• This is an interesting piece about how household choices are changing and causing many models to be tossed into the trash heap:

  “There has been a failure in some of the key assumptions which supported our analysis and modelling,” Mr McDaniel [president of Moody's] admits. “The information quality deteriorated in a way that was not appreciated by Moody’s or others.” Mortgage borrowers, in other words, did not behave as expected...

  “In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage,” says Malcolm Knight, head of the Bank for International Settlements, the central banks’ bank. “Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances but hand in the keys to their house ... these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”

  The question probably should be why Moody's or anybody else would have assumed that today's nothing-down with cash-out-at-the-close subprime buyer would behave the same way as the 20% down buyer of yesteryear who actually had something invested in the property...

• This week's 60 Minutes explores the same phenomenon:
  

  Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day. They were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.

  "Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt."

  Of course, at that time, most of those people did have money down and (in theory anyway) had a reason to stick around.

• And a nice summing up of the problem, again courtesy of 60 Minutes:
  

  "They were getting loans in excess of 100 percent of the value of the property," [real estate agent] Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow."

  "So, they were getting paid to buy a house?" Kroft asks.

  "They were getting paid to buy a house. Yes. Yeah," Abbott says.

  Yet the morons at Moody's never stopped to consider that people who are paid to buy a house might behave differently from buyers who wanted the house enough to pay to own it.

-btc