Strategic Defaults…Who Is Doing Them, How Many Are Happening…How Bad Will It Get?


Back in 07 when this phenomena was one of those topics we would receive criticism for reporting on. The critics suggested that by reporting the topic we were somehow endorsing agents to counsel their clients to walk-away from their mortgage obligations.

Of course, nothing could be further from the truth…if anything we coached agents how-to help homeowners keep their homes.

Now, several years into the never ending real estate bubble deflation death spiral strategic defaults have gone…as the kids say…viral. When we were growing up the understanding was that the last thing you don’t pay is your mortgage. In other words, always pay your mortgage. Now, oh my…how times have changed.
Of course, the new HAFA Guidelines actually seem to give incentives to defaulting homeowners to do short sales or deeds in lieu. At this point, we applaud the Obama Administrations continued focus on slowing the rate of foreclosure. Read about the new 2010 Treasury Department Short Sale Guidelines NOW. The market will shift back to the positive once the rate of foreclosures stops increasing.
Afterall, its hard for anyone to have confidence in the housing market when you are constantly hearing about home values sliding and foreclosure rates increasing….

Interesting story from Reuters….

How widespread are strategic defaults? Laurie Goodman and her team at Amherst Mortgage Insight yesterday released a report that shows they are indeed on the rise and for reasons we might suspect: negative equity and a more borrower-friendly environment.

The second reason should be kept in mind as we consider President Obama’s soon-to-be-announced plan to encourage principal reduction. If the plan is structured so that it gives incentives to default in order to secure principal forgiveness, well, expect defaults to spike.
Strategic default isn’t necessarily synonymous with mailing your keys to the bank and walking away. It may simply mean a borrower choosing to stop payments to the bank when economic incentives would have him do so. Amherst has come up with a novel metric to measure strategic default — the “default transition rate.” DTR looks at the percentage of borrowers who’ve never been more than one payment behind on their mortgage suddenly missing two payments in a row.
Lo and behold, negative equity leads more folks to strategically default, regardless of their credit score and whether they took out a liar loan:

Aparently, borrowers are intentionally defaulting to take advantage of the [HAMP] modification program. Or at least to take advantage of extra time living in the house rent free, courtesy of the modification program.

Amherst concludes:
Borrowers respond to their economic incentives. This has always been the case, be it for refinancing or for defaulting on mortgages that are deeply underwater. Over the past year, however, property values have been largely steady, but the environment has become much more kind to borrowers. There have been foreclosure moratoriums, the emergence of the HAMP modification effort, and the attendant increases of time spent in the delinquency/foreclosure pipeline, as well as a stretching out of the liquidation process in judicial states. As a result, borrowers can stay in their home rent free for a much longer period than was previously the case. However, few of these benefits apply to investor properties. Thus, when we look at the difference pre- and post-HAMP in the behavior of owner-occupied borrowers versus that of non-owner occupants—we find a dramatic difference in performance. Owner-occupied borrowers behave far worse than their non-owner occupied counterparts.