mitigation efforts for delinquent loans, with a primary goal of permitting borrowers to avoid foreclosure, we do not intend to defer purchases of delinquent loans until we are required by our MBS trust documents to purchase the delinquent loans from our MBS trusts. Although we have decreased the number of our optional loan purchases, the total number of loans purchased from MBS trusts may increase in the future, which would result in an increase our SOP 03-3 fair value losses. The total number of loans we purchase from MBS trusts is dependent on a number of factors, including management decisions about appropriate loss mitigation efforts, the expected increase in loan delinquencies within our MBS trusts resulting from the current adverse conditions in the housing market and our need to preserve capital to meet our regulatory capital requirements. For example, we recently introduced a new HomeSaver Advance(tm) initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with those purchases. The credit environment remains fluid, and the number of loans that we purchase from our MBS trusts will continue to be affected by events and conditions that occur nationally and in regional markets, as well as changes in our business practices to respond to the current adverse market conditions.

This seems to have a bunch of folks concerned that what Fannie Mae is doing is making unsecured loans to borrowers just so that Fannie doesn't have to buy the loan out of the pool and take a fair value write-down. What it says, of course, is that Fannie Mae certainly intends this program, if it is successful, to reduce the number of mortgages that have to be bought out of the MBS, because the point of the program is to avoid having to do a formal modification of mortgage. If that is successful, it should, in fact, reduce the number of loans Fannie buys out of pools for loss-mitigation purposes.

It does not say that the sole intent of the program is to avoid fair-market write-downs on loans bought out of pools. This mention of this program just appears in the part of the 10-K that deals with pooled loan repurchases. I see nothing here that says that the HomeSaver Advance loans do not involve an increase in reserves for guaranty losses or an increase in the fair value of guaranty obligations (see page 54ff for an explanation of how accounting for credit losses, actual and expected, on MBS loans is handled), instead of an FMV adjustment to an owned loan. Perhaps the question came up in the conference call; I didn't listen to it. I would certainly expect that these loans can be expected to result in higher guaranty costs in the future, and should be accounted for accordingly. The point is simply that as the loans remain in the MBS, they do not appear in the category of loans bought out of MBS and therefore requiring an FMV adjustment under the infamous SOP-03. The reduction to income (increase in reserves) would happen elsewhere in the financials, under guaranty costs.

All that may be too geeky for you; if so I congratulate you on being a normal human being. Getting beyond the GAAP issues here, I think people just really want to know what this HomeSaver Advance thingy is. According to Fannie Mae's website,

HomeSaver Advance, an unsecured personal loan, is a new loss mitigation alternative available to approved Fannie Mae servicers for eligible borrowers designed to bring a delinquent loan current without a formal loan modification. It provides funds to cure arrearages of principal, interest, taxes, and insurance (PITI), as well as other advances and fees as listed in the Highlights section below. HomeSaver Advance is documented by a borrower-signed promissory note, payable over 15 years at a fixed rate of 5% with no payments or interest accrual for the first six months.

HomeSaver Advance is designed for qualified borrowers who have fallen behind on their mortgage, but are able to resume timely payments once their loan is brought current by the advance. It helps simplify and streamline the workout process for applicable loans, as it provides an option for earlier resolution of delinquent loans.

HomeSaver Advance Highlights

*Loan amount up to the lesser of $15,000 or 15% of the original UPB for delinquent PITI, escrow advances, and advances for attorney fees and costs and up to 6 months of unpaid HOA fees (12 months, where the HOA fee is paid once per year)
*Advances may not include late charges or other ancillary fees and costs
*The full loan amount is applied directly to arrearage (borrower never receives funds in hand)
*Truth in Lending Statement and unsecured promissory note are executed at time of agreement with borrower
*Note rate at a fixed rate of 5% with 6-month no-interest/no-payment period
*Amortization period of 14.5 years after the conclusion of the 6-month no-interest/no-payment period
*Workout fee paid to servicer is $600
*Fannie Mae will contract with a third party to service HomeSaver Advance promissory notes

The general rules for borrower eligibility:

• The mortgage is delinquent in an amount equal to or greater than two full payments of principal, interest, taxes and insurance;
• The mortgage must be seasoned with a minimum of six monthly payments made since the date of loan closing;
The mortgage may secure a principal residence, second home, or investment property—owner occupancy is not required; and
• The mortgage may generally be any type of loan (i.e., fixed-rate, adjustable-rate, interest-only, bi-weekly or daily simple interest).

HomeSaver Advance does not have a loan-to-value restriction or property valuation requirement.

Borrower Eligibility

Servicers must also ensure their borrower meets the following qualifications:
• The borrower has successfully resolved the reason for delinquency;
• The borrower demonstrates a long -term financial capacity to resume making the payments on the first mortgage loan and all other debts, including any subordinate mortgage loans (verbal confirmation of financial capacity is acceptable);
• The borrower has surplus income to support an additional monthly payment of at least $200 but does not have the ability to cure the arrearage using a repayment plan within a period of not more than nine months;
• The borrower is willing to participate in HomeSaver Advance; and
• The borrower does not currently have an outstanding HomeSaver Advance note; the HomeSaver Advance option may only be used once during the life of the particular first mortgage loan.

Borrowers involved in an active bankruptcy proceeding or who have had the debt previously discharged in a bankruptcy action are not eligible for this loss mitigation option.

So what does all that mean? First, it doesn't mean that this is how Fannie will handle all troubled loan workouts; it is one possibility. The rationale for this kind of thing--which isn't unheard of, by the way, for banks and other portfolio lenders, although it's new as far as I know for Fannie Mae--is that if you have a borrower with a fairly modest past-due amount ($15,000 or less) and you have determined that the cause of the delinquency was short-term and is now fixed (like temporary job loss), you could find that the effort and expense of buying a loan out of a pool and doing a formal modification of mortgage to add this modest amount can cost you almost more than it's worth. An alternative is just to make an unsecured loan for the past-due amount, while leaving the existing loan's terms unchanged.

It's risky, of course, because you aren't securing the make-up loan amount; that means that you can't take that amount out of foreclosure recoveries, and if the borrower declares bankruptcy your make-up loan just gets tossed into the unsecured bucket with the credit cards and such. The idea is that you would only do this if the amount in question were modest enough that it's not worth the expense to secure it. It seems completely obvious to me that it's not always worth rewriting a $200,000 loan to secure another $1,000. Another $15,000? That seems rather high to me as a ceiling for this program. But cost-effectiveness is the idea here.

I would also have tightened up the verification requirements for this deal. I realize that Fannie Mae clearly has some ability to collect from servicers if they misrepresent on the borrower's situation; I am, however, getting more and more jaded by the minute about conducting these things on a rep-and-warranty basis. I'd want written documentation of the borrower's cause of delinquency and financial condition, not verbal.

However, I don't necessarily think this is a terrible idea, with the above caveats in mind. Of course it all depends on how good you are at targeting it to borrowers whom it will truly benefit. (Do remember that these are Fannie Mae loans, not those horrible subprime exploding ARMs and stuff. They aren't perfect, but they're not the worst loans in the bunch to start with.) A couple of our commenters have suggested that it seems like no more than a way to throw away $15,000 on every delinquent loan you have. I don't think it's that bad, so I thought maybe we could go through an example--and it's just an example, not a prediction--of how the math would work in deciding to offer a program like this.

Let's start by assuming we have a pool of 100 loans that are eligible for this treatment. We'll assume the average loan amount is $200,000, the average interest rate is 6.50%, and the loans are all interest only (mostly so I don't have to keep amortizing balances, but also because that gives you a slightly worse case in recovery from future foreclosure, and I'm not trying to build an optimistic scenario). I'll assume that the servicer waives all attorney's fees and there's no HOA looking for money, so all we have to work with is past-due interest payments and escrow account contributions. The average monthly interest payment on these loans is $1083, and we'll say the average monthly escrow payment is $417, since that gives us a nice round $1,500 monthly payment to play with.

If all the borrowers are six months past due--which is a lot--then the unsecured loan amount for each loan would be $9,000. Plus Fannie Mae pays $600 a pop to the servicer for the workout fee, so if we did this on all 100 loans, we'd end up with $900,000 unsecured money at risk on a $20,000,000 pool at a cost of $60,000. You can, if you want, assume that all of these loans are underwater--the math works the same way--but for convenience I will assume that the $200,000 balance represents 100% LTV (the property is valued today at $200,000).

Therefore, if we had added the $9,000 to the loan amount via a formal modification, we'd have ended up with an LTV of 104.5%. Because we didn't secure the loan, our LTV stays 100%. Remember that since the additional money is unsecured, there is less disincentive for the borrower to sell the property at break-even; the lien can be released without the additional loan amount being paid in cash at the closing table. So from a voluntary prepayment perspective, these loans should perform just like any other once-delinquent loan at 100% LTV.

Let's further assume that our estimated losses on this pool (net of mortgage insurance and including FC expenses), if we foreclosed today instead of doing this workout, are 30%. That means that foreclosing them all right now would cost us $6,000,000. If you assumed that 100% of these loans would be permanently cured and all those borrowers would pay back all of the unsecured as well as secured money, it's obviously a deal to do this.

Of course we won't assume for a moment that these will be 100% successful. Fannie Mae reported in the 10-K that of the loans it has done modifications on that have a 2-year history since the modification was put in place, going back to 2001, 60% were performing or paid in full 24 months later, and 9% had been foreclosed 24 months later (the rest were still on the books but had become delinquent again, just apparently not delinquent enough to mean foreclosure yet). We are going to assume that that is much better performance than our workouts are likely to get, even though, if the program requirements are truly fulfilled, these HomeSaver Advance deals ought to perform better than your average workout (because they're supposed to involve true "temporary" situations and clear financial capacity to carry the payments).

We will assume that after two years, only 20% of our loans are either still cured and paying as agreed, or paid in full including the unsecured amount. We'll assume another 10% of the loans paid in full (the borrower sold the home or refinanced), but the borrower stiffed us on the unsecured amount and we have to write it off.

Of the remaining 70%, we will assume that 50% end up in foreclosure after 12 months, and the other 20% end up in foreclosure after 24 months. We do that because we want to take into account the possible costs of delaying foreclosure. That is always the problem with workout calculations. It's one thing to compare the cost of a workout to the cost of foreclosure today, but if the loan re-defaults, it may end up costing you more, because foreclosure losses next year might well be worse than they are this year. For our example, we'll assume that losses in a foreclosure would be 30% today, 40% in 12 months, or 50% in 24 months. (This is an example, not a prediction, remember. I'm not building in any positive effect of my workout efforts, although logically I should; the more loans I can permanently cure, the better the recovery should be on the ones I do foreclose because it means less REO inventory.)

That gives us 20 loans with no losses except our $600 fee to the servicer or $12,000. The 10 loans that paid in full on the mortgage but stiffed us on the unsecured loans generated a $96,000 loss. The 50 loans we had to foreclose after a year generated a $4,480,000 loss ($200,000 times 50 times 40% plus $9,600 times 50). The 20 loans we had to foreclose after two years generated a $2,192,000 loss ($200,000 times 20 times 50% plus $9,600 times 20). Total losses: $6,780,000, or 34% loss severity after two years instead of 30% loss severity by foreclosing them all today.

I think it's fair to say that it doesn't take much to think we could break even here. For one thing, it's probably not likely that all loans would be six months past due; if you figured only 4 months past due, which is still severely delinquent, you get 33% loss severity after two years (because the unsecured loan amount is smaller). Add 10 loans to the mortgage paid but unsecured loan written off group and take 10 out of the foreclosure after 12 months group, and you've actually got losses at 24 months at 29%, or just slightly better than foreclosing today.

My point is that you have to remember with workout calculations that while delaying foreclosure might increase the severity of loss on the foreclosures, you do save a lot of money on the ones you cure, and that offsets the calculations on an aggregate level. In practical terms, a program like this is just a lot faster and easier than the buy-loan-out-of-pool-modify-mortgage thing, and it's fair to count in the plus column the extent to which that frees up resources to work with the loans that don't qualify for this kind of deal (the ones that you'll have to do a full-blown mod on). Of course, you have to add back the fact that anything that's faster and easier is going to suffer from adverse selection problems--it does tend to be the lazy, cheapskate servicer's first choice of loss mit options even if it shouldn't be.

At the end of it, I think I'd say this isn't a terrible way to handle the workouts for those borrowers who were tight on mortgage affordability but not impossibly over their heads--say originally qualified at 42% DTI--and who therefore ended up several months past due after an incident (cut back on work hours, unforeseen medical expenses, that kind of thing) that would, in a less expensive relative to income housing cost environment, probably have been tolerable. As long as those borrowers are working with the servicer and want to hang onto the home, this gets them over the rough patch without raiding their retirement accounts or borrowing from the local loan shark, and I can get behind the wisdom of that, at least.

I don't think most troubled borrowers are necessarily in that situation--too many, sadly, are really in over their heads. But if you limit the HomeSaver Advance thing to the salvageable borrowers, you salvage those borrowers quickly and fairly cheaply, freeing up your real effort and expense for dealing with the much more troubled cases. So if that's what they're up to, I guess it's OK with me--not like they asked my opinion--but I do hope OFHEO is keeping an eye on this kind of thing for us, and that we all get to see some periodic reporting about how well this initiative is working out.

As far as the cynical view that this is just a way for Fannie Mae to avoid buying mortgages out of MBS? Doesn't everyone want them to limit their portfolio expansion? As long as they're accounting properly for the increased guaranty obligation here, why not leave the loans on the MBS's books?

by Calculated Risk on 2/29/2008 01:35:00 AM

Here are a couple of interesting articles on "walking away", aka jingle mail, or more technically "ruthless defaults".

From Ruth Simon and Scott Patterson at the WSJ: Borrowers Abandon Mortgages as Prices Drop

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes.
...
A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn't afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income.
...
What's different now, analysts and economists say, is that home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won't recover anytime soon, and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity. "If they haven't lived in [the home] very long and haven't put any cash in it, it's a lot easier to walk away," says Chris Mayer, director of the Milstein Center for Real Estate at Columbia Business School.

From John Leland at the NY Times: Facing Default, Some Walk Out on New Homes

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
...
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said
...
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College

Unfortunately these articles don't really advance the ball. Tanta did an excellent job of suggesting some question the MSM media could ask: Let's Talk about Walking Away

What we have, so far, is a series of industry insiders making a general claim that "ruthless default" is on the rise. What we do not have, so far, is any rigorous quantification of the extent of this problem, or even any really detailed definition of what "a borrower who could afford to pay" is. We have no one offering baseline measures (what, for instance, a lender's analytical models might have predicted is the "normal" level of walking away), and hence no clear sense of the magnitude of the "change" in borrower behavior and attitudes (not to mention much rigor in distinguishing between the two). Hence, we don't yet really know if it's a change in borrower behavior as much as a change in definitions, servicer data collection and interpretation, or media exposure. Or a handful of anecdotes that are being pluralized into "data."

by Calculated Risk on 2/28/2008 08:05:00 PM

From Bloomberg: AIG Posts Biggest Loss, Misses Analysts' Estimates

American International Group Inc., the world's largest insurer by assets, posted its biggest quarterly loss as a publicly traded company after an $11.1 billion writedown of guarantees sold to fixed-income investors.

The fourth-quarter net loss of $5.29 billion, or $2.08 a share, compared with profit of $3.44 billion, or $1.31, a year earlier, New York-based AIG said today in a statement.

... AIG guaranteed $62.4 billion in collateralized debt obligations that included subprime mortgages as of Nov. 25, securities that led to fourth-quarter losses for MBIA Inc. and Ambac Financial Group Inc., the largest bond insurers.

The losses keep adding up. The confessional is very busy.