Borrower Behavior: The Big Unknown

Aline van Duyn tells an increasingly familiar story today: that while corporations have a very clear hierarchy of debt payments, with preferred stock, mezzanine debt, senior debt, senior secured debt, and all that, individuals do not -- and they don't always act according to expectations. She quotes TowerGroup's Dennis Moroney explaining why mortgages aren't necessarily senior debt:

"As they are losing value on their homes, they may be less motivated to repay their mortgages. Instead, they will focus on necessities, such as eating or paying for heating fuel. To pay for those, they need to keep their credit cards open. Credit cards have become an essential item for many people."

This seems perfectly reasonable, but the real insight, I think, comes at the end of the column, when Aline talks to Larry Rosenberger, the former chief executive of Fair Isaac. Yes, it's entirely possible to come up with reasons why people might stay current on their credit cards while defaulting on their mortgages. But are they actually doing that? The fact is that we simply don't know, and it's not going to be easy for Rosenberger to find out.

One of the obstacles Mr Rosenberger has encountered is finding the right data. Just as the mortgage financing business was sliced and diced through the use of securitisation, there is no central database with good and comprehensive information. The sector was so profitable for so long that there was little incentive to invest in updating databases or add new information to internal tracking systems.
"I have the impression this is going to be tough," says Mr Rosenberger. "The value chain in mortgage lending was chopped up and the data collection has become choppy because of it. Without the data, it is hard to really work out what exactly is going on."

The securitization of mortgages has made it hard for individual borrowers to find someone capable of modifying their loan. It seems it's also made it hard for any individual lender to find out much about borrowers, in aggregate. There really was a lot to be said for the days when borrowers and lenders actually knew each other.