Strategic Defaults Don’t Really Exist… Who would have thought that? Oh, that’s right… ME.
Hey, it’s about time! Finally someone who might be listened to has realized that there’s actually NOT a group of homeowners in this country that can afford their mortgage payments no problem, but have just decided not to pay them because they’re underwater. You know, the type with plenty of cash on hand, that hasn’t lost a job or had a real hardship, but just doesn’t like the fact that his or her house is worth less than they owe and so decides renting would be better.
Blogger Rortybomb has published a piece on Seeking Alpha that should set the record straight… finally. It’s titled: Strategic Default: Watch as Elites Freak Out About a Trend That Isn’t Happening.
I swear, I’m thinking of just re-posting my articles from last year, this year… maybe they’ll make more sense to more people the second time around.
Here’s what Rortybomb has to say:
Strategic default is not a phenomenon in any empirical data, but it is a boogeyman that needs to be ruthlessly pounded on before people realize that bankruptcy is something they pay for in their mortgages, and it is their ultimate safeguard against abusive practices. It’s telling to watch financial elites freak out about the prospect of strategic defaults waves, even as they don’t happen. It shows what really worries them about the state of the economy, about where they may not have control.
Talk about a dog that didn’t bark in 2010. The funny part about this rhetorical crackdown is that there’s been no wave of strategic default people can point to. Homeowners really value their promises and are doing anything they can to try and do right by them, and the industry is using that leverage over them anyway they can.
You’ll sometimes hear the number that a third of defaults are strategic. That number comes a survey conducted by Luigi Guiso, Paola Sapienza and Luigi Zingales. They asked random people if they’d strategically default if their home was X% underwater, took their answers, and projected them onto the actual defaults and how underwater they were. There was no actual look at household budgets in creating this number. I’m a fan of Zingales’ writings, but this is simply not useful for the debate. There’s nothing here.
REALLY? WHO WOULD HAVE THUNK IT? BESIDES ME, THAT IS.
I don’t like to do this, but I’ve been trying to point this nonsense out for so many months now, I can’t even keep track. I didn’t need a study to know this, I come up with my conclusions the old fashioned way… by taking the time to actually talk with thousands of America’s homeowners, hundreds every month since 2008. I know… there are plenty that didn’t believe me at the time, but they come around six months later when some study finally points out what I’ve been saying all along.
Here’s what I wrote some months back in reference to Howie Hubler’s idiotic new business venture and it’s new product that was designed to help stop strategic defaults. Here’s a link, in case you missed it, or weren’t able to read far enough into it to get the point. Howie Hubler’s Loan Value Group… Proof That Wall Street Has No Idea What’s Happening on Main Street…
And here’s an excerpt from that article:
Here’s what Loan Value Group’s Website says about why people default on their mortgages:
Once home equity becomes hopelessly negative, it is no longer in the borrower’s interest to continue paying, even if he or she can afford the payments. Some of these borrowers then default.
Today, 29% of all US mortgages, 15 million homes, have negative equity.
Analysis suggests that over 10 million mortgages are at significant risk of strategic default.
Boy, I’d love to take a look at that “analysis” that “suggests that over 10 million mortgages are at significant risk of strategic default,” mostly because that analysis would also have to simultaneously suggest that far fewer people are at risk of foreclosure because they can’t afford their mortgages, which is what President Obama has said is stopping him from offering more help to stabilizing the housing market.
Now, as many of my readers I’m sure know, I’ve spent the last 18 months talking with literally thousands of homeowners from just about all 50 states, and I’m talking seven days a week, with days so long they’ve too often seen me going to bed as the sun comes up. Suffice it to say, I’ve heard and read just about every take on the foreclosure crisis that could be taken. There’s only one thing I have never heard a homeowner say about their primary residence:
Yes, we can afford the payment no problem, but we decided to bail out anyway just because of our negative equity position. Yep, that was it… we just couldn’t sleep at night knowing that we’re underwater.
In fact, to the contrary… I’ve heard from countless homeowners willing to stay in their homes indefinitely if they could just get some sort of modification that will allow them to do so… regardless of how far underwater they are today.
Yet, in stark contrast to my real life experiences talking with homeowners, there is a fast growing story that tells a tale of homeowners simply walking out of their homes and refusing to pay their mortgages… even though they can afford the payments… ostensibly because they’ve pulled out their trusty HP financial calculators and determined, I suppose using some sort of time value of money-net present value calculation as compared with close substitutes and detailed alternative cost analyses, that their financial interests would be better served strategically defaulting. So ultimately, as the story goes, they are moving out, leaving their otherwise affordable mortgage debt behind them, either because they reside in a state that doesn’t allow for deficiency judgments, or via filing for bankruptcy.
NONSENSE. Not a chance. It’s simply not happening… yet, anyway. It may happen en masse at some point in the future, and perhaps it should be happening in larger number today, but to-date… sorry, no… it’s not true.
I said a lot more along those lines in that article, but if you can’t bring yourself to read the whole thing, at least you get the idea…
Next, here’s an excerpt from my article tearing apart of Donald Bisenius, Executive Vice President in charge of Freddie Mac’s Single Family Credit Guarantee Business, Freddie Mac Has a Message for Strategic Defaulters? Yeah, Well I Have a Message for Freddie Mac.
“…a new and growing concern has emerged: strategic defaults. In other words, borrowers who have the financial means to make monthly mortgage payments, but choose not to do so and, instead, purposely default on their loans.”
Yep, that’s exactly what’s happening in this country today. In fact, the entire foreclosure crisis is nothing more than a bunch of aging boomers deciding that it’s so much hipper to rent.
I’ve personally spoken with several thousand homeowners from all over the country, hundreds that have considered walking away from their mortgages, or are now in the process of doing so, and let me assure you, Don-O, your description bears no resemblance to anything that’s actually happening. And a strategic default isn’t a new, growing investment strategy, DB, it’s still someone losing their home.
Not one of the homeowners that I’ve heard from describes their situation in such happy-Sunday-in-the-suburbs type terms. The homeowners I know are undergoing the worst turmoil of their lives, and having exhausted every other avenue (supposedly) available to them, have come to the inescapable conclusion that walking away is their best… no, their only option. Don-Don makes it sound like they reached the decision over highballs at the 19th hole after wrapping up an afternoon on the links. Did I already call him a jackass? Rats.
And then, in my tearing apart of the Fannie Mae, in my article, Well, Would You Look At That… Homeowners Scared the Heck Out of Fannie Mae, I said the following:
No one is walking away from their home because they weren’t willing to make a good faith effort to find an alternative resolution by working with their servicer. Never happens, or happened. And if it has started to happen, which I still don’t believe, it’s only in response to the treatment of homeowners by their servicers. And true to form, the Wall Street Journal writes a story about homeowners happy about their decision to strategically default, some other news program interviews someone going to Hawaii as a result of not having to pay a mortgage payment, and you… you don’t bother to find out what’s really going on… you start with the threats.
I’m quite sure, if I took the time to find them, I could point to a dozen or more article I’ve written that said the same thing, but why bother?
Here’s my real point… up until now there hasn’t been any serious number of so-called “strategic defaulters,” but there will be soon if we don’t do something to stop the foreclosure crisis. In the words of James Earl Jones in the movie, “Field of Dreams”…
They will come, Ray, they will most definitely come.
I’m not guessing, folks, I’m telling you as sure as I’m typing this that there are feelings among homeowners of anger and frustration that are fast becoming utter hopelessness and when that takes hold, strategic default won’t just be the boogey-man, it’ll be very real and very much unstoppable.
It’s funny to me… in a very sad sort of way that last year when I was writing about HAMP not working and loans not getting modified, almost everyone else in the media was saying the opposite. Then the numbers finally came out towards the end of 2009, and all of a sudden the press started saying, “Gee, maybe HAMP isn’t working.”
The problem is that now HAMP and loan modifications are working better than they ever have before, and now the press is convinced that it’s next to impossible to get your loan modified. In point of fact, I can’t remember the last time I saw someone with a REST Report showing they’re qualified for a loan modification, lose a home. But I see what’s happening… people read what the press is saying and are hesitant to even try to get their loan modified. Great… well, isn’t that just friggin’ great.
I don’t know what else I can do… except to say… don’t listen to the press about loan modifications, or anything related to loan modifications. By the time they figure out what’s really going on, it’ll be over or the reverse will be true.
Stay tuned… I’m going to turn things up a notch with an article on The State of Loan Modifications and the REST Report… later this week. Don’t miss it.
Mandelman out.