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.
Baby Boomers & Strategic Default
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
25 SEASCAPE Dr Newport Beach, CA 92663
$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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24 Responses to “97% of strategic defaulters would recommend others do the same”
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Want proof that all debt-based (assets-LOL) are egregiously mis-priced?
Here ya go…..
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/09/household-liabilities-wages.png
Reality is, default and devalue is the name of the game.
Next!
The two lines on that chart must converge once again. The entire Greenspan era saw falling interest rates and increasing debt loads. It finally blew up.
Foreclosure sales increased 23.7 percent month-over-month in California
ForeclosureRadar released its Foreclosure Report for August on Monday, revealing that foreclosure starts fell dramatically during the month.
The company’s coverage area includes counties in California, Washington, Arizona, Nevada, and Oregon. In all states except Washington, foreclosure starts either fell drastically or stayed fairly flat month-over-month, with Oregon seeing an 80.6 percent drop in starts. In Washington, starts were up 34.9 percent.
ForeclosureRadar said the monthly decline in starts is even more significant when taken with the fact that August had more business days (23 days) than July (21 days).
While foreclosure sales increased 23.7 percent month-over-month in California, the increased number of business days helped flatten the daily average increase to 2.2 percent over July.
Sales in most other states either dropped or increased marginally, with Nevada posting the largest decrease (18.1 percent). Washington led in sales, reporting a 36.5 percent increase.
Time to foreclose changed little in all states, with Nevada showing the largest increase (up 8.9 percent increase to 512 days) and Arizona posting the only decrease (down 3.7 percent to 131 days). While Washington reported huge leaps in foreclosure starts and sales, the state remained completely flat in time to foreclose at 102 days.
ForeclosureRadar CEO Sean O’Toole said the drop in starts should put to rest any reports about another wave of foreclosure sales in the near future.
“We continue to see reports that there will be a wave of foreclosure sales after the election or at the start of the year,” O’Toole said. “The lack of foreclosure starts this month puts a nail in the coffin of this theory. There will be no wave of foreclosures for at least five months.”
“The good news for investors and first-time buyers is that foreclosure sales have at least remained flat, continuing to provide some opportunities in the meantime,” he continued.
Before this is over, anyone with the slightest desire to refinance, even if only to game the system for a few months, will be given the opportunity. The taxpayers will absorb the losses when these can-kicking measure fail.
Senators Introduce Refi Bill to Expand HARP, C.A.R. Expresses Support
Lawmakers introduced a new bill on Monday with plans to once more revamp the Home Affordable Refinance Program for current borrowers with eligible loans with Fannie Mae and Freddie Mac.
Sens. Barbara Boxer and Robert Menendez, among others, drafted the Responsible Homeowner Refinancing Act to increase lender competition, open up refinance opportunities to all current borrowers with government-backed mortgages, and strike through appraisal costs and upfront fees on home loans.
Menendez said in a statement that passing the bill “will get rid of the red tape that leaves millions of borrowers… trapped in higher interest loans, put money back into the pockets of middle class families and strengthen our economy. I’m asking Republicans to join us in putting families first.”
If the bill passes the House – an unlikely feat, given election-year partisanship and unyielding Republican opposition – lenders will begin to compete more often with other lenders that typically face tough underwriting standards.
Underwater borrowers would also benefit from expanded eligibility. The bill would do away with equity thresholds responsible for encumbering borrowers, giving those most affected by the financial crisis and sweeping losses in equity the opportunity to refinance their home loans.
Borrowers with less than 20 percent equity on their homes would face lower upfront fees, and the bill would get rid of manual appraisal fees for those trapped in underwater neighborhoods.
“This bill is a win-win-win: homeowners will have more money in their pockets, Fannie and Freddie will see fewer foreclosures, and the housing market and economy will be strengthened. That’s why the Menendez-Boxer bill has such broad support from industry and consumer groups,” Boxer added.
C.A.R. President LeFrancis Arnold announced support for the bill.
“We applaud Senators Boxer (D-CA) and Menendez (D-NJ) for reintroducing this bill and recognizing that it benefits all parties involved,” said Arnold. “Responsible homeowners who can refinance will avoid foreclosure and have more money in their pockets. Fannie Mae and Freddie Mac will see fewer foreclosures, and the housing market can continue its recovery.”
Boxer and Menendez are delusional; they simply want to feed the black hole of malinvestment with your money and purchasing power. “Benefits all parties involved, minus taxpayers, savers, creditors, and anyone who earns wages in or buys groceries with US dollars.”
“Benefits all parties involved, minus taxpayers, savers, creditors, and anyone who earns wages in or buys groceries with US dollars.”
Exactly. They make it sound like it’s one big free lunch. It’s a taxpayer giveaway to a group of the country’s least deserving.
Fed policy clash may undermine recovery efforts
As the Federal Reserve prepares to take what is expected to be new action to stimulate the economy this week, divisions at the central bank may be undermining its efforts to speed up economic growth and lower unemployment.
After the Fed concludes its policymaking meeting Thursday, the central bank is all but certain to extend its plan to keep interest rates low, moving the possible cutoff to 2015 from 2014. Many economists also expect the Fed to launch a bond-buying program targeting the mortgage market.
The guidance on interest rates is supposed to encourage businesses and consumers to invest and spend, stimulating the economy, while the bond purchases are designed to further lower interest rates.
But disagreements within the Fed risk muddying the central bank’s message, a problem that many economists say could make its efforts ineffectual and possibly counterproductive.
The economists note that the Fed plans to keep interest rates low for an extended period only because it believes the economy will be weak until then. This approach not only may make consumers and businesses fear a long period of economic malaise, but also suggests that the Fed will start to raise rates if the economy shows signs of recovery.
“You are changing expectations in a way that makes people even more reluctant about how they’re going to spend,” said Michael Woodford of Columbia University, who recently wrote a major paper on the subject. “That’s a large part of the problem with the economy — a lot of people are saying, ‘We should wait and see.’ ”
“After the Fed concludes its policymaking meeting Thursday, the central bank is all but certain to extend its plan to keep interest rates low, moving the possible cutoff to 2015 from 2014. Many economists also expect the Fed to launch a bond-buying program targeting the mortgage market. ”
Who could have seen this coming? We still may see 2.X% 30 year rates. This will drag on for years and years and years.
Self serving, but, it would work-out well for me if I could refi again in a few months extending the term to 30 years from 15, yet keep the rate at 3 (or lower). Then, over the next couple years, rates could rise to 6%-7% taking purchasing power and prices down.
These low rates are a direct response to the rampant deflation caused by the destruction of previous mortgage debt. As long as we still have delaveraging to do, rates will likely remain low.
Would it be fair to state that the true bottom of the housing market will coincide with a significant creep upwards in interest rates or would such an increase be a considered a lagging indicator?
Good question. I suspect it will be a lagging indicator. In an inflationary environment, interest rates are always raised too little too late as a reaction to inflation. When rising interest rates hurt economic growth, the central bank lowers interest rates and inflation picks up again. We went through that song and dance during the 70s, and we will likely see it again in the late 10s.
The only result of these artificially low rates will be further hollowing out of our economy. Savings and underconsumption are the only way to grow an economy. THE. ONLY. WAY. Rising rates are the first step. Rising interest rates do not hurt economic growth (except in the eyes of the short-sighted). Artificially low rates force savers to chase returns with their money; things which they normally would not. Savers are forced to increase their risk propensity. Rising interest rates serve to rebalance capital after a period of overconsumption and undersaving.
Perhaps policy makers will relearn this lesson when we look back at the failed attempts of the federal reserve to jump-start the economy with low rates.
I want to see the question asked of this group, “Do you admit, that your choices and actions were the predominant cause of the need to strategically default? Do you admit that you financed war too much relative to your household income to buy a house? Do you admit that the NINJA option-ARM mortgage you chose was the dumbest financial move you’ve ever made?
What percentage will answer these affirmatively? I’m guessing less than 10%. They all think they’re victims of: a down housing market, an evil broker, an evil banking system, bad luck with income loss, etc. They’ll never admit that their decisions were doomed from the start, and that’s mostly their fault.
It’s human nature not to want to take responsibility for your own decisions and actions. I agree with you that less than 10% would ever admit any fault. Most will also drink the same kool aid next time around because they failed to learn the lesson this time. After all, it requires admitting your own culpability before you can learn anything from the experience.
Most were lying to lever up to ride the gravy train. Predatory borrowers: “I want this property, make this loan happen Mr Loan Guy”. Blame lies in the centrally planned 1% fed funds rate (“Greenspan stimulus” not to be confused with 0% “Bernanke stimulus”). This created the malinvestment environment for soccer mom realtors to schlep stucco boxes to suburban family dude who got approved to borrow by hip hop loan officer at PassItTotheSecondaryMortgageMarket Lending Inc. thanks to bagholder Idaho Teachers Pension Fund chasing returns in stable Mortgage securities with the help of I Drive a Maserati So I Must Know What I’m Talking About Investment Planner Super Hero. They all show up to the 9-5 to make money. Most everyone gets swept up in the false signals of a cheap money boom.
Great comment. You really nailed it.
Don’t forget a lot of loan brokers apparently pushed inappropriate loans especially in Sub-Prime as the brokers managed to make a lot of money in fees off these folks. Not saying all or most strategic defaulters were taken by crooked loan brokers but some definitely were…
http://online.wsj.com/article/SB10000872396390443696604577644700448760254.html?mod=WSJ_World_MIDDLENews#articleTabs%3Darticle
Looks like Wall St will make money coming and going this time:
Colony owns about 3,600 foreclosed homes, including 133 bought in the Atlanta area in one day, and officials hope to increase the firm’s inventory to 10,000 by next spring.
According to investment bank Jefferies & Co., major financial firms led by Colony, Blackstone Group LP, BX +1.36% Och-Ziff Capital Management and Oaktree Capital Group LLC have raised more than $8 billion to buy houses, largely in markets pummeled by the housing crisis.
At first, many investors hoped lenders would sell foreclosed houses in bulk. But most banks prefer to sell one house at a time, figuring that approach will fetch higher prices.
As a result, the foreclosure circuit hasn’t yet produced a giant windfall for buyers like Colony, though executives say early returns are promising. Yields on rents from houses owned by the firm are 7% to 8%, higher than many other types of real estate. Purchase prices have averaged 12% less than Colony expected, which should make it easier to sell the homes or borrow against them and exit with double-digit percentage gains.
The article has some more interesting tid-bits.
Uh…. been hearing about inflation is coming for years. But, inflation is already sky high; it’s just that CPI is designed to hide it. ie.,
oil Jan 2009: $41bbl
oil Sep 2012: $96bbl
Even despite sky high inflation, they’ve not been able to reflate the housing bubble this time due to interest expenditures and the fact that the deflationary undertow is much more powerful than the inflationary influence. Why is that?
private sector–80% of GDP– is deflating
vs
public sector–20% of GDP– is inflating
The next leg down will be brutal.
the oil numbers are somewhat cherrypicked. 08 was brutal for commodities. I agree CPI understates inflation.
Most numbers should be falling. We are in an economic contraction. The fact that numbers are stable or slightly rising tells me we already have high inflation.
The last statistic i heard was the fed has added around 15% of GDP to the money supply in the last few years. Inflation is the expansion of the money supply, rising prices are simply a result. Rising prices take months and years to manifest.
el O cherry picking data points…imagine that.
Irvine, why do you think that the older generation will have to get by on poverty?
Government policy, has for the last decade, been moving in the direction of taking from the younger earners and giving to the older (the older are more consistent voters). They will just reward the guys that lived it up during their middle ages, by having the government and in turn the taxpayer provide for them in their old age.