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Mortgage defaulters have good credit
A new study suggests many people who are walking away from their mortgages know exactly what they're doing. They're not especially desperate. They're not subprime borrowers. They're just making a business decision.
Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to "strategically default" -- abruptly and intentionally pull the plug and abandon the mortgage -- compared with lower-scoring borrowers.
The study says "strategic defaulting" is far more common than the real estate industry estimates. A couple of other facts:
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.
Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: "Well, I'm $200,000 in the hole on my house, and yes, I'll damage my credit," he said of defaulters. But they see it as the most practical solution under the circumstances.
Can you guess where many of these strategic defaults are occurring?
California and Florida. In California last year, strategic defaults were 68 times higher than in 2005.
The study doesn't go into the moral/ethical questions surrounding the practice of bailing on mortgages, but it does say lenders should try to spot these people and avoid offering them loan mods. They'd default on those, too. While strategic defaulting is a rational, legal practice, I'm sure it's tough for the neighbors to accept.
But would they prefer this? From the Tracy Press in Tracy, California:
A husband and wife are suspected of burning down their $1 million home in Tracy last summer (for the insurance money) -- a blaze that almost killed several firefighters.
Public record paints a picture of a couple so dependent on the housing market that they lost virtually all of their property wealth when the economy tanked. They let several properties lapse into foreclosure as their income as real estate agents and brokers suffered from a dearth of buyers.
Although the study doesn't go into the ethical issues of strategic defaults, we can certainly do it here. You have any problem with it?
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I think having a great credit score will not matter in the future. Too many people have been forced to abandon their homes and mortgages and ruin their credit. A bad score will be more the norm now.
But I don't think people are abandoning their homes and mortgages unless they have no other choice or resources.
Kwame Kenyatta did it while he was a councilman in Detroit. He was up for one of 6 council spots in a recent election (well after walking away from his mortgage) and was the 4th or 5th leading vote getter, which means he'll be re-elected.
<a href="hhttp://www.mlive.com/news/index.ssf/2009/04/detroit_councilman_kwame_ken... Kenyatta</a>
According to the capitalistic system these people did the moral and resposible thing. They made the decision that is in their own best interest. It's just when decisions are in the best interest of the individual someone tries to throw shame around but when decisions are in the best interest of a company or industry then it's to help shareholders, workers, the country in general, etc,etc. Don't fall for this moral responsiblity and shame hogwash. The banks got beat by thier own game. So be it.
That's not exactly a fair statement. Bernie lied and cheated. These people just invoked a portion of the agreement that that banks didn't want. Namely the part of the agreement that says if I don't pay then the bank takes the house. No deception there from what I can see. The banks should really start reading the fine print.
I think it's more fair than you think. The entire sub-prime mortgage collapse was carried out at the tactical level by loan issuers who were able to rollover loans and pass them off to investors. They took their piece and passed of the risk.
The ratings companies acted in their self-interest and by handing over flawed ratings on the loans.
The office of thrift supervision acted in their self-intersest when they went around giving marketing talks to banks to encourage them to restructure in such a way that the would have less oversight on derivatives.
At every step of the way people followed all of the principles of acting in their own economic self-interest.
The statement that you made which was unfair was the one injecting Bernie into the conversation and implying the defaulting home owners were much like him. Bernie falsified documents and committed other crimes in order to work in his self-interest. That is not the same as opting to follow an undesirable portion of a contract, namely giving back the collateral (the house) when failing to pay the bill. Completely different and an unfair comparision in my view.
Now, your points about the rating agencies and others are quite valid. By your logic, if capitalism is working you one's own self-interest and the steps that lead to the crisis were consistent with everyone working legally in their own self-interest, then capitalism is the cause of the crisis? I can't say I disagree but that's just not an opinion I expected on this site.
"The study doesn’t go into the moral/ethical questions surrounding the practice of bailing on mortgages, but it does say lenders should try to spot these people and avoid offering them loan mods. They’d default on those, too."
Right. As if the lenders are somehow smart enough to spot financially sophisticated people with good credit ratings who are likely to default when it is rational to default.
The real take-home message is that the lenders blundered by making it rational to default in the first place. How did the lenders make this mistake?
1. By not requiring 20% down.
2. By not doing really tough appraisals of the properties, instead going along with bubble-inflated appraisals.
I read the article and it seems to be missing some data that would be helpful.
For example, how many of the "strategic defaults" are the result of some external but logical reason such as the loss of a job, divorce, needing to move, etc.
For example a co-worker relayed a story recently about a coulple he knew who did just this. The primary wage earner lost their job, and they had to move to take a new one. They could not sell the house for anwywhere near what they paid for it and owed more on it than they could get from the sale. They moved into rental housing, attempted to sell the house and attempted to renegotiate the terms to match their new, slightly lower income and higher expenses (they had to rent now + pay the mortgage. All attemps to fix the situation were unsuccessful.
So, eventully they just gave up and quit paying the mortgage on the home and told the bank to take it. They had good credit before this happened.
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