by ilene - September 19th, 2009 11:02 pm
Courtesy of Mish
An interesting report in the Los Angeles Times shows that a person with super-prime credit scores is more likely to walk away from an underwater mortgage than a person with a subprime credit rating.
Inquiring minds are reading Homeowners who ‘strategically default’ on loans a growing problem.
Who is more likely to walk away from a house and a mortgage — a person with super-prime credit scores or someone with lower scores?
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.
Among researchers’ findings are these eye-openers:
- 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.
- Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances.
- People who default strategically and lose their houses appear to understand the consequences of what they’re doing.
Those set of facts may at first glance be counterintuitive, if not shocking, but if one explores the psychology of the situation, one finds it is quite logical.
Psychology of the Subprime Strategic Default
The only "asset" many subprime borrowers have is their home. Although that asset has negative value, the homeowner may have nowhere else to go, especially if they have to put up a month’s rent plus a 1-2 month security deposit in
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Tags: foreclosure, Home Affordable Programs, strategic default
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by ilene - September 11th, 2009 12:46 pm
Welcome George!
Courtesy of Washington’s Blog
The foreclosure problem in American is not just subprime mortgages. True, banks have been holding on to their foreclosed properties for months, but now they’re getting ready to release them onto the market, which could depress prices for existing homeowners, further driving them underwater. But that’s not what I’m talking about.
There are huge tidal waves of defaults on option arm, alt-a, and other types of loans coming (see this and this).
But even that is arguably not the main problem.
Perhaps the biggest problem is that the crash in real estate and rising unemployment together form a negative feedback loop. As McClatchy and the Associated Press note, foreclosures rise as jobs and income drop.
As former chief IMF economist Simon Johnson points out, there is a vicious cycle also exists between unemployment and property foreclosures:
Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.
Indeed, the Washington Post notes:
The country’s growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind.
And see this.
Some economists give 5% as the magic number: when unemployment declines to 5%, then unemployment will no longer be such a huge contributor to foreclosures.
But Moody’s forecasts that unemployment will not go back down to 5% until 2014.
Similarly, the the chief economist for the U.S. Chamber of Commerce – Martin Regalia – "thinks that it could be five years before the U.S. economy generates enough jobs to overcome those lost and to employ the new workers entering the labor force", according to McClatchy.
Indeed, unemployment could be a problem for many years to come.
Tags: alt-a, Banks, foreclosure, huge tidal waves of defaults, negative feedback loop, option arm, Residential Foreclosures, Simon Johnson, subprime mortgages, unemployment
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by ilene - August 26th, 2009 4:56 pm
Christopher Fountain agrees with Joe’s (Clusterstock) Case-Shiller Flashing The "Ultimate False Bottom" In Housing.
Christopher is another non-practicing lawyer "and glad of it." He’s been selling real estate in Greenwich, Ct for many years.
Courtesy of Christopher Fountain, For What It’s Worth
I think so and have said so repeatedly but here’s a genius who thinks so too (the mark of genius in a person being the extent to which he agrees with you). The pessimist’s argument is that the only high end houses currently selling are those bought pre-bubble for, say, $1,000,000. Their owners watched the value soar to $2.5 and then drop to $1.5 but they still have equity they can cash out and use to buy a cheap house in a retirement spot. The C/S index would be really whomped, the argument goes, if it accurately reflected the loss of value of all those houses that aren’t selling.
Of course, Case-Shiller reflects actual sales, not present value of houses still unsold and since they aren’t selling, the index is accurate, as far as it goes. But if the homes with no remaining equity ever do begin to move, either through foreclosure or abandonment (not a problem in Greenwich, yet, but I’m hearing reports of it happening in Stamford, in good neighborhoods), watch out.
Photo: Courtesy of Lockhard at Curbed.
Tags: actual sells, Case Shiller, foreclosure, Real Estate
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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