Jingle Mail, Jingle Mail, Jingle All the Way...

From the Wall Street Journal: Now, Even Borrowers With Good Credit Pose Risks.

Kenneth Lewis acted far ahead of the competition in 2001, when he got Bank of America out of the business of issuing subprime mortgages. While profit margins on these loans to risky borrowers seemed tempting, the bank's chief executive believed the default risks were too hefty to justify.

So what is Mr. Lewis worrying about today? In an interview last week with Wall Street Journal editors, he expressed concern that even borrowers with strong credit scores might turn out to be default risks if housing prices keep tumbling. In other words, what is being portrayed as a credit-quality problem with the riskiest 20% of the mortgage market could spread to a much wider cross-section of home loans.

"There's been a change in social attitudes toward default," Mr. Lewis says. Bankers typically have believed that cash-strapped borrowers would fall behind on their credit cards, car payments and other debts -- but would regard mortgage defaults as calamities to be avoided at all costs. That isn't always so anymore, he says.

"We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes." The clear implication: At least a few cash-strapped borrowers now believe bailing out on a house is one of the easier ways to get their finances back under control.

Such behavior was highlighted in a page-one Journal article this week about the housing quagmire in Corona, Calif. One couple bought a home for $557,000 in 2004 and then refinanced it for increasing amounts as property prices soared, eventually ending up with an $835,000 mortgage -- and extra cash for personal expenses. The couple then bought a cheaper home in Texas and stopped making payments on the Corona home in June. As the countdown to foreclosure continues, it looks increasingly likely lenders will be stuck with that house.

First off, from a rational economic point of view, mailing back the key is absolutely the "correct" thing to do. It is somebody else's problem; in this case, the MBS holder's. They took on the risk, loaned these people the money. If it didn't work out, so sad, too bad...

Secondly, doesn't Mr. Lewis realize that value is perceived by how much effort it takes to achieve something? How useful is "good credit" when any fool gets two to three credit card offers two weeks out of bankruptcy?

By comparison, a "renter" has to all but subject him/herself to an anal probe. In most places, they have to get a credit check, two letters of reference, put up a deposit in escrow, and pay the first month's rent.

If people have no skin in the game, they will walk away. One doesn't have to be Warren Buffett to figure this one out.

The blunt truth is any mortgage product that didn't involve a hefty downpayment is doomed to fail. Period. It's all about skin in the game. No amount of tap dancing around this subject will work.

Lastly, it is critical to keep in mind the role of psychology in these things. If it becomes socially acceptable to go to a party and say, "I mailed in the keys to the bank. Hah hah hah!", the banks are doomed. Flat out, doomed. There's not a power in the world (including the central banks) that can rescue them. Social acceptibility is the ultimate arbiter of many a behavior, and if everyone's doing it, there's no stigma attached to it.

(And just for the record, I'm willing to bet that this is the scenario that will come to pass. Why? It was socially acceptable in the early-to-mid-90's, and it will be again.)

Incidentally, that story up there was in yesterday's Journal. The couple pulled out the "phantom equity", bought a brand new Lexus and a SUV, and a house in Texas (most probably in cash.)

Why?

You can't go after a house in Texas in bankruptcy, and you certainly can't go after a fully-paid one. You also can't go after a car (because a car is considered the modern equivalent of a "horse" which cannot be repossessed in Texas!) The lender is pretty much screwed. This particular couple has played the system like a Stradivarius.

Welcome to Planet Reality(TM), Mr. Lewis. We hope you will enjoy your stay.