The papers both present the increased defaults as the result in part of a huge culture change in what a house represents to Americans—a shift the lenders themselves encouraged as much as anybody. The WSJ:
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. And even then, the number of people who walked away was relatively small
Some borrowers, says Mary Kelsch, senior director at Fitch Inc., are less willing to make the sacrifices needed to stay in their homes, given the current environment. “It’s a change of mind-set” she says. They are “looking more at their home as an investment that has lost its appreciation potential and don’t really want to continue to pay.”
Both reports have lots of interesting stuff. The Times says much of the problem is, of course, due to the aggressive lending of the bubble era that required little or no down payment from buyers, many of whom had negative equity the minute they closed on their loans because of closing costs. It says the median down payment for first-time buyers last year was just 2 percent.
The WSJ includes numbers that indicate further that the press should lighten up on its use of “subprime” when describing the current housing crisis. Subprime was just the canary in the coal mine. The Journal reports that $3 trillion worth of mortgages—or nearly one in three— could be “underwater” by year’s end. Total subprime mortgages equal about $1 trillion.
The WSJ has the best anecdote, with a look at an Army sergeant who bought a $455,000 house an hour from San Francisco in the spring of 2005, when he was fresh off his first tour in Iraq. It’s now worth about $285,000 and his adjustable-rate mortgage payment has soared by more than one-third. He’s walking away.
Here’s the Times:
“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”
It’s hard for the banks to blame their customers for their greed now isn’t it? These are some of the same guys trying to walk away from their own commitments when the economic value doesn’t favor them anymore.
Which brings us to our Quote of the Day, from the NYT:
“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”
The WSJ is a day late and (sorry, we couldn’t resist) a dollar short with its front-page splash on the falling greenback, noting it has tumbled more than 40 percent against the euro in six years. The NYT and FT went big with this yesterday.
Still it’s a must-read when the Journal brings its considerable powers to bear, as it does here. The story’s lead author, Craig Karmin, has a new book called “Biography of the Dollar” and we get lots of good background here on the dollar’s place in the global economy, whose $3.2 trillion in transactions a day are 86 percent dollar-denominated in some form. We specifically love the brilliant analogy of the buck as PC Guy:
Yet for all of the gloom, the world is unready to let go of America’s unloved dollar. Akin to the way Microsoft’s often-criticized Windows operating system remains indispensable to the majority of computer users, the dollar remains the common language of finance, the medium of exchange in everything from sugar to wheat to oil. Shaking the dollar loose from that place would require a vast reworking of the global financial system that few parties seem prepared to confront.
So is the euro the Mac of the global financial system?