Dec282012
Accelerated default, what strategic default really is (redux)
People form strong attachments to their homes. Walking away is never a decision they take lightly. We can discuss the pros and cons and come up with our own beliefs and attitudes about it, but the turnover of our housing stock caused by the housing crash will be very painful for those who go through it.
Ruthless default or accelerated default?
I write often about hidden premises buried within the arguments writers make. These distinctions are important, and unless we uncover our fallacious beliefs, we make erroneous judgments and carry false beliefs. I have written many times about strategic default, and in my last post on the subject, I uncovered something new.
There is no accepted definition of strategic default. Lenders have tried to define the issue as any borrower who is capable of making a payment and chooses not to. On the surface that sounds reasonable, but that misses a very important distinction. Some people chose to default because they know they can’t afford the home and they are merely choosing the timing of the inevitable.
When I think about strategic default, I think about people who chose the timing of their default when there is little reasonable hope of having equity and they are facing escalating payments. The only thing strategic about the default is the timing, not whether or not they will lose the home.
True strategic default — a default by a non-distressed homeowner who can afford the payment on a fixed-rate amortizing mortgage — is rare. In cases where the owner is severely underwater and they can rent for far less than their current payment, the incentive certainly exists, but most borrowers in that circumstance with a fixed-rate mortgage will chose to ride out the collapse. The borrowers with most incentive to default are those with toxic financing or temporary loan modifications that know they are facing an increased debt and an increasing payment. When those borrowers default on their own schedule, is their default truly strategic or merely accelerated?
Although attitudes toward strategic default are changing quickly, for now most borrowers still think it’s a bad idea.
Mortgage Is a Priority, Foreclosure Is a Reality
By Carmen Nobel 06/10/10
SILVER SPRING, Md. (TheStreet) — Among the lousy home-foreclosure reports comes encouraging news from the National Foundation for Credit Counseling: Most Americans at least think that foreclosing on their homes is a bad idea.
The NFCC’s Financial Literacy Survey found that only 23% of respondents consider it justifiable to default on a mortgage even if the property value is now lower than the amount of money owed on the mortgage. When asked if they would be more likely to keep their mortgage or their credit cards current, 91% said they would pay their mortgage first.
They should ask that same question to people who are underwater and see if they get a different response. I suspect they would.
Americans continue to prioritize their obligation to service their mortgage loan, and this is indeed good news for homeowners, mortgage lenders and the housing market overall,” NFCC spokeswoman Gail Cunningham said in a statement.
But the reality seems less rosy. The delinquency rate for mortgage loans on one- to four-unit residential properties increased to a seasonally adjusted rate of 10.1% of all outstanding home loans at the end of the first quarter, an increase of 59 basis points from the fourth quarter, according to the Mortgage Bankers Association. The percentage of loans on which foreclosure processes started in the first quarter was 1.23%, up three basis points from the previous quarter. The total percentage of loans in foreclosure at the end of the first quarter was a record 4.63%.
The serious delinquency rate, including both foreclosures and loans more than 90 days past due, was 9.54% at the end of March, a slight decrease from the previous quarter but an increase of 2.3% over the first quarter of 2009.
This is strong evidence that most of the defaults are not strategic but out of necessity. Most people are delinquent because they cannot make the payments not because they choose to default. However, as more in the media question this choice, many more will continue to chose accelerated default.
Know when to walk away
I never thought I would write something like this. I used to believe that it was wrong to just walk away from a home. I am not talking about taking the dog for a walk — I am talking about not paying the mortgage and leaving.
Yes we all signed legal documents that say we have to pay back our mortgages, but some people can’t, and as we all know, many owe more on their homes then they can be sold for. In the past I have represented sellers who sold their homes because they could no longer afford the payments due to a change in their life circumstances, like divorce or the death of a spouse.
When that happens some home owners can’t afford the mortgage on one income. Loan modifications are few and far between and so are short sales. Some home owners have tried everything and every program and there isn’t any help and they can not pay. It seems that the bank would rather take the loss than modify the payment or entertain a short sale, and even if they do say yes to the short sale they may not say yes to an offer so that the sale can take place.
What about all those people who were given loans on terms under which they couldn’t sustain ownership? Loan modifications are just Option ARMs in disguise. The people who can’t afford their homes are going to sell eventually. Banks are hoping that not all of them decide to sell at one time, so they are doing whatever they can to drag out the liquidation process and hopefully get prices up a bit to increase their recovery. When the people chose to default when an unsustainable loan modification is available, I argue that default is accelerated and not strategic.
Walking away may be the only option, but keep in mind that the foreclosure process is slow. It can take a year from the last payment until the bank owns the home. A person could live rent free for six months to a year before they had to leave — giving them some time to pack and to save some money. It may mean the difference between years of struggling to come up with enough money and having little money for anything else like home repairs or food, and being able to make a fresh start and have a life again.
The more banks allow delinquent owners to squat the greater this incentive becomes.
Like I said when I started, I never thought I would write anything like this but now I get it. I have talked to people who have tried everything. They have called the bank many times, they have checked into various programs designed to help distressed home owners and there isn’t any help. There is help for some but not for all. Programs that teach money management are nice, but there are some who simply don’t have enough money to manage.
This may all sound wrong, but there have been so many foreclosures that I don’t think it has the stigma it used to have. It may hammer a credit rating, but again — with so many foreclosures — I suspect the time will come when lenders will need to loan money to people who have gone through a foreclosure. I understand that a home loan is a legally binding contract but if there is no money, there is no money, and banks could modify loans or be more cooperative with short sales.
This is the other compelling truth about strategic default: banks will not make people wait five years before they loan them money again.
With the way things are today I don’t think it is a good idea to try and save a home at any cost. It just doesn’t make sense anymore. On the other hand I have no respect for people who walk away just because they owe more on the home than it is worth when they can afford to make the payments. I made payments on my home for at least three years when the value was less than what we owed and never would have considered walking away because it is my home. We bought it so that we would have a place to live and raise our children.
It is a difficult distinction to make between the truly ruthless default and the merely accelerated one. It is certainly much easier to feel empathy for the accelerated default because these people could never sustain home ownership. There is a dignity in choosing your own time rather than being subject to the whims of bankers and legislators. In contrast, the ruthless defaulters won’t get much sympathy from anyone. What criteria separates the two groups? Who decides? It is possible to embrace one and reject the other?
Do you see a distinction between ruthless (strategic) default and accelerated default?
BofA paying deadbeats $30,000 to move out
Just days after Bank of America officially announced its nationwide program offering up to $30,000 in relocation assistance for short sales, a Massachusetts-based real estate company revealed in a blog that one of its clients was approved to receive $10,000.
“We knew this client was eligible for some relocation assistance but we did not realize it would be this much. It was a welcome surprise for our client who is having a hard time coming up with money to move,” said Anthony Lamacchia, owner and broker of Mcgeough Lamacchia Realty. “I think [BofA] is making many improvements across the board, and I applaud them for it.”
BofA posted the announcement in a statement Tuesday. In order to be eligible for the relocation assistance, BofA stated that the short sale must be initiated by the end of this year and close by September 26, 2013. Also, sellers must do their part and work proactively with the bank to obtain a preapproved sales price before submitting a purchase offer.
The relocation expenses are offered at closing and can range from $2,500 up to $30,000, and the amount offered is determined on a case-by-case basis, with variables such as the value of the home and amount owed factored into the equation.
“This program can help customers make a planned transition from ownership when home retention options have been exhausted or they have made a decision not to keep the home,” said Bob Hora, home transition services executive for BofA.
Mcgeough Lamacchia Realty also posted an example of a cash incentive letter in which BofA outlined tips on how to more successfully complete a short sale.
The tips were to return all requested documents on time, respond quickly to counter offers, complete the release of subordinate liens where applicable, and stay in touch with your real estate agent.
In addition to the cash assistance offer, BofA also recently announced in April that it’s trimming response times for short sales down to 20 days. However, real estate professionals must do their part and submit five documents for a complete short sale package when initiating the process.
The five documents are a purchase contract including Buyer’s Acknowledgment and Disclosure HUD-1; IRS Form 4506-T; Bank of America Short Sale Addendum, which includes the Agent Certification form; and Bank of America Third-Party Authorization Form.
According to a BofA statement, the bank has completed 200,000 short sales in the last two years and another 30,000 in the first quarter of 2012.
I actually knew of agent that two of his clients got this money.
Housing Optimism Bias Sweeps the Financial Reporting Industry
Without a doubt, the U.S. housing market has been the most successful sector of the economy this year, and Wednesday’s Case-Shiller home-price index report — which showed a fifth consecutive month of year-over-year increases in home prices nationwide — was a late Christmas present for homeowners across the country.
The housing-market “bottom” was one of the biggest business stories of 2012. After years of falling home values, the data clearly showed that the bleeding stopped somewhere in the first part of 2012 and that home prices have actually begun to slowly rise since then. In addition, other indicators like housing starts, new home sales and foreclosure statistics all point toward a healing housing sector.
These dynamics have gotten some economists and market analysts excited about the growth prospects for the U.S. economy in 2013. Robert Johnson, director of economic analysis for Morningstar, called housing “the big change factor in 2013″ and believes that “direct housing investment will be a meaningful contributor” to economic growth in 2013. He also sees industries related to housing — like furniture manufacturing and sales — adding to economic growth in 2013 as the housing market begins to pick up.
(MORE: Why Are Real Estate Listing Sites Hot Right Now?)
There’s no doubt that we’re finally seeing the beginnings of what economists call a positive feedback loop when it comes to housing. Rising home prices allow lenders to be more generous with home financing, which allows even more prospective home buyers to access the market, further driving up home prices. And higher home values give consumers and builders more confidence to go out and spend money or make investments, which also stimulates the real estate market and broader economy.
But with all this enthusiasm for the housing-market recovery, it’s important to take a step back and think about the real driving force behind rising home prices. Jonathan Miller, president and CEO of the real estate appraisal and consulting firm Miller Samuel Inc., astutely asks the question of how home prices can rise in an environment in which unemployment remains high, there is little growth in take-home pay, taxes seem poised to rise and lending standards continue to be tight.
One of the answers to this riddle, according to Miller, is the Federal Reserve. Record low mortgage rates, primarily (though not exclusively) due to the Fed’s decision to buy up mortgage-backed securities, have done much to boost home prices. Last month I wrote about an analysis done by Tim Iacono of Iacono Research that illustrated just how significant Fed stimulus efforts can be when it comes to home prices. He showed that today’s superlow rates can enable a home buyer to purchase a house that is 50% more expensive than she would have been able to afford under the average mortgage rates over the past 20 years.
Homeowners faking filings to delay foreclosure
Nick Taylor 27-Dec-2012
Homeowners in California are buying fake documents to delay foreclosures on their properties, a local paper reports.
Prosecutors in Stanislaus County, California, have cottoned on to the practice and begun cases against four homeowners. The four are accused of filing phony court documents – claiming the debt has been repaid or changing a trustee – in an attempt to stall foreclosure proceedings.
“It comes to a point where enough is enough. How many breaks can we give these people?” Jeff Mangar, a prosecutor with the district attorney’s fraud unit, told The Modesto Bee. Staff handling filings are now aware of the practice and tip off investigators.
The counterfeit court filings are available online – for a fee – from websites claiming they can tie up banks in administrative proceedings for years. A website reviewed by the Bee claims none of its 2,600 customers have made a mortgage payment in the past two years.
milkin’ it
Number of the Week: Without Unemployment Extension, Millions to Lose Benefits
By Ben Casselman
2.1 million: The number of Americans who will lose their jobless benefits on January 1 if Congress doesn’t extend emergency unemployment programs.
Most of the focus during the drawn-out (and apparently now stalled) negotiations over the “fiscal cliff” has been on taxes — who should pay more, who should be spared and how much additional revenue the government should raise. Less discussed has been the imminent expiration of nearly all federal emergency unemployment programs, which now provide benefits to 2.1 million job seekers.
Congress created the programs starting in 2008 as a temporary supplement to regular state-administered unemployment insurance, which in most states provides 26 weeks of payments. At their peak, federal programs provided up to 99 weeks of benefits to 6 million unemployed workers.
Congress has repeatedly extended the emergency benefits amid continued high unemployment, and the White House is pushing to do so again. But even before the cliff negotiations bogged down, the prospects of another extension was uncertain. The recent drop in the unemployment rate to 7.7% may have made the issue appear less pressing — although the jobless rate remains well above where it was when Congress first enacted the programs in 2008.
Indeed, even before the year-and deadline, the federal programs have been shrinking. The Extended Benefits program, the final step in the multi-tiered structure, once provided benefits to more than a million job seekers; after a major cut back earlier this year, it now serves fewer than 45,000. The more widely available Emergency Unemployment Compensation program, known as EUC, has seen its rolls fall to about 2 million from nearly 6 million at its peak. Part of the drop is due to the improving labor market, but the programs have also become less generous: No state now offers more than 73 weeks of benefits, and in some states the clock runs out after less than a year.
Still, that doesn’t mean the programs’ disappearance would be insignificant. Unlike past deadlines, this one is a hard stop — benefits won’t roll off gradually but rather will expire all at once overnight. That has economic implications that go beyond the impact on the recipients themselves. The average EUC beneficiary receives about $284 a week, making the program the equivalent of a $2.4 billion monthly stimulus. Credit Suisse estimates that allowing the program to expire would be enough to shave two tenths of a percentage point off GDP growth next year.
Economic research has shown that unemployment benefits can lead to higher joblessness by discouraging beneficiaries from accepting jobs they might otherwise have taken. Various economists have attempted to quantify the impact of the federal emergency programs on the unemployment rate during the recent recession; their conclusions vary, but in general, most of found the programs boosted the unemployment rate by somewhere between 0.5 and one percentage point at the peak of the crisis. The effect is almost certainly smaller now the benefits of become less generous.
Long-term unemployment, meanwhile, remains high. Some 4.8 million Americans had been out of work for more than six months in November, more than two fifths of all job seekers, and the average unemployed worker has been out of work for over nine months.
“…When those borrowers default on their own schedule, is their default truly strategic or merely accelerated? …” It’s merely accelerated. For a default to be truly strategic, the borrowers must have the full ability to pay the housing costs and pay all of the other typical commitments (other debt payments, savings, etc.).
“…They should ask that same question to people who are underwater and see if they get a different response. I suspect they would…”
It’s hard to explain the frustration of being underwater. I shared all of the typical complaints with other underwater borrowers about the banks inability to do anything right. I just deviate from the typical underwater borrowers because I was never asking for a “bailout” (as I define it
).
I was in a bad position, but my mortgage creditors were in a worse position. I was frustrated over years of trying to get them to simply acknowledge their terrible position in my loans, much less offer to do something mutually beneficial.
Oh well, that chapter is now over, thankfully…
In the long run, you will be happy with your decision not to strategically default. You will be in a position to buy that move-up property sooner this way. Of course, you had to deplete your savings to do it, but you will be able to qualify for a mortgage sooner, and you will have equity again.
“had to deplete your savings to do it.”
Money creation by the Federal Reserve might be doing that for us.