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:
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.
(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.
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).