Phil Castle, an IFA [Independent Financial Adviser] for Kent-based Financial Escape, said: “The Together mortgages were nearly all cohabitees rather than married couples although I do not have a large enough mortgage presence for my impression to be conclusive.

“But bearing in mind Northern Rock could have all of this information it would be very interesting to see statistics on this.”

My suspicion is that there is a significant difference between “joint [cohabiting]” and “joint [married]” in terms of risk, but we shall only really know the answer to that when proper studies are undertaken.

David Cameron “cites research showing that almost half of cohabiting couples split up before their child’s fifth birthday, compared with one in twelve married people”.

This line of thinking is supported by an interesting paper “Mortgage Default among Rural, Low-Income Borrowers” printed in the Journal of Housing Research in 1995 and [ironically] apparently funded by Fannie Mae.

It is quite an old paper and may not be entirely relevant. I think it is indicative that potential changes in lifestyle may not have been factored in sufficiently to lenders’ thinking. It includes:

“On average change in marital status increases the risk of default 4.5 times”.

This is supported further by other research, “Why have a rising number of Americans defaulted on their mortgage payments in recent years? When economist Darryl E. Getter of the U.S. Department of Housing and Urban Development set out to answer this question, he discovered that the problem was often not chiefly financial, but rather marital: many of the American homeowners who fall behind in their mortgage payments are experiencing the economic distress occasioned by divorce or separation from a spouse……….. Getter specifically identifies divorce/marital separation as a “variable that represents changes in economic circumstances” likely to cause a default on home mortgage payments. Whether looking at all households or just at those with “normal and unusually high” incomes, Getter finds unusually high default rates for home mortgages among Americans who are divorced/separated ……… (Source: Darryl E. Getter, “Contributing to the Delinquency of Borrowers,” The Journal of Consumer Affairs 37.1 [2003]: 86-100.)

This was published in 2003 and based on earlier data. The recent and rapid increase in cohabitation is not considered. I believe my contention that it is really the increase in cohabitation which has precipitated the current mortgage/financial/economic crisis is a reasonable one.

In “Research Into Mortgage Default and Affordable Housing: A Primer”, [2002] Charles A. Capone, Jr., Ph.D, Congressional Budget Office, Center for Home Ownership, Local Initiatives Support Corporation writes, “….. statistical results are reported as multiplier ratios. These ratios give the relative strength of various influencing factors on incentives to default. Deviations from a value of one (1.0) tell direction and strength of effects. For example, the ratio reported for marital problems is 4.48. That means the incentive to default is 4.48 times as high for families experiencing marital problems than for those without such difficulties. This is not quite the same as saying probabilities of default will be 4.48 times as high, but it is close.”

There is an interesting letter [12th August], “A Myth About Fannie Mae and Freddie Mac” in the New York Times by Judith A. Kennedy, President and Chief Executive, National Association of Affordable Housing Lenders, Washington. She concludes, “Fannie Mae and Freddie Mac aren’t victims; they dug their own holes”.

Judith Kennedy should know what she is talking about as she has previously worked for both Fannie Mae and Freddie Mac!

Based upon this evidence - such as it is - and if my contention turns out to be correct, “….. that it is the banks and mortgage lenders who created their own crisis, when there was enough evidence staring them in the face about the consequences of pursuing their ‘business models’”, I hope it will strengthen the resolve of couples to commit themselves to each other and to prepare for marriage carefully before taking out mortgages and that mortgage lenders will consider the risks in the light of all the evidence, when it becomes available.

-Ron

“…… studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie’s left-wing defenders are underwriters of crony capitalism, not affordable housing.”

The question I am raising is, “Did the increase in cohabitation precipitate this crisis”?

Not All Financial Woes Are Created Equal
The failure of Indymac Bank – according to The New York Times the largest lender to fail in more than two decades – can be laid squarely at the feet of the lax (or nearly non-existent) underwriting that is part of (a big part of) the sub-prime mess. The chickens simply came home to roost.

The troubles of Fannie Mae and Freddie Mac are quite different. Freddie and Fannie underwrote loans carefully; their difficulties are a result of the unprecedented decline of home values.

In 2006, going against the conventional wisdom that single-family home prices never decline (they might stop rising for awhile, but they never decline), we predicted that single-family prices could decrease 10 to 20 percent. Painfully, that forecast turned out to be very correct – but also optimistic. We’re in a cycle now in which housing declines already are greater than at any time since the Great Depression of the 30s. And we’re not at the bottom yet.

If you don’t want to be disappointed by housing performance in the near term, disregard forecasts that the bottom is just around the corner – unless that corner is in Timbuktu. The bottom is NOT coming soon. And when it does arrive, it will not be obvious, like the bottom in the chart of the DJIA. The housing “bottom” will become apparent only in the rear-view mirror, when you realize that prices have stopped falling. Don’t expect a sharp rebound.

We will stay at the bottom for quite a while. How long that lasts will vary, as always, market-by-market.