Bailout

Jingle mail datapoint of the day

By Felix Salmon

David Streitfeld has got his hands on new data from CoreLogic. It’s hard to find actual numbers in the article, or any kind of link to the data, so here’s the accompanying chart:

You can see how this might have blindsided lenders: the richest borrowers, who historically had the lowest default rates, now have the highest.

?The rich are different: they are more ruthless,? said Sam Khater, CoreLogic?s senior economist.

And, they’re disproportionately likely to live in California, or other non-recourse states where you can default on your seven-figure mortgage without any realistic worry that the bank will come after your other assets. That said, there’s a good chance that many of these delinquencies are forced rather than strategic.

Streitfeld’s piece is bylined Los Altos, California, a town where the median home is $1.5 million. In such towns, you don’t need to be a millionaire to find yourself in a multi-million-dollar home. Let’s say you’re a tech geek who found yourself with $200,000 for a downpayment on a house over the course of the dot-com bubble. So you buy a million-dollar home, and then start up a series of companies. You need to live, of course, and you can’t afford to pay yourself a salary, so you do two or three cash-out refinancings on a home which by 2007 was worth $2.5 million. Before you know it, you’ve got a $2 million mortgage, no way of paying it, and a home which is worth significantly less than the mortgage. Realistically, you have no choice but to default.

Even after accounting for your initial $200,000 downpayment and a series of mortgage-interest payments along the way, you still took out of the house much more money than you put in: the cost of living there over the past 10 years has probably been negative to the tune of well over half a million dollars. Essentially, the house has paid you $50,000 a year — money which is easy to spend, and is now long gone.

In any event, these were jumbo mortgages when they were taken out, and they’re jumbo mortgages now — none of this has anything to do with Fannie or Freddie, except insofar as the homeowning majority of the population might yet wake up and, emulating the rich, default on their underwater homes. And so the GSEs are desperately, and unconvincingly, trying to persuade them not to do so:

Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy. That’s because strategic defaults affect many other families and communities. And these costs ? or as they are known in economic jargon, externalities ? are not factored into the individual borrower’s calculations.

Well, sure, it’s not good social policy to strategically default. Fine. That doesn’t stop the rich, and it shouldn’t stop the rest of us either. I think it’s pretty clear which direction we’re headed in, and moralistic exhortations aren’t going to turn the tide.

Full post as published by Macroprudential on July 09, 2010 (boomark / email).