Report shows strategic defaults increasing

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Submitted by Arraya on March 27, 2010 - 5:04pm

http://blogs.reuters.com/rolfe-winkler/2...

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:

Submitted by jpinpb on March 27, 2010 - 5:51pm.

I know a realtor who bought a house in 2005 for 800k. Right now he owes 1.2 million. I don't know the details of the loan, if he did a re-fi and/or HELOC or if it's an Option ARM. In any case, he is upside-down on it.

He tried to get the bank to do a loan modification on it. They didn't give him the time of day. He heard that would be the case until he gets their attention by not paying. So he intentionally has not made a payment in 4 months. He has not received a NOD. At 51 years old, he says if the don't work w/him, he will live there until they take it and then move in w/his parents.

I think we can expect anyone who is upside-down to strategically not pay so they can get loan mods and/or principle reduction. People will want to get theirs.

Submitted by NotCranky on March 27, 2010 - 6:37pm.

Dear Mr. Obama,

In 2006 I put a bunch of my own money down on a house and mortgaged a small fraction.It really is nothing at all to pay it even in this recession, I mean since we turned off the electricity and live on rice and beans. Things have been tight at times but we were proud of the blood sweat and tears we put into making a "home" we could afford. Someone I know got a 100% loan from Countrywide and a way better house. In the interim he has spent money like a fiend. He also has several other properties he is losing which fueled some of the spending with MEW.They are all maxed out! They have a lot of stuff and have had insane trips to almost any place you can think of. They got a built in pool last year. We had one of those blow up things.

Now these people are in deep trouble. They might lose their house, I mean houses.Please save them from this crisis!I think they hid a bunch of money and quit paying their mortgage.They need that money! I think it would be cool if you give them a lot of principal reduction to help them deal with the consequences of their American dreaming...After all, what better use of the nations capacity for charity could there be? Oh, and I think in the process you should make all rich people richer.Make sure they don't lose any of that money they lent to over-spenders. That all would be a shame, since our economy depends on these kinds of things happening. Think of all the reasonable spenders,renters and owners alike... and the homeless schizophrenics living in American parks who would be screwed if you didn't save the rich! Thanks for taking good care of us.

Best wishes to Michelle, who looks great in Narcisco and yourself, for all the hope you bring.

Submitted by Arraya on March 27, 2010 - 7:26pm.

delete

Submitted by CA renter on March 27, 2010 - 8:32pm.

Good post, Russell.

Submitted by SD Realtor on March 27, 2010 - 9:01pm.

Awesome Rus!

Submitted by equalizer on March 28, 2010 - 10:50pm.

Russell wrote:
Dear Mr. Obama,

In 2006 I put a bunch of my own money down on a house and mortgaged a small fraction.It really is nothing at all to pay it even in this recession, I mean since we turned off the electricity and live on rice and beans. Things have been tight at times but we were proud of the blood sweat and tears we put into making a "home" we could afford. Someone I know got a 100% loan from Countrywide and a way better house. In the interim he has spent money like a fiend. He also has several other properties he is losing which fueled some of the spending with MEW.They are all maxed out! They have a lot of stuff and have had insane trips to almost any place you can think of. They got a built in pool last year. We had one of those blow up things.

Now these people are in deep trouble. They might lose their house, I mean houses.Please save them from this crisis!I think they hid a bunch of money and quit paying their mortgage.They need that money! I think it would be cool if you give them a lot of principal reduction to help them deal with the consequences of their American dreaming...After all, what better use of the nations capacity for charity could there be? Oh, and I think in the process you should make all rich people richer.Make sure they don't lose any of that money they lent to over-spenders. That all would be a shame, since our economy depends on these kinds of things happening. Think of all the reasonable spenders,renters and owners alike... and the homeless schizophrenics living in American parks who would be screwed if you didn't save the rich! Thanks for taking good care of us.

Best wishes to Michelle, who looks great in Narcisco and yourself, for all the hope you bring.

Dear Russell

On behalf of the President, I would thank you for your diligent sacrifice and team spirit. We need more people like you who understand that in this time of deep economic distress, that we as country need to stick together to fight dark forces that are holding USA back from laudable goal of everyone achieving (and now retaining) the elusive American dream (or dreams as rightly point out). In 2010, America too shall overcame with brave forward thinkers such as yourself who understand the need for small sacrifice for the common good.

Your progressive views are in stark contrast to misguided folks such as Equalizer and his Long-Island Iced-Tea Party brethren. They would seek to vilify the unfortunate souls who bought a few Jovani Couture dresses (and the requisite platinum bling)and now are having mortgage problems and the dedicated Wall Street bankers that have to get new safety deposit boxes every week to store their weekly bonuses. We need to move on from this short-sighted blame game and march our country toward prosperity once again.
Here's Angelo Mozilo with his Karaoke:
"We'll be back in the High Life again. All those foreclosed doors will open and let us back in..."

Sincerely,
Rahm Emanuel,
White House Chief of Staff

PS
I thought I would pass along a money saving tip.
Uncle Ben (from his GD research) has told me that rice is just fattening and has low nutritional value. So your family could cut out the rice and save a few bucks and fit into couture (rental)outfits that would look great on a White House visit.

Submitted by aldante on March 29, 2010 - 1:02pm.

Russell wrote:
Dear Mr. Obama,

In 2006 I put a bunch of my own money down on a house and mortgaged a small fraction.It really is nothing at all to pay it even in this recession, I mean since we turned off the electricity and live on rice and beans. Things have been tight at times but we were proud of the blood sweat and tears we put into making a "home" we could afford. Someone I know got a 100% loan from Countrywide and a way better house. In the interim he has spent money like a fiend. He also has several other properties he is losing which fueled some of the spending with MEW.They are all maxed out! They have a lot of stuff and have had insane trips to almost any place you can think of. They got a built in pool last year. We had one of those blow up things.

Now these people are in deep trouble. They might lose their house, I mean houses.Please save them from this crisis!I think they hid a bunch of money and quit paying their mortgage.They need that money! I think it would be cool if you give them a lot of principal reduction to help them deal with the consequences of their American dreaming...After all, what better use of the nations capacity for charity could there be? Oh, and I think in the process you should make all rich people richer.Make sure they don't lose any of that money they lent to over-spenders. That all would be a shame, since our economy depends on these kinds of things happening. Think of all the reasonable spenders,renters and owners alike... and the homeless schizophrenics living in American parks who would be screwed if you didn't save the rich! Thanks for taking good care of us.

Best wishes to Michelle, who looks great in Narcisco and yourself, for all the hope you bring.

Russell,

Fantastic......I love it.

Submitted by bearishgurl on March 29, 2010 - 6:55pm.

Amen, Russell and Equalizer!

One of my neighbors has purchased seven cars and an RV and boat in the last few years. All but the boat is parked in the street because they only have a one-car garage, which is - you guessed it - full. They inherited their property free and clear under Prop. 13 ($350 yr. taxes) and then - - you got it - mortgaged it to the hilt after taking out 2 seconds, one HELOC and 7 "cash-out" refi's. Now they're pushing retirement age saddled with yet another new "cash-out" 30-year mortgage that just closed. They've paid more in closing costs than I took out on my first trust deed! Guess I'm the stupid one still driving a 16 year-old vehicle . . . Hail to CONSUMERISM!!!!

I'm sure I'll be around to see the day their bank rolls in a 34-foot dumpster - LOL! They're on "disability."

Submitted by paramount on March 29, 2010 - 8:31pm.

If strategic defaults are rising, I see this as a positive trend.

All of us FB's are finally getting smart!

Submitted by BillS78 on March 29, 2010 - 10:15pm.

Here's my not so planned strategic default story.

I bought a house a little over 3 years ago for just under $570k. I was getting married that June after being together for 4 1/2 years. The loan amount was just about 5 times my annual income and less than 3 1/2 times our soon to be combined income. I was going to put 10% down but the mortgage broker said that I only needed to put down 3%, okay cool.

So we move in and then 2 months later she says she's done, it's over. Great. She gets stuck with the wedding deposits, and I have this big house that I don't really want but at least I took back the engagement ring. I get a friend to move in thinking that this will be doable and I can salvage my 810 credit rating, I'm only 28 this will work out.

By July of 08 I'd had it, the market was continuing to drop and my house was just this big thing I didn't need so I decided I wasn't going to pay anymore, it's a non-recourse loan they can have the house. I figure they'll probably take it back before the end of the year. I'm kind of a minimalist, my car is a 99 civic, and have no other debts and I can start fresh.

Now it's 20 months later and still no NOD. This is awesome. With all the money I've saved and made in the market this last year I could buy the exact same place down the street in the low $400Ks with 50% down. I wont but it's nice how this has worked out.

I don't blame anyone but myself, it was just a bad decision made for a relationship. I guess the moral of the story is when life gives you lemons make lemon aid, or just throw the lemons at your Ex.

Thank god I didn't marry her and there's no kids.

Submitted by CA renter on March 29, 2010 - 11:01pm.

Wow, Bill. You really did luck out on that one (getting rid of the ex without having a long marriage and kids). She sounds like a real piece of work. Sorry you had to deal with that.

It sounds like you did well for yourself, anyway! :)

Nice job on the lemonade. :)

Submitted by 1stimebuy on March 29, 2010 - 11:18pm.

When I looked at the loan history of the houses that I considered buying, I noticed something disturbing.

It's quite rare that the owners lose money in the process - more often, it's the banks that are losing 100K's or 200K's but not the owners. In each cases, the original owner simply took out the home equity loan equaling the amount of their down payment (or more) before foreclosure.

I used to think these morons are taking 500K loan - but their action is consistently smart. And I grow concerned as I wonder how much of our economy was fueled by these kind of money. It must have been quite an effect.

Submitted by jpinpb on March 30, 2010 - 10:58am.

BillS78 wrote:

Now it's 20 months later and still no NOD.

When I talk about people living for free not paying their mortgage and not receiving NODs, they think it's an rare, isolated incident.

Submitted by sdrealtor on March 30, 2010 - 11:02am.

I had a great little listing in Clairemont. The seller had full recourse loans and we negotiated a reasonable settlement for him (about $7,000 on a $100,000 loan) and he could have been done with it. He decided to walk away and roll his dice instead of getting a full release for the $7000. That was over 18 months ago. The house still sits vacant and there has been no NOD filed. I dont see a ton of these out there but I do see some.

Submitted by briansd1 on March 30, 2010 - 12:27pm.

jpinpb wrote:
BillS78 wrote:

Now it's 20 months later and still no NOD.

When I talk about people living for free not paying their mortgage and not receiving NODs, they think it's an rare, isolated incident.

20 months of living for free is nothing to sneeze at considering that most first time buyers buy with hardly any skin in the game.

Going on 2 years of free housing is a huge windfall that few would pass up if they had the option.

Submitted by SD Realtor on March 30, 2010 - 12:33pm.

Yes they are living for free. Just remember you are paying for them. As will everyone else in your family who pays federal taxes. So each deadbeat that lives for free sucks money away from all the social programs that you feel are essential to our country.

Submitted by desmond on March 30, 2010 - 12:57pm.

78, good job on 20 months of nonpayment, awesome. Your fiancee made the right decision.

Submitted by NotCranky on March 30, 2010 - 1:55pm.

SD Realtor wrote:
Yes they are living for free. Just remember you are paying for them. As will everyone else in your family who pays federal taxes. So each deadbeat that lives for free sucks money away from all the social programs that you feel are essential to our country.

For some, Since it is happening on Obama's watch, it is all good. No hypocrisy there.

Submitted by Arraya on March 30, 2010 - 1:59pm.

Actually, I think if they lived for free or went out and rented another place, we would still pay. At least this way they can pump more money into the economy and keep people employed. There are between 8-10 million people not paying their mortgage.... That's gotta help the economy

Submitted by jpinpb on March 30, 2010 - 3:04pm.

That's what I keep thinking. The only reason our economy hasn't completely collapsed is those people who are strategically not paying their mortgage are using the money for other things. Your biggest expense is housing and cars. If you don't have to pay for housing, that's a lot of discretionary spending. But I'm sure there are people in a bad way and not paying a mortgage could mean they have no money so nothing is going towards spending to help the economy.

Submitted by briansd1 on March 30, 2010 - 3:26pm.

Russell wrote:
SD Realtor wrote:
Yes they are living for free. Just remember you are paying for them. As will everyone else in your family who pays federal taxes. So each deadbeat that lives for free sucks money away from all the social programs that you feel are essential to our country.

For some, Since it is happening on Obama's watch, it is all good. No hypocrisy there.

It's not true to say that the government is directly paying for the deadbeat.

The government is bailing out the banks to prop up the economy, so we don't all suffer a collapse.

The fact that banks choose not to foreclose on a timely basis is a side effect of accounting rules on how banks recognize loan losses; or it's simple incompetence on the part of private banks. But those are private decisions made in the private sector.

Sure, the government has a role in providing incentives for good or bad behavior... but private citizens and business have the primary responsibility for their actions.

As for the Obama remark, bad government decisions, made years before Obama, created the financial incentives that led to the crash.

TARP and Fed led bailouts are pre-Obama. Those huge trillion-dollar programs were put in place before Obama took office. It's not something that can be easily undone at the stroke of a pen.

This new administration is trying to mitigate the social costs of the crash.

The reality is never as simple as the headlines. (For example, Republicans never liked Medicare, but why did they not undo it (instead of expanding it like Bush did) when they were in power?).

Submitted by briansd1 on March 30, 2010 - 3:26pm.

jpinpb wrote:
That's what I keep thinking. The only reason our economy hasn't completely collapsed is those people who are strategically not paying their mortgage are using the money for other things. Your biggest expense is housing and cars. If you don't have to pay for housing, that's a lot of discretionary spending. But I'm sure there are people in a bad way and not paying a mortgage could mean they have no money so nothing is going towards spending to help the economy.

You make an excellent point jpinpb.

Debt repayment does not contribute to economic activity. You need spending on goods and services to support the economy.

So the deadbeats are doing the right things and helping us avert a deeper recession by not paying the banks and spending on other things.

Submitted by SD Realtor on March 30, 2010 - 4:08pm.

This has nothing to do with obama. This has to do with tax money. It doesn't matter if you are renting a home or not paying on the mortgage because if you are doing either, then you are squatting. Those here who think it is a good thing have never been landlords or owned rental property. Nobody gets to live in a house for free. Somebody pays when someone else is a freeloader. Plain and simple.

I agree private citizens and businesses do have a primary responsibility for their actions. If none of this bailout happens banks foreclose and liquidate properties in a timely manner. People go find places to rent and live within their means. Prices fall and old debt is wiped out. New money comes into the system and creates a stronger foundation and fundamentally lower price levels. It hurts. Weaker financial institutions fail and stronger ones emerge.

Stop with the economy would have crashed and we all would be living in caves excuse about the bailouts okay? Bush sucked and Obama sucked and they were nothing but yes men to Wall Street.

There is no "new administration". Republicans and democrats are all controlled by Wall Street. The current administration has a spokesman who is very good at what he does. If you noticed Wall Street seems to be very happy with him.

Banks are not foreclosing because they don't have to, and more and more legislation is being pushed to create more hurdles to prevent foreclosures. Imagine how many hard working people who saved money could be in homes by now if the housing market would have been left alone. People who have no business owning homes are still in them, living in default, getting loan mods and now reductions in their balance.

The social costs of the crash... really now, to think that there could have been no better way to let the market normalize that would have resulted in a much healthier market AND saved taxpayer money is quite closed minded. However, there is no way that could have happened right? Why not? Because they told us so! In the end the social cost of not allowing the crash could be a hell of alot more damaging.

To applaud people for essentially squatting is ridiculous.

Submitted by CA renter on March 30, 2010 - 4:39pm.

jpinpb wrote:
That's what I keep thinking. The only reason our economy hasn't completely collapsed is those people who are strategically not paying their mortgage are using the money for other things. Your biggest expense is housing and cars. If you don't have to pay for housing, that's a lot of discretionary spending. But I'm sure there are people in a bad way and not paying a mortgage could mean they have no money so nothing is going towards spending to help the economy.

Totally agree with this. It's the stimulus with no name: people not having to pay housing expenses are now free to spend everywhere else. In the meantime, the taxpayers prop up the banking system.

Submitted by CA renter on March 30, 2010 - 4:42pm.

Great post, SDR!

Submitted by SD Realtor on March 30, 2010 - 4:51pm.

CAR sometimes I think you and I are the only people in the world who think that the world would not have spun off the edge of the universe if the bailouts did not happen.

Submitted by jpinpb on March 30, 2010 - 4:57pm.

SD Realtor wrote:
CAR sometimes I think you and I are the only people in the world who think that the world would not have spun off the edge of the universe if the bailouts did not happen.

x3. I'm in the same camp.

Submitted by briansd1 on March 30, 2010 - 5:03pm.

SD Realtor wrote:

There is no "new administration". Republicans and democrats are all controlled by Wall Street. The current administration has a spokesman who is very good at what he does. If you noticed Wall Street seems to be very happy with him.

Gotta keep the capitalists happy. ;) They control the money which we all need them to lend us to survive and buy real estate.

If anything at all about the "new administration" that isn't new, I like the new spokesman better than the old one -- superbly well-spoken, finely educated, better looking, athletically superior, etc...

Submitted by briansd1 on March 30, 2010 - 5:10pm.

SD Realtor wrote:
CAR sometimes I think you and I are the only people in the world who think that the world would not have spun off the edge of the universe if the bailouts did not happen.

The world would still be fine.

But America would have been hit hard because all economic activity is based on credit.

Less developed, cash-based economies would have suffered some ripples but we would have experienced a tsunami.

How many people, or businesses do you know that can live one week without access to credit?

Submitted by Arraya on March 30, 2010 - 5:14pm.

Actually, you could blow up every bank in the world along with wall street put the dow at zero and the world would be fine. It does not change the natural order of things one bit.

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