“There has been a failure in some of the key assumptions which supported our analysis and modelling,” Mr [Ray] McDaniel admits. “The information quality deteriorated in a way that was not appreciated by Moody’s or others.” Mortgage borrowers, in other words, did not behave as expected.
The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first ”“ and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. MoreÂover, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans ”“ turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.
“In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage,” says Malcolm Knight, head of the Bank for International Settlements, the central banks’ bank. “Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances but hand in the keys to their house”‰.”‰.”‰.”‰these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”
“When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first – and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers.”
As my children would say, Duh! They’re comparing apples to oranges.
In consort with what is happening in American churches, the world is being stood on its head.
I’m a little confused by this. Your mortgage is a big expense each month $800 and up, a couple thousand and up for a lot of people who have taken out equity and bought a lot of house. I could see someone just not being able to pull that scratch together or just giving up as it seems too overwhelming. But credit cards have piddly little minimum amount due. Why would people ever default on credit cards before their mortgage?
#3,
Because teh credit card companies, whatever they claim, cannot take the roof from over your head. People didn’t default on mortgages in the past because they needed a place to live and had a responsibility to their families. One wonders if there might be some sort of connection between the decline of the family and the rise of mortgage defaults? Are people with fewer children and/or a history of backing out on other important agreements (such as marriage itself) more willing to walk away from their houses?
Partly along with #4’s comments, if I remember correctly part of the subprime boom was made up of childless singles buying homes. I know as a member of that cohort I’ve been bombarded with mailings about buying one bedroom condos. Might this be a factor? Losing your house is much less of an event when it’s just you than when you have a family.
Several other possibilities:
As far as the car is concerned, most people need them to be employed, so they are in a sense more crucial than a roof.
But I think perhaps the other side of the coin is that if one is carrying much of a credit card balance, the penalty for late payment is huge and immediate, and gets out of hand far faster than the mortgage does.
I think the phenomena of continuing to pay on the credit cards, while not paying on the mortgage is an unintended consequence of the bankruptcy reform.
Previously, debtors let the cards go and filed bankruptcy to get out from under the debt. Now they can’t do that as easily, and something has to give, especially among workers in the home construction industry and their suppliers, who were among the first to go to reduced hours and layoffs. Then came the mortgage writers, etc.
And everyone of those people provided indirect employment to at least one other in various
support functions – grocery clerks, childcare, dentists, hairdressers and so forth. Pretty soon everyworker is feeling a pinch.
C. Wingate beat me to it; i’ll only add that when you’re carrying $15,000 unpaid balance already, you can’t throw another $800 or $1600 mortgage payment into that gaping maw. They don’t default on the credit card only because it takes a little longer for that process to go “spuuuuuuunnnnnggggggg” than three months in a row unpaid mortgage, but when the house goes, the cards were already gone.
Add in the absolutely true point that many one-bedroom or cohabiting couples are in the heart of this mess, and they walk away from everything — re: Kipling “down to Gehenna, or up to the throne, he travels the fastest who travels alone.”
My guess is that these people are so in over their heads even without paying the credit card and car, they still couldn’t keep up with the house. Why default on all three?
The observations above leave out a very important factor: lack of health insurance to protect one (somewhat) from catastrophic or simply very high bills.
You default on all three when there is an unexpected medical emergency in your family or for yourself and your hospital bills, prescription drugs, etc., etc. are sky-high. This is especially true if you have been laid off and no longer have health insurance, or if you were involved in an auto wreck with an illegal immigrant who is uninsured and just disappears into the ether. Or, try having diabetes and searching for health insurance! You won’t get it at any cost.
The system is broken for working people. An enormous portion of bankruptcies have medical costs at their root. One maxes out the cards to pay the medical bills, and when it’s gone it’s gone.
Many, many Americans are one accident or hospital stay away from losing everything they have worked for their entire lives.