Strategic Defaults Scaring the Securitizers

This is what scares the hell out of the pretender lenders. The reason? Because it transfers POWER from them to the borrower. They have embarked on numerous “ventures” in PR, rumors and even attempts at criminal investigations to scare off people from dumping their sour investments.

The people who have shared their stories with me basically all say the same thing. They say that they are so far underwater in their homes that it does not make sense for them to stay in an investment where the only likely prospect is a continuing drain on their resources. As for the hit on their credit score, they regard that as a small price to pay in order to relieve themselves of the debt that they probably won’t be able to pay any time in this lifetime.

In all cases, they report that they are able to either rent or buy comparable housing, sometimes with seller financing, reducing their monthly payment substantially and eliminating the huge debt that exceeds the value of their prior home. In states that use nonjudicial sale,  the option of pursuing a deficiency judgment is usually limited or nonexistent. In states that permit the “lender” to pursue a deficiency judgment, the party filing suit against the former borrower must actually prove that they lost money. Thus most, if not all, of the defenses that are present in a foreclosure action would most likely apply in a case where a “lender” sued for the alleged loss (the difference between the auction sale price and the amount due on the mortgage according to whoever files suit).

With millions of people the target of foreclosure, and where many of them had high credit scores but for the foreclosure, some lenders are starting to treat the foreclosure hit as less significant than had been true prior to this foreclosure mess. Therefore the people who are electing a strategic default say a have found an effective vehicle to end the nightmare while at the same time recovering a portion of their loss on the loan product that was sold to them merely through nonpayment. Some people have reported to me that they have been able to defer the auction sale and eviction long enough to save enough money to buy another home.

In my opinion there are probably large numbers of current homeowners who are underwater for whom the strategic default (voluntary nonpayment) is a viable option. And it would seem from the article below that even for people who have substantial resources apart from the home the strategic default is considered by them to be viable and even mandatory when they look at their investment in the home as strictly an investment that went bad.

July 8, 2010

Biggest Defaulters on Mortgages Are the Rich


LOS ALTOS, Calif. — No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.

The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

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.

Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.

Not so long ago, said Chris Redden, the paper’s advertising services director, “it was a surprise if we had one foreclosure a month.”

The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago — like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.

In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.

“I’ve never seen the wealthy hit like this before,” Mr. Lowman said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”

The defaulting owners, he said, often remain as long as they can. “They’re in denial,” he said.

Here in Los Altos, where the median home price of $1.5 million makes it one of the most exclusive towns in the country, several houses scheduled for auction were still occupied this week. The people who answered the door were reluctant to explain their circumstances in any detail.

At one house, where the lender was owed $1.3 million, there was a couch out front wrapped in plastic. A woman said she and her husband had lost their jobs and were moving in with relatives. At another house, the family said they were renters. A third family, whose mortgage is $1.6 million, said they would be moving this weekend.

At a vacant house with a pool, where the lender was seeking $1.27 million, a raft and a water gun lay abandoned on the entryway floor.

Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.

Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.

In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.

With second homes, the delinquency rate for both types of owners was rising in concert until the stock market crashed in September 2008. That sent the percentage of troubled million-dollar loans spiraling up much faster than the smaller loans.

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”

Willingly, but not necessarily publicly. The rapper Chamillionaire is a plain-talking exception. He recently walked away from a $2 million house he bought in Houston in 2006.

“I just decided to let it go, give it back to the bank,” he told the celebrity gossip TV show “TMZ.” “I just didn’t feel like it was a good investment.”

The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.

“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” Mr. White said.

The CoreLogic data measures serious delinquencies, which means the borrower has missed at least three payments in a row. At that point, lenders traditionally file a notice of default and the house enters the official foreclosure process.

In the current environment, however, notices of default are down for all types of loans as lenders work with owners in various modification programs. Even so, owners in some of the more expensive neighborhoods in and around San Francisco are beginning to head for the exit, according to data compiled by MDA DataQuick.

In Los Altos, Los Altos Hills and the most expensive neighborhood in adjoining Mountain View, defaults in the first five months of this year edged up to 16, from 15 in the same period in 2009 and four in 2008.

The East Bay suburb of Orinda had eight notices of default for million-dollar properties, up from five in the same period last year. On Nob Hill in San Francisco, there were four, up from one. The Marina neighborhood had four, up from two.

The vast majority of owners in these upscale communities are still paying the mortgage, of course. But they appear to be cutting back in other ways. The once-thriving Los Altos downtown is pocked with more than a dozen empty storefronts in a six-block stretch.

But this is still Silicon Valley, where failure can always be considered a prelude to success.

In the middle of a workday, one troubled homeowner here leaned over his laptop at the kitchen table, trying to maneuver his way out from under his debt and figure out the next big thing.

His five-bedroom house, drained of hundreds of thousands of dollars of equity over the last 13 years, is scheduled for auction July 20. Nine months ago, after his latest business (he has had several) failed in what he called “the global meltdown,” the man, a technology entrepreneur, said he quit making his $9,000 monthly payments.

“I’m going to be downsizing,” he said.

The man spoke on the condition of anonymity because, he said, he did not want his current problems to interfere with his coming reinvention. “I’m a businessman,” he explained. “I have to be upbeat.”

Carol Pogash contributed reporting.

10 Responses

  1. I agree with you BSE, i have been saying the same for months. Let’s take our money from the banks and not pay
    any bills. They want caos, let them have.

  2. Look at the MBIA statements and auditor comments. MBIA offers municipal bond insurance, investment management products,securitization of infrastructure finance issues,

    The insurers are charging these assets to losses and therein the assets are abandoned.

    Now PSA? What! It was written for regulatory compliance to satisfy the FDIC and regulators and means little to a closed end fund. Mortgage backs are a high risk venture.

    The trusts are delisted now three years. .what PSA… and banks are restored to the point their doing new junk issuances again. See CITIGROUP ….they all dumped Uncle Sam and TARP…

    Hey, and we are left with the tab! Citigroup $40 billion
    e x c e l l e n t !

    There is nothing there with the PSA if the initial transfer was conducted as alleged under GAAP. Hey Wal-Mart shoppers all sales are final hint hint! The investments held in a tax exempt trust is concerned only for the monthly lump sum, pot of gold, Texas “t” …or dividend it is entitled to receive.

    Get it? So stop ….and listen – icemen back with a new rendition! Mischief makers . . . Listen up! If the loans go sour the trust investors relies solely on the monthly lump sum coming from an FDIC world renowned financial institution that prostituted its name out like Charlie Keating did in AZ with continental. ..Get it. ….today’s special – FDIC giant Bunk of America structured assets tax exempt senior subordinate certificates carved up to meet your capital management and small banks liquidity problems.

    True story-this fool was fired on the spot! I was visiting a small, very small bank and while buying paper one day and watched in horror a terrible accident.

    Let me catch my breath.

    Okay. A new teller recruit took a walk-in “depositor” and gave up a 12 month CD for a fat $1 million. (It was a very small thrift offering the best yield in town.) This fool was fired on the spot!)

    Why? (If you don’t your going to have a tough go at your hearing).

    • Banks have to lay off short term excess capital and deposits – get it! I’ve seen traders (brokers) move a “yard” ($ 1.0 billion) or two from one institution to another in minutes.

    •Fannie, Freddie and Ethyl Mertz offer these short term derivatives with nowhere close the sex- appeal of a sub slime credit crime mortgage backs.

    • Still lost about “goodwill”? Ouch! Okay, “Yaw al looky hear!

    La lesson Deux

    You’re in Vegas or let’s say….Wall Street:
    Take $1 billion and a weighted coupon just a few bps under 9.0%

    Sample $ 1,000,000,000 (pool) x 0.0850 = $85,000,000 ($ 85 million)

    Now take your fruits of labor totaling $ 85,000,000 (income from borrowers after servicing fees and Hampton renovations costs and yacht club memberships). And divide it using short term hi balance demand depsoits from banks around the country and say…..Yielding a few Bps under 0.09% …again less costs

    And what have we here …..$ 11.3 billion, in new bank deposits.

    What does a depositor have to do with mortgage friends?

    You give me a billion in collateral and I’ll give you $11 billion plus or minus after I take my commissions and head out . . . to buy some barges off the coast of Nigeria…hint hint.. Get it! Nigerian barges hint hint.
    (Go check Google…how’s that)

    Sound good? Ahhhh, yeah, if you say so …okay!

    So wow, we can use subprime enzyme slime to leverage our capital base at 10 to 11 times multiples and guess what …We can saddle the homeowners with the banks cost of funds. We can saddle the homeowners with the banks cost of funds. We can saddle the homeowners with the banks cost of funds.

    Did anyone tell Fred and Barney that the multiples based on inverse short-term spreads run the risk of redemption if you cannot roll it over in 30 days to 90 days or 3 months? This is tranche warfare. Or do they know they are playing with a long term (30 year) bomb vs 30 day bullet…

    Look at the yield curve in treasuries and notes and see for yourself the market manipulation. (Make him stop ….oh please…..someone make him stop agghhh!).

    Its Harvard man. Harvard Yale and maybe Stanford, Wharton and Baruch that gave us the financial genius to reengineer the Watson Crick PSA model for mapping our financial DNA.

    We use long term mortgages written to a ghost income on property values trending five years based upon an IRR twice prime and current cost of funds based on comparable maturities. (is he making this up…) no …no …he’s letting go and getting dangerously close to crossing the line here while seeking to reveal a bigger story line.

    Less pressure on the Treasury in a down economy? IRR ? CMBA underwriters? and commercial bond trading guidelines? WTF (where’s the Fed).

    So is this really about a mom and pop SFR recovery totaling $2 million that they’re losing or maybe lost to foreclosure. No wrong subject line. I mean no, yes …Okay LOOK:

    Hows this – You cannot foreclose on a pooled asset sold for securties offered at higher multiples of over 10 times book for collateral and whereby the investment is tax exempt and relys heavily on leveraged issuance bound by dertivies and hedges still covering OPEN posiotons. But ….Okay!

    As for mortgages! Boring There is too little focus on the UCC title issues. Cases should focus upon the title to debt instrument.

    The parties seeking to enforce the note must show that it is the holder of this note original by transfer, with all necessary rounds; it cannot.

    If it had possession of the note before it was lost; as in lost to

    a) The Dog
    b) Trash
    c) A Sale
    d) A Sale

    If it can show that title to the note runs to it, but the original is lost or destroyed or sold , the holder must be prepared to post a bond;

    And here is the gem you’re waiting for. If the parties or entities seeking to enforce the terms and conditions of the note are an agent, it must show its agency status and that it’s principal is the holder of the note (and meets the above requirements).

    Unless it’s lawful alienation by sale; for real property under a trust deed.
    Get it…Trust Deed.

    Play it again Sam….in Court


  3. […] Comment on Strategic Defaults Scaring the Securitizers by BSE Today, July 10, 2010, 6 hours ago | BSE […]

  4. In a deflationary environment, people are going to
    default whether they want to or not because there is
    not enough cash in circulation to pay both the principal
    and the interest.
    With a “debt money” system like we’ve had since 1968, new money comes into being when someone
    takes out a new loan. Old money disappears when
    debts are liquidated by default or bankruptcy. When
    the latter overwhelms the former, it results in deflation.
    This has happened many times in US history. One
    has periods of inflation then the bubble bursts and
    we get deflation.
    FDR tried to stop this cycle by creating a “tripartite”
    currency system consisting of “non interest bearing”
    US Notes and Silver Certificates, spent into circulation
    by the government, to supplement the “interest bearing” privately issued bank notes issued by the
    Federal Reserve Banks. This system worked well
    from 1934 to 1968 when all “government Notes” were
    removed from circulation and the gold reserve requirement was removed from private issue Federal
    Reserve Notes.
    A balanced system of 1/3 goverment Notes and
    2/3 private bank Notes results in the possibility of
    debts actually being paid back. It is a compromise
    between Socialism and Capitalism. It worked in the
    past, we should try it again!

  5. I think any and every homeowner should stop payment for at least one year. Let’s see what this government and banksters will do next. Further, the world may even be better off with out Wall Street. Somewhere there is a lack of integrity and honesty amongst the these good fellows.

    Theses S.O.Bs screwed and fleeced the US tax payer by the removal of regulations.
    These regulations were established to prevent this situation. But yet this government continues the cover up…

    Call H.O.P.E. – They will tell you to cut back on your food budget.
    Apply for H.AM.P. You will find that you are .1% from qualification.
    Call H.U.D. – Consumer Credit Counseling Agency. They will waste your time
    and refer you to web sites that give free legal advice.

    Someone needs to tell these scumbags that several us can make the payment. But refuse because we were fleeced and put into a position of usury. Remember Senators and Representatives from other states made decisions that created this fiasco. But yet they participate in a cover up and blame the consumer. Never trust this congress and government ever again. There is no freedom as long as these bastards are in office.

    Sorry Neil for speaking my peace of mind on your website. But I am mad as hell.

  6. Securitizers brought strategic default on themselves. In so many of the PSA’s it seems there is language that allows for modification and write downs where it would be in the best interest of the investor. To me nothing is being done in the best interest of the investor if it was we would not have all these foreclosures.

    Homeowners even wealthy ones don’t stop paying because they want to, they do it after job loss or income reduction, death of a wage earner, after failed efforts at modification, after they have exhausted all means of payment or simply refuse to wipe out their savings. I wish I had just WALKED AWAY instead I tried to do the right thing and used my savings and 401k to keep paying when income tanked.. (STUPID decision on my part) I held on as long as I could and tried to get help from the lender. I claimed Bankruptcy so that I could keep all the money coming in going to the house that is how important it was to me. It was early 2008 and I did NOT know to look at the Motion for Relief from the pretended lender to make sure they were the true “Party of Interest” neither did my BK attorney . I now know the pretender lender lied to the court but it is to late now. I missed the opportunity to object and force discovery.

    After reading this site and comparing my documents from my closing with my BK-7 Motion for Releif paperwork and the QWR response from new servicer/debt collector I see major issues. My loan has been sold three times it was a table funded with a warehouse loan and then sold immediately. Loan number changed twice in the first few months of the loan and has changed again in late 09. So now I wonder

    What is really owed on this note and to whom?

    What payments have been applied to the orginal note?

    Where did my payments go to ?

    Read and Learn from my mistakes.

    .I was using my homeowner mentality not my business mind. If I just walked away I would not have needed to have every day consumed with trying to learn why this was happenning. The emotional stress this has put on my entire family through is has been life shattering. I had 12 different mortgages over my life time and always had wonderful credit. I knew something was terribly wrong but did not know what with this loan. Now I do and I am grateful to Neil for educating us and allowing us to share our stories so others can save themselves.

    My last payment was made in beginning of 09. It has been 17 months since my last payment not proud of it but doing what I must. I am still in the house because of what I have learned on this web site. Home is valued at 40% less than when I purchased it in 2005, never mind what it was valued at by 2007 when I did a refinance to get out from under an option arm recast. I got behind in my payments a year after after Bk-7 . The bank accepted a lump sum to allow me to catch up.The servicer told me what amount I needed to pay which I gave to them, then I learned they took a portion of the three payments and put it in a suspence fund and sent a NOD and refused any further payments. I qualified for my refi or so I thought. I supplied income tax returns ,assets records and a letter from our CPA showing profit and loss for prior three years when I got my loan. This loan was based on a ten year track record of income .I took an option arm based on the information I was told by broker. If the lender had said I did not qualify that would have been the end of story I would not have refinanced and dealt with the consequesnces back in 2007.Little did I know it would lead to this living HELL!

    Now after what I have learned on this site I wonder if my orginal option arm that was orginiated in 2005 with same broker through BOA ever really got paid off when II refinanced in 2007. Or could I have the chance of many claims against this property becuase loan 1 in 2005 and loan 2 in 2007 were each securitized and could have claims from many investors in the future.

    Talk about a clouded title.!

    What a Mess!

    Now my credit has been ruined but I have had time to start to rebuild my life after BK 7, income is stabilizing although reduced and what makes me so angry is if the pretender lender (not the true owner of my note) denied me access to any kind of workout what so ever!

    I lost money to a modification company I trusted to help once efforts on my own failed with the bank, now I am paying attorney a monthly payment to be ready to fight the furture foreclosure .
    I have paid 280,000 +into this home with down payment ,monhlty payments, modification scam fee and attorney fees on a home that now has a value of under 550,000. I owe over a million on it!

    The good news I have nothing to loose at this point! The real rub is if I had just walked away in early 2008 and treated this like a business venture gone bad I would not have had to claim BK 7, I would still have my 401k, I would have paid my monthly bills and started over in a rental and by now I would be back on my feet. Yes I would have a foreclosure on the records but so what so does millions of other folks…

    Learn from my mistake folks.

    It makes no sence why the pretender lender has not foreclosed yet. The only reason is I am here paying the utilities and keeping the house up and they will probably wait till the value comes up a little before making their move. Now I am educated and MAD as HELL . I would like to be made whole again as Neil says . IIn the meantime I share my story so someone else may find the courage to make an informed decision for their family. I will fight the pretended lender in court and pray for justice and hopefully quiet title. I will accept a workout only from the real party of interst .If the system fails I will leave only when the sherriff comes a knocking and consider my payments to my attorney as rent for a lovely home that I have loved for 5+ years.

    If I could rewind the clock I would not play their game and throw good money after bad I would just WALK AWAY!

  7. THE A MAN,
    You are correct! We need to explain and expose how this became “FUBAR”… then we need to take it VIRAL!!!

    ‘Audemus Jura Nostra Defendere’
    (We Dare Maintain Our Rights)






  9. Making decisions and taking actions that are based on the parties own financial best interests…. Isn’t that what corps and banks do on a daily basis? Isn’t that merely considered good business?

    On the other hand, making decisions and taking actions that are known damage one’s own financial interests AND are in the best interests of another party…

    Draw your own conclusions.

  10. Do you notice the tone of this article when describing borrowers of properties worth more than $1 million? It could just as well have been describing those corporations that make “economically sensible” decisions to walk away from debt (like the Mortgage Bankers Association on its headquarters building). “More ruthless” is about as judgmental as it gets.

    Bankers, analysts, politicians, the press, the GSE’s, (judges?) seem to carefully save their contempt and name-calling for the lower and middle class borrowers who are constantly tarred with labels such as “deadbeats” or the like.

    “They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest” – but I observe that they are much less a target of those tactics as well.

    This sea change of more affluent strategic defaulters has them all confused as to discouraging the behaviour without insulting the borrowers. If more and more affluent strategic defaulters make their way into the courts where they choose to fight “lenders,” it will be interesting to see how the judiciary responds.

Contribute to the discussion!

%d bloggers like this: