How mortgage default could get much worse

By Felix Salmon
June 8, 2010
Brent White, in his tour de force paper on how homeowners are guilt-tripped into remaining current on their mortgages even when doing so makes no financial sense, notes that non-profit organizations setting themselves up as friends of the consumer are in fact part of the problem:


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Brent White, in his tour de force paper on how homeowners are guilt-tripped into remaining current on their mortgages even when doing so makes no financial sense, notes that non-profit organizations setting themselves up as friends of the consumer are in fact part of the problem:

A homeowner who turned to any number of credit counseling agencies would also find little sympathy – and much moralizing – should they announce their plan to walk on their “affordable” mortgage. Gail Cunningham of the National Foundation for Credit Counseling declared for example in an interview on NPR: “Walking away from one’s home should be the absolute last resort. However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities.” Indeed, the uniform message of both governmental and non-profit counseling agencies (which are typically funded at least in significant part by the financial industry) is that “walking away” is not a responsible choice and should be avoided at all costs.

Well, Gail Cunningham is back, with an inadvertently scary press release on the same subject (emphasis in original):

The National Foundation for Credit Counseling’s (NFCC) 2010 Financial Literacy Survey revealed data that supports consumers’ ongoing efforts to stay in their homes. The survey found that the overwhelming majority of consumers, even those in financial distress, still consider their mortgage payment a priority. When asked if they were unable to meet all of their financial obligations, would they be more likely to keep their mortgage current, or their credit cards current, 91 percent of respondents said they would pay their mortgage first.

The survey also asked under what circumstances, if any, they would consider it justifiable to default on a mortgage. Only 23 percent of respondents answered that foreclosure is justifiable if the property is now worth less than what is owed on it. Further, 15 percent replied that there is no justifiable circumstance under which it would be acceptable to default on a mortgage.

“Taken together, the NFCC survey data brings us some encouraging news: consumers still place a priority on making their mortgage payment, less than one-fourth think that defaulting on a mortgage is justifiable simply because the property is underwater, and a significant number take mortgage obligations so seriously that they find no acceptable reason to default on a home loan,” said Gail Cunningham, spokesperson for the NFCC.

This news is not, in fact, encouraging. For one thing, it comes as little surprise to find out that people who are current on their mortgage payments say that their mortgage payments are a priority. But actions speak louder than words. Just ask FICO, for instance:

Reversing a long historic trend, mortgage default risk for consumers with high FICO scores now exceeds their credit card default risk, even though most credit cards are unsecured credit and mortgages are secured by real estate…

In 2009, 0.3 percent of consumers with FICO scores between 760-789 defaulted on real estate loans, compared to 0.1 percent who defaulted on bankcards.

“We’re identifying lending industry situations in FICO Score Trends that to our knowledge have never been seen before,” said Dr. Mark Greene, CEO of FICO…

Or Transunion:

The share of borrowers who are delinquent on their mortgages but current on their credit cards rose to 6.6% as of Q309 (from 4.3% in Q108), according to national credit bureau TransUnion.

At the same time, the share of borrowers that are delinquent on credit cards but current on their mortgages slipped to 3.6% from 4.1%.

But the NFCC’s survey data is not just useless: it’s worse than that, since it encourages complacency when in fact it should be cause for great alarm. It’s clear that the number of people defaulting on underwater mortgages is rising, and insofar as the NFCC survey tells us anything, it just tells us that there’s a lot of room for strategic default to become a much bigger problem than it is already.

Imagine, for instance, that a survey showed a large number of homeowners with 30-year fixed mortgages over 7%, and who had no intention of refinancing even with mortgage rates below 5.5%. On the one hand, that might be considered good news for banks: more money for them. But more realistically, it would be worrying news, since it would mean millions of people who could suddenly wake up one morning and realize how much more money they could have by changing their mortgage situation. When there’s an easy and obvious strategy which benefits consumers at the expense of banks, consumers are likely, sooner or later, to adopt it. The NFCC survey just shows that a lot of them just haven’t got to that point yet. But there’s a good chance that, eventually, they will.

10 comments

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wow no comments after almost 5 hours! must really be leaving people in stunned/scared silence…

Posted by CDNrebel | Report as abusive

The MBA (Mortgage Bankers Association) weren’t bashful about short selling their national headquarters in Washington DC in February of 2010.

They encourage mortgage holders to be stupid, but when they disregard their own obligations it’s just a business decision.

http://dailybail.com/headlines/delicious -irony-mortgage-bankers-association-mba- dumps-headq.html

Posted by breezinthru | Report as abusive

Lets quit rewarding bad behavior (people that over extended themselves). Lets help the Americans that have lost their jobs and have been out of work for a long time. Not these people with no money down and living in a house they should never have been put in in the first place.

Posted by Abbyjacks | Report as abusive

I’ve changed my mind on this whole issue over the last year. I did condemn people for defaulting on their mortgage, huge houses that were way more than they needed. Now my brother has done the same thing and I took a step back. What if YOU had to make the choice between a mortgage payment on a money pit or being able to put food on the table and enjoy life? He chose to take the FICO hit and downsize and is much happier for it.

The only reason it all still makes me mad is that our idiot politicians keep giving the banks our money instead of letting them eat it. They should be the ones taking the hit, it was their choice to lend, not the taxpayers.

Posted by ptribe77 | Report as abusive

Are you serious?, just because you can loan something doenst mean its a smart idea to do it. You can all blame the banks but in the end it was plain greed on both sides.

thanks your brother for me, thank god he is enjoying life.

also defaulting on the banks and letting them all fall would cost more then keeping them alive.

Posted by jajanssen | Report as abusive

A mortgage is a secured loan. The bank makes an agreement to loan you money for a profit and take your property if you fail to repay them. If the property is worth less than the loan then walk away. The bank takes a risk for their profit. Any moral persuasion to keep paying an underwater loan is just bank propaganda.

Posted by befair | Report as abusive

The Hope and the Hype

What’s keeping those underwater mortgagees paying is Hope -
The hope that their property will regain its past value.
What’s keeping this hope alive is Hype – The notion that an economic recovery is underway, and things will get back to the way they were before.

Posted by yr2009 | Report as abusive

Loaning money at interest has always been a bad idea. The housing market is no different. Right now I’m upside down on my house by a couple of thousand. If all I had to pay back was the money I borrowed then it wouldn’t be so bad. But even after taking my tax dollars just to stay alive, the bank still wants me to pay interest on a house that isn’t worth what I owe. The tax payers helped out the banks, but the banks don’t care about helping their customers at all.They only care about the interest. The care nothing for serving the community.

I wouldn’t mind refinancing but there are so many scams out there that it’s not worth the effort. But if my house payment began to interfere with the needs of my family I’d have no problem dropping this house like a bad habit. Usury as a legitimate business practice must come to an end. Everyone will be much happier for it.

Posted by Benny_Acosta | Report as abusive

Your analysis is absolutely correct. I am one of those who has been frugal, paid bills on time and never extended myself financially. I personally lose because of the bank bailout and because of the reckless use of one’s house as the ATM machine by many. However, on a purely logical basis I could not understand why people do not walk away from an underwater mortgage. It is really no different from a stock option. You have an option to buy the house at the end of 30 or so years. If you do not exercise the option, it is no sin. The one’s at fault really are the people who are willing to sell me the option with very low price. They should pay the price. It is true that if everyone followed this, we have a disaster– However, I agree with you that the false morality play is a temporary fix. People will wise up and those who wise up early will benefit more. At my “personal” cost. However, this is what logic dictates. I was surprised that there is almost a conspiracy of silence on this in the newspapers.

Posted by PaulV | Report as abusive

One thing to note here is the NFCC is stuck between what its backers want and what’s in the best interest of consumers. Like Fannie and Freddie being stuck between their mission to help advance home ownership and effective due diligence and balance sheet management. I totally agree that in some cases a family’s safety, security and long-term financial health are better served by walking away but how does an organization like the NFCC make that kind of statement and survive the political fire storm that would surely follow. I think the mortgage default crisis will get worse, and I sympathize with the NFCC.

Posted by clbemail | Report as abusive