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 Arraya on April 3, 2010 - 8:54am.

That poor unfortunate homeowner schtick is really code for shoveling ALL tax payer money into a PONZI scheme run by criminals. Nobody in power really cares about helping citizens. They care about getting people with jobs to keep paying on mortgage debt. They are feeding a ponzi-scheme on it's last legs.

We have 10 million non-payers out there. What the government is going to try and do is filter through and find the people with the ability to pay something reasonable. I would not be surprised if they tried to "help" Bill. For some reason I don't think bill would go for a principle reduction.

Really, the banks need help and that help is the government trying to convince people to keep paying something. This is a negotiation on a mass scale with the government as the banks agent negotiating with the FBs with jobs.

If they were honest it would go something like this:

"hello, this is Ben Bernake. We at the fed whose job it is to protect banks from taking on too much risk seemed to have made a few little mistakes. I completely understand if you did not see the bubble. heck, even I did not see the bubble and testified to congress ironically at the very very peak. you know I was telling the truth because I would be subject to 30 years in jail for making false statements regarding asset prices.

Anyway, we need everybody that has a job to please keep paying their mortgage. We understand that if you have half a brain, it does not make sense in many cases. For this we have principle reductions because what we do not need is a mass strategic defaults on an already fragile system.

If I wanted to be a real sleaze I would tell you all it is to help homeowners. But lets be honest the best thing for homeowners with jobs is to walk away en masse and home prices will plummet like there is no tomorrow. Well below what we are willing to reduce"

Submitted by SD Realtor on April 3, 2010 - 9:02am.

Fantastic advice Arraya that all homeowners should walk away. So what sort of system do you propose? That we all be awarded a home for free?

Submitted by SD Realtor on April 3, 2010 - 9:07am.

Well Bill you certainly have it all figured out. Your responses absolutely reveal your integrity. Someday when you are older and wiser you will realize life is not all about yourself. Until then live it up like you are doing.

What a wonderful world we would have if we were all like you.

Submitted by Arraya on April 3, 2010 - 9:12am.

SD Realtor wrote:
Fantastic advice Arraya that all homeowners should walk away. So what sort of system do you propose? That we all be awarded a home for free?

If somebody is upside down sufficiently. Absolutely, I recommend it to everybody I can.

Submitted by scaredyclassic on April 3, 2010 - 9:44am.

wow. it's difficult to fathom how we got here.

I compare this to BUY NOTHING DAY.

it's a day of protest against consumer culture. t he idea is to buy nothing.

maybe there should be a comparable housing protest.

Submitted by SD Realtor on April 3, 2010 - 9:46am.

Okay I can see that, however wouldn't you agree that the fundamental problem lies in the consumerism right? Upside down in the house, walk from the house, upside down in the car walk from car. Obviously carrying your strategy to a logical conclusion is that nobody should purchase an asset with borrowed funds correct? Obviously free market valuations will cross the "upside down enough" threshold that you spoke of.

Carrying the strategy further the extension of credit should be eliminated because perpetual appreciation of any asset is impossible right?

Submitted by scaredyclassic on April 3, 2010 - 9:53am.

i had mentioned this previously but the damned house my wife likes a short sale we made an offer in early december and the house is still vacant and rotting from the rains.

if the family had elected to still be living there how coudl they be characterized as a freeloader rather than a caretaker?

Submitted by scaredyclassic on April 3, 2010 - 9:54am.

not sure; i think the key word is a sustainable system. whetehr it's environmental, finacial...anything that depends on sucking people or things or places dry is no good.

Submitted by scaredyclassic on April 3, 2010 - 9:55am.

the upside down car is different because it has a shrot lfie span and no one sees it as an investment. w e don't pay an "nvestment premium" to buy a car, indeed, it's MUCH cheaper than renting to buy. so the upside down car is not liek the upside down house

Submitted by SD Realtor on April 3, 2010 - 10:15am.

Scaredy the reply was meant for Arraya and not you. Also no house, car, boat, it doesnt matter. Lifespan doesn't matter. Look, extension of credit is extension of credit. I am loaning you money and you promise to pay me back or return the asset I loaned you the money for. Regardless of the asset, there is never an inherent gaurantee of appreciation or depreciation.

What Arraya said about encouraging people to walk if there is a certain threshold that they reach makes sense for them financially. However the threshold is arbitrary and the premise cannot be carried out in entirety because the bounds do not hold.

The logical answer is as follows, do not buy on credit. Similarly only a fool would extend credit to someone who will walk on the basis of depreciation of the asset. Accordingly a free market economic system cannot operate under that guise, (at least that I know of)

I agree with everything that Arraya said about the ponzi scheme, about the fed, about our banks, about the govt. People who I have represented in short sales I also counsel not to pay if it will be a hardhsip for them.

The premise that living in a home for free is a victimless crime is not true. In fact, for those who think they are punishing a bank, they are mistaken. The bank would rather have you live for free in the home, rather then vacate. Once you vacate and send them the keys, they are responsible for the home. If you go further and work a deed in lieu of foreclosure they then become responsible for taxes, and other costs as well. Furthermore that will trigger a change on the books for them.

It is a complex problem. Most people I know who have had to walk on the loan feel very badly about it. They have paid their debts all their life and psychologically it is tough. Other people brag about it and as we have seen, become quite vitriolic when challenged. Still others have had true hardship and simply cannot pay.

The problem I have with issue of walk when depreciation strikes is that the system of credit does not work then.

Submitted by scaredyclassic on April 3, 2010 - 10:23am.

sure it does. the credit system works, it just needs to price the risk accordingly. the price of credit is very low when housing prices are expected to go up forever.

the price of credit will be appropriately higher while we are in a downward spiral.

i meant the car was different for the person with the debt, not systemically

Submitted by SD Realtor on April 3, 2010 - 11:37am.

No scaredy the price of credit has nothing to do with the expectation of housing prices. The price of credit drives housing prices.

The price of credit is ultimately, when you trace it back up the chain, is driven by the bond market. Yes risk is inherent in the price of credit but if credit were really determined by risk then in 2007 when we first started seeing spiraling defaults credit should have skyrocketed but it did not because the dominoes would have all fallen, rightfully so I might add.

So we have punted the risk from the consumer past the lenders, and now it is at the federal level. One would think it stops there because our creditors are foreign govts now. It should and we will see.

Submitted by scaredyclassic on April 3, 2010 - 12:46pm.

i don't know; it seems like a system that gives feedback in both direction.

if you asked me for a loan, I might be inclined to lend you money, based on how risky I thought the loan was. I find you less risky if you have lots of assets.

with lower valued assets, i find you a riskier bet.

If your house is depreciating, you have less assets.

You need to pay more interest.

if your house is going up up up, I'd know you're not going to default on the loan, because there's no reason to, you can sell the asset, and so i'd charge you tiny interest.

I mean, the banks are going to be tighter with credit when housing prices drop, right? How do we know whether interest prices are causing home values to change or whether the change in home values is affecting the interest rates banks want on home loans?

Submitted by scaredyclassic on April 3, 2010 - 12:48pm.

i dont know about 2007, im not saying interest rates will automatically adjust to risk, I'm sure there's lots of games TPTB can play, but ultimately, if the system adjusts to market conditions, fallling (not just lower, but persistently falling) home prices should probably cause banks to charge more itnerest. It's basically an unsecured loan at that point, right?

Submitted by Arraya on April 3, 2010 - 1:16pm.

SD Realtor wrote:
Okay I can see that, however wouldn't you agree that the fundamental problem lies in the consumerism right? Upside down in the house, walk from the house, upside down in the car walk from car. Obviously carrying your strategy to a logical conclusion is that nobody should purchase an asset with borrowed funds correct? Obviously free market valuations will cross the "upside down enough" threshold that you spoke of.

Carrying the strategy further the extension of credit should be eliminated because perpetual appreciation of any asset is impossible right?

Oh boy. It's not quite that simple. It's not that I think credit needs to be eliminated per se but I don't think the government should be in the business either. And certainly not encouraging more debt dependency to the degree that they have. Frankly, as the day go by, it all becomes more and more absurd. What's next, forced debt for people that can afford it. I would not be surprised if the were slipping people into recourse loans. Using loan officer tactics to slip them into an even shittier situation all while calling it "help".

honestly, it's offensive that they are positioning these programs as "helping" homeowners. Somebody that has a job is the last person that needs help. In the one write up that I read described the people that were not going to get help as "too far gone". If I wanted to give help to anybody it would be the too far gones. Really, it's the homeowners helping the whole system from collapsing into a deflationary spiral as well as all the new buyers that are buying, by many measures, over priced assets. Wall Street spent a good part of the bubble selling "AAA" MBSs to pensions around the world with guaranteed returns. So, there is a huge amount of systemic dependancy on high asset prices.

It's just not a situation that ends well either way. All those FBs that are getting "help" better read the fine print and realize that this is a big hail mary pass of delusional bankers, of which I put a very low percentage of working out for anyone except the well-connected.

here is a scenario. They go through the next year and "help" several hundred thousand FBs. The help included lowering principle to current market value and slipping them into recourse loans. The "plan" doesn't work as anticipated and home prices fall another 20% and many of the "helped" lose their job.

All actions taken are to stop deflation. We'll see if that is possible.

Submitted by jpinpb on April 3, 2010 - 1:20pm.

SD Realtor wrote:

Furthermore that will trigger a change on the books for them.

Now THAT I like!

Submitted by mastergutah on April 3, 2010 - 2:31pm.

Works for me.

Submitted by CA renter on April 3, 2010 - 4:01pm.

SD Realtor wrote:
No scaredy the price of credit has nothing to do with the expectation of housing prices. The price of credit drives housing prices.

The price of credit is ultimately, when you trace it back up the chain, is driven by the bond market. Yes risk is inherent in the price of credit but if credit were really determined by risk then in 2007 when we first started seeing spiraling defaults credit should have skyrocketed but it did not because the dominoes would have all fallen, rightfully so I might add.

So we have punted the risk from the consumer past the lenders, and now it is at the federal level. One would think it stops there because our creditors are foreign govts now. It should and we will see.

Have to agree with scaredy on this one.

Interest rates were held too low by the Fed, and they were also held too low via credit default swaps. Note that when interest rates **should have risen** (in the 2005-2008 period, when people in the financial industry started getting scared), the CDS market took off like a rocket. This gave bondholders/debt purchasers a false sense of security, so the risk was not priced in the bond market -- you saw it in the derivatives market.
-------------

Some of us would indeed argue that debt that is not self-liquidating should not be freely available; and when it is, it should be fairly expensive to account for the risk.

If we want a mortgage market, the govt should not be involved in setting interest rates, either through direct/indirect guarantees, or direct lending. Again, this causes the mispricing of risk, and the private market will never be able to compete without taking on far too much risk.

Also, if they want to avoid walk-aways when prices depreciate, they need to mandate 20% down payments (at a minimum). This forces the borrower to take first-loss position, and will deter them from walking away.

Submitted by SD Realtor on April 3, 2010 - 5:59pm.

CAR and Arraya do nto misunderstand what I am saying. Arraya once again I agree with what you said and the with the current direction govt is heading forced debt would not surprise me in the least.

Of COURSE govt should be out of the lending business and govt insured loans are something I don't agree with either. Honestly if the entire industry was fully privatized with no subsidy or insurance by the govt I believe we would have much lower housing prices. Once more, nobody is entitled to own a home however the govt has convinced the public otherwise. Again, ponzi scheme...

As we have all seen, backstopping any industry causes severe distortions. CAR of course your proposal of 20% (in my opinion maybe even 30% or more is a very good solution) however can you imagine the outcry? Is it the best solution yes? Is it even remotely possible no, not in my opinion.

Arraya you did not really address my point, you kind of walked around it pointing out how f'd up things are which we all know and agree with. Of course they are getting what they asked for which is massive walkaways, fraud, because it is pretty endimic for humans to behave in that manner. Once again though humans cannot be trusted to do the right thing. Nobody should buy a home if they do not have a vested interest in it. This is the point I was trying to make in a roundabout manner. There will always be appreciation and depreciation cycles so there has to be more to tether a homeowner to a home. To me that is a very healthy downpayment.

Submitted by UCGal on April 5, 2010 - 12:37pm.

After a week long vacation I came back to this monster long thread.

A couple of thoughts.
* I agree with everything CAR said. The bailouts actually hurt us, longterm. We'd have been better off without them.

* I'm troubled that someone who has no financial hardship thinks it's morally ok to just stop paying. I, personally, couldn't do it. I'm sure I'll be called a ball-less bitch for admitting that I like to honor my word and contractual obligations.

* I keep thinking of the contractor I'm in litigation with. He received his NOD on his house in Oct. His NOT in Dec. He's had 2 extensions on his trustee sale. He doesn't qualify for HAMP because his loan's too high. Yet he's living rent free. I actually have a slight bit more sympathy for him since he's faced financial hardship (contracting sucks these days)... But I still feel strongly that he shouldn't get free rent. It bothers the crap out of me that my tax dollars are helping subsidize people who have the capacity to meet their contractual obligations but selfishly choose not to.

Bill - what you're doing is legal. In my book, it's not moral.

Submitted by CarlsbadMtnBiker on April 5, 2010 - 3:12pm.

I'm a Bill. 9 months mortgage/rent free. Going to ride this train as long as possible. I know of many others who stopped in the last 6 months. And also many who are about to stop paying into the Ponzi. Don't be afraid to join us.

Submitted by briansd1 on April 5, 2010 - 3:18pm.

SD Realtor wrote:

Sixth, Bill it is okay you stopped paying. However why didn't you simply move out? If you said well the asset is depreciating so I am done with it, why didn't you simply mail in the keys and move out?

I just don't get why you want homeowners to move out and leave houses empty when the banks don't even bother foreclosing. Makes no sense at all.

Economically, it's a waste to leave an asset unused. Empty houses are more likely to be vandalized.

I truly don't see the morality point here.

Submitted by briansd1 on April 5, 2010 - 3:30pm.

SD Realtor wrote:

Carrying the strategy further the extension of credit should be eliminated because perpetual appreciation of any asset is impossible right?

I heard that in Canada, mortgages are recourse against other assets the borrower owns.

That deters buyers from speculating using OPM.

I believe that NYTimes had an editorial about that.

If banks can gamble using OPM and get bailed out, than I don't see why homeowners are immoral for doing the same thing.

Submitted by briansd1 on April 5, 2010 - 3:35pm.

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.

If this spokeman is controlled by Wall Street, then he can't possibly be a socialist who's redistributing the wealth to the poor.

Submitted by jpinpb on April 5, 2010 - 4:16pm.

CarlsbadMtnBiker wrote:
I'm a Bill. 9 months mortgage/rent free. Going to ride this train as long as possible. I know of many others who stopped in the last 6 months. And also many who are about to stop paying into the Ponzi. Don't be afraid to join us.

Like I said, when I mention that there's people out there living for free and not receiving defaults from banks, there's some folks out there that think it's an isolated incident. It is more common than people think or want to admit. It's the new thing. Before it was trying to gauge how bad the market is by the number or foreclosures. Then the bank stopped foreclosing. So then we looked at the number of NODs. Now they don't even bother to file those. Sure makes it difficult to determine how distressed the market really is.

Submitted by UCGal on April 5, 2010 - 4:19pm.

briansd1 wrote:

I truly don't see the morality point here.

When you take a loan you sign a contract agreeing to pay it back.

Would you consider it morally ok to run up credit cards with cash advances then walk on the debt... Most folks would consider that theft. Maybe you think it's ok.

Is it ok because Bill borrowed from a big nameless bank? Would it be ok if he'd borrowed from a family member and was refusing to pay - even though he had the means? I suspect the answer is that the latter is NOT ok.

I'm not absolving the banks in this... plenty of bad behavior all around. I don't agree with the banks being bailed out - because it rewards their risk taking in the first place.

I wish there were some way to tag a strategic defaulter's credit report permanently so that lenders would know this person has a personal moral compass that lets them walk away from contractual commitments. They'd pay a higher interest rate in the future. Right now it's a temporary hit on the credit score and a couple of year hit on getting future mortgages.

Bill is young. He could, theoretically, do this type of thing multiple times in his life. Sign up for mortgages... stop making payments, even though he has the means, and live rent free... take the temporary credit hit and rent when he's finally kicked out... then do it again a few years later.

So... yeah... I do think there's a moral component. I'm not absolving the banks... but I also think Bill and folks like him are less than honest in their business dealings... and that strikes me as immoral.

Submitted by jpinpb on April 5, 2010 - 4:35pm.

It would all change if loans were recourse.

Submitted by jimg111 on April 5, 2010 - 4:52pm.

The banks would foreclose if they could. If they foreclosed on all the deadbeats like Bill they would be insolvent, they can't hold up their end of the contract to foreclose if Bill doesn't pay, it would be a death sentence. Bill of course is taking advantage of this and we as taxpayers and our children will be footing the bill via a lower standard of living for decades.

Submitted by briansd1 on April 5, 2010 - 7:20pm.

I don't believe in morality as much as I believe in human nature.

Our capitalist system is not based so much on morality as it is based on individual greed (the invisible hand) to create wealth and productivity to benefit us all.

BillS78 is part that invisible hand.

More specifically, home ownership is separate from the mortgage.

You own your house and use it as collateral for a loan. Even if you don't pay your mortgage, that house still belongs to you, until the bank takes it away in court, or via trustee sale.

Trustee sale is a mechanism that is advantageous to the bank and allows the bank to foreclose quickly. So that is a legal right you (the homeowner) have given up when you agreed to the terms and conditions of the mortgage.

The bank knows that very well. If they don't take advantage of the remedies to foreclose quickly, well, then that's their problem.

BillS78 is doing nothing but living up to the terms of the contract. Nothing illegal or immoral about that.

In my opinion, it's a lot more immoral and illegal for a businessman or a Realtor to take his wife (who is not his business associate) out for dinner then take that as a business deduction. He will never get caught so that's only between him and his conscience.

Submitted by briansd1 on April 5, 2010 - 7:28pm.

jpinpb wrote:
It would all change if loans were recourse.

Yes, that and make government/GSE guaranteed/insured loans non-dischargeable (like student loans).

But if the government is to get involved, we could just as well cut out the banks and have the government lend the money directly like student loans.

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