The Changing Ethic of Homeowership?

The Wall Street Journal has a thoughtful look at how the creative lending boom has perhaps fundamentally altered the way many Americans view homeownership.

It’s a change that has caught even Bank of America’s CEO Kenneth Lewis off-guard to some extent:

“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.

I don’t know if people’s attitudes towards homeownership have changed all that much, myself, but what this suggests is that many borrowers are — likely correctly — identifying the no-win situation they face when they have little equity and a property that is losing value. Especially when faced with so-called “3 Ds” that have long traditionally driven borrower defaults in any economy: death, divorce, and dumb (that’s fraud and the like). Add in potential job losses as part of a slowing economy, and you’ve got a situation where borrowers decide to mail it in.

If you’ve ever seriously invested in stocks, it’s the equivalent of being on the losing side of an option trade and simply walking away from the contract. Nothing astonishing about that, really.

What may be astonishing, however, are the costs. From Calculated Risk, a look at what this may mean for the industry:

If every upside down homeowner resorted to “jingle mail” (mailing the keys to the lender), the losses for the lenders could be staggering. Assuming a 15% total price decline, and a 50% average loss per mortgage, the losses for lenders and investors would be about $1 trillion. Assuming a 30% price decline, the losses would be over $2 trillion.

Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion (far in excess of the $70 to $80 billion in losses reported so far).