by Jim the Realtor | Dec 20, 2011 | Strategic Defaults |
Will short-sellers and strategic defaulters race to the exits before the debt-relief tax exclusion expires on 1/1/13? They would be crazy to assume that the benefit will extend, though it may. Here is the last third of this article from the New Yorker comparing AA’s bankruptcy to housing. More articles like this might encourage additional defaults!
When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms.
They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting). And there are plenty of useful ideas out there for how banks could do this without taxpayer subsidies and without rewarding the irresponsible.
For instance, Eric Posner and Luigi Zingales, of the University of Chicago, suggest that, in exchange for writing down mortgages in hard-hit areas, lenders would take an ownership stake in a house, getting a percentage of the capital gain when it was eventually sold. Lenders, though, have avoided such schemes and haven’t done mortgage modifications on any meaningful scale. It’s their right to act in their own interest, but it makes it awfully hard to take seriously complaints about homeowners’ lack of social responsibility.
Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages.
Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better.
The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead.
Read more: http://www.newyorker.com/talk/financial/2011/12/19/111219ta_talk_surowiecki#ixzz1h0qsLS9y
by Jim the Realtor | Sep 20, 2011 | Strategic Defaults |
From foxbusiness.com:
Gene Kessler, 67, may be the new face of mortgage default. The tech industry retiree is in the process of walking away from the home he purchased for $166,000 in 2004 in a small town 75 miles southwest of Minneapolis.
Its value has plummeted to $111,000, wiping out Kessler’s $45,000 down payment and leaving him with a mortgage that’s more than the home is worth. He stopped paying the loan six months ago, and estimates he’ll have to vacate by March 2012.
But Kessler isn’t in financial trouble, and he could afford the monthly payments. He has no other debts and two pensions from former employers, as well as Social Security. He also has a woodworking hobby, and runs a small business selling the artisan lamps he makes in galleries. He’s single now, and his two children are grown and gone.
“I was looking for a way to get back to a larger city, and this was the only way I could get out of this house,” says Kessler, who paid $800 to YouWalkAway.com to help guide him through the process known as strategic default. He’s anticipating a move to a warmer climate and a more active art and dating scene in Santa Fe, N.M.
There’s no data on the demographics or financial histories of the people receiving recent default notices. But among them are some homeowners who have never defaulted on a loan before, at least according to one poll. YouWalkAway.com surveyed several hundred of its clients earlier this year, and just 23% said they had previously shirked a financial obligation.
“The people we are now seeing are nearing retirement age, who never missed a payment on anything in their lives,” says Jon Maddux, co-founder and CEO of the Carlsbad, Calif., firm. “They are trapped. They can’t sell or get a modification and they need to downsize or move for a job.”
Attitudes toward default have also shifted, Maddux says. “Back in 2008 people were very emotional, very scared, in disbelief or denial,” he says. “Now they are simply fed up. It’s a very calculated, black-and-white business decision. People feel very relieved.”
(more…)
by Jim the Realtor | Jul 27, 2011 | North County Coastal, Strategic Defaults |
How many people try to short-sell their house, before getting foreclosed?
Those on the default list get bombarded with save-your-credit and extend-your-free-rent offers from realtors – plus kickbacks too. To resist, a defaulter must be really committed to NOT short-selling.
Of the 41 SFRs that were foreclosed in North SD County Coastal since June 1st:
Tried short-selling: 14 (34%)
No attempt to short-sell: 27 (66%)
I guess there could be a few who thought that their loan modification still had a chance of succeeding, but the bank foreclosed on them prematurely. But the vast majority of the 27 who didn’t try to short-sell must have been determined to let that house go.
On a side note – having just 41 foreclosed in almost two months, in an area that closed 410 detached sales during the same period, is discouraging news for buyers waiting for additional REO inventory.
by Jim the Realtor | May 17, 2011 | Shadow Inventory, Strategic Defaults
From HW:
The trend of borrowers choosing to default on their mortgage when they otherwise might have been able to afford payments is on the decline, JPMorgan Chase analysts said Monday.
Definitions for what qualifies as a strategic default varies. But analysts took a deeper look in the report. One widely held requirement for strategic default is that the borrower stops making payments when the property loses equity, meaning the mortgage is worth more than the underlying home.
JPMorgan analysts used Standard & Poor’s/Case-Shiller indices and tracked prices against original loan amounts on a metro level. Then, analysts collected counts for all defaulted loans since 2007 and tracked those that started missing payments once the loan went underwater.
They found 60% of all defaults were strategic by the middle of 2009, more than double the percentage in January 2008. But analysts wanted to get more specific.
Using data from Equifax, the JPMorgan analysts looked at which borrowers did not experience a monthly payment increase before defaulting. Then, they added in which borrowers were still making payments on other debts after missing their first mortgage payment.
The final definition of strategic default used was the “percentage of defaults from underwater borrowers who started missing payments once underwater, continued paying their other debt, and had no payment increase on their mortgage.”
While the analysts admit they might still be overestimating the amount of strategic defaults when accounting even for all these variables, they noted the trend is going down.
Across the private-label mortgage-backed securities market, the analysts found 10,000 strategic defaults fit their definition, down from nearly 20,000 one year ago.
“Overall, strategic defaults have stabilized as home prices flattened, and initial jobless claims declined,” analysts said. “A trend worth watching, no doubt, but we can comfortably say that strategic defaults are less than 30% of all defaults, and the pipeline of borrowers [delinquent more than 90 days] has even lesser strategic delinquencies.”
But there is still the possibility of the trend heading upward. The latest offer from the 50 state attorneys general in the foreclosure investigation includes provisions that allow for some borrowers to receive principal reduction. In March, at least four of the AGs sent a letter to the others, warning that such requirements may only attract more borrowers into strategic default.
Currently, 42% of underwater borrowers remain current on their mortgage, according to the JPMorgan Chase analysts. And they also warned of the risk these borrowers pose.
“Of course, the moral hazard of potential strategic defaults in the future is still present. Even though these borrowers have not been defaulting in large numbers, the event risk remains that they could,” analysts said.
by Jim the Realtor | May 9, 2011 | Double Dip, Foreclosure Count, Market Conditions, REOs Coming to Market, Shadow Inventory, Strategic Defaults, Thinking of Buying? |
It’s all over the news – the housing double dip is here.
They say that the DD is caused by an overload of foreclosures dragging down prices – but they are talking about the overall national market.
Are the recent trustee sales building a backlog of REOs around San Diego?
It looks like more of the same around here – just when the servicers get some momentum, they turn off the spigot. There have only been 14 successful trustee sales in NSDCC over the last two weeks, so we’re back to the 1+ foreclosure per day.
The threat of future foreclosures is always lingering – could the worst be yet to come? With the banks and servicers controlling the flow, there doesn’t seem to be much reason to expect a flood coming anytime soon – or ever.
How many REOs are floating around in the shadows?
Here are the San Diego County properties owned by each lender, the number of SFRs they own in North San Diego County Coastal, and the count of how many of those aren’t listed yet:
| REO Owner |
SD All Prop |
NSDCC SFR |
NSDCC SFR not listed yet |
| Fannie Mae |
1,060 |
4 |
4 |
| Wells Fargo |
377 |
19 |
3 |
| Freddie Mac |
311 |
2 |
0 |
| Bank of NY |
272 |
17 |
5 |
| Bank of America |
235 |
8 |
6 |
| JPMChase |
124 |
12 |
5 |
| Citi |
88 |
5 |
2 |
| Totals |
2,467 |
67 |
25 |
In the depressed areas where REOs are abundant, there’s no surprise to see some can-kicking, but around North County Coastal it’s been quiet. A few of the shadows have just been foreclosed, so you know there is some lag for evictions, repairs, and processing. Others are involved in litigation too, so it doesn’t appear that they are purposely delaying the process much around North SD County Coastal.
The buyers around NSDCC will welcome the 25 well-priced SFR REOs when they hit the open market over the next couple of months – expect bidding wars!
by Jim the Realtor | Apr 27, 2011 | Strategic Defaults, Thinking of Buying? |
We just saw the FICO study a few days ago, here are excerpts from a report by the Federal Reserve Board, in an article written by Keith Jurow at the Business Insider:
Last May, a very significant analysis of strategic defaults was published by the Federal Reserve Board. Entitled “The Depth of Negative Equity and Mortgage Default Decisions,” it was extremely focused in scope. The authors examined 133,000 non-prime first lien purchase mortgages originated in 2006 for single-family properties in the four bubble states where prices collapsed the most — California, Florida, Nevada, and Arizona. All of the mortgages provided 100% financing with no down payment.
By September 2009, an astounding 80% of all these homeowners had defaulted. Half of these defaults occurred less than 18 months from the origination date. During that time, prices had dropped by roughly 20%. By September 2009 when the study’s observation period ended, median prices had fallen by roughly another 20%.
This study really zeroes in on the impact which negative equity has on the decision to walk away from the mortgage. Take a look at this first chart which shows strategic default percentages at different stages of being underwater.
Notice that the percentage of defaults which are strategic rises steadily as negative equity increases. For example, with FICO scores between 660 and 720, roughly 45% of defaults are strategic when the mortgage amount is 50% more than the value of the home. When the loan is 70% more than the house’s value, 60% of the defaults were strategic.
The implications of this FRB report are really grim. Keep in mind that 80% of the 133,000 no-down-payment loans examined had gone into default within three years. Clearly, homeowners with no skin in the game have little incentive to continue paying the loan when the property goes further and further underwater.
While the bulk of the zero-down-payment first liens originated in 2006 have already gone into default, there are millions of 80/20 piggy-back loans originated in 2004-2006 which have not.
We know from reports issued by LoanPerformance that roughly 33% of all the Alt A loans securitized in 2004-2006 were 80/20 no-down-payment deals. Also, more than 20% of all the subprime loans in these mortgage-backed security pools had no down payments.
Here is the most ominous statistic of them all. In my article on the looming home equity line of credit (HELOC) disaster posted here in early September (Home Equity Lines of Credit: The Next Looming Disaster?), I pointed out that there were roughly 13 million HELOCs outstanding. This HELOC madness was concentrated in California where more than 2.3 million were originated in 2005-2006 alone.
How many of these homes with HELOCs are underwater today? Roughly 98% of them, and maybe more. Equifax reported that in July 2009, the average HELOC balance nationwide for homeowners with prime first mortgages was nearly $125,000. Yet the studies which discuss how many homeowners are underwater have examined only first liens. It’s very difficult to get good data about second liens on a property.
So if you’ve read that roughly 25% of all homes with a mortgage are now underwater, forget that number. If you include all second liens, It could easily be 50%. This means that in many of those major metros that have experienced the worst price collapse, more than 50% of all mortgaged properties may be seriously underwater.
JtR Summary: These studies and charts show what we’ve suspected – that negative equity is the main reason why borrowers are doing strategic defaults.
We’ve been monitoring the NOD/NOT lists, but to stay ahead of potential defaults, you need to peruse the tax rolls and determine how many homeowners have negative equity in your target neighborhood. You can’t judge it by date purchased, because they could have refinanced in 2004-2007 – we seen many foreclosed who bought 20-30 years ago.
It needs to be a property-by-property search of neighboring streets around any home you are thinking of purchasing. It sounds like a lot of work, but it needs to be done – and realtors have access to the tax rolls. If there were 1-3 potential strategic-defaults within a block or two, you could probably survive them without a big hit to values. More than that might be pushing it.
by Jim the Realtor | Apr 24, 2011 | Market Conditions, Strategic Defaults, Thinking of Buying? |
From the WaPo:
Some borrowers can’t keep up with their mortgage payments because they’re struggling to make ends meet.
Others choose not to keep up even though they can afford their monthly payments, and a new picture is emerging about who these borrowers are and why they walk away.
A growing body of research shows that these so-called “strategic defaulters” defy the tell-tale characteristics of most people whose loans go bad. They pay their bills on time, rarely exceed their credit-card limits and hardly use retail credit cards, according to a study released Thursday.
And they plan ahead.
They know their credit scores will take a hit after they fall behind on their mortgages, so they tend to open new credit cards in advance of defaulting, according to Thursday’s study, conducted by FICO, the firm that created the nation’s most widely used credit scoring system.
“These are savvy people who organize themselves,” said Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.”
This relatively new type of behavior is the latest sign of just how profoundly the mortgage crisis has reshaped consumer attitudes toward their homes and their finances. It is largely driven by plunging home values, which have left nearly a quarter of the nation’s homeowners underwater, or owing more on their mortgages than their homes are worth.
So some do the math and walk.
A team of researchers estimated that 35 percent of defaults in September may have been strategic, up from 26 percent in March 2009. But they acknowledge in a report published last month that the numbers are tough to tease out because “strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,” according to the report by researchers from the European University Institute, Northwestern University and the University of Chicago.
(more…)
by Jim the Realtor | Apr 20, 2011 | Foreclosures/REOs, Market Conditions, Strategic Defaults |
From Lily at the U-T:
Foreclosures are inching up again, while closely watched defaults shot up 34 percent in March — the largest monthly increase for San Diego County in more than two years.
Analysts at DataQuick Information Systems on Tuesday reported there were 1,837 mortgage defaults in March, up 34 percent from February but down 19 percent from a year ago.
The company’s numbers also show there were 1,047 foreclosures in March, a 17 percent increase from February but an 8 percent decrease from the same time last year.
Some industry leaders predict monthly numbers will continue to rise this year as banks are apparently becoming more expedient with foreclosure processes and people continue to walk away from their homes, even when they’re able to afford the mortgage payments.
March’s monthly increases may indicate that lenders are becoming “more comfortable going forward with notices of defaults,” said Dave McDonald, a branch manager for New American Funding in Bonita and a past president of the California Association of Mortgage Brokers’s San Diego chapter.
Another factor that could lead to more defaults: homeowners who took on five- and seven-year adjustable rate mortgages, or ARMs, during the height of the market. McDonald said those consumers are expecting drastic changes in their loan terms this year and in 2012, which could mean increases in monthly payments. In the past, he’s seen them go as high as $800 more a month for some homeowners.
Since refinancing is an unlikely option, McDonald suspects many will end up defaulting on their loans. “It’s the next wave (of defaulters,)” McDonald said.
Gary Laturno, a San Diego real estate broker whose expertise is in foreclosures, is still in the wait-and-see category with foreclosures and defaults this year.
Still, Laturno concedes the state of the county’s distressed market is volatile. He’s still seeing a number of “strategic defaulters,” homeowners who walk away from their homes because they are so underwater, even when they can afford to make the payments.
“I think we have a long way to go” before the distress is over, said Laturno, also a San Diego attorney.
by Jim the Realtor | Apr 7, 2011 | Psycho-babble, Shadow Inventory, Short Sales, Strategic Defaults, Thinking of Buying? |
From Diana Olick at cnbc.com:
Home prices fell 6.7 percent in February year over year, according to a new report from CoreLogic. That numbers includes distressed sales, that is, sales of foreclosed properties or short sales, where the bank agrees to let the homeowner sell for less than the value of the mortgage. If you take those sales out, however, home prices were basically flat.
“When you remove distressed properties from the equation, we’re seeing a significantly reduced pace of depreciation and greater stability in many markets,” notes CoreLogic’s chief economist Mark Flemming. “Price declines are increasingly isolated to the distressed segment of the market, mostly in the form of REO sales, as the stock of foreclosures is slowly cleared.”
Distressed sales, though, still make up more than a third of all home sales, according to the National Association of Realtors, and that number is likely to rise at least in the near future. The banks have slowed the process of foreclosure, and that has reduced the number of bank owned properties hitting the market lately, but it’s a whole different story with short sales.
“Absolutely we can see on the ground, it’s just happening,” says Robert Cruz, a real estate broker just south of San Francisco who deals primarily in short sales. “The banks are asking us to go out and engage the borrower, find the borrowers who have defaulted or re-defaulted and list the properties before they have to foreclose.”
Short sales used to be a long, tedious process with a very low success rate. “Short sales used to be a waste of time,” Cruz remembers. “Now it’s totally changed.”
Much of that is due to banks streamlining the process and a new government incentive program, but much of it is coming from the banks themselves. Cruz says in the first quarter of this year his firm’s short sale closings were up at least 60 percent, thanks to the banks and servicers being far more aggressive in pursuing them; not only are they pursuing them, but they are paying for them.
While the government’s Home Affordable Foreclosure Alternative Program offers borrowers $3000 in “relocation assistance” after successful short sales, Cruz says some of the banks are paying borrowers up to $25,000. He says the banks know the sellers are more savvy today and know they can live rent free for at least a year before a bank takes possession of the home in foreclosure. $3000 isn’t much incentive to move quickly; $25,000 is.
“It’s a sea change,” adds Cruz.
So why am I telling you all this? Because if short sales continue to increase at this rate, even just this year, that’s going to push the home price numbers down even further. Sure, if you take out the short sales, the numbers will look better, but those big headline numbers generally include short sales, and that will further erode confidence. More short sales will also force organic sellers and home builders to try to compete with lower prices. Short sales may be better for the banks and better for borrowers’ credit scores, but they will take their toll on the greater market.
by Jim the Realtor | Apr 6, 2011 | Bailout, Strategic Defaults |
From HW:
The California Housing Finance Agency said Wednesday it has expanded the eligibility requirements for several Keep Your Home California programs, allowing more distressed homeowners access to $2 billion in funds allotted for foreclosure prevention initiatives.
With the implementation of the changes, federal mortgage assistance of up to $3,000 per month is available to unemployed homeowners who are in danger of losing their properties. In addition, a program that provides funds for mortgage payments tied to financial hardship will offer up to $15,000 per household to reinstate mortgages in danger of foreclosure. Funds also will be provided for relocation expenses when homeowners determine that they cannot stay in their homes.
The Treasury Department approved the changes for the federally supported program. The initiatives impacted by the changes include the unemployment mortgage assistance program, the mortgage reinstatement assistance program and the transition assistance program. The programs now include mortgages originated after Jan. 1, 2009.
“California homeowners have welcomed the assistance provided by Keep Your Home California,” said Steven Spears, executive director of CalHFA. “In the two short months since the launch of these programs, we have collected information that has helped us identify areas of improvement to make the programs more effective, particularly given the continued high level of unemployment in California.“
Through the Dodd-Frank Act, HUD was cleared to establish the $1 billion Emergency Homeowner Loan Program. Through it, unemployed homeowners can receive a $50,000 interest-free loan to assist with their mortgage payments for up to 24 months.
When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms.
