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» VISIT US ONLINE @ DSNEWS.COM COVER STORY COVER STORY MARKET PULSE Borrowers of today (and tomorrow) look decidedly different from what we've known—how does this shift affect default risk as we move forward? INDUSTRY INSIGHT A total of $16 trillion in wealth was wiped out by the housing and ensuing financial crises, according to the latest assessment from the White House Council of Economic Advisers. The magnitude of such loss caused families to pull back on spending plans, reduce debt, and increase savings, while corporations cut back on hiring, laid off staff en masse, and halted investment plans, resulting in an estimated 8.8 million job losses. Borrower Psyche Consumer confidence in the economy—and housing, in particular—took a severe hit following the market's bust. For many families, their homes are their biggest assets, and plunges in property values across the country hit them deeply. That, compounded by the unforgiving job market throughout the Great Recession, incited a shift in borrowers' views of homeownership and views of their own obligations as mortgage borrowers. Much of that movement likely was a consequence of consumers' lack of trust in the system and lack of trust in lenders and financial institutions in general. In March 2011, the Chicago Booth/Kellogg School Financial Trust Index showed a lingering discontent toward mortgage lenders by the American public. The data also showed a propensity to strategically default, even among people morally opposed to such behavior, if accusations of predatory lending surfaced. Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business and co-author of the index, explained at the time, "Interestingly, 48 percent of Americans said they would be more likely to default if their bank was accused of predatory lending, even if they're morally opposed to strategic default. And, 11 percent said they'd be less likely to pay their mortgage and more likely to walk away from their loan if their bank or lender used false or faulty documentation in trying to foreclose. One likely reason for this may be related to a psychological notion of retribution—as if the homeowner is more likely to get back at their bank or lender for being dishonest in the first place." THE BIG PICTURE POINT— COUNTERPOINT Some 5.5 million borrowers have lost their homes to foreclosure since 2007, according to the number crunchers at the Statistic Brain Research Institute, who base their assessment on market data compiled from the Federal Reserve, Equifax, and RealtyTrac. And although Zillow says homeowners reclaimed $1.6 trillion in equity in 2012, home value losses up to that point, from 2007 through 2010, total a cumulative $6.5 trillion. It's probably safe to say the housing market's downturn has touched the lives of every single American in some way, whether a casualty of foreclosure themselves or simply suffering from sensory overload with mainstream media headlines blaring bad housing news for the better part of the last six years. Undoubtedly, the housing and mortgage industries are in the midst of a complete transformation in the aftermath of the downturn. Forty-nine of the Dodd-Frank Act's 279 rulemaking requirements directly relate to mortgage reform, regulators and government officials are rewriting default-related procedures with every settlement and enforcement action issued, and a national set of servicing standards has taken form under the direction of the Consumer Financial Protection Bureau (CFPB). But it's not just the internal makeup of the marketplace that has a new look—today's borrower has a distinctly different profile from previous eras. So what does the new borrower look like and more importantly, what type of credit risk does he or she pose? 49