Why Don't Americans Mass Default?

[RLflutie7]

That is just mass default on everything that is not tied to something and secured? Ie: Credit cards. What are they gonna do? Wreck your credit? Credit will already extremely tight.

 

Oh... And of course STOP spending. Maybe actually live in A (one house) house for 40-50 years.

 

Another note... Think they guy who worked his whole life at US Steel to earn a pension is bitter? They didn't bail them out.

 

 

I thought the same thing. If banks can walk away and let the tax payers pay the bill, why can't average the average guy . . . and I think it will happen . . . but not by choice.

[finknottle]

I thought the same thing. If banks can walk away and let the tax payers pay the bill, why can't average the average guy . . . and I think it will happen . . . but not by choice.

 

The banks are not walking away, they are indirectly negotiating (via congress) a way out. If they can't they go bancrupt.

 

You have the same options. When your hospital bills are too high, you can negotiate with someone a smaller payment. If you owe a ton of money to the credit card companies or a collection agency, you can try to argue the total down. Maybe they agree to the smaller amount, maybe you declare bancruptcy and they get nothing.

 

The only real difference - and the one that makes us mad - is that when a hospital agrees to cut your bill in half, they are making that decision for themselves and are effectively paying for 'the bailout.' It's their calculation and their choice. With the current situation, we have the government agreeing on behalf of us that *we* will provide the funding/loans that the financial community needs to keep functioning. The banks are not sitting down with me, the payer, they are sitting down with Pelosi, Dodd and Frank. It may be in our interests in the long run, but it sure isn't palatable.

[Jon in Pasadena]

So you're saying that people who max out the borrowing capacity on their homes have zero impact on the rising mortgage debt, as long as they keep making payments. Did I get that right?

GG, could you clarify for me what, if any, differences you perceive in the "impact on the rising mortgage debt" of performing vs. non-performing debt? My understanding (which is almost certainly imperfect) of the mortgage-related factors in the current liquidity crisis (I realized there are other factors as well), is that the CDOs or MBS, or what have you, comprise "good" debt bundled with "bad", and they are so deeply intertwined that no-one wants to touch any of it right now, thus reducing the market, and hence the market value, of those securities to near zero. I see how performing debt gets added into the total, but I don't see how you can blame the complying (paying/performing) mortgagee for the subsequent collateralization and sale of his mortgage?

 

Ah - I read a few of the other threads, so I might have a glimmer of where you're at with this...are you saying that highly leveraged but performing mortgagees are implicitly stressing the system because, in the event of a severe downturn, they may more easily transition to non-performing debtors, thus ratcheting up the crisis yet further? And if so, then where, exactly, is the cut-off between too-leveraged and not: ability to keep paying one's debt obligations for an interval of 6 months of joblessness? a year? 2 yrs? ... infinite?

 

(Apologies in advance if I've misunderstood your argument.)

[GG]

GG, could you clarify for me what, if any, differences you perceive in the "impact on the rising mortgage debt" of performing vs. non-performing debt? My understanding (which is almost certainly imperfect) of the mortgage-related factors in the current liquidity crisis (I realized there are other factors as well), is that the CDOs or MBS, or what have you, comprise "good" debt bundled with "bad", and they are so deeply intertwined that no-one wants to touch any of it right now, thus reducing the market, and hence the market value, of those securities to near zero. I see how performing debt gets added into the total, but I don't see how you can blame the complying (paying/performing) mortgagee for the subsequent collateralization and sale of his mortgage?

 

Ah - I read a few of the other threads, so I might have a glimmer of where you're at with this...are you saying that highly leveraged but performing mortgagees are implicitly stressing the system because, in the event of a severe downturn, they may more easily transition to non-performing debtors, thus ratcheting up the crisis yet further? And if so, then where, exactly, is the cut-off between too-leveraged and not: ability to keep paying one's debt obligations for an interval of 6 months of joblessness? a year? 2 yrs? ... infinite?

 

(Apologies in advance if I've misunderstood your argument.)

 

Nope, you got the argument right. Subprimes were the iceberg, but the problem wouldn't have escalated this far if it wasn't for the sheer volume of debt, which includes mostly performing prime mortgages, but also a big boost from home equity & jumbo loans (not quite a subprime market). So when you look back at it and gauge the market at the peak, everyone got rosy eyed because your loss estimates baked in the assumption that a) defaults would continue to be low, and b) prime borrowers in the pool would give ample protection to the most senior tranches. The result is that as more securitizations were written, credit became more available and the total just multiplied. And yes, by getting lumped with non-performers, the low valuations of performing MBSs is exacerbating the problem. If the securities were isolated solely to subprime, banks would have taken their losses, and armed with the $100 bn in new equity they've raised to date would have been on the road to recovery.

 

So, you not only have to worry about P&I payments, but the underlying value of the mortgages, as home values drop the mortgages go further underwater. Factor in a natural 15% moving rate for Americans each year - that puts added pressure on the market. Then add the rising unemployment, and you see why we haven't sees a floor to the valuations.

[YellowLinesandArmadillos]

Nope, you got the argument right. Subprimes were the iceberg, but the problem wouldn't have escalated this far if it wasn't for the sheer volume of debt, which includes mostly performing prime mortgages, but also a big boost from home equity & jumbo loans (not quite a subprime market). So when you look back at it and gauge the market at the peak, everyone got rosy eyed because your loss estimates baked in the assumption that a) defaults would continue to be low, and b) prime borrowers in the pool would give ample protection to the most senior tranches. The result is that as more securitizations were written, credit became more available and the total just multiplied. And yes, by getting lumped with non-performers, the low valuations of performing MBSs is exacerbating the problem. If the securities were isolated solely to subprime, banks would have taken their losses, and armed with the $100 bn in new equity they've raised to date would have been on the road to recovery.

 

So, you not only have to worry about P&I payments, but the underlying value of the mortgages, as home values drop the mortgages go further underwater. Factor in a natural 15% moving rate for Americans each year - that puts added pressure on the market. Then add the rising unemployment, and you see why we haven't sees a floor to the valuations.

 

? The moving rate has been reported to have dramatically slowed, what if any effect other then velocity does this have on liquidity?

 

P.S. I have appreciated you insight in the last few posts. Learned a lot, thanks. So far my credit hasn't lessened, in fact Chase just approved me for a pre-approved card.

[Jon in Pasadena]

Nope, you got the argument right. Subprimes were the iceberg, but the problem wouldn't have escalated this far if it wasn't for the sheer volume of debt, which includes mostly performing prime mortgages, but also a big boost from home equity & jumbo loans (not quite a subprime market). So when you look back at it and gauge the market at the peak, everyone got rosy eyed because your loss estimates baked in the assumption that a) defaults would continue to be low, and b) prime borrowers in the pool would give ample protection to the most senior tranches. The result is that as more securitizations were written, credit became more available and the total just multiplied. And yes, by getting lumped with non-performers, the low valuations of performing MBSs is exacerbating the problem. If the securities were isolated solely to subprime, banks would have taken their losses, and armed with the $100 bn in new equity they've raised to date would have been on the road to recovery.

 

So, you not only have to worry about P&I payments, but the underlying value of the mortgages, as home values drop the mortgages go further underwater. Factor in a natural 15% moving rate for Americans each year - that puts added pressure on the market. Then add the rising unemployment, and you see why we haven't sees a floor to the valuations.

Thanks, that was very helpful. In my case, I put about 23% down on my property late last year, and I'm crossing my fingers & toes that that will be enough equity to ride out the current cycle without going underwater.

[GG]

Thanks, that was very helpful. In my case, I put about 23% down on my property late last year, and I'm crossing my fingers & toes that that will be enough equity to ride out the current cycle without going underwater.

 

Looking at RE prices in CA, let's hope you don't have to move for a while.

[Jon in Pasadena]

Looking at RE prices in CA, let's hope you don't have to move for a while.

I have no plans to move, although plans sometimes do change unexpectedly. Where I bought, the median sale price for SFR was down about 12% YOY in August. I bought in November 2007, so I'll have to wait a couple months to see where we're at then. I'm not too worried; the below-median sector (where I am) has very solid support. If my area dropped another 20%, I'd expect that most of LA would have crashed to Detroit-like levels. I suppose it's possible, if we're really entering another "Dust Bowl" era.