It's not just subprime borrowers who are defaulting on their mortgages these days.
Bank executives and credit-rating agencies are warning that an increasing number of homeowners who are current on their credit cards, car leases and other debts are walking away because the size of their mortgage debt exceeds the value of their homes.
What's going on undermines the idea of home ownership as the American dream, where people do whatever they can to own and keep their homes. The stigma that used to exist when you lost your house apparently is fading; more homeowners are deciding against the economics of an underwater mortgage as home prices fall around the country.
Wachovia Corp.'s chief risk officer Don Truslow told analysts that one of his bank's challenges was dealing with the "acceleration" in people who should be paying but aren't because "they've lost equity, value in their properties."
Fitch Ratings echoed that when it announced on Feb. 1 that it was considering cutting its rating on $139-billion in mortgage debt because it assumes more people who borrowed money to buy homes in the past two years are going to default.
"The apparent willingness of borrowers to 'walk away' from mortgage debt has contributed to extraordinarily high levels of early default," the rating agency said.
There are even businesses popping up to help homeowners navigate the default process. One, YouWalkAway.com in Carlsbad, Calif., offers advice on how to repair credit and says it can assist clients in understanding their legal rights. The company declined to give specifics on the size of its customer base.
Banks and financial institutions can only blame themselves for this mess. To start, they encouraged borrowers to load up on debt during the housing boom, often by fully financing their home purchases, and offered all sorts of adjustable-rate and interest-only mortgages.
Now the party is over - for everyone. Nationwide, home prices have tumbled 5 percent since the market peak since early 2006, and some estimates say a 5 to 10 percent decline is to come. The pullback has been more pronounced in some parts of the country, like Southern California, where prices are off more than 15 percent.
That has led to surging defaults among subprime borrowers who could barely afford their payments even before they got hit with falling home values and rising adjustable rate loans.
Seemingly creditworthy homeowners are bailing out now, too. They aren't following the predictable script of the past, which meant stopping payment on credit card and other debt just to keep up their mortgage obligations.
Lenders also failed to recognize the likelihood of creditworthy borrowers defaulting. The rules of mortgage lending had changed, which meant default rates could, too. But most financial institutions didn't pick up on that because they used historical data as their basis for future estimates.
"Were they modeling risk right? No, since they were showing very low expected losses. They were blinded by the immediate opportunity" of bringing in bigger profits through such lending, said Christopher Whalen, managing director at the consulting firm Institutional Risk Analytics.