Home, Home I'm Deranged Part 6

Over at NakedCap, Yves Smith has a great piece on the coming "jingle mail" hell.  The next leg down in the housing market will stoke a flood of people simply mailing their keys back to the bank and walking away from their mortgages, the "strategic default".  When you're $20,000 or $50,000 or $100,000 underwater on your mortgage and it's getting worse, and your mortgage payment is going up through no fault of your own because you took out a mortgage you could afford on a $300,000 home and the home is now worth $200,000, and the penalty rates have jacked your mortgage up to twice what it was...why do you continue to pay the house off, especially when you know further reductions in the price of your home are coming?

Now that we know it's the wealthiest Americans with the largest mortgages who are walking away, why can't Americans with smaller mortgages do so?  The answer is Fannie and Freddie are cracking down on this practice...something they can't do on million-dollar mortgages because they don't have any:  Fannie and Freddie are limited to mortgages that are less than $729,750, by federal law.  The folks with the million-dollar jumbo mortgages?  They don't have any huge government agency threatening them.

Yves explains why this is:

So why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income.

Why would the banks oppose principal mods? It will force an end to extend and pretend, and when THAT happens, a lot of financial firms will be shown to be undercapitalized and in need of rescue or resolution (as we and others have pointed out repeatedly, Mike Konczal’s conservative analysis of second mortgage portfolios at the four biggest US banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo, shows that they probably need another $150 billion in equity among them, and others contend the writedowns on seconds should be much more aggressive than Konczal assumed).

This push could also be an effort by the GSEs to shift blame, Whocouldanode 2.0: “whocouldanode prime borrowers would default at such high rates?” It wasn’t our crappy procedures and unduly optimistic assumptions, it was the black swan of a change in values!

Now let us say I am wrong and the banks and GSEs are about to embark on new tactics versus defaulting borrowers, say by getting more aggressive in trying to garnish wages when recoveries fall short. That has the potential to backfire massively.

Backfire massively all over President Obama, that is.  If you made a bad investment in your summer home, you can walk away from it.  If you are six figures underwater on the only place you've got, Fannie and Freddie are going to make sure you drown there or die trying.

The rich?  They're not like you and me. And so help me, I don't even think Obama's even aware of just how much of a disaster this is going to be very very soon.