Banks' mail jingles as borrowers walk: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

LONDON (Reuters) - Increasing numbers of Americans are simply walking away from their houses and mortgages, increasing pressure on banks and the economy.

Rapid house price falls in many parts of the United States will soon leave as many as one in five borrowers owing more on their loan than the house will fetch, removing at a stroke the single most powerful incentive to keep up with payments.

The phenomenon of "walk aways" or "jingle mail," so called because of the noise the house keys make in the envelope mailed to the bank, is hard to measure but shows every sign of gathering pace and having a substantial impact.

Wachovia Corp. WB.N went so far as to change its models on how quickly loans will go bad in the face of what it called "unprecedented" changes in consumer behavior.

"I don't know where the tipping point is, but somewhere when a borrower crosses the 100 percent loan to value, somewhere north of that ... their propensity to just default and stop paying their mortgage rises dramatically and really accelerates up. It's almost regardless of how they scored, say, on FICO or other kinds of credit characteristics," Wachovia chief risk officer Don Truslow told analysts on a conference call.

FICO, a credit score developed by Fair Isaac Corp., is one of many barometers of credit worthiness used in home lending to help predict the likelihood that a borrower will repay.

Wachovia this week announced that it would make a $2.8 billion provision for credit losses as it posted a first quarter loss, cut its dividend and sought to raise $7 billion in fresh capital.

While the law varies from state to state, in many parts of the United States mortgage lenders cannot go after defaulting borrowers' other assets. And even where they can, few lenders take the expensive and low-yielding option of chasing down borrowers who walk away from loans.

The scale of the potential problem is huge.

Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first mortgage holders.

The impact of a new wave of defaults will also be potentially important. Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.

While few might shed tears for banks, this means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.

To give a flavor of the impact, Zandi has estimated that every foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent.

GROWING PHENOMENON