January 27, 2008

Moral Hazards

From numerian @ The Agonist

Bank of America announced this morning that virtually all of its quarterly profit was wiped out by write-offs of Collateralized Debt Obligations and related mortgage securities. The bank set aside reserves for further losses in its consumer mortgage and credit card portfolio, in line with large increases in defaults and delayed payments in the fourth quarter of last year.

Several weeks ago the bank had alerted markets to the charge-offs, but the amount written down in the CDO portfolio of $5.28 billion was $2.0 billion more than anticipated. At that time, CEO and Chairman Kenneth Lewis said "There's been a change in social attitudes toward default .... We're seeing people who are current on their credit cards but are defaulting on their mortgages....I'm astonished that people would walk away from their homes."

It's even more astonishing that an executive of a U.S. bank would expect Americans to continue paying on their mortgages after the way the banking industry has treated borrowers. Let's review the tape:

Go read numerian's whole post to see what the bankers were teaching the borrowers. (via)

As CalculatedRisk says, the watch words of 2008 will be

  • Intentional Foreclosure

    "Can you imagine if you had a same or similar home and your mortgage was half the price?" asks Linda.

    This is how it works. Bob paid $420,000 for his home. Then he notices the house across the street, with more upgrades, and is selling for $315,000.

    So Bob, who has pretty good credit, decides to buy the cheaper house. He can't afford both, so then he walks away from his original home, letting it fall into foreclosure. That will hurt his credit, but he's willing to take the hit for a more affordable home.

  • Jingle Mail

    Jingle Mail: where homeowners have mailed in the keys because they can't make the payments and no longer have any equity in their homes.

    That phrase was a prominent feature of the S&L bust and ensuing real-estate debacle in 1990-1991 -- and something we'll be hearing lots more about in the future.

    What makes Jingle Loans more interesting is that in many states, California being one, the first mortgage is known as a non-recourse loan which means the loan papers were drawn up so that the house itself is the full collateral for the debt. So if the house value falls and the buyer finds themselves in negative equity land, then they can just turn the keys back into the mortgage holder and no longer owe anything on the house. The mortgage holder is now the one holding the house worth much less than the original loan value.

  • Negative Equity

    At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages).

    By the end of 2007, the number will have risen to about 5.6 million.

    If prices decline an additional 10% in 2008, the number of homeowners with no equity will rise to 10.7 million.

All of these consequences derive from the wildly unregulated mortgage market bubble which Alan Greenspan helped create.

Posted by Mary at January 27, 2008 10:57 AM | Economy | Technorati links |

Hessia final. Hessia is the seat of the European Central bank.

Posted by: ccoaler at January 27, 2008 04:50 PM