The silver lining in the housing bust

The market opportunity in missed mortgage payments.


Andrew Leonard
August 23, 2006 1:07AM (UTC)

The glory of modern capitalism is in its endless willingness to defy the maxim that you can't make a silk purse out of a sow's ear. Pshaw, snort a phalanx of Wall Street investors. There's value to be found everywhere, including, but not limited to, the hearing appendages of swine. Just take note of this quick brief from National Mortgage News, brought to us by the Housing Bubble Blog. "Investors are starting to eye the default management services market. With an anticipated boom in defaults, some buyers are hoping to get in on the ground floor. Two former Goldman Sachs executives have raised $50 million to buy DFM companies."

Default management services companies? Isn't that just a pretty name for the muscle who knocks on the door in the middle of the night demanding that you cough up some cash for an angry bookie?

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Seems yesterday's thugs are today's database whizzes. Modern default management services companies specialize in advanced software systems that seek to minimize the pain for lenders when consumers start having problems paying their bills. In this case, those bills would be mortgage payments.

Among the services offered by one such company, the First American Corp., are a "Default Tracking System" that is the "ultimate solution for tracking loss mitigation and reinstatements." First American is also eager to assist mortgage holders in the outsourcing of "foreclosure and bankruptcy packaging, imaging, filing, document retrieval, mail processing, system updates, invoice processing and claims processing."

If there's a market in default management, then things are getting bad. Six months ago you could have had a decent argument as to whether the housing bubble had popped. No longer. That's a given. Now the big question is: How awful is it going to get? Will the mighty American consumer at long last topple over, as the spigot of easy home equity cash finally gets turned off?

In early July, economist Dean Baker told readers to keep an eye on consumer credit numbers. In May, credit card debt spiked up 9.9 percent, a possible sign, said Baker, that consumers were beginning to rely on plastic for their purchases, rather than cash from their home refinancings. But one month did not make a trend, he noted. What about two months? The numbers were far worse in June. According to Bloomberg, overall "consumer credit, or non-mortgage loans to individuals, rose $10.3 billion to $2.19 trillion following a revised $5.89 billion increase in May. The two-month gain was the biggest since September-October 2004."

And on the heels of that comes a tidbit from the Capital Spectator, which encourages us to look at what is happening in the world of home equity loans. According to a research note by Northern Trust analyst Asha Bangalore, home equity withdrawals are drying up. "Households tapped into home equity to the tune of about $600 billion in 2005 to support their expenditures," but during the most recent 10 weeks of 2006, home equity loans have dropped every week.

Credit card debt ... going up. Home equity loans ... going down. Do you suppose the default management service companies are hiring?

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Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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