There was a nice expose on CBS 60 Minutes this weekend called House Of Cards. I seldom watch TV but happened to catch it.
Steve Kroft reports on how the U.S. sub-prime mortgage meltdown, in which risky loans drove a housing boom that went bust, is now roiling capital markets worldwide.
Click here to play video.
Steve Kroft: "It sounds complicated but it's really very simple. Banks lent hundreds of billions of dollars to homebuyers that can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities and sold them round the world as safe investments. If it sounds a little bit like a shell game or a ponzi scheme, in some ways it was".
"Matt and Stephanie Valdez say they knew exactly what they were doing when they bought this small two bedroom house for $355,000."
....They cannot refinance because the value of the house fell below the existing mortgage. They say they can afford the higher payments but see no point in making them.
Matt: The value of the house keeps going down and the payments keep going up. Where's the logic in that?
Stephanie: Why make a $3200 a month payment on a 1200 square foot home? It makes no sense.
Steve Kroft: But that's what you agreed to do when you bought the house.
Stephanie: Fine if the value was going up. The value is going down.
Steve Kroft: You are saying essentially you are going to stop making payments.
Stephanie: The only advice we've gotten so far is to walk away.
60 Minutes Legitimizes Walking Away
What 60 minutes described was a Beautiful Model For Fraud. That model is now imploding as all fraudulent schemes eventually do. And for those on the fence, 60 Minutes may just have legitimized it walking away.
The LA Times is writing A tipping point? "Foreclose me ... I'll save money"
A homeowner who can't sell his house tells the L.A.Times, "Foreclose me. ... I'll live in the house for free for 12 months, and I'll save my money and I'll move on."Intentional Foreclosure: The New Trend
Banks and lenders fear this kind of thinking -- that walking away from a house could be the smart economic move -- appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: "... people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties..."
CBS13 is talking about the New Trend in Sacramento: 'Intentional Foreclosure'.
This is how it works. Bob paid $420,000 for his home. Then he notices the house across the street, with more upgrades, and is selling for $315,000.Changing Social Attitudes At Forefront Of Crisis
So Bob, who has pretty good credit, decides to buy the cheaper house. He can't afford both, so then he walks away from his original home, letting it fall into foreclosure. That will hurt his credit, but he's willing to take the hit for a more affordable home.
Changing Social Attitudes About Debt have clearly moved to the forefront of the housing crisis. Even those who can afford to pay are walking away with no regrets. And with people walking away in mass, Banks Attempt To Freeze Balance Sheets is destined to fail.
This is what happens when you give people free money. Unfortunately, Bernanke, Congress, and Paulson are intent on giving away more free money to fix the problem. On the surface this might appear inflationary. However, credit destruction and bank impairments are happening far faster than Bernanke and Congress are acting.
Welcome to Deflation American Style. At the current rate of progression, Deflation American Style figures to be far worse than anything Japan ever saw.
Mike "Mish" Shedlock
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