Posts Tagged ‘strategic default’

Strategic Default Is Only Ok If You’re Rich

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A recent article in the New York Times discussed how the rich are defaulting on their mortgage loans at an increased rate as compared to the rest of the population.  From the article:

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

In fact, the delinquency rate on investment homes with mortgages of a million dollars is more than double the rate of homes where the mortgage was less. For the million dollar homes, the rate is 23% as opposed to 10% for less expensive properties.

Yet, Fannie Mae and Freddie Mac, the largest lenders of residential mortgage loans under $500,000, are stepping up the rhetoric against strategic defaulters and taking steps to penalize them. 

Since Fannie Mae and Freddie Mac cannot take loans of greater than $729k, the result is quite obvious: to penalize the working and middle class for making the same smart money moves that rich people do and take for granted all the time.

Recently, the Republicans added an amendment to a bill that would forbid strategic defaulters from getting FHA financed loans, ever. Who gets FHA loans? Not the rich…these are solidly middle and working class financial instruments. 

Despite all of the moralizing about “keeping your word…you signed on the dotted line that you would pay…” and “foreclosures damage the community,” the real motivator for lenders here is fending off damage to the bottom line.  Let’s be clear:  if a high percentage of mortgage holders with loans under $500K were to default, this would really damage the financial health of the  banks.  It has nothing to do with morality or a sense of community and everything to do with profit. If these banks gave a fig about community or morality, they never would have created the incredible mortgage casino that brought us to this point.

Strategic Default = A Free Rent. Really??

I am sick and tired of posts like this one. It is yet another moralistic, snide view point from a person without an ounce of common sense.

The Times story features Alex Pemberton and his mom, Wendy Pemberton, who both live in St. Petersberg, Fla., and who both pay an attorney $1,500 who says he does “as much as needs to be done to force the bank to prove its case.”

That $1,500 these homeowners are paying in lawyers fees is considerably less than what they’d pay to keep up with the mortgages. So they pay the lawyer and justify their defaults by saying that this is simply business. And nowadays, homeowners finally seem more apt to approach homeownership in a cold, even ruthless business manner

I have two major problems with the above statements: For one, how does the author know that paying on the mortgage would cost less than the $1,500 that these homeowners are paying the attorney? Moreover,  where in the story does it say they pay the attorney $1,500 per month?

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Strategic Defaults May Force Lenders and Servicers To Modify Loans, Including Principle Reductions

The writing is on the wall. Many people across the United States have decided that it just doesn’t make an ounce of economic sense to continue paying on a mortgage when the underlying asset isn’t worth half of what they owe on paper. A lot of these folks could afford to continue to make payments, but they’re deciding its just not worth it. 

In a May 3rd article on the Freddie Mac site,  Executive Vice President Don Bisenius implores people to continue paying on their mortgage if they can afford to do so. He claims that people walking away from their homes harms communities and further brings down property values.  Mandelman Matters already tears this guy a new one, so I won’t go that route, but I do believe that the banksters might be running a little scared these days.

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People With High FICO Scores More Likely To Default On Mortgage Than Credit Cards

A FICO  report released in February of this year reveals that people with high FICO scores (between 760 and 850) have a higher default rate on mortgages than on credit cards. From May through October 2009 the default rate for this group was .32 percent for mortgages and .12 percent for credit cards. This is an increase as compared to .08 percent for mortgages and .10 percent for credit cards in 2007.

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