Nope, it's not the poor people who chose to default....
Started by Riversider
almost 17 years ago
Posts: 13573
Member since: Apr 2009
Discussion about
http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story 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. * The... [more]
http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story
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.
* 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.
[less]
Response by Riversider
almost 17 years ago
Posts: 13573
Member since: Apr 2009
Based on this article, it sure sounds like Low and no downpayment mortgages are/were a HUGE mistake. Government mortgages and Securitizations the big enabler!
Ignored comment.
Unhide
Response by walterh7
almost 17 years ago
Posts: 383
Member since: Dec 2006
State law also aids and abets 'sudden defaulters'. The following states are 'non recourse' states which means that the homeowner can walk away from a house, default on the mortgage and have no futher liability... Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, Texas, Utah, and Washington. Yes, a default will trash their credit report for seven or so years, but they have likely figured that in.
If I were a bank heavy into Connecticut real estate, I'd be very nervous given the heavy hedge fund concentration in that state. That industry is struggling.
Ignored comment.
Unhide
Response by Riversider
almost 17 years ago
Posts: 13573
Member since: Apr 2009
To me this is an extremely interesting story. It's been axiomatic that Prime mortgages don't default if the borrower can afford to pay his mortgage. This challenges the whole basis of low down payment lending.
Ignored comment.
Unhide
Response by 30yrs_RE_20_in_REO
almost 17 years ago
Posts: 9913
Member since: Mar 2009
Equity, equity, equity ..... it's why I say Coops shouldn't allow cash out refi's even if the current value is much higher than when they bought.
Waves of Americans faced with negative home equity are choosing to game the system and walk away from their mortgages and strategically default, despite their likely ability to pay.
Ignored comment.
Unhide
Response by 30yrs_RE_20_in_REO
almost 17 years ago
Posts: 9913
Member since: Mar 2009
What they aren't saying: you may have people who have POSITIVE equity who try the same thing hoping that if the thing gets big enough, they will slip through the cracks.
Ignored comment.
Unhide
Response by evnyc
almost 17 years ago
Posts: 1844
Member since: Aug 2008
Wait, we're calling people who strategically default "gamers" of the system? Why? Seems like rational economics to me.
It isn't a moral issue, it's a business issue. You're out for #1, just as the banks are. Right?
30 yrs...I used to have the same reaction. But then I considered the long chain of irresponsible and perhaps immoral acts, and the lines became rather blurry. Lets consider...
- The buyer who (not in this case) lied on loan aps about income.
- The mortgage broker who sold a product that they fully knew would blow up just to make a commission.
- The regulators/policy makers/policitians who would do anything just to keep the ponzi scheme afloat. Lowering the minimum quality threashold incrementally and than bloating Fannie Mae and other GSE's by purchasing the paper created from the junk.
- Securitizers who either did zero due diligence or turned a blind eye as they supposed created 'AAA' paper from the poor quality paper.
- Ratings agencies who did nothing but rubber stamp deal after deal with 'AAA' ratings based on seriously flawed models that had not been properly stress tested.
And the list goes on. So why is the person who can pay their mortgage, but makes an economic calculation not to, any worse than any of the above mentioned actors? Why should the prudent and/or conservative pay for the sins of this mob? Those who are financially sound are paying a very high percentage of the costs of this mess. A mess made by others. Is that moral?
No, I'd argue that the only truly moral thing to do is to level the playing field. If the truth is that the consequences of default are not sufficiently high enough to deter folks from walking away then the regulators have failed (which we already knew). The system is broke and to force an un-due cost on the most prudent of borrowers simply because they have the financial capacity to do so is immoral. This is a tax to the prudent and that is backwards. Capitalism is designed (rightly so) to punish poor decision makers. How else will the folks tasked with re-engineering the entire home lending system have all the experiences to make rock solid policies? Its all part of the feedback loop.
Ignored comment.
Unhide
Response by Riversider
almost 17 years ago
Posts: 13573
Member since: Apr 2009
You left out the great enabler. Government who assumed Credit risk on countless mortgages to further a government policy of promoting home ownership. or more correctly maintaining a certain voter base and pleasing certain financial interests.
It's more than interesting how much Credit Risk was off-loaded to the GSEs FHA and ultimately the U.S. tax payer. And all the people in government who pushed this agenda or the lobbyists can say is WHOOPS!
Ignored comment.
Unhide
Response by Riversider
almost 17 years ago
Posts: 13573
Member since: Apr 2009
Expanding on lenders to persue deficiency judgments should go a long way toward fixing this. Not sure about Florida, but can definitely see this a factor in a state like California.
Ignored comment.
Unhide
Response by apt23
almost 17 years ago
Posts: 2041
Member since: Jul 2009
how can the lenders afford to pursue expensive legal remedies against those who bolt on their mortgage. in addition, the courts are jammed. in florida, the default rate would be much higher but they can't move the paper through the court. there is a huge backlog.
Based on this article, it sure sounds like Low and no downpayment mortgages are/were a HUGE mistake. Government mortgages and Securitizations the big enabler!
State law also aids and abets 'sudden defaulters'. The following states are 'non recourse' states which means that the homeowner can walk away from a house, default on the mortgage and have no futher liability... Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, Texas, Utah, and Washington. Yes, a default will trash their credit report for seven or so years, but they have likely figured that in.
If I were a bank heavy into Connecticut real estate, I'd be very nervous given the heavy hedge fund concentration in that state. That industry is struggling.
To me this is an extremely interesting story. It's been axiomatic that Prime mortgages don't default if the borrower can afford to pay his mortgage. This challenges the whole basis of low down payment lending.
Equity, equity, equity ..... it's why I say Coops shouldn't allow cash out refi's even if the current value is much higher than when they bought.
http://www.businessinsider.com/500000-defaulters-are-gaming-the-system-2009-9
story got just picked up by "mainstream media"
Waves of Americans faced with negative home equity are choosing to game the system and walk away from their mortgages and strategically default, despite their likely ability to pay.
What they aren't saying: you may have people who have POSITIVE equity who try the same thing hoping that if the thing gets big enough, they will slip through the cracks.
Wait, we're calling people who strategically default "gamers" of the system? Why? Seems like rational economics to me.
It isn't a moral issue, it's a business issue. You're out for #1, just as the banks are. Right?
http://articles.moneycentral.msn.com/Banking/HomeFinancing/WhenToWalkAwayFromAMortgage.aspx
I am absolutely dunbstruck by that statement.
30 yrs...I used to have the same reaction. But then I considered the long chain of irresponsible and perhaps immoral acts, and the lines became rather blurry. Lets consider...
- The buyer who (not in this case) lied on loan aps about income.
- The mortgage broker who sold a product that they fully knew would blow up just to make a commission.
- The regulators/policy makers/policitians who would do anything just to keep the ponzi scheme afloat. Lowering the minimum quality threashold incrementally and than bloating Fannie Mae and other GSE's by purchasing the paper created from the junk.
- Securitizers who either did zero due diligence or turned a blind eye as they supposed created 'AAA' paper from the poor quality paper.
- Ratings agencies who did nothing but rubber stamp deal after deal with 'AAA' ratings based on seriously flawed models that had not been properly stress tested.
And the list goes on. So why is the person who can pay their mortgage, but makes an economic calculation not to, any worse than any of the above mentioned actors? Why should the prudent and/or conservative pay for the sins of this mob? Those who are financially sound are paying a very high percentage of the costs of this mess. A mess made by others. Is that moral?
No, I'd argue that the only truly moral thing to do is to level the playing field. If the truth is that the consequences of default are not sufficiently high enough to deter folks from walking away then the regulators have failed (which we already knew). The system is broke and to force an un-due cost on the most prudent of borrowers simply because they have the financial capacity to do so is immoral. This is a tax to the prudent and that is backwards. Capitalism is designed (rightly so) to punish poor decision makers. How else will the folks tasked with re-engineering the entire home lending system have all the experiences to make rock solid policies? Its all part of the feedback loop.
You left out the great enabler. Government who assumed Credit risk on countless mortgages to further a government policy of promoting home ownership. or more correctly maintaining a certain voter base and pleasing certain financial interests.
It's more than interesting how much Credit Risk was off-loaded to the GSEs FHA and ultimately the U.S. tax payer. And all the people in government who pushed this agenda or the lobbyists can say is WHOOPS!
Expanding on lenders to persue deficiency judgments should go a long way toward fixing this. Not sure about Florida, but can definitely see this a factor in a state like California.
how can the lenders afford to pursue expensive legal remedies against those who bolt on their mortgage. in addition, the courts are jammed. in florida, the default rate would be much higher but they can't move the paper through the court. there is a huge backlog.