Strategic Mortgage Defaults

[Tom Joad]

The Art of Strategic Mortgage Defaults: The Coming Wave of Foreclosures in California. 588,000 People Nationwide Stop Paying Their Mortgage Even Though they had Funds to Pay.

The Art of Strategic Mortgage Defaults: The Coming Wave of Foreclosures in California. 588,000 People Nationwide Stop Paying Their Mortgage Even Though they had Funds to Pay.

Throughout the current housing crisis, most of the negative economic data has been clumped into one large group. That is, housing has been a nationwide problem and job losses have impacted virtually every state. Yet there is a coming crisis that has its targets on very specific states. In fact, many states will not even feel the repercussions of this new economic problem. The issue is that of strategic defaults. Most Americans have not heard of this term but they will know this intimately like they learned about subprime loans or interest only loans.

A strategic default occurs when a homeowner stops paying their mortgage even though they are still financially able to do so. A recent study shows why this problem will impact mega-housing bubble states like California more than other states. You will also find that many people that walkaway from these products have stellar credit scores. So why would someone strategically decide to leave their mortgage? The reasons are many but first let us look at the distribution of late Alt-A loans in the country:

Now why focus on Alt-A loans? Under this category of loans we will find most Interest Only and option ARM products. These are loans most at risk for a strategic default. In many cases for example option ARM loans were given to people with good credit but simply did not have the income to back up the purchase of a home. In these situations you would see a family with good credit and a household income of $100,000 taking on a $700,000 mortgage in California. With a teaser payment, the family could pull this off. But when the recast of the payment occurs the family will default especially given the crash in housing values in California.

Let us examine a few reasons why and how people strategically default. A recent study may surprise you. This study examined 24 million credit files and gives us a good view of the overall situation:

“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.”

This number is enormous and we can expect this number to rise. Why? Many of the interest only and option ARM products will start hitting recast dates in 2010 to 2012 that will severely impact borrower’s monthly payment. Many of these loans are far below the current loan modification program caps of being underwater at a ratio of 125 percent or higher. In some case, some of these loans have 150 to 200 percent LTV ratios. That is, someone might have a $600,000 mortgage on a home worth $300,000.

“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.”

This is probably one of those shocking statistics. How can someone with a perfect credit history go from on time borrower to a strategic default? The answer is simple. For the average American their housing payment, either rent or mortgage, is the biggest line item on their budget. Increase that payment by 50, 60, or even 70 percent and you have a default waiting to happen. Housing makes up 34 percent of consumer expenditures:

In areas like California however, this category is much bigger. That is why this issue of strategic defaults is more concentrated to states like California and Florida that have the bulk of these Alt-A loans. 588,000 may sound high but it will only get higher in the next few years.

“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.”

It is rather clear how unequal this will impact the U.S. The strategic default seems to be an issue of housing bubble states. And you can put yourself in the shoes of someone who bought a home at the peak. Say you and your spouse bought a home in a bubble market for $500,000. Deep down, both of you felt that housing would never go down. This view was widespread. You saw for nearly 5 years homes appreciate by 10, 15, and 20 percent per year. At the very worst, you would be able to sell your home for $600,000 or $700,000 in a few years when your loan recast. Well your home is now worth $250,000. It may never regain that peak value. Your payment will jump from $1,500 to $3,000. You can rent a similar place for $1,300. What do you do? Many are simply electing to walkaway. In a state like California with 12.2 percent unemployment this decision might be made also by necessity. Sure, they can make the payment but how much of their budget is it eating up?

“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.”

Now this is simply more fuel to believe that those who strategically default will occur unequally in states like California and Florida. These states saw the biggest housing bubbles and also took on most of these exotic mortgages. If you don’t believe this? Just take a look at this article:

$30 billion home loan time bomb set for 2010
“(SF Chronicle) Thousands of Bay Area homes have a ticking time bomb embedded in their mortgage. The homes were purchased with loans known as option ARMs, short for adjustable rate mortgages.

Next year, many option ARM payments will begin to readjust, slamming borrowers with dramatically higher monthly mortgage bills. Analysts say that could unleash the next big wave of foreclosures - and home-loan data show that the risky loans were heavily used in the Bay Area.

From 2004 to 2008, “one in five people who took out a mortgage loan (for both purchases and refinancing) in the San Francisco metropolitan region (San Francisco, Alameda, Contra Costa, Marin and San Mateo counties) got an option ARM,” said Bob Visini, senior director of marketing in San Francisco at First American CoreLogic, a mortgage research firm. “That’s more than twice the national average.

“People think option ARMs (will be) a national crisis,” he said. “That’s not really true. It’s just in higher-cost areas like California where you see their prevalence.”

And here is an example of an area that depended on decent credit scores to dish out toxic mortgages like option ARMs. Now you might be asking why are so many loans gathered in certain areas? Well these areas had a collective bubble psychology where people had very little qualms taking out $500,000 or $600,000 mortgages:

“First American shows more than 54,000 option ARMs issued here with a value of about $30.9 billion. Fitch shows more than 47,000 option ARMs here with a value of about $28 billion. Both say their data underestimate the totals.

Why are so many option ARMs clustered here?

“In markets where home prices were going up rapidly, more and more borrowers needed a product like this to afford something,” said Alla Sirotic, senior director at Fitch Ratings. Option ARMs were designed for savvy real estate investors and people whose income fluctuates, such as those paid on commission. Instead, the loans became a tool for regular people to “stretch” to buy homes that were beyond their means.”

I tend to disagree that borrowers “needed” a special mortgage to afford housing. This is like saying people needed cows during tulip mania to buy tulips. These products were merely creations of the housing bubble. They only serve a purpose in a rapid rising housing market. They gave the biggest incentives to mortgage brokers and Wall Street. These loans are a mess. Take a look at an example that highlights all of the above:

“Joey Amacker of Newark, who works as an account manager for a catering company, refinanced his home with an option ARM for $624,000 so he could pull out money to build an addition. The friend who sold him the loan assured him that an option ARM was a safe and affordable product, he said.

Amacker said he initially made only the minimum monthly payment of $1,800, which covered part of his interest and none of the principal. The amount he owed grew to $660,000 by November 2008, according to loan documents…

Between the negative amortization and his missed payment and penalties, Amacker’s total debt has ballooned to $725,000, while the house is probably worth about $500,000, he said.

“I feel so ashamed of how I could have gotten myself in such a bad situation,” he said.

Like Amacker, most option ARM borrowers owe much more than their homes are worth, so they cannot refinance their way out of trouble.”

This is a perfect example of the environment for strategic defaults. The borrower took out a $624,000 mortgage that had a minimum payment of $1,800. The payment reflects a mortgage of $200,000 and not $624,000. However, with negative amortization the loan is now at $725,000 on a home that is probably worth $500,000. The payment will likely be higher than $4,000 once recast hits. Take a wild guess what will happen then?

Strategic defaults will be a major problem in 2010 but only for states in major bubbles. California and Florida need to gear up for this because it will be happening.

[roadkill]

It is a strange peculiarity of US housing loans that most of them are non-recourse: that is to say, the borrower can walk away, the lender takes possession of the property and that's the end of it. In Australia and I assume in the UK, Canada and most other developed nations, the borrower is liable for the full amount borrowed, regardless of how much the foreclosed property sells for.

It's too late for American lenders to do anything about past loans but in hindsight, how stupid do you have to be to lend money without imposing an obligation on the borrower to have to pay it all back?

Duh!

[Tom Joad]

Originally Posted by roadkill

It is a strange peculiarity of US housing loans that most of them are non-recourse: that is to say, the borrower can walk away, the lender takes possession of the property and that's the end of it. In Australia and I assume in the UK, Canada and most other developed nations, the borrower is liable for the full amount borrowed, regardless of how much the foreclosed property sells for.

It's too late for American lenders to do anything about past loans but in hindsight, how stupid do you have to be to lend money without imposing an obligation on the borrower to have to pay it all back?

Duh!

I may be wrong, and if I am someone please correct me, but I am under the assumption that if a bank forecloses on a $300,000 mortgage and is only able to clear $150,000 from the sale of the house then the borrower is liable for the rest.

Of course then there is the question of whether or not the bank wants to run up legal costs suing and getting a worthless judgement against someone who most likely hasn't got a pot to piss in. Just more money down the drain.

Historically mortgages here in the U.S. were considered to be solid gold investments because up until fairly recently lenders did a pretty good job checking out borrowers to determine if they had a good credit history and the means to pay back the loan. This was because it was customary for the lender to hold the mortgage themselves.

A few years ago this went out the window.

Mortgages began to be handled by "brokers" who were only interested in getting their commissions. Lenders also quit holding mortgages themselves and instead started bundling them up and selling them as soon as they could.

Therefore the money being made on mortgages became commissions at the point of origination or sale and the incentive was to maximize volume while not giving a shit if the borrow had a decent credit history or the means to make the payments.

It got to the point where about the only question being asked of mortgage applicants was "how much do you want?".
This had the effect of giving everyone at an auction a wheelbarrow full of monopoly money and as a result the price of houses got 'bid up" to absurd levels. It got to be like that famous Tulip bulb bubble.

Appraisers, realtors, and mortgage brokers all played along because the more volume they did, the more they made in commissions.

[roadkill]

I am under the assumption that if a bank forecloses on a $300,000 mortgage and is only able to clear $150,000 from the sale of the house then the borrower is liable for the rest.

This is apparently true is some cases but in others it is not. In this part of the world a bank might think twice about how much it spends on legal costs to extract a missing $100,000 from a destitute couple that declares bankruptcy with no belongings other than the clothes they stand up in, but in the case of the American strategic defaulters, who are often well off and have good jobs, wouldn't it make sense to skewer a few of them, so as to encourage the rest?

Never mind.

American banks and the legislators who empower their supervisory bodies seem to work with logic from a parallel universe.

[ninjalooter1701]

Originally Posted by roadkill

American banks and the legislators who empower their supervisory bodies seem to work with logic from a parallel universe.

No, they work with donations from the Republicans.

[potter]

Strategic mortgage defaults.

In other words, when immoral little thieves take out loans....

[VanishingPoint]

Originally Posted by Tom Joad

The Art of Strategic Mortgage Defaults: The Coming Wave of Foreclosures in California. 588,000 People Nationwide Stop Paying Their Mortgage Even Though they had Funds to Pay.

They are walking away because the housing was so inflated in the west that now they owe more than the house is worth. They can go out and pay cash for a house now. I agree with them just by the title of this article alone. I walked away from mine and now in a much better neighbor and cheaper too.

[potter]

Originally Posted by VanishingPoint

They are walking away because the housing was so inflated in the west that now they owe more than the house is worth. They can go out and pay cash for a house now. I agree with them just by the title of this article alone. I walked away from mine and now in a much better neighbor and cheaper too.

Ah..I see. So honoring your comittment has nothing to do with signing a note any more?

You could say the same for pretty much anything you buy right? Say you buy a new car. Everyone knows a new car depreciates 10-25% the minute you drive it off the lot, so you drive it for awhile and then let the loan company re-posess it and eat the depreciation?

The bank still gave you X amount of dollars to buy that house and you accepted that X amount of dollars when you signed the note. That X amount of dollars did NOT depreciate in value. Someone has to eat those dollars, likely the taxpayers or other bank patrons.

These people gambled that housing prices would continue to go up and they would reap big buck by buying now. They KNEW housing priced were ridiculous and inflated yet they bought anyway. They lost the bet...so they welch on it.

I find the practice of skipping out on a written obligation simply because it has become distasteful to be entirely without honor and absolutely dishonest. It's really nothing more than stealing.

[VanishingPoint]

Originally Posted by potter

Ah..I see. So honoring your comittment has nothing to do with signing a note any more?

You could say the same for pretty much anything you buy right? Say you buy a new car. Everyone knows a new car depreciates 10-25% the minute you drive it off the lot, so you drive it for awhile and then let the loan company re-posess it and eat the depreciation?

The bank still gave you X amount of dollars to buy that house and you accepted that X amount of dollars when you signed the note. That X amount of dollars did NOT depreciate in value. Someone has to eat those dollars, likely the taxpayers or other bank patrons.

These people gambled that housing prices would continue to go up and they would reap big buck by buying now. They KNEW housing priced were ridiculous and inflated yet they bought anyway. They lost the bet...so they welch on it.

I find the practice of skipping out on a written obligation simply because it has become distasteful to be entirely without honor and absolutely dishonest. It's really nothing more than stealing.

I don't agree with you on this issue. I lost more than the bank did. We are sharing in the loss. I lost all my equity and the many years I paid on the loan, along with high interest, I do not pity them. They can sell my house and get their money but I have nothing to sell and nothing to show for those years of payments.

[potter]

Originally Posted by VanishingPoint

I don't agree with you on this issue. I lost more than the bank did. We are sharing in the loss. I lost all my equity and the many years I paid on the loan, along with high interest, I do not pity them. They can sell my house and get their money but I have nothing to sell and nothing to show for those years of payments.

Did you walk away because you lost your job and could not possibly make the payment, or simply because you were upside down although you could still make the payments?

[VanishingPoint]

Originally Posted by potter

Did you walk away because you lost your job and could not possibly make the payment, or simply because you were upside down although you could still make the payments?

Medical, explosion, burned, hospital, used all savings to make payments. GE finally paid the medical bills but not the year I spent dealing with it. I did not get reimbursed for that. By the time, I could pick up a pen, the mortgage was three months behind along with everything else.

Aluminum vapor burn from faulty electric stove. Still no warnings on stove or pans--- aluminum melts at 900 degrees, it vaporizes at 1500 degrees F. They use it in jet fuel. Never ever cook on an electric stove in an aluminum pan! I am going to re-visit this corporate problem when I am done jumping through hoops. I am almost there. Wal-mart did get sued for a 7 year old burned over 90% of her body and lived but still no warnings.

If I had been a 4 year old, it would have been much worse. I was lucky, children are not. It happens more often then people realize. Cook with iron or stainless steel on electric stove.

Today, people can live with over 85 percent of their body burned but I promise, you would not want too.

Also, I agree with the republicans on the greatest medical care. I have very little scarring. BUT, you lose everything else in the process. Healthcare reform. That is why I post so much on the subject.

REALITY IS WHEN IT HAPPENS TO YOU! I can betcha not one person that post against a public option understands that fact. It is not real to them cuz they have not needed the care.

[potter]

Sounds like you had issues other than just walking away from a mortgage you didn't want to pay on any more.

Jesus...sorry about the burn. I had a similar thing happen to me when I was much younger and just married with a new baby. I was heating a pan of oil on low and the heat regulator on the stove malfuntioned and the coil heated up full red. The oil exploded. While putting it out I ended up with 2nd and 3rd drgree burned all up my arm. My sweater and the cabinets caught fire.

Luckily my health insurance paid for the hospital bill in full (that's when insurance actually worked as it was supposed to), and my renters policy bought new cabinets. I was out of commission for two months but the missus worked so we got by.

I'm not the sueing type so I didn't sue, even though the apartment complex had had sears out previously to repair the heat regulator on the stove. To this day I will not have an electric range.

I still have white scars on my hand but my arm has healed. Those burns hurt like hell and are a son of a bitch. You have my sympathy.

[VanishingPoint]

Originally Posted by potter

Sounds like you had issues other than just walking away from a mortgage you didn't want to pay on any more.

Jesus...sorry about the burn. I had a similar thing happen to me when I was much younger and just married with a new baby. I was heating a pan of oil on low and the heat regulator on the stove malfuntioned and the coil heated up full red. The oil exploded. While putting it out I ended up with 2nd and 3rd drgree burned all up my arm. My sweater and the cabinets caught fire.

Luckily my health insurance paid for the hospital bill in full (that's when insurance actually worked as it was supposed to), and my renters policy bought new cabinets. I was out of commission for two months but the missus worked so we got by.

I'm not the sueing type so I didn't sue, even though the apartment complex had had sears out previously to repair the heat regulator on the stove. To this day I will not have an electric range.

I still have white scars on my hand but my arm has healed. Those burns hurt like hell and are a son of a bitch. You have my sympathy.

I was in between jobs. I had no intention of suing. I was cooking as a volunteer for a leukemia patient. He died in 2008. He was a Korean war vet. He called GE and told them what happened. According to John, they started blaming him and me. He just wanted to order some parts and decided to tell them about it. He told me to ask his homeowners for compensation but since there was no negligence and the event happened in a logical sequence, they said no. But all is good now.

I was wearing a sweater with acrylic fibers, it was a bitch. It melted into my abdomen. I try to stay away from anything polyester and I don't use electric stoves or aluminum pans.

The morphine did not even help at times. It is not the 3rd and 4th degree burns that cause the pain. Cuz they cauterize the nerves, it is the 1st and 2nd that cause the most pain, I had 1st, 2nd, 3rd, and 4th.

Thank you for the concern.

[Tom Joad]

Originally Posted by VanishingPoint

I was in between jobs. I had no intention of suing. I was cooking as a volunteer for a leukemia patient. He died in 2008. He was a Korean war vet. He called GE and told them what happened. According to John, they started blaming him and me. He just wanted to order some parts and decided to tell them about it. He told me to ask his homeowners for compensation but since there was no negligence and the event happened in a logical sequence, they said no. But all is good now.

I was wearing a sweater with acrylic fibers, it was a bitch. It melted into my abdomen. I try to stay away from anything polyester and I don't use electric stoves or aluminum pans.

The morphine did not even help at times. It is not the 3rd and 4th degree burns that cause the pain. Cuz they cauterize the nerves, it is the 1st and 2nd that cause the most pain, I had 1st, 2nd, 3rd, and 4th.

Thank you for the concern.

Wow, that is rough.

When you get in a situation like that you do whatever you have to get through it.

That's all you can do.

[VanishingPoint]

Originally Posted by Tom Joad

Wow, that is rough.

When you get in a situation like that you do whatever you have to get through it.

That's all you can do.

Thanks Tom.

Luckily, we come from a family of Docs and my 11 year old daughter (at the time) was not afraid of drippy bloody things; she helped me tremendously. She thought of all kinds of ways I could get clean. We used a lot of duck tape and plastic.

You know that Silver Sulfadiazine is very very expensive because it has silver in it. I sent what I had left to Iraq for burn victims. I had over $800 worth of that stuff left over. They were so appreciative. I really feel good about that. When I do things for others, it actually does more for me.

[potter]

Originally Posted by VanishingPoint

You know that Silver Sulfadiazine is very very expensive because it has silver in it. I sent what I had left to Iraq for burn victims. I had over $800 worth of that stuff left over. They were so appreciative. I really feel good about that. When I do things for others, it actually does more for me.

That's what I had to use. My weekly doctor visit he would unwrap my hand and arm, clean the stuff of and re-wrap it. The pain had me in tears many times. I can't think of anything as painful as a burn...

[VanishingPoint]

Originally Posted by potter

That's what I had to use. My weekly doctor visit he would unwrap my hand and arm, clean the stuff of and re-wrap it. The pain had me in tears many times. I can't think of anything as painful as a burn...

Honestly, I can't either.

[Tom Joad]

Originally Posted by potter

I had a similar thing happen to me when I was much younger and just married with a new baby. I was heating a pan of oil on low and the heat regulator on the stove malfuntioned and the coil heated up full red. The oil exploded. While putting it out I ended up with 2nd and 3rd drgree burned all up my arm.

I still have white scars on my hand but my arm has healed. Those burns hurt like hell and are a son of a bitch.

My son that is in the Army had something similar to that.

Four tours in Iraq with hardly a scratch but between his third and fourth tour he burned himself badly at home heating up a pot of oil to cook chicken wings.

The oil caught fire and he did exactly the wrong thing and tried to carry it outside.

He tripped and spilled the oil . In the process the hot oil burned his right hand pretty bad along with splashing his leg and face.

It took him a couple of months to recover and his hand is OK now but scared.

The Army paid for everything which I think came to about $20,000.

[VanishingPoint]

Originally Posted by Tom Joad

My son that is in the Army had something similar to that.

Four tours in Iraq with hardly a scratch but between his third and fourth tour he burned himself badly at home heating up a pot of oil to cook chicken wings.

The oil caught fire and he did exactly the wrong thing and tried to carry it outside.

He tripped and spilled the oil . In the process the hot oil burned his right hand pretty bad along with splashing his leg and face.

It took him a couple of months to recover and his hand is OK now but scared.

The Army paid for everything which I think came to about $20,000.

I am sorry about your son.

I am happy my daughter was not with me that day. She went with me on many occasions. I also, worked as an assistant for Quadriplegics Most were vets.

[Nemo]

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