The L.A. Times’ Ken Harney wrote this article on the study of homeowners with good credit histories intentionally defaulting on their mortgage:
http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story
An excerpt:
* 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.
Here’s an example where the high foreclosure rate is feeding on itself, leaving many more possible defaulters behind with high mortgage balances and little hope.
I’m not picking on San Elijo Hills, just trying to help – because if there isn’t a pot of gold at the end of this rainbow, there’s more trouble ahead:
Fron the WSJ:
Strategic default is most likely when home values have fallen by more than 15%, according to the study by authors of the Financial Trust Index, a joint project of the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management.
The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%.
“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”
I wonder how many of these defaulters are actually walking away rather than staying in their high-end lifestyle homes riding the free rent gravy train for the next year or more.
I think that’ll be the package du jour from now on – work the free rent as long as possible, take the cash for keys after foreclosure, and then hang out for a few years.
The REO tenant in RP was offered $4,900 cash for keys in exchange for vacating in 30 days – the day their first baby is due. They haven’t decided to take it or stay until the end of their lease.
Smart defaults should pool the ‘free rent’ as the down payment for their next misadventure in real estate.
Without mark to market accounting, banks don’t really have the financial incentive to flood the market and crush housing prices.
CA has near 20% U-6 unemployment. I don’t see a reason why housing prices don’t fall…good school district / bad school district aside
If the homeowner’s credit rating is already shot, I say milk the system for all it’s worth. Free rent, cash for keys, the works! The banks created this mess in the first place. Why should anyone give the banks a break especially with all the bailout money they’ve already received?
It’s as right for the prices to fall as it was for them to go up so high in the first place. Default was one of the described outcomes of the contract. It isn’t right or wrong for someone to default on thief mortgage. Maybe next time they won’t lend money so freely and cheaply, it causes all kind of problems just like an open bar at a party.
I visited the area for a kids soccer game and while houses are big and fancy, the area is arid and desolate.
I don’t see a reason why housing prices don’t fall…good school district / bad school district aside
JK,
Our San Elijo Hills friend Russel/Adam wondered over the weekend how SEH will fare against South Carlsbad houses nearby in the Encinitas School District.
I think you can set aside the good/bad/whatever school issue once house payments get in line with rents, which is what is happening in SEH.
I could see a regular SEH range of $450,000 to $650,000 for SFRs – that’s the way it has been this year with a steady stream of foreclosures to contend with. Carlsbad’s would be a little higher.
Another great video. Is there any way the mello roos and hoa fees could be modified? I like SEH even with San Marcos Schools and 15 minute plus drive to freeways but that whole community is in deep S. The views really are hard to beat in SD county, and proximity it UCSM is a plus. Maybe SEH should try to market itself as CV north or use HOA’s to prop up SM secondary schools.
When you can get qualified for another house in 2-3 years I guess I cant blame the people for defaulting.I imagine the smart people get some cash from their credit lines before they default on the mortgage.One thing interesting is the new credit card laws.the universal default rule will end sometime soon.Meaning if you have a late payment of default on one loan the credit card companies cant raise your rates across the board anymore.
Another interesting thought comes to mind with 2nd loans.If you are way underwater why not quit making your payments on the 2nd? They wont forclose if there is no equity for them after 1st is paid.You might be able to get a loan mod out of them.The 2nd will still be there if you go to sell but if you are facing foreclosure on an underwater house that might free up some money.Not advocating any of this but does raise a lot of questions.I say stop short alses alltogether and get on with the show.
Yet another example why good credit alone should not be enough to get a loan. Here’s looking at all the people without stable income who think they’re entitled to a prime loan.
It’s also worth pointing out that free rent alone is not enough incentive for someone who still has a job and a future. It’s just icing on the cake when you’re tens or hundreds of thousands dollars upside down on your house. That’s where the real financial decision is made. A low credit score is not just costly but also one less safety net. But it makes sense when a lot of money is on the line.
Thank You Jim! Good stuff as always. Ahh the memories of driving those streets and getting a little nervous.
What is your take on the bank owned VIEW home that already sold before it hit the MLS?
2 homes this week that never hit the MLS
1499 Sandbar sold (VIEW home)
and 885 Orion went pending (VIEW home)
That rainbow yesterday was amazing! I was up on El Camino Real in Encinitas and it was stretching across the entire sky and there was a quite nice double one going on, too.
I’m glad you had a camera with you. I sure wish I had one!
-Erica
Have a close friend who bought in San Elijo Hills 4 years ago. 1800sq ft for 500k. Who knows what its worth now but he is still there. But I was struck at the time by the pressure he was immediately under from the tax standpoint. His effective property tax rate is 1.75% or $8750 a year while I live 5 miles away in La Costa Valley and pay roughly 1.15% on 750k or $8625. I paid 250k more for my house, yet his taxes are more than mine. At 500k, my taxes would be $5750 — how many of those SEH owners could use a break of $3000 or $250 a month right now….? Even if his house is reassessed, a property tax rate of 1.75% is absurdly high. The problem compounds itself at higher levels. This is contributing to the problem Jim’s video highlights – someone who is in for 900k on Orion is paying $15750 or $1300 a month just to pay their property tax bill….
propertysearch,
What do I think about seeing REOs being sold prior to hitting the open market?
You know the bank didn’t FSBO it, there was a realtor who very deliberately breached their fiduciary duty to the seller and undersold the property to their own waiting buyer, and pocketed the full 6%.
I think it is the biggest contributing factor to why the public doesn’t trust realtors, and why most people think agents are scum.
…Maybe SEH should try to market itself as CV north or use HOA’s to prop up SM secondary schools…
You mean Chula Vista North?
Yet, another discussion on strategic defaults. Haven’t we beaten this horse long enough? I looked out my window and saw that double rainbow, walked out the door and felt the light sprinkle. For a moment, I felt like I was still on vacation. Bahhh, back to reality.
Ruthless defaults are being rational. Not honorable, but rational. Because honor is not rewarded, or even acknowledged.
I recently leased a building to a guy who seemed stable, had a big bank account but made a strategic default on his home. I didn’t hold it against him. Guess what; he was late for the 2nd month’s lease and bailed by the 3rd.
I used to not think too much about someone who is in a bind like the homeowners of SEH, but last week I had another building up for lease and there were two people who wanted it. One of them also had a “strategic default” on their record. Nope, they are not moving in.
Something for others to watch out for when leasing.
The next property tax payment is coming up in December. Will be interesting to run these streets through and sees who has paid up. Not paying prop tax is a pretty sure sign that you’re letting it go.
https://www.sdctreastax.com/ebpp3/
Hate to break it to you but SEH’s demise will have an impact on your home equity even if it is “3clicks from da beach”.
Where is the regulation? Can’t someone report that realtor? Is that not illegal? Shouldn’t that guy have his license revoked?
Jim, that’s a very staggering post. Looking into your crystal ball, which neighborhood is next? Bressi? LCO? Could PHR ever see this?
Speaking of government cheese, this was sent over today by a mortgage broker:
Have you seen the name Home Path on an MLS listing recently? Do you need more properties to show your buyers? We can assist with financing up to 97%. Here are the details:
-Home Path is only for Fannie Mae properties that have been recently foreclosed
-Home Path allows the purchase for use as a primary, second home or investment
-Second home or investment max LTV is 90%
-The program does not require an appraisal as the LTV is set by the purchase price
-Down payment can be gifted and seller can credit up to 6%, minimum fico 660
Enjoy your full shared commissions on all Conventional files done with us.
Blur,
Bressi and SEH are in a horse race – both built about the same time, with the same desperation among builders to slam buyers into whatever crappy loan needed to buy, and max out profit with high Mello-Roos payments – the gift that keeps on giving.
An embarassing display of greed and profit without a care in the world what they left behind.
Reminds me of the mortgage industry, and in particular a well-tanned Italian.
Best video ever Jim.
Mozart is right, a person who defaults once is much more likely to default again regardless of the circumstances. I know a number of people underwater or having trouble paying their mortgage. All of them did the responsible thing one way or another – they sold the house anyways, or moved out and rented it.
Now if it were $100K or more, I think we’d all reconsider.
I am fairly sure I could round up about 500 or so buyers for anymore of those 585K 3300 sqf homes with ocean views if you have them (like the last home in the video)
Me too, and I think the seller would like that, if they only knew. The Mello-Roos becomes less of an issue too, at $585,000.
…Hate to break it to you but SEH’s demise will have an impact on your home equity even if it is “3clicks from da beach”.
You do know that everything is down (with the exception of CV) – right?
SEH (92078) is 10 miles from Moonlight Beach and 20 minutes away.
I’ve got two words for this…
holy sh*t.
Good stuff Jim
Boy, those communities look so dry. Not a proper tree in sight, not even a lonely palm tree.
And it’s been a long since since we’ve had a heavy rain storm. Wonder if they’ll have mud slides around there when the heavy rains finally come? It really looks like they built on sand.
Shouldn’t the banks be the most upset? that the agent kept it off the open market and obviously sold at a lower price than they could have gotten?
I guess you can steal one from the bank if you know the right unethical realtor. Assuming the interior wasn’t trashed, that seems like an amazing price for that house.
Most of that area is fairly solid ground, a lot of what looks like hard black granite, I would be hiring someone to dig the holes for the trees if you know what I mean.
Well I will be looking forward to this winter then, got to keep an eye on that area,
Thanks again, Jim
And yea what spartacus said,
holy sh*t.
I find it interesting the realtors are so happy to pocket the cash that they don’t realize what they are doing. They are in effect lowering prices for future buyers by bringing the comps down when they don’t list on the MLS.
For the buyer it is annoying to miss out on all the view opportunities but with patience can be a positive thing. It just brings the price down for the future foreclosures.
If I were an owner on that street I would be upset.
JtR: I’m fine with that.
Me too.
That house going for $128/sf sounded good until you started mentioning those killer MR/HOAs. WOOF! Otherwise SEH seems a lot nicer than CV.
I feel sorry for the guy that paid cash; he’s the only one that is guaranteed to lose a large portion of his own money.
—
p.s.: Jim, it’s been too long since I’ve said how sharp a blog you run here. Looks nice, updated frequently, and killer content. I don’t know how you manage to do everything you do, but you do it great. Keep up the good work!
Something’s always left out of the strategic default discussion: its impact on future employment.
The conventional wisdom in HR for the past two decades is that surest sign someone will be a bad employee is their credit history.
After a layoff in late 2007, I was hired and relocated to SD by a fortune 10 company last year. The ONE thing that delayed my onboarding after I signed the offer letter was the credit check. Had I had a few missed credit card payments on my record, let alone a major loan default, I guarantee I’d still be unemployed or underemployed.
A loan walkaway is strategic alright, a strategic disaster.
One last comment, As far as homes selling before they hit the MLS (whether they do show up or not ,, ie.. List agent having cash investor buyers lined up in his pocket).
Welcome to the club, Temecula Valley buyers have been putting up with that sh*t for the last 1.5 years or so.
The reason you don’t see any palm trees in SEH is because they violate the CCR’s.
JtR,
Can you give some insight as to how similar (mid-to-high end, new construction) homes fared after the last major downturn? What were those neighborhoods like when the market came back? How long did it take for them to rebound, relative to other more established areas?
While I think this downturn, and subsequent recovery, will be longer/different than anything else, I’m curious to hear your (or anyone else’s) thoughts.
Also, what are the age range of the people with these foreclosures? I’d be curious to see some statistics on the ages of people who are ruthlessly defaulting. Are they young, old, or all across the spectrum?
What group is defaulting? I don’t have statistics, but I have a gut feeling they are between their 30s and early 40s and are easily influenced by their peer group. Another word for this is the older segment of the Generation Me group living in the age of entitlement. I would venture to say the Internet through the many social media sites like Twitter, Facebook, MySpace and LinkedIn (yes I said LinkedIn) and blog sites is the silent enabler. Why work for something when you can create and exchange your own persona and Internet friends at will? Couple that with easy credit, a new house, designer jeans and a Bimmer in the driveway and your famous. Narcissism is absolutely toxic to society.
So shocking! No palm trees in SEH because of CC&Rs is crazy.
there’s really no need to make generational generalizations here.
bottom line is when you are looking at differences in thousands of dollars monthly, this cease to be a moral issue and becomes a purely financial one.
Let’s take this 3600 sqft house on Antilla (next street over from Orion) purchased in 2005 for $970k. with another $130k in landscaping and interior upgrades, that’s $1.1 mil on the house. assuming 20% down and cash on the improvements, that’s still $780k owed, or $5200/month after mello roos and hoa.
The newest comp is $585k, with 20% down that’s only $464k owed, or $3200/month after mr and hoa.
$2000/month difference between you and your neighbors for the next 20-30 years? the bank isn’t going to talk to you unless you stop payment. so what are you going to do? you stop payment. period.
here’s a real life example of high end Strategic Default:
successful businessman in his 50’s and wife purchased a home for $1.9 million in 2006, they had $400k down on the home, so they owe $1.5 million on the house. comparable homes in the area dropped to $1.2 million in late 2008.
difference between $1.5 million and $1.2 million is $2000/month in mortgage.
so what did the couple do? they defaulted, they stopped paying property tax, they put their house on for short sale for $1 million, they played hard ball with the bank.
the bank gave in and closed that $2000/month gap, NOD cancelled and the couple are staying put.
the couple lost more sleep thinking about that $2000/month than whether it was moral, that’s for sure.
Carlsbad Renter, agree with you there. Bad credit also risks losing a security clearance if you have one.
I say let the defaults roll and move those people out who made the bad decision to buy at inflated prices and allow those of us who endlessly took the shame of not buying and being renters to buy the homes at reasonable prices. That is what we call capitalism.
Now if you believe in some form of socialism, then force the banks to take my tax money and give principal reductions. Principal reductions, Jim, come from someone’s pocket.
If it is the latter solution, while good in the short run, trust me it will be very bad in the long run for this country. We need to build a society in which people realize their are consequences for decisions. Just watch the intervention program on A&E and you will see how “saving” those who made bad decisions is, honestly, not a good strategy. It is easy to blame the drugs, drug pushes etc. but at the end of the day it is the enablers (those who come to the rescue) that fuel addiction / poor decisions.
I really wonder how much this affects neighboring communities. Let’s say, for example, a buyer is looking in Encinitas or LCV. Are they more likely to say, “I’d really like to live where I’m looking, but I just can’t ignore the fact that I can get a newer, bigger house in Bressi or SEH for $200k-$300k less?” Or, are they more likely to say, “SEH and Bressi are lesser areas so it doesn’t matter what those homes are going for?”
I know, of course, what the seller thinks, but I wonder how much pressure this puts on neighboring communities to get more competitive.
Good examples, ocrenter. At the end of the day it is a business decision. How much is your good credit worth? $2K/mo. and $300K upside down? It’s a business decision, but as ocrenter indicates by including the fact that these folks were losing sleep over their situation, it is also a mental health and emotional issue. Of the 3 people (so far) that I know who have “ruthlessly” defaulted, all had a huge feeling of relief once they were out of the home and the debt.
To add to ocrenter’s example, a pertinent issue is rents on comparable properties or at least rents on properties that would be satisfactory as homes for 3-5 yrs out. For someone who is $300K upside down with a $5K/mo. mortgage and who can save $2K/mo. by defaulting then renting, how do the numbers work out?
If they live in the home for a year without making mortgage payments they have maybe $60K in payments plus another maybe $10K in unpaid taxes for approx. $70K pre-tax-adjusted dough in hand. Then, if it’s a $2K/mo. savings going forward as a renter, that’s $24K/yr times let’s say 3 yrs renting, that $72K. So now they have about $140K in hand plus the biggie – they have erased the negative $300K off the balance sheet – so 4 years out and they have an approximate swing of $440K in net worth. Pretty huge.
How much is your credit worth?
Good info, Thank you. Can you do a similar video for Del Sur? It would be nice to know how many are in foreclosure and how many are short sales and what is their percentage, since we are starting to look at houses there.. Thanks Jim!
“I say let the defaults roll and move those people out who made the bad decision to buy at inflated prices and allow those of us who endlessly took the shame of not buying and being renters to buy the homes at reasonable prices. That is what we call capitalism.”
Hmm, not totally sold on that one yet. Using that line of logic, that means that the creation of the housing bubble was also capitalism at work. So capitalism just creates a highly inflated market based on free-wheeling lending and easy credit to create an inevitable crash to supply a new wave of buyers (high percentage of them just investors anyway) to take advantage of the capitalist system? Somehow, I think capitalism can be better than that…
dacounselor, you make your point well. The swing amount could be less depending how much DP was involved plus mortgage interest tax deduction is lost. In OCs high end scenario, the couple kept their home and won. On the low end, going through strategic default may not be a viable option, hence the word ‘strategic’, but given the economic reality and the lack of frugality in today’s buyer, many have no choice anyway. And for those that want to get a bigger house in SEH (not sure why anyone would want or could efficiently use a +3000 sq ft), by all means purchase it. Generally speaking, living in SEH will add 400 hrs of commute and stress time per year. How much is time and stress worth?
So THAT’s what happened to 864 Genoa. My wife and I were hot for that house and kept askin’ our realtor about it and he kept sayin’ it was pending.
What dirty *&&^%% rats. On second thought the school noise apparent in your clip might’ve eventually become annoying.
Unless you work from home during the school noise should not matter?
3clicks- point is moot now ’cause of the dirty dealing listing agent. There were 3 houses I really liked- 1595 Glencrest, 1659 Milan, and that 864 Genoa and I struck out on all 3 swings : (
and no I am not interested in anything on Orion.
3 clicks said ” And for those that want to get a bigger house in SEH (not sure why anyone would want or could efficiently use a +3000 sq ft), by all means purchase it.”
It is a valid point that no one really NEEDS 3,000sq ft. The reality is that most houses sell for around $500,000 regardless of the sq ft. Whether 1800sqft-3600 sqft. A lot of people here have 3-5 kids. I know several with 6 kids. Can you pack them in? Yes. But if they are giving away and extra 1000 sq ft why not take it?
So Jim, does that mean you can cross out the ‘not’ in ‘I’m not giving it away’ and have a second run on Beefy -Ts?
I am thinking about a second run of Beefy-Ts, because we’re out of shirts now.
This was on the original list:
“Give It Away Or Else, Bitch”
But it got cut after wifey and I had the ‘older vulgar and offensive vs. younger hip and trendy’ argument.
I feel dirty now and I must confess. After working with my buyers agent for six months, and getting kicked in the teeth repeatedly, I have contacted the REO listing agent on a property that went MLS today. They refered me to an agent that the broker “works with”(what does that mean?). I made it clear I want to make an all cash offer and make it quickly, as I have felt the stinging disappointment of not having any of my well funded offers considered. The realtor did not say anything to suggest that I will have an “in”, but I made it known that I contacted them for that reason. I don’t like it,I know it’s not ethical, but in the OC market I have just not been able to compete. From on the dark side it’s, well, dark. Pray for me.
Yeah, Orion is bad. I run by there all the time and was wondering when you were going to video it. When we bought last December, we had offers on all those homes. Never heard back from the bank at all.
DB,
Well, 6% commission’s gotta get you something. If you’re going all cash, you need to be prepared to walk if they don’t give you a fair price.
JTR, which university did you mention in discussing the view of the last home that was sold by bank without the MLS listing?
I didn’t realize there were any universities in the area.
Cheers,
Pigpen
“Give It Away Or Else, Bitch”
I like it, but … you are talking about houses, right?
Re: Bob, the topic of principal reductions. Here is my perspective.
Let’s say that the only thing we’re worried about regarding foreclosures are the strategic defaults. Let’s say that it is a problem that MUST be solved (though I personally don’t care, but whatever). I have heard this debate amongst Mark Hanson and his followers. Their theory/response is that the way to keep people from defaulting on purpose is to lower the amount they owe to the current market value. I find this to be a horrific idea for reasons financial and moral. Why not an even simpler solution of making their personal pains too high to default? Make the amount the bank lost a debt that even bankruptcy can’t ween them from, like student loans? After all, that solves the strategic defaults without the financial or moral malaise.
So let’s say 100 people are deeply underwater. Say 40 of them will walk away because of this, the rest are decent human beings and will pay off the loans. The banks eat it on those 40, but the other 60 are fine. Principal reductions would have been applied to ALL 100 of them. That is far more costly and horribly immoral.
I know I’m sort of ranting here, and this might not be the appropriate forum for this debate, but I’m sure some of you guys have heard proponents of principal reduction at some point before. Just wanted to point out this alternative “solution” to strategic defaults that whether you agree with doing it or not (again, I am indifferent), it accomplishes everything that principal reductions would, without the nonsense of paying for their mortgages which is f***ing INSANE.
While you still have good credit, rent a place. Then default and pay cash for what you need. You will be better off in the long run.
Screw the banks.
Pigpen wrote:
“JTR, which university did you mention in discussing the view of the last home that was sold by bank without the MLS listing?”
Sounds sketchy, but I think it’s this one:
http://en.wikipedia.org/wiki/San_Elijo_College