Wave of Voluntary Strategic Defaults Coming: 20% Under water

Editorial Comment: Actually the number is far higher. We compute it as around 45% when all is said and done. First of all there is consensus that property values are actually around 15% less than seller’s are asking. Second costs of selling the home makes up the rest, taking another 6-10% off the selling proceeds.

The break point where people go for “jingle mail” sending the keys back even if they are current is when that value is less than 75% of the principal due on the mortgage. In that sense, the 1/5 figure is right.

What has NOT been computed is what will happen if the growing trend toward strategic defaults (jingle mail) becomes a stampede. I think it will do just that — and further the trend will probably spread to other loans, especially those have been securitized like credit cards, auto loans, and student loans where the loan originator never advanced a penny toward the loan and just collected a large fee.

Investors and borrowers need to get together and work out the details, throwing the loss onto the “banksters” (Pecora term from 1930’s). Disinformation is being spread and believed. The creditors and the debtors are being intentionally blocked from knowing their relationship to each other. When they DO know, the ship will turn back over and start floating again — at the cost of those who perpetrated the largest fraud in human history.

There IS a way to work this out but not if the goal is to save the banks that created this mess. We have at least 7,000 other banks, TARP and other bailout money available, and an IT infrastructure that can be used today to provide the full range of services and conveniences that the “too big to fail” banks use to beat down the competition from community banks and credit unions.

Associations of community banks not controlled by large regional banks can play a pivotal role in this. Where the associations are controlled by the big banks like Florida bankers Association, the community bankers need to re-start their own association.


One-Fifth of U.S. Homeowners Owe More Than Properties Are Worth

By Daniel Taub

Feb. 10 (Bloomberg) — More than a fifth of U.S. homeowners owed more than their properties were worth in the fourth quarter as the number of houses and condominiums lost to foreclosure climbed to a record, according to Zillow.com.

In the fourth quarter, 21.4 percent of owners of mortgaged homes were underwater, up from 21 percent in the previous three months and down from 23 percent in the second quarter, the Seattle-based real estate data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in December, the highest rate in Zillow data dating back to 2000.

Underwater homes are more likely lost to foreclosure because their owners have a harder time refinancing or selling when they get behind on loan payments. U.S. home values dropped 5 percent in the fourth quarter from a year earlier, the 12th straight quarter of year-over-year declines, Zillow said.

“While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year,” Zillow Chief Economist Stan Humphries said in a statement. “Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time.”

There were 2.82 million foreclosures in the U.S. last year, according to RealtyTrac Inc., the most since the data provider began compiling figures in 2005. The number may rise to 3 million in 2010, the Irvine, California-based company said last month.

Bank sales of foreclosed properties accounted for a fifth of all U.S. home sales in December, Zillow said. Such transactions made up 68 percent of sales in Merced, California; 64 percent in the Las Vegas area; and 62 percent in Modesto, California, the company said.

Almost 29 percent of homes sold in the U.S. went for less than their sellers originally paid for them, Zillow said.

The closely held company uses data from public records going back to 1996. Its mortgage figures come from information filed with individual counties.

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net.

Last Updated: February 10, 2010 00:01 EST

No Help in Sight, More Homeowners Walk Away

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

See the whole article in New York Times. Extensive discussion of the issue. It’s beginning to look like a parade. There is no question that without principal reduction, the bottom has yet to be reached in home values. Strategic Defaults are on the rise and may well dominate the housing market for years to come.

No Help in Sight, More Homeowners Walk Away

NY Times

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.
“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”


Response to Cat: Why Hold Onto an Upside Down Investment?

Mortgage Meltdown: Cat Writes:


All good but why would I want to keep paying on a house that I owe $450,000 that is only worth $325,000 at best.



THERE ARE ONLY TWO REASONS YOU WOULD WANT TO HOLD ONTO THE HOUSE — MONEY AND STRESS. Using the procedures and substantive claims addressed here it is POSSIBLE to get the mortgage note down to something considerably less than the value of the house.

The violations of TILA and other claims (including fraud) gives you a leg up on a complete refund of all the interest and points you paid, plus the down payment and improvements you made to the house, and a refund of the difference between what the house was really worth in fair market value and what it was stated to be worth.

Put all that together in a settlement (rather than a trial) and you can end up with a mortgage that is perhaps 50% of true fair market value, with your payments down by as much as 75%+ per month. 

Whether you offer an olive branch to the lender/investor of participating in the upside (an honest increase in the fair market value of the home) so that they recover some of their investment when you sell or refinance, is up to you. We would suggest that you offer that inasmuch as it is more likely to lead to settlement.


Mortgage Meltdown: Renting vs Owning

This CNN reporter makes some good points, although contrary to the philosophy expressed in this blog site. 

Our premise has been to stop the clock, freeze foreclosures and evictions and work out a plan that gives the occupant a chance to make payments, maintain the home, and reinstate the defaulted loans so that bank balance sheets and investor balance sheets could be restored. With proper regulation and normal market conditions returning, all the participants would be able to participate and recover in a longer upward cycle that the usual boom, but nonetheless end the day in one piece or nearly so. We are seeking to avoid a flood of another 1.5 million homes driving prices and values down to frightening levels.

The premise of this article is that the stress on homeowners would be reduced if they just went out and rented a house or apartment and this might be correct. Rental values are far below the cost of making a mortgage payment that include principal, interest, insurance and taxes. And as pointed out in a recent post to this blog, “Jingle mail” is another strategy that helps homeowners recover — but it takes nerve to finesse the system and get 6-24 months without payments. Nonetheless, combining the savings from the jingle mail strategy and the notion of getting out of a collapsing market to rent, many people might indeed be far better off than looking for ways to save their house. 

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Many problems with mortgage bailouts

There are calls for the government to help homeowners at risk of foreclosure. But some experts think a mortgage rescue could cause more problems than it solves.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) — Congress appears eager to help more than a million homeowners facing foreclosure, but a proposal aimed at fixing the battered housing market could instead end up as the latest blow to a recovery.

An ambitious plan proposed by Rep. Barney Frank and Sen. Chris Dodd calls for up to $300 billion in loan guarantees from the Federal Housing Administration to refinance loans that homeowners can’t afford as long as the original lender reduces the principal on the loan to 85% of the home’s current market value.

Backers say borrowers would get out from under unworkable debt and original lenders would get back more than they would foreclosing. It would also prevent 1.5 million foreclosures and halt home-price declines since it would keep more houses from flooding an already battered market.

Critics, including some in Congress, say the rescue plan rewards reckless behavior and transfers risk to homeowners and lenders who were responsible during the housing boom.

But some experts think this is the wrong solution for purely financial reasons.

The plan won’t work

Robert Shiller, a Yale economist who has long argued there was a bubble in home prices, thinks the plan will do little to stop the slide in housing prices.

The runup earlier this decade, fed by low interest rates from the Federal Reserve and lax underwriting standards by lenders, created a bubble that hasn’t yet completely deflated.

Shiller notes that prices shot up 85% when adjusted for inflation from 1997 through mid-2006 and have fallen only about 15% since then.

Shiller adds that when compared to measures such as rents and household income, housing prices are still out of equilibrium

“I’m not sure we can achieve continuing high home prices,” he said.

If he’s right, more borrowers may find themselves owing more than their house is worth, which could add to the number of foreclosures and homes on the market.

In addition, the FHA would be left with a large portfolio of loans backed by houses worth less than the mortgage. In other words, instead of banks facing foreclosure risk, the government (and hence taxpayers) would be on the hook for billions of dollars in bad loans.

And the FHA is already strapped. The agency’s estimated losses are already soaring and the FHA has been warning Congress it might no longer be able to count on premiums paid by borrowers to cover its losses.

Housing prices should be falling

Not everyone agrees with Shiller. Some think the Dodd-Frank plan willat least slow the decline in home prices. Problem is, that could ultimately be bad news for the economy too. That’s because some think that, as painful as it may be, the best way to fix the housing crisis is for the free market to run its course.

After all, lower home prices might actually help stimulate demand again.

“What the market is in the process of doing is bringing home prices back to where they should be by any traditional measure,” said Barry Ritholtz, CEO and director of equity research Fusion IQ. “If home prices don’t go down, it means newlyweds can’t go out and find a home they can afford.”

The Bush administration seemed to be worried about just this kind of impact when the Dodd-Frank bill was first proposed.

“We must work to limit the impact of the housing downturn on the real economy without impeding the completion of the necessary housing correction,” said Treasury Secretary Henry Paulson in a speech last month.

And Keith Hembre, chief economist of First American Funds, also is concerned that other efforts by the government to respond to problems in housing, including the Federal Reserve’s recent move to accept mortgage-backed securities and collateral from lenders, will create more problems than they solve.

“Fixing the prices of one asset will distort the price of others,” he said, adding that the Fed’s actions could lead to inflation in other parts of the economy, as the Fed’s efforts to inject money into the troubled credit markets could lead to an even weaker dollar and higher commodity prices, which would feed price pressures down the road.

There should be more renters

William Wheaton, a professor with the Massachusetts Institute of Technology’s Center for Real Estate, says one quiet shift that occurred during the housing boom was that more homes and apartments went from being rental units to being owner-occupied.

Wheaton argues many of the homeowners now facing foreclosure could be better off renting the same home at current market prices, rather than trying to refinance the mortgage.

He adds that if there isn’t a significant increase in the supply of homes for rent, rents will rise, which will just make things more difficult for those who do lose their homes.

For this reason, he thinks the government would be better off giving tax assistance to companies willing to buy foreclosed properties and then rent them to the current occupants.

“That could be just as good if not better for housing market, because it would also keep the foreclosed homes off the market, and limit the damage to house prices while also preventing rents from soaring,” he said.

But Wheaton admits that such a move probably has little political support in Congress because politicians want to be seen as doing what they can to promote and preserve home ownership, even if people better off paying less in rent for a comparable home than they’re now paying to own a home.

“It’s very popular to say you’re in favor of home ownership, even if it doesn’t make any economic sense,” he said. To top of page

© 2007 Cable News Network LP, LLP.
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