Are Mortgages Struggles Really Something New?

There's a good post about HELOCs on CalculatedRisk about why a company involved in mortgage backed securities suddenly increased the amount of loss due to HELOCs.

CR says it's more likely that losses rose suddenly than that they rose slowly but FSA "didn't get the news" right away.

CR suggests a reason: People were living off these HELOCs. When house prices went down, they couldn't continue living off them.

I agree with all of this. I disagree with interpretations (other people's not CR's) of these facts that they are a sign of a fundamental problem with the US economy. Rather, I think there is always a segment that doesn't have its act together. These people would struggle regardless of what developments occur in the economy. There are many things in life they don't prepare for. You could similarly find a bunch of stories about people who need disability insurance but didn't buy it.

The HELOC situation gets our attention because we can see the results of failure to plan in default numbers on specific packages of loans. We see those numbers and know many people are struggling. It's similar to the moment of morbid fascination reporters on the excellent show This American Life: The Giant Pool of Money experienced when a mortgage servicer showed them the patterns of people getting barely caught up on their mortgages and then falling further behind. These are lives we're looking at, they exclaimed. When we see a group of people struggling together, we feel for them, want to help them, maybe curse them for failing to plan ahead, and worry that their troubles will become a problem for everyone.

People who argue that the problems experienced by this group will be a problem for everyone need to provide evidence that people are struggling significantly more than on average. So far I'm not believing it. These people get our attention because:

• They come in groups that provide summarized figures.
• The troubles affect major investment firms.
• If you report the facts about their cases selectively, they can appear more sympathetic than other cases of people doing irresponsible things.
• Some people's memories don't go back to the recession of '91, so they think this is totally new.

As a result consumer confidence is at a 20 year low. People think there are serious economic problems. They're willing to use their tax dollars to bail out FIRE (finance, investment, real estate) industries as well as families and individuals who made bad decisions. Before we do that, show me the evidence of serious economic problems? I am just not believing it.