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 April 24, 2010 - 9:22am.

briansd1 wrote:
Be angry at those who didn't enforce the rules because they believed the market could self-regulate.

And I am of the belief that banks are in business to make money and were there no bailout, they would be eager to foreclose and sell the house to get somone in there who would pay. Rather than that happening, bailouts to banks and homeowners and even more people joining the others in not paying. Moral hazard out the window.

Submitted by briansd1 on April 24, 2010 - 9:31am.

jpinpb wrote:
It is principle. People need to be responsible for their own decisions. Period. Goes for companies and individuals.

Actually, I'm just a pissed off as you... but I take it stride.

I look at it relative to the big scheme of things.

You should be more angry at businesses going bankrupt and taking down investors and society with them.

Business executives (especially Internet and high-tech) get to start businesses and go bankrupt multiple times over and over. They borrow and use financial instruments to spread risk around to society at large. When the companies go bankrupt, are executives banned from doing it again? No, they continue on and on, while we bear the costs.

Of course, some business succeed and bring great benefit. But many others fail over and over again while executives who game the system get rich. It's just collateral damage. Take a deep breath.

Submitted by briansd1 on April 24, 2010 - 9:39am.

jpinpb wrote:

And I am of the belief that banks are in business to make money and were there no bailout, they would be eager to foreclose and sell the house to get somone in there who would pay. Rather than that happening, bailouts to banks and homeowners and even more people joining the others in not paying. Moral hazard out the window.

You are looking at the old banking model which no longer exists.

Banks have not held mortgages for the last two decades.

Loan servicers are no more eager to foreclose than a property manager is save you maintenance on your property. The name of game is the fees that they can charge for the servicing (and during the boom, the commission they could generate for the origination of the loans).

Submitted by Arraya on April 24, 2010 - 9:45am.

jpinpb wrote:
Arraya - please consider that anyone who bought a home during the bubble, for whatever reason, fear of being priced out, pressures, greed, stupidity, whatever, contributed to the bubble. Cogs in the wheel. Some people abused it and bought multiple houses.

This is NOT a question of FBs having to be punished. It is principle. People need to be responsible for their own decisions. Period. Goes for companies and individuals. Now I did not go around telling people not to buy. People can and will do what they want. And they did. Buying and spending like no tomorrow. Taking trips. Buying toys. Bragging and showing off. All great.

But now the piper's coming home. Rather than owning their mistakes, they are getting rewarded. See the problem here? No. Because maybe you are in Bill's boat. If people want to make bad decisions (buying a house during a bubble) then that's their perogative. But do not come back later and expect to get help, too.

I resent having to help people/companies that made bad decisions. The only punishment going on is to ME. I am being punished for making right decisions. And to add insult to injury, I am having to pay companies and homeowners for their bad decisions.

Give it a rest, Bill and Arraya. You are working the system, but you do not get to complain about it while benefitting from it.

how is Bill not responsible for his decisions? What should he be held responsible for.

And for the record. I am not working any system. I am a single, childless renter that makes a decent salary, so I subsidize every body.

Submitted by jpinpb on April 24, 2010 - 9:46am.

briansd1 wrote:

Banks have not held mortgages for the last two decades.

Then tell me again why we've had to bail them out.

Submitted by jpinpb on April 24, 2010 - 9:50am.

If someone (individual or company) is responsible for their decisions and it turns out to be a bad decision, then that person should not benefit from the bad decision at the expense of others who did not make the bad decision.

It is, in effect, rewarding someone making the bad decision and punishing someone who didn't make the bad decision.

It is so backwards, I can't even begin to explain it to you if you don't see how clearly obviously wrong that is.

Submitted by briansd1 on April 24, 2010 - 10:02am.

jpinpb wrote:

Then tell me again why we've had to bail them out.

Because 401k accounts and pensions funds own the banks shares and the assets the banks created.

France and Germany are having to bailout Greece because the French and German banks own the Greek debts.

It's better to bailout Greece and make them pay back the debts over time, than to let them default and only get 50c now.

It's all interconnected.

Submitted by jpinpb on April 24, 2010 - 10:26am.

Again, then, we are rewarding the banks for failing the 401k and pension funds. If the houses are the banks' assets, then they have a duty and obligation to the pension funds to see that the asset performs. I.e. when they don't get a monthly payment, foreclose and sell it to someone who will pay.

Rhetorical question: What's to stop them from doing this again now that they see they suffer no reprecussions, get rewarded and they have us over a barrel?

And please don't come back w/new regulation when we can't/don't even enforce the existing ones.

Ugggh. I'm so frustrated and disgusted.

Submitted by jpinpb on April 24, 2010 - 10:24am.

briansd1 wrote:

It's better to bailout Greece and make them pay back the debts over time, than to let them default and only get 50c now.

I'm going to break this down in a very small example.

Say I loan 500k to two people (A & B) so they can each buy a condo. I don't bother to check their incomes. One of them (B) stops paying.

Do I take a little loss on that one, maybe foreclose and sell the house to someone else for less, like say 300k and then get monthly payments from someone qualified? I lose 200k. But I make sure to check people's income from now on, b/c ouch that 200k loss hurt. Owner A sees what happens and thinks twice about not paying.

Instead of that happening, I go to taxpayers who bail me out for greater than 200k b/c otherwise I'll never lend again. I let the owner B live for free for an indefinite period of time b/c who cares. No loss to me. In the interim, owner A sees what's happening and wants a piece of it. Owner A stops paying and wants to live for free also

Now I have two loans, A & B, both not paying. I've multiplied my losses and nonperforming assets. I've in effect doubled my losses. Well, doubled the losses to the taxpayers.

Which is cheaper, again? Maybe I need to go back to school to learn my math.

As a result of the generosity of the government now in the future, I know the taxpayers will give me money for my bad in not checking who I lend to. Well, since I suffered no loss, what have I learned? In fact, I somehow through the magic of accounting even have a profit and gave myself a bonus.

Sorry, brian. I do not have anything against you at all, in fact, appreciate your posts. But we do disagree on this issue.

Submitted by briansd1 on April 24, 2010 - 10:43am.

jpinpb, your suggestion sounds simple enough and that's how it works for a small property investor.

Finance works differently. If you foreclose too quickly, you have to immediately write down the assets. And that affects that whole class of assets. Which then affects reserve requirements, etc...

If people's portfolios drop, they can't borrow and consume as much, etc..

Financial products are worth only what people believe they are worth. And since those products are backed by housing, we need people to believe that housing is worth more (by restricting supply and playing other games).

They are letting the air out slowly rather than all at once. Everything is interconnected in a catch 22.

If we let a class of assets lose value, all the other classes will drop too and we'll be less wealthy.

Be patient.

Yes, we disagree on this issue. And that's fine. :) We can still be friends. ;)

Submitted by scaredyclassic on April 24, 2010 - 11:18am.

That there can be such vehement disagreement ont he subject I think shows that it is a difficult issue in a grey area. We probably all agree on basic principles; that people should act in a responsible fashion in accord with the law. People should not harm others. People should not steal. Society should be set up to encourage responsible legal and efficient behavior.

It's just when you start to get down to analyzing how to apply those seemingly clear general principles, you can come up with different answers. And that should be expected. A simple, clear book like the Torah generates millenia of commentary in the Talmud. Why would we expect clear results from seemingly simple rules?

I keep thinking about a malfunctioning slot machine in las vegas. What if you put in a buck and it constantly spit out $50, and you cannot be detected. You did it once, twice, three times. You keep winning. You know the machine isn't working right. Is this like returning water as weed-killer to the store (clearly a criminal act, because of the knowledge and intent). Or is this more like a smart market operator, say a stock trader who's found a way to game the system legally and celverly to produce guaranteed excess returns (a real-life Madoff).

My mom would probably tell the floor manager.

I would probably play the machine all night.

In some sense, the "winnings" here, free rent, are a logical consequence of a system where it doesn't pay the bank to foreclose quickly. There's no way that the lingering homeowner is like the weed-killer-returned example. You can prosecute the weed-killer guy and put him in jail -- you cannot put the homeowner in jail. You may feel that you are permitted to rightfully heap derisive social comments on him, but that's a different thing, particularly in an era when the morality around foreclosures is in flux. Similarly, you could heap derision on a promiscous chick int he 70's, but if she thinks you're crazy and square and not violating an social or legal code, your derision is not very socially meaningful or effective. It may make you feel good (or not) to blast away a bit, but if the object of your derision is chuckling, then you are kind of wasting your breath. The only reason for social derision is to try to get the object to shape up and conform to the old rules,a dn if they've already moved on and decided the old norms are dumb, then you are sort of dumb for trying to use that type of social control on them. Or maybe dumb's the wrong word. Misguided. You can't teacha pig to dance, that kind of thing...

Not sure about the laws in Nevada about knowing or should have known you were playing a defective slot machine.

always felt the housing gains were a bit like vegas, with a bigger cut to the House. Remember a fellow ecestatic lawyer who had flipped a condo in vegas for 100k a very somber, conservative dde, and all I could think was, this pinhead, making money hand over fist, more on the condos than he could make at the tables. so wrong. soooo wrong....and so arrogant about it....but, legal.

For the record, i persoanlly see nothing morally wrong with squatting while society figures out hwo to work in an efficient moral manner, but I probably wouldn't do it myself.

Submitted by Arraya on April 24, 2010 - 11:29am.

I don't think the slot machine is a good analogy because you know damn well you would get shut down if caught. Whereas a strategic defaulter is out in the open and known that people are not paying and waiting to be kicked out per contract.

It's really not a grey area legally. The house is his until the bank takes it back, period.
.

Submitted by briansd1 on April 24, 2010 - 11:35am.

Arraya wrote:

It's really not a grey area legally. The house is his until the banks take it back.

.

I actually agree with Arraya on this one.

The house belongs to the homeowner until the bank takes it. I don't see why SD Realtor would want the homeowner to abandon his own house and go rent. Makes no sense at all.

We should not conflate the issues. House ownership is separate from the loan.

The house is the collateral.

The ball is in the bank's court. The homeowner has nothing to do with the bank's action or non-action.

Submitted by jpinpb on April 24, 2010 - 11:41am.

briansd1 wrote:
The house belongs to the homeowner until the bank takes it. I don't see why SD Realtor would want the homeowner to abandon his own house and go rent. Makes no sense at all.

brian - don't you think if the house were empty, the bank would act quicker? They legally become the owners and are responsible for things such as taxes, HOA, MR, maintaining the property so they don't get fined by the city, etc.

Submitted by Arraya on April 24, 2010 - 11:53am.

Do they legally become the owner and or act quickly? That seems to be an assumption.

Submitted by scaredyclassic on April 24, 2010 - 11:55am.

I only meant the Vegas example as a moral not a legal analogy. Is it ok to steal from Vegas. The other gamblers are subsidizing your winnings

Submitted by scaredyclassic on April 24, 2010 - 11:55am.

I only meant the Vegas example as a moral not a legal analogy. Is it ok to steal from Vegas. The other gamblers are subsidizing your winnings

Submitted by BillS78 on April 24, 2010 - 12:09pm.

jpinpb wrote:
BillS78 wrote:

I missed out on earning multiples of the $25k that I "saved on my free rent" because of the bank bailouts. My shorts would have paid off so much more, I haven't been bailed out I've lost money on the bank bailout.

Again, you don't want to think of it as a bailout, but trust me, for anyone spending money every month on rent AND having to pay the taxes for this bailout, at least you've got a little something every month to do w/what you want to ease the pain. Still better than a renter. Who wouldn't want to live in their place for free?

Sorry you are upset, but you flat out don't know what you are talking about. I was not bailed out. I lost over $100K easy in profits on my July-Sept. 2008 oil shorts because of the bank bailouts and that money funneled back into the commodity futures market. You are crazy if you think the ~$25K I saved in rent makes up for the $100K to $150K I would have made if oil stayed in the 30's/40's or dropped even lower.

I can tell you are angry and looking for someone to blame but being irrational isn't going to help you. The income taxes that I would have paid on my profits would have been more than the ~$25K I've saved in rent. Did you lose over $100K on investments because of the bank bailouts? I doubt it unless you were shorting the market. Your 401K was saved.

Get real, you were bailed out more than I was.

jpinpb wrote:
BillS78 wrote:
Hey I'm being priced out of the market just like any other potential able buyer because I don't want to overpay.

Again, every month you live for free deprives you of the right to complain.

Bullshit. I lost more than you did on investments(unless you were heavily shorting) because of the bank bailouts and I bet that I also pay more federal income tax than you.

The people that got screwed the worst in all this mess were the people shorting the markets. We made money but only a small fraction of what we would have made if there were no bailouts.

Guess it's tough all over, quit your bitching.

Submitted by Arraya on April 24, 2010 - 12:10pm.

I still don't think it is a moral equivalent because the casino would be losing money from continuous play. It does not change the banks bottom line if they move out before they miss a payment or stay for 5 years if the banks choses not to take it back.

Submitted by BillS78 on April 24, 2010 - 12:26pm.

SD Realtor wrote:
Jeez when we were teenagers we would make some scratch by doing yardwork and weeding. We would go to the store by tons of weedkiller, use it, fill the containers back up with water and return them. So because the hardware stores had a f'd up system, that justified our actions?
WOW just unbelievable.

Only a lying thieving realtor would equate their stealing with my 100% legal actions.

Good job hypocrite. You know no bounds.

Submitted by briansd1 on April 24, 2010 - 12:38pm.

The whole financial market is really a casino.

As a society, we have consciously allowed it because we realized that financial innovation accelerates economic activity and wealth creation.

There is really no difference between gambling that a mortgage-backed asset will go bad and gambling that the Chargers will lose the next football game.

The people who run the financial markets are allowed to spread their risks to society at large because the benefits of money as the grease in the wheels of commerce are thought to outweigh the downsides.

That's capitalism. It's not a moral system per se, but it's the best at generating stuff that we want to consume.

Do you want morality; or you do you want to buy all your stuff for cheap, and more and more of it for the income you're making?

Submitted by Hobie on April 24, 2010 - 1:51pm.

My grandfather and the majority of his generation would treat a man's word as his bond. The older I get the more I understand and appreciate the Great generation.

Submitted by scaredyclassic on April 24, 2010 - 2:25pm.

people were slimeballs back then too. they were worse then. if the immorality fo a society could be measured, it was much larger back then.

Submitted by Fletch on April 24, 2010 - 4:01pm.

scaredycat wrote:
people were slimeballs back then too. they were worse then. if the immorality fo a society could be measured, it was much larger back then.

They were better at the hard virtues. We are better at the soft ones.

Submitted by jpinpb on April 24, 2010 - 4:11pm.

BillS78 wrote:

Sorry you are upset, but you flat out don't know what you are talking about. I was not bailed out. I lost over $100K easy in profits on my July-Sept. 2008 oil shorts because of the bank bailouts and that money funneled back into the commodity futures market.

Let me see if I understand. Besides investing in a house during the bubble, you made another investment in shorts and b/c that decision didn't make you money then living for free is not considered a bailout. And I'm irrational.

BillS78 wrote:
Did you lose over $100K on investments because of the bank bailouts?

That was another business decision you made. No one forced you to do it.

BillS78 wrote:

Bullshit. I lost more than you did on investments(unless you were heavily shorting) because of the bank bailouts and I bet that I also pay more federal income tax than you.

Again, just b/c you chose to invest in shorting doesn't ever guarantee you are entitled to a return on your investment. In the interim, you are still nevertheless living for free.

Submitted by patientrenter on April 24, 2010 - 4:11pm.

jpinpb wrote:
....Maybe I need to go back to school to learn my math....

Nothing wrong with jp's math or reasoning. The example makes it plain. People who make it sound interconnectedly intergalactically incomprehensibly complicated don't understand it themselves.

Submitted by sdrealtor on April 24, 2010 - 6:40pm.

I've completely stayed out of this because i guess that I am a different breed. If I did what Bill did, I would consider myself a slimy deadbeat freeloader. I would not be able to sleep at night nor could I live with myself. However that is me looking at me through the lense I view myself through.

When I look at Bill's actions, I say.....whatever. I'm not here to judge the morality of his actions and I dont compare or judge myself relative to him or anyone else. If what he does is legal and he can live it with it thats fine by me. I wouldnt hang out or respect someone like him but I wouldnt condemn him either.

I guess more than anything it makes scaredy wrong that we all compare oursleves to others and judge ourselves that way. At least one of us doesnt and as much as I like think I'm one of kind there must be others like me?????

Party on Bill.....

Submitted by Arraya on April 24, 2010 - 8:25pm.

http://www.oftwominds.com/blogapr10/gami...
Gaming the system is not just encouraged--it has become the foundation of the U.S. economy. Without it, the status quo will implode. Goldman Sachs gamed the system to package guaranteed-to-default mortgages and present them to buyers as AAA-rated "safe" investments yielding a high return, while selling a hedge fund derivatives which were a bet against the mortgages. The hedge fund helped GS select the most likely to default mortgage tranches to raise the probability that their bet (going short) against the mortgages would rise to essentially guaranteed profitability.

This is the norm on wall Street and has been since at least the late 1990s, as revealed in the important book Fiasco: The Inside Story of a Wall Street Trader.

But it's not just Wall Street which the status quo rewards for gaming the system: the housing/credit bubble offered average Americans ample opportunities to game the system--a practice they continue perfecting as the Federal government desperately attempts to reinflate the housing bubble with wave after wave of trillion-dollar bailouts, mortgage guarantees and tax credits.

snip

This leads to a staggering conclusion: were the gaming to cease, the stock market would collapse, as it now depends on dark pools, high-frequency trading, unregulated derivatives, and a host of other "gaming the system" tricks. Without the tricks to support it, the U.S. market will fall like a rotten plum.

Submitted by NotCranky on April 24, 2010 - 9:13pm.

sdrealtor wrote:

I guess more than anything it makes scaredy wrong that we all compare ourselves to others and judge ourselves that way. At least one of us doesn't and as much as I like think I'm one of kind there must be others like me?????

Party on Bill.....

I don't buy scaredy's theory.

There are a lot of good reasons to live in a neigborhood deliberately, inspite of potentially being representative of someone's idea of what the lower 2/3 constitutes.

There may well be an inherent primate tendency to compare ourselves to others, I am sure there is.It is part of how we learn to deal with our environment/relations/interactions, but the measuring stick we chose to use can vary in its qualities greatly. The tendency can also be kept in perspective sufficiently to maintain happiness in any reasonable place.

Consumption habits, material possessions,position,looks etc., may be common items on many peoples measuring sticks but sensible,secure people,however rare, have better devices, and I think more common sense than to make themselves unhappy because they don't come off as king of the hill.

Sometimes I think the people who struggle to be the king of the hill,bigshots, are the ones that have the most dysfunctional metrics. They are the ones that easily find themselves in Bill's upside down situation and working the system(to compensate for failure),or working for blood money, or whoring themselves, even though in some cases, they make, or have been given, much more money than many contented, humble, people will ever see.

Ultimately, I think a life possesed of a satisfying "purpose" or "purposes"is more important than anything else.

Oh yes...party on Bill.

Submitted by scaredyclassic on April 24, 2010 - 10:02pm.

having a purpose and a couple of bucks in the bank are not mutually exclusive.

and the measuring sticks don't ahve to be cash or stuff.

if you're an academic, it's publciations.

if you're a law or med student, it's grades.

if you're a triathlete, it's times.

wherever you're going there's something to measure oyurself against, and it's probably not escapable, however much you try to pretend you live apart.

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