Pete Kendall's Socio Times: A Socionomic Commentary

February 1, 2008
Fitch Places $139 Billion of Subprime on Negative Watch, Cites ‘Walk Aways’
Fitch Ratings said late Friday that it had placed $139 billion of subprime RMBS on Watch Negative, the result of increased loss expecations. The rating agency said it now expected cumulative losses for the 2006 and early 2007 subprime vintages to range from 21 to 26 percent.
In Fitch’s opinion the contraction in the mortgage markets has contributed to an acceleration and deepening of home price declines, and has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers.

It’s worth noting some of the language in Fitch’s press statement — because it’s the first time any of the rating agencies have lended credence to the idea that borrowers are walking away from their homes:
"Additionally, the apparent willingness of borrowers to ‘walk away’ from mortgage debt has contributed to extraordinarily high levels of early default, which is particularly noticeable in the 2007 vintage mortgages. As Fitch has described in recent research reports, this behavior appears to be largely attributable to the use of high risk mortgage products such as ‘piggy-back’ second liens and stated-income documentation programs, which in many instances were poorly underwritten and susceptible to borrower/broker fraud."

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Bull Market Instruments Now Multiply Strength of Decline
By: Pete Kendall, February 4, 2008

When bubbles burst, they invariably unleash a negative social response against the most aggressive and successful exploiters of the preceding advance.
The Elliott Wave Financial Forecast, September 2006

foreclosureOne of the things we’ve been touched on in various passages of The Elliott Wave Financial Forecast is the unexpected ways in which things get turned on their head in a bear market. In the latest issue, for instance, EWFF covers credit-default swaps. On the way up, they performed wonderfully for bond holders and companies alike because they allowed bondholders to protect against downside risk without actually selling a given companies bonds. This kept the corporate bond market percolating as even borderline businesses plans were able to attract capital. This was great for the economy as it kept even the most marginal enterprise humming along – at least until the trend changed. Now that everything is headed the other way, trillions and trillions in swaps have been issued. In fact, the swaps are worth way more than the bonds that they are derived from. So much more that faltering companies will be worth more to financial participants dead than alive. This means workout plans and loans in which  companies survives by restructuring debts will be a thing of the past for many firms.

The walk-away response to falling home prices is another shocker, nobody thought twice about it when stocks were rising. Jim Bianco of Bianco Research says financial participants have yet to fully grasp this dynamic:
"Refusing to pay a mortgage when one has the ability to do it, because home prices are falling, is a real trend.  We believe it is being fueled by the large body of borrower-friendly foreclosure laws set up over several decades.  In other words, homeowners used to "beg borrow and steal" because they thought home prices only went up.  So, greed drove them to do whatever was necessary to pay their mortgage in order to hold onto their home.  Now that they have little-to-no equity and do not believe home prices are going to rise anytime soon, they are walking. 

Here's an excert from a "60-Minutes" interview that illustrates the homeowners emerging belief that they don't have to pay their mortgages because house prices are supposed go up:
STEPHANIE VALDEZ: Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense.
STEVE KROFT: That's what you agreed to do when you bought the house.
STEPHANIE VALDEZ: Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way.
STEVE KROFT: You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?
STEPHANIE VALDEZ: You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?

As Bianco notes, the laws in many state's have been changed so that it is now "easy and convenient" for howowners to walk away. Forgiving foreclosure laws are another by-product of the easy money era. When the new  tight-money era gains full control, the costs of  “walking away” will increase. In the meantime, banks' real estate interests are going to be far more hands-on than they ever imagined.

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The fact that people make deals (obligations) and are willing to walk away from them, and then say they are only hurting "their credit" is a sign of how far we have fallen.
Posted by: mark
February 4, 2008 03:29 PM

Note the Socionomic-oriented cover of the February issue of Wired: Why Things Suck!
Posted by: sheila
February 4, 2008 03:29 PM

Shocking on one hand, unsurprising on the other. It is a basic principle of economics that what is easily or freely had will be overused or abused.I recently read a different type of story which told of a new trend toward arson among homeowners angry with their lender and impending foreclosure. I have also heard other stories where owners cannibalize the home - selling copper pipe, appliances, essentially gutting the home before leaving. More signs of the times to come.
Posted by: Chris Grosso
February 4, 2008 03:29 PM

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