Most people are cautious by nature waiting for others to pioneer new places, new ideas, and new patterns of behavior. People will observe the results of pioneering behavior, and if the pioneers are rewarded and recommend what they did to others, the herd will follow. If the pioneers are handsomely rewarded and strongly recommend a course of action to others, the herd can turn into a stampede.
The rewards of strategic default has bankers worried. With 11 million underwater loan owners, the last thing bankers want is a wave of strategic default as overextended borrowers realize they can eliminate their debt-service payments with little or no penalty. The onerous burden of housing debt may be soothed by rising prices, but the monthly payments remain. Most who strategically default feel a great sense of relief once they make the decision. And with the first wave of pioneers reporting their good fortune to others, many more will likely do the same.
Survey Study Of YouWalkAway.com Clients In Relation To Retirement & Foreclosure
Baby boomers, generally considered those born between 1946 and 1964, face a myriad of issues as the larger-than-average generation ages. The cohort that demanded an increase in the production of consumer goods – homes included – is now hitting retirement age. This means fixed incomes and reduction in living space requirements. While this is to be expected for anyone hitting the retirement milestone, this has been an especially difficult transition for the boomers due to the reduction in value of dream homes purchased at the peak of the market to house their entire families. Facing high mortgage payments, increased maintenance, and a reduction in income, many of the boomers are choosing to walk away. Many others claim to have no choice.
What surprises me is how many seniors took on massive debts just before retirement. They knew their income was going to diminish, yet they took on huge debt-service obligations. The stupidity in that may be partially explained by kool-aid intoxication and wishful thinking, but it is really irresponsible. I don’t feel sorry for those who took this risk and lost, particularly since they are demanding my generation overpay for housing to bail them out.
Compared with their younger counterparts, baby boomers are generally more likely to have depleted their savings, retirement and other accounts prior to making a decision to strategically default, leaving them with little to no safety net keeping them above the poverty line during what should be their golden years. Many of the clients that You Walk Away works with on a daily basis are in their late 50s or 60s and during a time when they should be planning for a retirement of leisure and relaxation, they are instead consumed with debt, continued unemployment, and a looming fixed income.
From the experience of You Walk Away, in stark contrast to younger generations that saw walking away from an underwater home as a strategic business decision, baby boomers are often more concerned with the negative stigma associated with defaulting on a mortgage contract. Rather than seeing the cost versus reward, they depleted their savings accounts because they had never missed a payment and could not fathom breaking a contract like a mortgage. They weren’t raised this way, and the departure from the traditional view of the American Dream often took some time. However, in that time, many of these Baby Boomers inadvertently removed their own safety net of 401ks, retirement funds and savings accounts in order to maintain an underwater property.
In the below graph, we crossed the data with age bracket
I think it’s sad so many will now endure an impoverished retirement because they didn’t wise up sooner and strategically default while they still had savings. They compounded one foolish decision with another.
One story from a client of ours who created her own blog called “Adventures In Default” stands out. They didn’t deplete their savings, however they saved through the process. She writes:
“It will be 2 years in October our foreclosure was final. Our family is all doing very well now, even Mom. We are so thankful we had to ability to help our family when they most needed us. We have proof, ethically, and every other way, no doubts, we made the right decision. We’re so glad we put our money into savings rather than throwing it away to feel better about keeping a contract to MERS. (Don’t know who MERS is? Neither does anyone else.)
Notice how this borrower had to dehumanize the party bearing the loss. In the days of the community banker, these people wouldn’t have defaulted, but now with the anonymous ABS pool investor absorbing the loss, most people don’t care.
Because we walked, we were prepared for a major family emergency without throwing us back into more debt. Now that our son is here, we sometimes wish we had the space we did in the other house, but, we sure don’t miss the expense of it! And, he’ll only be with us until the end of the year at most. So we choose to be thankful for a home we can afford that’s full of a family who has really pulled together for the things that count most in life. No regrets.”
The defaulters have no regrets, but many who are underwater and hanging on do. They cling to fantasies of principal forgiveness that is not forthcoming.
Some came to us before they exhausted their savings and others came after. Left with little to no savings, an underwater home, unemployment, and the looming thoughts of growing old and potential health problems, the encroachment of the golden years is no longer so glistening. It may me wracked with more stress, anxiety, fear and worst of all, hopelessness.
I wrote that rising home values will halt strategic default. My reasoning is based on the perception of rewards for continued payment.
People bought houses during the housing bubble because they believed they would be rewarded with HELOC money or increasing value in their properties. The housing bust squelched most of these dreams, but hope springs eternal, and many are holding on with the belief the market will eventually make them whole again. The belief in this future reward can push a borrower in either direction depending on what’s happening with home prices. As home prices plummeted, so did borrower’s hopes of ever having equity again. Borrowers without hope of equity often strategically default. If it becomes a widespread perception that house prices are on the mend, the psychological impact on loanowners will be profound. Many who still may not have equity in many, many years will at least see the light at the end of the tunnel. Rising home prices give loanowners hope, and this hope will dramatically change the strategic default equation. In 2013, strategic default will become far less common.
Lenders are desperately praying more people perceive rising house prices are a benefit and ignore the advice of the pioneers. How this plays out with the individual decisions of millions of loanowners will determine how much longer this situation takes to resolve. Liquidating several million more properties of strategic defaulters will weigh on prices for many more years.
The hidden evidence of shadow inventory
I define shadow inventory as those properties inhabited by people not paying their mortgages that also have not been served a default notice. This inventory is hidden from the public because until a notice of default is filed, there is no public record of the delinquency. Ever since banks began amend-extend-pretend in late 2008, they have been amassing shadow inventory. We don’t see it until the banks finally serve notice, but we know it’s there because the delinquency reports always show much higher numbers than the default notices. Today’s featured property was in shadow inventory for quite some time. So how can I tell?
The last loan on this property was for $412,300 on 5//11/2006. It was not an Option ARM, so the balance should have been getting smaller as the borrower made payments. Once the borrower defaults, the banks add on lost interest, junk fees, and serving costs and foreclose on the full amount outstanding. After five years of making payments and a relatively swift foreclosure process, the total foreclosed amount should have been near the original loan amount. Instead it was $473,808, a full $62,508 over. There is no way this $62,508 was racked up in the seven months the property was in foreclosure. The only way the bill got this large was that the former owner was allowed to squat for a very long time.
Properties with some equity are the ones the bank is least likely to foreclose on. The bank knows either the seller can get out, or the bank can wait until the fees consume all remaining equity before they act. In this case, the bank did the latter.
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Proprietary OC Housing News home purchase analysis
$449,900 …….. Asking Price
$367,000 ………. Purchase Price
8/7/2003 ………. Purchase Date
$82,900 ………. Gross Gain (Loss)
($29,360) ………… Commissions and Costs at 8%
$53,540 ………. Net Gain (Loss)
22.6% ………. Gross Percent Change
14.6% ………. Net Percent Change
2.2% ………… Annual Appreciation
Cost of Home Ownership
$449,900 …….. Asking Price
$15,747 ………… 3.5% Down FHA Financing
3.54% …………. Mortgage Interest Rate
30 ……………… Number of Years
$434,154 …….. Mortgage
$130,215 ………. Income Requirement
$1,959 ………… Monthly Mortgage Payment
$390 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$112 ………… Homeowners Insurance at 0.3%
$452 ………… Private Mortgage Insurance
$450 ………… Homeowners Association Fees
$3,364 ………. Monthly Cash Outlays
($292) ………. Tax Savings
($678) ………. Equity Hidden in Payment
$18 ………….. Lost Income to Down Payment
$76 ………….. Maintenance and Replacement Reserves
$2,487 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,999 ………… Furnishing and Move In at 1% + $1,500
$5,999 ………… Closing Costs at 1% + $1,500
$4,342 ………… Interest Points
$15,747 ………… Down Payment
$32,086 ………. Total Cash Costs
$38,100 ………. Emergency Cash Reserves
$70,186 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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