Homeowners who ‘strategically default’ on loans a growing problem

[HarryBosch]

Not sure you all saw this. Dated 9/20/2009

http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story

A study shows that people who abruptly and intentionally abandon their mortgages often have high credit scores, in stark contrast with most financially distressed borrowers.

Reporting from Washington – Who is more likely to walk away from a house and a mortgage — a person with super-prime credit scores or someone with lower scores?

Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to “strategically default” — abruptly and intentionally pull the plug and abandon the mortgage — compared with lower-scoring borrowers.

National credit bureau Experian teamed with consulting company Oliver Wyman to identify the characteristics and debt management behavior of the growing numbers of homeowners who bail out of their mortgages with none of the expected warning signs, such as nonpayments on other debts.

With foreclosures, delinquencies and loan losses at record levels, strategic defaults and walkaways are among the hottest subjects in residential real estate finance. Unlike in earlier academic studies, Experian and Wyman could tap into credit files over extended periods to identify patterns associated with strategic defaults.

Among researchers’ findings are these eye-openers:

* The number of strategic defaults is far beyond most industry estimates — 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year’s fourth quarter.

* Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they’ve fallen behind on other accounts.

* Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.

* Two-thirds of strategic defaulters have only one mortgage — the one they’re walking away from on their primary homes. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.

* Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore — a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion — are far more likely to default strategically than people in lower score categories.

* People who default strategically and lose their houses appear to understand the consequences of what they’re doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters “are clearly sophisticated,” based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.

Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: “Well, I’m $200,000 in the hole on my house, and yes, I’ll damage my credit,” he said of defaulters. But they see it as the most practical solution under the circumstances.

The Experian-Wyman study does not try to explore the ethical or legal aspects of mortgage walkaways. But it does suggest that lenders and loan servicers take steps to screen and identify strategic defaulters in advance and possibly avoid offering them loan modifications, since they’ll probably just re-default on them anyway.

[scaredyclassic]

ok, this bugs me, because while i am willing to not buy at the absolute bototm, i want to buy near the bottom, like int he vicinity of the bottom. this kidn fo bs strikes me as (1) historically unprecedented on this scale and (2) bad for the future of housing price predictability. like, i have no ehtical problem with gaming the system, but ultimately, if gaming the system goes absolutely mainstream, the system is screwed, isn’t it? somebody ahs to do the honorable thing. it’s like everyone’s caught on…what doe sall this mean?

[scaredyclassic]

ok, this bugs me, because while i am willing to not buy at the absolute bototm, i want to buy near the bottom, like int he vicinity of the bottom. this kidn fo bs strikes me as (1) historically unprecedented on this scale and (2) bad for the future of housing price predictability. like, i have no ehtical problem with gaming the system, but ultimately, if gaming the system goes absolutely mainstream, the system is screwed, isn’t it? somebody ahs to do the honorable thing. it’s like everyone’s caught on…what doe sall this mean?

[scaredyclassic]

ok, this bugs me, because while i am willing to not buy at the absolute bototm, i want to buy near the bottom, like int he vicinity of the bottom. this kidn fo bs strikes me as (1) historically unprecedented on this scale and (2) bad for the future of housing price predictability. like, i have no ehtical problem with gaming the system, but ultimately, if gaming the system goes absolutely mainstream, the system is screwed, isn’t it? somebody ahs to do the honorable thing. it’s like everyone’s caught on…what doe sall this mean?

[scaredyclassic]

ok, this bugs me, because while i am willing to not buy at the absolute bototm, i want to buy near the bottom, like int he vicinity of the bottom. this kidn fo bs strikes me as (1) historically unprecedented on this scale and (2) bad for the future of housing price predictability. like, i have no ehtical problem with gaming the system, but ultimately, if gaming the system goes absolutely mainstream, the system is screwed, isn’t it? somebody ahs to do the honorable thing. it’s like everyone’s caught on…what doe sall this mean?

[scaredyclassic]

ok, this bugs me, because while i am willing to not buy at the absolute bototm, i want to buy near the bottom, like int he vicinity of the bottom. this kidn fo bs strikes me as (1) historically unprecedented on this scale and (2) bad for the future of housing price predictability. like, i have no ehtical problem with gaming the system, but ultimately, if gaming the system goes absolutely mainstream, the system is screwed, isn’t it? somebody ahs to do the honorable thing. it’s like everyone’s caught on…what doe sall this mean?

[EconProf]

This has to be the ticking time bomb that keeps bankers awake at night: middle-class, underwater homeowners who rationally weigh the pros and cons of default, including the increasing time period they can stay in their home rent-free and mortgage payment-free, and conclude, “Yeah, I’m going to simply stop paying and live on cash instead of credit.”

[EconProf]

This has to be the ticking time bomb that keeps bankers awake at night: middle-class, underwater homeowners who rationally weigh the pros and cons of default, including the increasing time period they can stay in their home rent-free and mortgage payment-free, and conclude, “Yeah, I’m going to simply stop paying and live on cash instead of credit.”

[EconProf]

This has to be the ticking time bomb that keeps bankers awake at night: middle-class, underwater homeowners who rationally weigh the pros and cons of default, including the increasing time period they can stay in their home rent-free and mortgage payment-free, and conclude, “Yeah, I’m going to simply stop paying and live on cash instead of credit.”

[EconProf]

This has to be the ticking time bomb that keeps bankers awake at night: middle-class, underwater homeowners who rationally weigh the pros and cons of default, including the increasing time period they can stay in their home rent-free and mortgage payment-free, and conclude, “Yeah, I’m going to simply stop paying and live on cash instead of credit.”

[EconProf]

This has to be the ticking time bomb that keeps bankers awake at night: middle-class, underwater homeowners who rationally weigh the pros and cons of default, including the increasing time period they can stay in their home rent-free and mortgage payment-free, and conclude, “Yeah, I’m going to simply stop paying and live on cash instead of credit.”

[kicksavedave]

Well some people are doing the right thing. I have a buddy who is hopelessly upside down on a townhouse in San Marcos, he’s locked into a 9 % fixed rate, paying about $4500/mo for a 2 BR townhouse, and he now has two kids. But he refuses to “strategically walk away” like these people in the article. I have another friend who had to put $45K on her credit cards to get out of an upside down flip in Florida. She’s making her payments despite great inconvenience, because she feels is the only moral thing to do.

So not everyone is a deadbeat these days, but the percentage who are, is clearly growing and effecting the overall market somewhat.

[kicksavedave]

Well some people are doing the right thing. I have a buddy who is hopelessly upside down on a townhouse in San Marcos, he’s locked into a 9 % fixed rate, paying about $4500/mo for a 2 BR townhouse, and he now has two kids. But he refuses to “strategically walk away” like these people in the article. I have another friend who had to put $45K on her credit cards to get out of an upside down flip in Florida. She’s making her payments despite great inconvenience, because she feels is the only moral thing to do.

So not everyone is a deadbeat these days, but the percentage who are, is clearly growing and effecting the overall market somewhat.

[kicksavedave]

Well some people are doing the right thing. I have a buddy who is hopelessly upside down on a townhouse in San Marcos, he’s locked into a 9 % fixed rate, paying about $4500/mo for a 2 BR townhouse, and he now has two kids. But he refuses to “strategically walk away” like these people in the article. I have another friend who had to put $45K on her credit cards to get out of an upside down flip in Florida. She’s making her payments despite great inconvenience, because she feels is the only moral thing to do.

So not everyone is a deadbeat these days, but the percentage who are, is clearly growing and effecting the overall market somewhat.

[kicksavedave]

Well some people are doing the right thing. I have a buddy who is hopelessly upside down on a townhouse in San Marcos, he’s locked into a 9 % fixed rate, paying about $4500/mo for a 2 BR townhouse, and he now has two kids. But he refuses to “strategically walk away” like these people in the article. I have another friend who had to put $45K on her credit cards to get out of an upside down flip in Florida. She’s making her payments despite great inconvenience, because she feels is the only moral thing to do.

So not everyone is a deadbeat these days, but the percentage who are, is clearly growing and effecting the overall market somewhat.

[Author]

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