Fannie Mae noted in a recent press release that “Nearly Twice as Many Underwater Borrowers Think It Is Okay to Default Due to Financial Distress.” Has strategic default reached a tipping point in America?
Irvine Home Address … 53 CARVER Irvine, CA 92620
Resale Home Price …… $650,000
It's these changes in latitudes, changes in attitudes
Nothing remains quite the same
With all of our running and all of our cunning
If we couldn't laugh we would all go insane
Jimmy Buffett — Changes in Latitudes, Changes in Attitudes
Attitudes toward strategic default are changing. Last December I flatly stated, Strategic mortgage default will become common and accepted in 2011.
Many of those who chose not to strategically default make this choice because they believe making the payment is a moral obligation — an obligation above and beyond what is written in the contract. Banks are relying on those borrowers motivated by their perceived morality to keep making payments. Unfortunately, there is no longer a moral stigma associated with strategic default (accelerated default is a more accurate term).
Banks need a moral stigma to be associated with loan repayment. If the transaction were viewed by borrowers as a simple business transaction — which it is — then issues of morality are not effective at cajoling debtors into repayment, particularly when default is in the best interest of the debtor. Banks have long relied on borrower morality to get repaid.
Due to the events of the Great Housing Bubble, borrowers no longer feel a moral obligation to repay their mortgage debts. Borrowers view the system as corrupt. Many borrowers believe greedy lenders inflated prices with oversized loans to pad their own profit margins. Those borrowers are correct in their views and beliefs, and based on that view, many borrowers no longer feel compelled by morality to repay their mortgage debt.
Fannie Mae in it's most recent press release confirmed my prediction. Strategic default is rapidly becoming accepted by Americans.
May 11, 2011
Fannie Mae's National Housing Survey Shows Uptick in Consumer Attitudes Since December, But Rising Household Expenses May Be Cause for Concern
Though Perceptions of Investment Safety Have Been Declining, 57 Percent of Americans Believe That Homeownership Has a Lot of Potential as an Investment, Ranking Higher Than Other Investments
Feeling Less Financially Secure, Nearly Twice as Many Underwater Borrowers Think It Is Okay to Default Due to Financial Distress
One of my former co-workers is a deeply moral man. He views life rather simply, and most issues to him are either black or white. I watched him deal with the struggles of our declining incomes as the real estate bust dragged on, yet he remained committed to paying his mortgage on a house in Riverside County that declined about 50% in value. He was paying $3,200 per month for a property he could rent for $1,800.
Late in 2008, the pain became unbearable, and in a sudden change of heart, he moved out of his house to a rental in the same neighborhood and stopped paying his mortgage. In fact, he simply stopped everything. He left the house, stopped communicating with the bank, and moved on with his life. His was a purchase-money, non-recourse loan, so there wasn't much the bank could do.
I never questioned him about his decision. It was none of my business. But knowing the kind of man he is, it must have pained him deeply. I know he was concerned about the standard of behavior he was setting for his children, and he was worried his family and his community would lose respect for him.
As it turned out, he was one of the last on his street to strategically default. All his neighbors he was worrying about had already bailed on their homes. He was the last holdout who fought acceptance of strategic default as an option. It cost him $20,000 more than it would have if he had made his move a year earlier when the situation was already hopeless.
WASHINGTON, DC — Fannie Mae's latest national housing survey finds that Americans expressed more cautious optimism during the first quarter of 2011 than in the fourth quarter of 2010, but they continue to lack confidence in the overall strength of the housing market and economic recovery. The First-Quarter 2011 Fannie Mae National Housing Survey polled homeowners and renters between January 2011 and March 2011. Findings were compared to similar surveys conducted throughout 2010 and December 2003.
Survey results show that Americans' newfound optimism about home prices, the economy, and personal finances is balanced by concerns about rising household expenses, which may require Americans to remain cautions about the recovery. Despite consumer caution, 57 percent of Americans still believe that buying a home has a lot of potential as an investment – ranking higher than other investments, such as buying stocks and putting money into and IRA or 401(k) plan.
Since March of 2009, real estate has been one of the poorest performing asset classes in the country. The stock market has more than doubled. Ben Bernanke's printing press is causing commodities to rise, and most other asset classes have been going up as well. The real estate kool aid is more powerful than reality.
“Despite moderate signs of improvement in the housing market and the overall economy, consumer attitudes continue to be shaped by ongoing concerns about the recovery and their own financial situations,” said Doug Duncan, Vice President and Chief Economist of Fannie Mae. “Uncertainty regarding the improving labor market, expectations of little home price and interest rate movement, and rising household expenses has left consumers feeling less financially secure and translates into weak mortgage demand. While we have seen indications of improving economic activity in recent months, especially the strengthening of private sector employment, consumers' attitudes improved only marginally, and in some areas not at all, from a year ago, reflecting the continued unevenness and uncertainty of this recovery.”
- Only 33 percent of Americans said they believe the economy is on the right track, up four percentage points from the fourth quarter of 2010, but virtually unchanged from January 2010 (31%).
- Forty-two percent of respondents said they expect their personal finances to improve over the next year (up by 2 percentage points from the fourth quarter of 2010), compared with 44 percent in January 2010.
- Forty percent say that their current monthly household expenses are significantly higher than twelve months ago, up from 34 percent in the previous quarter and 31 percent in January 2010.
Does anyone believe the government statistics on inflation? The cost of everything is going up — except real estate.
- While the number of Americans who perceive homeownership as a safe investment has been declining (from 83% in 2003 to 66% in first quarter of 2011), 57 percent still believe that buying a home has a lot of potential as an investment, more than any other investment tested.
- Nearly twice as many Underwater Borrowers (27%) think it is okay to walk away from a mortgage if they face financial distress than in January 2010.
They don't devote much text to what is really the only important finding in their study. Of course, this particular fact doesn't bode well for their massive underwater loan portfolio, so they probably aren't going to make it a headline like I did.
Consumer attitudes don't change that fast or that often. For twice as many borrowers to accept strategic default as acceptable behavior is an alarming trend for banks.
As is the case with any change in attitude, it takes a few pioneers to take a bold step forward. When the timid see the success of the bold, they emulate them. If their are significant rewards for the behavior — which there are for strategic default — then the behavior spreads rapidly, and all resistance to the idea is washed away.
Strategic default is part of the downward spiral that crushes house prices. The cycle above can only be broken if negative equity does not prompt strategic default. Since the debt relief is so substantial, the benefits quickly outweigh the negatives. Without a compunction against strategic default, the cycle continues unabated until house price graph looks like Las Vegas's.
That is what strategic default does to a housing market. Lenders are rightfully frightened this outcome will repeat in every housing market in America.
The Fannie Mae First-Quarter 2011 National Housing Survey polled homeowners and renters to assess their attitudes toward owning and renting a home, confidence in homeownership as an investment, the current state of their household finances, views on the U.S. housing finance system, and overall confidence in the economy.
The cognitive dissonance revealed in some of these survey results is truly remarkable. Read on.
Other Survey Highlights
Forty-four percent of homeowners believe that the value of their home today is worth 20 percent or more than what they originally paid for it, declining from 46 percent in June 2010 and 51 percent in January 2010.
One in three Americans (30%) expect home prices to strengthen over the next year, up four percentage points from the fourth quarter of 2010, but virtually unchanged from a year ago.
Most people live in a house seven years or less. Since every market in the county is trading below its 2004 price levels, it is highly unlikely that 44% of homeowners have homes worth 20% more than they paid for it.
Most people don't have a clue about what makes house prices go up and down, so perhaps it isn't too surprising that 30% believe house prices will go up. House prices in nearly every market will decline this year.
Fifty-nine percent of Generation Y Americans (ages 18-34) expect their personal financial situation to improve over the next year, compared to 49 percent among Generation X (ages 35-44) and 37 percent among Baby Boomers (ages 45-64).
Fewer African-Americans think the economy is on the right track (44% in the first quarter of 2011 versus 51% in the previous quarter), and they are less optimistic about their personal finances (61% expect their finances to get better over the next year compared to 67% in the fourth quarter of 2010).
Only 13 percent of Pre-Baby Boomers (age 65+) think it will be easier for the next generation to purchase a home than it was for them, compared with 28 percent of Generation Y Americans.
Does the generation that manages to price-out the subsequent generation feel guilty about their actions? If buyers really are priced out forever, how would homeowners feel about that?
Nearly one in four (23%) Mortgage Borrowers say they are underwater, compared with 30 percent in January 2010.
Only 31 percent of Underwater Borrowers think they have sufficient savings (compared to 42% in June 2010, and 43% of all Mortgage Borrowers).
Forty-six percent of Underwater Borrowers say they are stressed about their ability to make payments on their debt (versus 35% in June 2010, and 33% of all Mortgage Borrowers).
For more detailed findings from the survey, click here.
If nearly half of borrowers are feeling mortgage distress, strategic default will continue to grow in popularity.
Back on the market
Some properties get caught up in the mortgage morass and take years to emerge in the hands of a family who will make it their own. Today's featured property is one such problem child.
- This property was purchased for $800,000 on 9/14/2004. The owners used a $640,000 first mortgage and a $160,000 down payment.
- On 11/18/2005 they refinanced with a $714,750 first mortgage and a $142,950 stand-alone second.
- The total property debt is $857,700 plus accumulated missed payments.
- Total mortgage equity withdrawal is $57,700 plus four years of free rent worth approximately $120,000.
Four full years of squatting with no end in sight
There is a reason we have a foreclosure process: when people stop paying, we need to get them out of the property and recycle it to someone who will pay for it. Now, after over four years, she is still there.
Recording Date: 10/15/2009
Document Type: Notice of Sale
Recording Date: 07/09/2009
Document Type: Notice of Default
Document #: 2009000364972
Recording Date: 11/12/2008
Document Type: Notice of Rescission
Document #: 2008000530065
Recording Date: 01/04/2008
Document Type: Notice of Sale
Document #: 2008000006033
Recording Date: 10/01/2007
Document Type: Notice of Rescission
Document #: 2007000592079
Recording Date: 09/27/2007
Document Type: Notice of Default
Document #: 2007000586776
Recording Date: 05/23/2007
Document Type: Notice of Default
Document #: 2007000334839
This house has been in default as long as I have been writing for the IHB. It looks as if they have received two loan modifications, and they still can't make the payments. Obviously, the lender was in no hurry to take this one back. The owners are now working on four years without a consistent mortgage payment, so they are also happy with the status quo.
With owners getting upwards of four years of free housing, strategic default is quite appealing, particularly if the alternative is to stress over payments the borrower cannot afford.
Irvine House Address … 53 CARVER Irvine, CA 92620
Resale House Price …… $650,000
House Purchase Price … $105,000
House Purchase Date …. 7/24/1998
Net Gain (Loss) ………. $506,000
Percent Change ………. 481.9%
Annual Appreciation … 14.3%
Cost of House Ownership
$650,000 ………. Asking Price
$130,000 ………. 20% Down Conventional
4.59% …………… Mortgage Interest Rate
$520,000 ………. 30-Year Mortgage
$114,113 ………. Income Requirement
$2,663 ………. Monthly Mortgage Payment
$563 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$135 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$0 ………. Homeowners Association Fees
$3,361 ………. Monthly Cash Outlays
-$447 ………. Tax Savings (% of Interest and Property Tax)
-$674 ………. Equity Hidden in Payment (Amortization)
$223 ………. Lost Income to Down Payment (net of taxes)
$182 ………. Maintenance and Replacement Reserves
$2,647 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,500 ………. Furnishing and Move In @1%
$6,500 ………. Closing Costs @1%
$5,200 ………… Interest Points @1% of Loan
$130,000 ………. Down Payment
$148,200 ………. Total Cash Costs
$40,500 ………… Emergency Cash Reserves
$188,700 ………. Total Savings Needed
Sq. Ft.: 2770
Property Type: Residential, Single Family
Style: Two Level, Modern
Year Built: 1979
On Redfin: 4 days
Irvine home with a little work. Paint, carpet and misc repairs. .. .will go a long way with some TLC.