I was just noodling around with respect to default modeling. You all know my views on negative equity as the leading cause of loan default across all paper types. I am seeing in real-time much higher paper grades defaulting due to negative equity, as borrowers strive to de-lever their balance sheet.
Remember, until the past five years or so, allowable debt-to-income ratios were only 28/36 or 33/38 on Jumbos. With the advent of 50% debt-to-income and even higher given Stated Income, Interest Only and HELOC’s, homeowners are totally leveraged in their home. They can’t sell, refinance or save money.
What is the easiest way to de-lever and maintain their lifestyle? You got it; leave the home and go rent a similar home for half the price. Immediately, they are able to save money, take vacations, keep their SUV and get on with their life. This describes the move from the Subprime Implosion into higher paper grades I keep warning you about.
Now that bailouts and foreclosure are the norm with even the top Republicans taking about ‘getting people right in their homes again’, how does that effect psychology? Has it become ok to default on your mortgage?
I can hear the guy making $120k a year with a 750 score right now say ‘if values would not have fallen by 50% I never would have defaulted. The market made this decision for me. All my other credit is perfect. I am not having any financial trouble. This was a business decision’.
How do you model that?