Report shows strategic defaults increasing

Mar 26, 2010 13:01 UTC

How widespread are strategic defaults? Laurie Goodman and her team at Amherst Mortgage Insight yesterday released a report that shows they are indeed on the rise and for reasons we might suspect: negative equity and a more borrower-friendly environment.

The second reason should be kept in mind as we consider President Obama’s soon-to-be-announced plan to encourage principal reduction. If the plan is structured so that it gives incentives to default in order to secure principal forgiveness, well, expect defaults to spike.

Strategic default isn’t necessarily synonymous with mailing your keys to the bank and walking away. It may simply mean a borrower choosing to stop payments to the bank when economic incentives would have him do so. Amherst has come up with a novel metric to measure strategic default — the “default transition rate.” DTR looks at the percentage of borrowers who’ve never been more than one payment behind on their mortgage suddenly missing two payments in a row.

Lo and behold, negative equity leads more folks to strategically default, regardless of their credit score and whether they took out a liar loan:

Screen shot 2010-03-26 at 12.05.37 AM

The x-axis measures combined loan to value ratios (CLTV). In other words, combine the balance of all mortgages attached to a property (e.g.: a first mortgage + a home equity loan) and compare that to the property’s value. CLTV over 100% means more is owed on the house than it is worth. Yes, there’s a higher default rate for more poorly written mortgages (lower FICOs, low/no documentation), but even those that are well-underwritten (high FICOs and verified income) show spiking strategic defaults as equity goes negative. In other words, more folks who could pay their mortgage are choosing not to.

Even more interesting are other charts that demonstrate borrowers…

…are intentionally defaulting to take advantage of the [HAMP] modification program. Or at least to take advantage of extra time living in the house rent free, courtesy of the modification program.

Screen shot 2010-03-26 at 12.17.27 AM

(Click here to enlarge in new window)

This is one of many charts they have showing that, for all types of mortgages, the strategic default rate is actually higher for owner-occupied homes than non-owner occupied because, they argue, owner-occupieds are eligible for modification under HAMP whereas non-owner occupieds are not. And the difference appears to be more pronounced above a debt to income ratio of 31%.

Why 31%? Because that’s the ratio at which owner-occupiers qualify for a HAMP modification.

Amherst concludes:

Borrowers respond to their economic incentives. This has always been the case, be it for refinancing or for defaulting on mortgages that are deeply underwater. Over the past year, however, property values have been largely steady, but the environment has become much more kind to borrowers. There have been foreclosure moratoriums, the emergence of the HAMP modification effort, and the attendant increases of time spent in the delinquency/foreclosure pipeline, as well as a stretching out of the liquidation process in judicial states. As a result, borrowers can stay in their home rent free for a much longer period than was previously the case. However, few of these benefits apply to investor properties. Thus, when we look at the difference pre- and post-HAMP in the behavior of owner-occupied borrowers versus that of non-owner occupants—we find a dramatic difference in performance. Owner-occupied borrowers behave far worse than their non-owner occupied counterparts.

COMMENT

The only reason the banks would want your house in foreclosure is if you have a lot of equity in it and they can profit when they sell it. Otherwise they don’t want it. Like a previous poster said they have you go on a temporary modification and you pay for several months then they say “no” to the permanent modification. They are screwing the homeowners and so is the government. They should have let market correct itself 3 years ago when the bubble burst no matter how painful. This artificial prop up of the housing collapse is the cause of the prolonged financial mess. I personally didn’t want to bail out Wall street, the banks and AIG. This is just the beginning of the housing mess. The banks have so many liabilities if they were to put them in the correct column on their balance sheet they would fail like the rest of the banks that went under. So they actually like this limbo status of the foreclosures they have on their books. They take all the money and write offs the government is throwing at them and on paper they still look profitable. When they are forced to show us their cards the other shoe will drop. Also debt collection agencies are jumping on the band wagon more than before. They are illegally obtaining judgments on debts they don’t own and the courts in New Jersey is letting them. The Special Civil Part of the Law Division. There is never any proof at all and the judges are committing treason on the people. The debt collectors are putting liens on people’s houses and the poor home owners are now trying to deal with these sharks in addition to their foreclosures. The debt collectors send clerks to the courthouse to check for foreclosures and then starts sending them fake bills like they own your GE money bank credit card. It is unbelievable. I had to go to court to fight Pressler & Pressler aka New Century Financial Services,Inc aka Midland Funding aka Palisades Collections and I thought I was on Candid Camera. They couldn’t produce one iota of evidence and wanted me to provide them with all my statements, the contract etc. so they could use it against me. The judge agreed with them. New Jersey is corrupt. Oh one last thing the judge’s name is Judge Crook. ( I swear this isn’t made up).

Posted by deedee3003 | Report as abusive

2010: Walking away will gain cachet

Dec 31, 2009 01:27 UTC

Why bother? That’s the question more underwater Americans are asking themselves about their mortgage.

Trapped in the abyss of negative equity, more will decide to quit paying. As they should.

About a quarter of all mortgages in the United States are on houses that are worth less than the unpaid balance of the mortgage, according to real estate consultant First American CoreLogic. About half of that group, 5.3 million borrowers, are 20 percent or more underwater. For 2.2 million, the property is worth less than half the mortgage balance.

Those folks are called “homeowners,” but “homeborrowers” would be more accurate. All they own is an obligation to whatever entity services their mortgage. They’re essentially renters paying above-market prices.

But that “ownership” tag is often felt to be important. Americans who are trained to believe that a mortgage is a moral obligation fear punishment or a bad conscience if they walk away.

But foreclosure is hardly the mark of Cain, especially in states like California and Arizona, where lenders have no practical recourse to pursue a borrower’s other assets.

As more underwater homeowners realize there’s no hope to regain their equity, more will cut their losses. The reduction of liabilities brings immediate debt relief and often a lower cash outlay — on rent — for comparable housing. The financial shot in the arm should outweigh the stigma of foreclosure.

Financial self-interest is likely to be contagious. A study by three economists suggests that when a few borrowers in a neighborhood just say no, others are likely to follow.

Lenders do what they can to keep the disease of economic rationality from spreading. They try to “extend and pretend” with lower interest rates, extended terms, and the pretence that eventually the borrower will make good. Anything, really, to avoid the hit to capital that comes from a writedown of the principal.

Until now, borrower guilt has helped protect bank balance sheets. That is likely to change. If it does, the next chapter of the financial crisis could be a painful one.

COMMENT

The economy is terribly interesting right now.

Pimco was shouting from the rooftops that the Fed needs to not merely stabilize but actually reflate. In other words, they felt it was important for the Fed to bring house equity levels back toward where they were so people aren’t underwater in large numbers. They are not convinced that reflation has happened.

Pimco is now actually backing the truck up on long bonds, which on its face seems crazy with quantitative easing and the like. But they are terribly smart. Apparently they have judged that deflation is winning. Tightening of lending standards together with debt repudiation by Americans is shrinking the money supply steeply.

Meanwhile, efficiency and productivity by companies and prudence and thrift by individuals is soaring. While that’s terrific, it means high unemployment for quite a while.

We are in for a slog. The decline in the money supply caused by the collapse of lending is in the tens of trillions.

There may be one last bond rally yet! As the next round of resets hit and many cannot refinance, there may be a second deflationary gust. If the fed comes to the rescue again at that time, the decades-long super-rally in treasurys may be over at last!

Posted by Dan Hess | Report as abusive

Evening Links 12-23

Dec 23, 2009 21:36 UTC

(Reader note 1: posting will be light through the weekend….taking a few days off)

(Reader note 2: Just saw Avatar, the IMAX 3D version. I highly recommend it.)

Food stamps altering how retailers do business (Maestri/Baertlein, Reuters) “At 11 p.m. on the last day of the month, shoppers flock to the nearest Walmart. They load their carts with food and household items and wait for the midnight hour. That’s when food stamp credits are loaded on their electronic benefits transfer cards.”

The Protocol Society (Brooks, NYT) “When the economy was about stuff, economics resembled physics. When it’s about ideas, economics comes to resemble psychology.”

Treasury to seek easing of bailout fund rules (Somerville, Reuters)

One cheer for Barney Frank (WSJ editorial) WSJ editorials tend not to be very useful, but I thought the last line of this one was notable: “Perhaps the House and Senate should simply … start over with a new mission for [financial] regulatory reform: break up the too big to fail racket.More evidence that all sides of the political spectrum agree on this. I wonder how they would propose we do it.

New home sales decrease sharply in November (Calculated Risk) Yesterday’s existing home sales report had everyone exited, but new home sales are far more important for economic growth, and those are still terrible. Bill has dubbed this “the distressing gap.”

Gross’s Total Return Fund now biggest in history (Bhaktavatsalam, Bloomberg) The main reason Gross screamed for government to “support asset prices!” during the crisis….because he and his investors have a ton of paper wealth at stake.

Everyone’s defaulting, why don’t you? (Gross, Slate) I have a short column running later this week in the biz section of NYT on this topic. I’m sympathetic to McArdle’s view that folks who strategically default are gaming the system and leaving the rest of us to pick up the pieces. Yet savers themselves were part of the arrangement. Our savings were intermediated by the banking sector into more home loans. When guys like me say banks messed up and have to eat losses, we mean the shareholders and creditors of banks. That includes depositors. I’m speaking very generally of course, but de-levering the economy means writing down debts on one side of the ledger and paper wealth on the other side.

“Youth Depression” hard on retailers (Stoddard/Sage, Reuters) The authors are referring to the inordinate impact of the economy on youth employment, not youth mental health.

Malcolm Gladwell’s stickiness problem (Wise, Psychology Today) “[Malcolm] Gladwell [is] masterful at brewing up memes so potent that they travel far beyond the realm of where the mere modest truth would go. They spread. And they stick. And having stuck, they proceed to affect the decisions that people make, the policies they implement, the laws that they pass. A normal person, when he is wrong, adds a little drop of erroneousness in the great sea of human conversation. Gladwell, when he is wrong, creates a tsunami of wrong.

View of space shuttle launch from a commercial flight (better muted)

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