Predicting Mortgage Defaults

This runs against the experience of Clayton Homes that Buffett put in his latest shareholder letter (PDF)

Clayton’s 198,888 borrowers, however, have continued to pay normally throughout the housing crash, handing us no unexpected losses. This is not because these borrowers are unusually creditworthy, a point proved by FICO scores (a standard measure of credit risk). Their median FICO score is 644, compared to a national median of 723, and about 35% are below 620, the segment usually designated “sub-prime.” Many disastrous pools of mortgages on conventional homes are populated by borrowers with far better credit, as measured by FICO scores.

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Why are our borrowers – characteristically people with modest incomes and far-from-great credit scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices.

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Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.

Now, Buffett obviously is not a neutral party here, being an investor in Clayton Homes. The Fed paper isn't loading for me so I can't look for confounding factors.

(leaving the same comment at MR. CR's posts are great but the comments are a disaster area.)

I agree that most people who put a large down payment of their own money will stay as long as possible even if they owe more than its worth, but what about all the loans that were nothing down at all? These people have no skin in the game and no real reason to fight it out. There were a large number of these loans in 05-06 when the market peaked. These loans also represent the largest overall loses for banks. Many actually come out ahead overall when you factor in 10-12 months living rent free in the home.