Fairly Self Evident (Blah3)

I've seen many stories wherein the tone runs along the lines of "How can people walk away from their homes? That's unthinkable, and runs counter to human nature." The truth is actually fairly simple: People -- an increasing number -- are underwater on their homes, which is to say that their mortgages are now larger than their home values. This has to do with declining values, low (or no) downpayments, negative amortization, etc., etc. These people are, in fact, often making rational decisions: They'll take the hit to their credit, but in the long run probably save themselves thousands (or tens of thousands) of dollars on a currently depreciating asset. The single best line I've seen to describe this activity is from yesterday's NY Times: �When people don�t have skin in the game, they behave like they don�t have skin in the game,� said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm. It's really as simple as that. By the way, this might be an opportune time to mention that during the Clinton era, in October 1999, a report was issued titled Interagency Guidance on High LTV Residential Real Estate Lending [Note: .pdf]. The report, among other things, warned about the "Credit Risks Associated with High LTV Loans," saying, in part: Recent studies indicate that the frequency ofdefault and the severity of losses on high LTV loans far surpass those associated withtraditional mortgages and home equity loans. Undaunted -- and plainly ignorant -- Bush went on to tout his Zero Down Payment Initiative right into the peak of the bubble. Way to go, George.
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