Over half a million strategic defaulters in 2008

By Felix Salmon
September 21, 2009
Kenneth Harney has got his hands on a fascinating new study from Experian and Oliver Wyman, which looks at the prevalence of strategic mortgage defaults, a/k/a "jingle mail" or "walking away". Unsurprisingly, it's financially sophisticated borrowers in non-recourse states like California who are doing this in droves: apparently there were 588,000 nationwide strategic defaults in 2008, more than double the total in 2007.

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Kenneth Harney has got his hands on a fascinating new study from Experian and Oliver Wyman, which looks at the prevalence of strategic mortgage defaults, a/k/a “jingle mail” or “walking away”. Unsurprisingly, it’s financially sophisticated borrowers in non-recourse states like California who are doing this in droves: apparently there were 588,000 nationwide strategic defaults in 2008, more than double the total in 2007.

This is a perfectly rational and ethically defensible thing to do, but subprime borrowers, almost by definition, tend not to have the sophistication to default in the most financially-advantageous way.

Interestingly, the Experian-Wyman study (if anybody has a copy of it, do send it on over) recommends “that lenders and loan servicers take steps to screen and identify strategic defaulters in advance”. I’d love to know how lenders are meant to do that. Credit score obviously isn’t a good indicator, so what is? Financial literacy?

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Comments
14 comments so far

What they would likely do identify age/race/income demographics that have a strong correlation with the strategic defaults….

Posted by Mark Beauchamp | Report as abusive

I agree with Mark Beauchamp, this is essentially a data mining operation. What you’d do, in rough terms is the following:

You take all, or at least a large statistically representative sample of the people who have already ‘strategically defaulted’, slam the data they provided on the mortgage origination documents into what IT folks call a data warehouse, then run regression or other kinds of analysis on that data until you find commonalities, which you can then use as a priori criteria to identify people in the future who are more likely than not to ‘strategically default’.

Any halfway decent consulting firm could have such a system up and running inside of a quarter or two.

Posted by Brahma | Report as abusive

Felix,

Yes, financially literate borrowers should clearly be screened out of the loan process. Perhaps anyone with an IQ over 75 as well. Stupid debt slaves are sooo much more profitable.

Posted by Oggi | Report as abusive

Casey Mulligan has done a good job talking about this issue:

http://caseymulligan.blogspot.com/2009/0 9/about-one-million-modifications-during .html

This is my favorite post:

http://dmarron.com/2009/08/18/the-charmi ng-world-of-las-vegas-real-estate/

“The juiciest part of the article recounts how real estate agent Brooke Boemio advises clients to exploit the realities of the collapsed housing market:

Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that’s about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they’ve been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it’s willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.”

Various credit and anti-discrination laws would make it difficult time screaning out likely strategic defaulters.

Can you imagine what would happen if an African-American/Hispanic/Gay family with a 780 credit score and the income to support an $XXX,XXXX mortgage got turned down or charged a higher interest rate?

The only real solution to the problem is to ensure borrowers never get in a position of significant negative equity by:
1. Making sure appraisals are tough and accurate, and
2. Forcing borrowers to put significant money down.

A “no money down” mortgage is a non-recourse state is just plain stupid.

Posted by Brad Ford | Report as abusive

There’s a reason data mining has a bad reputation, and it’s not just the questionable morality. There’s the fact that it doesn’t work very well. Most data mining is looking for “meaningful” patterns in a swirl of clouds.

Hamlet: Do you see yonder cloud that’s almost in shape of a camel?
Polonius: By the mass, and ’tis like a camel, indeed.
Hamlet: Methinks it is like a weasel.
Polonius: It is backed like a weasel.
Hamlet: Or like a whale?
Polonius: Very like a whale.

Methinks it is very like a financially literate strategically defaulting jingle-mailer.

Posted by nemo | Report as abusive

“The only real solution to the problem is to ensure borrowers never get in a position of significant negative equity by:
1. Making sure appraisals are tough and accurate, and
2. Forcing borrowers to put significant money down.

“A “no money down” mortgage is a non-recourse state is just plain stupid.”

Exactly right. We need to stop thinking that somehow this generation is facing unique problems that the world has never seen before. There’s a reason sensible lenders have required significant money down since before our grandparents’ generation.

Of course, a sensible lender doesn’t get crazy rich crazy fast by acting sensible during a crazy housing bubble.

Posted by nemo | Report as abusive

Its simple: Ruthless defaults happen when the borrower is
a) underwater
b) Has a clue

You could either datamine to the point where you can detect “yes this guy has a clue” or, better yet, just don’t lend with less than 20% down and don’t lend into grossly obvious bubbles!

Posted by Nicholas Weaver | Report as abusive

That is another difficulty subprime borrowers have, no downpayment for another. Even 20% down is meaningless when prices are down 50%.

Posted by Lord | Report as abusive

Once the financially astute accept that they’ll never get back to breakeven in a forseeable timeframe then jingle mail becomes a no-brainer. Corporations reneg on commercial loans all the time and the banks renegotiate or end up with an empty store. Why are residential defaults considered immoral but commercial defaults aren’t?

Posted by JC | Report as abusive

Anyone who can get financing for another home while they prepare to walk away or short sell their current home must be OK financially.

Posted by JC | Report as abusive

Lenders aren’t currently going after borrowers who default even on recourse loans. But they do have that option.

What we may see, as the economy picks up, are collection agencies buying up defaulted non-recourse loans at pennies on the dollar and going after recovering “homeowners”.

In California, by the way, only original first mortgages are non-recourse. Second mortgages, refinanced mortgages, and home equity loans are not non-recourse loans.

Sympathy for people “losing their house” is overemphasized. Most of those people never really owned a house. They were effectively renters with an option to buy. They got to live in a nice house for a below-market rent for a few years. They had their fun. Now they can get an apartment.

The people who saved up, put 20% down, and got a fixed-rate mortgage are mostly doing OK.

(Oops, meant “defaulted recourse loans” above.)

This seems to me to be a sign of just on ongoing sociological problem with this country. It seems that we’ve almost gotten too modern. Everything is a business decision and no one has any sense of pride or keeping their word on something.

Selective defaulting is a project that I feel should come with some negative consequences. Its going to have to be done on the banks end though. They need to start trying to pursue these people’s money more rather than just taking back the property. Pursuing it though is costly as well. Its just business decision after business decision. We might as well have computers running this whole affair. I think that if we injected a little more human into all ends of this and all other aspects of the financial spectrum, we’d all be a whole lot better off for it.

Check out my blog on selective defaulting and personal financial irresponsibility at….. http://www.thedebtgazette.com/2009/09/st rategic-defaulters/

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