Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Housing Market Foreclosure Prevention Tactics Useless

Housing-Market / US Housing Sep 19, 2009 - 03:58 PM GMT

By: Mike_Shedlock

Housing-Market

Best Financial Markets Analysis ArticleAn interesting report in the Los Angeles Times shows that a person with super-prime credit scores is more likely to walk away from an underwater mortgage than a person with a subprime credit rating.


Inquiring minds are reading Homeowners who 'strategically default' on loans a growing problem.
Who is more likely to walk away from a house and a mortgage -- a person with super-prime credit scores or someone with lower scores?

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.

Among researchers' findings are these eye-openers:

  • The number of strategic defaults is far beyond most industry estimates -- 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year's fourth quarter.
  • 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 defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.
  • Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances.
  • People who default strategically and lose their houses appear to understand the consequences of what they're doing.

Those set of facts may at first glance to counterintuitive, if not shocking, but if one explores the psychology of the situation, one finds it is quite logical.

Psychology of the Subprime Strategic Default

The only "asset" many subprime borrowers have is their home. Although that asset has negative value, the homeowner may have nowhere else to go, especially if they have to put up a month's rent plus a 1-2 month security deposit in advance to rent.

Someone unable (or unwilling) to come up with 2-3 month's total rent in advance is stuck. Moreover, even if the homeowner is able and willing, landlords may screen out poor subprime prospects in advance.

Also note the psychological factor about "losing the only thing I ever had".

Finally, even though home may have negative value in a monetary sense, that home has real value in a practical sense, if the alternative is being homeless, unable to rent, with no place to live.

Psychology of the Superprime Strategic Default

In contrast, the concerns of the superprime homeowner are vastly different.

Such a person could easily land a rental, likely has other assets than the home, may have no psychological attachment to the home, etc.

The primary concerns of the superprime person is more likely to be the nuisance factor of moving and a credit score hit that for may be meaningless in a practical sense.

Making Home Affordable Deals

In light of the above, one should quickly conclude that current foreclosure prevention tactics are unlikely to be a rousing success.

Indeed, many subprime borrowers are unlikely to walk-away and superprime homeowners are going to do what they are going to do, depending on how far underwater they are, as opposed to payment amounts or interest rates.

The current HAMP (Making Home Affordable) success rate is 12 percent. However, "success" is defined as getting people into the program. The program is doomed to failure because the effort is concentrated on temporarily reducing payments and lowering interest rates not on reducing principle balances.

For more details and analysis on HAMP, please see Foreclosure Filings Top 300,000 for Sixth Straight Month.

Additional Links

Calculated Risk mentioned the LA Times Strategic Defaults article in Report: Strategic Defaults a "Growing Problem" .

CR comments: "This fits with recent research from Guiso, Sapienza and Zingales: See New Research on Walking Away and here is their paper: Moral and Social Constraints to Strategic Default on Mortgages"

Walking Away

I have talked about walking away dozens of times. Here are a few of the more recent ones:

Friday, June 05, 2009: Walking Away Revisited - Reader Mailbag - Moral Dilemma

Sunday, July 26, 2009: Preemptive Defaults

Wednesday, July 29, 2009: Emails from Housing Hypocrites about Ethics

Thursday, July 30, 2009: Many Chime In On "Housing Hypocrites" Post

Additional Foreclosure Links

Sunday, May 31, 2009: More Prime Foreclosures; More Re-Defaults

Sunday, June 14, 2009: California Foreclosure Moratoriums An Exercise Of Stupidity

Thursday, July 16, 2009: Foreclosure Filings Hit Record 1.5 Million; One in Eight Americans Delinquent; Obama's Mortgage Rescues Create ‘Confusion’

Wednesday, September 16, 2009: "New Rules" Hope to Stave Off Commercial Real Estate Defaults

Inescapable Conclusion

The LA Times Article concludes with:

"The Experian-Wyman study does not try to explore the ethical or legal aspects of mortgage walkaways. But it does suggest that lenders and loan servicers take steps to screen and identify strategic defaulters in advance and possibly avoid offering them loan modifications, since they'll probably just re-default on them anyway."

Judging from the vast preponderance of evidence presented in the above links, one can conclude that offering anyone loan modifications is not likely to do much good except in isolated cases. Indeed, services are getting paid to modify loans at taxpayer expense, only to have the mortgage holder walk anyway (or in the case of some subprime loans, not walk away anyway) .

Still others, out of a job, cannot afford any mortgage payment at all!

Thus, the total benefit of Home Affordable Programs (as they are currently structured) is negative. HAMP should be scrapped. Unfortunately, the most likely thing to happen is Congress will expand the program still further, wasting even more money.

By Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in