Housing Hopefulness and Helplessness

Mark Perry, the author of the Carpe Diem blog, has written a number of very good posts about the housing market.  Yesterday’s post highlights how bad the housing market was in the early 1980s.  This is good perspective — we’ve been here before and lived through that housing decline as well — that’s the hopeful news.  I think it is worth remembering that many borrowers in the ’80s became “upside down” in their mortgages (i.e. the mortgage balance on the home was greater than the value of the property) but did not default on their loan.  I remember friends needing to save money to be able to sell their condo since the proceeds from the sale would not cover their mortgage. 

If history is any measure, fears of massive mortgage defaults may be overblown.  Many people view their contractual debt obligations as moral obligations.  Even those who have a less principled view recognize that there are huge practical consequences to defaults: ruined credit, etc.  We may even be surprised by the resiliency of households in the face of job loss — the increase of dual-income households over the past few decades theoretically should lower default rates as the likelyhood of both earners losing a job is exponentially smaller than just one loss.  

Where I fear we may be helpless is in preventing high foreclosure rates among sub-prime borrowers.   The Mortgage Bankers Association has already chronicled enormous differences in foreclosure rates between prime and subprime mortgagees.  The real question is why borrowers are rated subprime.  A seasoned corporate lender once told me that loan repayment is largely a matter of character (he was speaking of business borrowers, not individuals with mortgages) — there are some borrowers who will go to the ends of the earth to repay their obligations, while others quickly walk away in a downturn.   It is a very 19th century notion that credit worthiness is a matter of character, but there’s some truth to this.  This is not to disparage people who have genuine unexpected hardships and are forced into default, merely to point out that in aggregate, forestalling default poor credit borrowers may be more than a matter of economics.   The Comptroller of the Currency recently reported that over half the mortgages that were modified in the first quarter of ’08 are already delinquent with many having redefaulted.

There’s good and bad news in all this.  The good is that, based on history, we hope that many borrowers will stay current with their mortgages despite the steep decline in their home values.  Unfortunately, though, we may also find that, among subprime borrowers, no amount of intervention will be effective.

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