December 11, 2009

The Rapid Rise Of "Strategic" Defaults

Wall Street Journal Strategic Default Map

Defined as those who stop paying their mortgages but remain current on all their non-real-estate debts, Experian and Oliver Wyman estimate nearly a third of all defaults in California were "strategic" in 2008 (up from 2 percent in 2004).

As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.
"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.

No word on whether or not any of the bank owned units at Watermark might have fit the strategic default bill (or if others are in the works).

American Dream 2: Default, Then Rent [Wall Street Journal]
Rewarding Forgiving Their Riskiest Borrowers [SocketSite]
Another Bank Owned Watermark Comp To Be: 501 Beale #6C [SocketSite]

First Published: December 11, 2009 11:30 AM

Comments from "Plugged In" Readers

Unsurprising, considering that intentionally skipping payments used to be the only way to make banks negotiate mortgage mods.

Posted by: anonn at December 11, 2009 11:37 AM

Unsurprising, considering that so many homes were purchased during the bubble years as a near no-cost option in anticipation of appreciation. Now that the investment has not panned out and these buyers owe so much more than the place is worth, they stopped paying and have either left or are just waiting to be kicked out. It will take many years to clear out the growing backlog of defaults/foreclosures.

Posted by: anon at December 11, 2009 11:46 AM

Several acquaintances have stopped making payments. They tried for a short sale, but couldn't make it happen with the banks. Their condos are underwater so any down payment they made is gone already.

But they need to move on with their lives. One found a job in another state, another is in the process of getting a divorce. Another is just overwhelmed by the payments and wants out. They've all stopped making their payments and they are not going to make another one no matter what happens.

They aren't going to try for a mod, they need to move and have no equity so there isn't any point in continuing the process. The guy with the new job moved out last week. He didn't remove the appliances as they would cost more to move across the country than they were worth and he didn't have the time to sell them. The others are just living rent free until they get kicked out.

The condo dues are all going unpaid and I assume the foreclosures will wipe them out. The dues will rise for the suckers who didn't leave.

The upstairs neighbor of the guy who moved out last week is literally freezing in his condo without his downstairs neighbor providing any heat. He told me that without the heat supplied by his downstairs neighbor, the wall heaters in his newly built, "luxury condo" literally cannot keep up.

Posted by: tipster at December 11, 2009 12:03 PM

LOL Tipster. Well, I know 100+ people happily living in their San Francisco residences, paying mortgages that they can easily afford.

Posted by: anonn at December 11, 2009 12:06 PM

Maybe strategic. But as this article points out Americans have been over leveraged for the last 10 years and default is pretty much assured for millions of people: http://www.ritholtz.com/blog/2009/12/millions-more-at-risk-of-default-than-most-think/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+%28The+Big+Picture%29

Maybe the owners haven't lost a job to cause the default or there isn't a specific incident that leads to default. . . but as Tipster notes, debt builds up over time, the average American is way over-leveraged, and some people need to face their indebtedness head on and default even if they don't lose a job, etc.

The banks would rather everyone have a 50% total DTI and be slowly bled out over their lives. I don't accept their definition of "strategic default". Someone wanting to exercise their contractual rights and walk away from a bad deal may be strategic---but their overall debt levels are causing this and in a very real sense it's not voluntary.

The strategic defaulters are setting themselves up for future success while the voluntary leech bait is setting themselves up to be slowly bled out in the future.

Posted by: SFHawkguy at December 11, 2009 12:21 PM

@Tipster - What kind of lame-a$$ default debtor is your friend? He didn't sell the appliances or leave the heat at 80 degrees in his apartment?

Clearly, this guy needs more experience on being a default debtor.

Posted by: JayDawg at December 11, 2009 12:28 PM

Ha ha...outstanding! IIRC, these were the people that LMRiM used to call "great American heroes" or something to that effect, no?

Posted by: Legacy Dude at December 11, 2009 12:34 PM

"LOL Tipster."

It's offensive that you find their circumstances funny.

"Well, I know 100+ people happily living in their San Francisco residences, paying mortgages that they can easily afford."

That's what I thought about all three of the defaulters I know. They spent the last 6-12 months hanging on hoping for a rebound, but now that it's clear that no rebound is going to occur, they're starting to give up.

Posted by: tipster at December 11, 2009 12:42 PM

I concur with tipster, i know of a few people here in the east bay w/significant lost downpayments/equity getting ready to walk away as well. i suspect there are a ton of pissed off owners out there.

Posted by: priced_out_with_envy at December 11, 2009 1:02 PM

Strategic breaches of contracts are commonplace when the value of the contract no longer exceeds its obligations. During the boom, many people equated buying real estate to investing. Now, on the downside, many of the same people are lamenting that the houses are being treated as investments by being dumped. Once society started to treat the home you live in as an investment, strategic defaults were the inevitable consequence.

Posted by: D at December 11, 2009 1:29 PM

"LOL Tipster."

"It's offensive that you find their circumstances funny."

I find this comment amusing, though.
You and many others routinely laugh at the financial plight of others.
Just because you know them, why should that make it any different to those who do not know them?

Posted by: REpornaddict at December 11, 2009 1:37 PM

I don't find the circumstances funny. I find them fishy. What I find funny is the notion that you think anybody who reads this site with even a small degree of regularity might take your anecdotes at face value. I also find it odd, and slightly funny, that you slipped a "luxury" condo slam in. Of course, you'd never say which building it is. No. Wouldn't want anybody to snoop around a massive building trying to discover the identity of a friend of Tipster, all in the hopes of finding out who Tipster really is!

Sorry, but that's the persona you've built around yourself at this point. A paranoid spinner of tall tales.

Posted by: anonn at December 11, 2009 1:53 PM

"Sorry, but that's the persona you've built around yourself at this point. A paranoid spinner of tall tales."

whilst you have become a paranoid denier of pretty much everything.

this is all getting really old. lets all try a new tune.

Posted by: bobTrouser at December 11, 2009 2:01 PM

A paranoid denier? That's funny.

Yesterday, on Socketsite:

A chorus of "Ha this one of a kind Presidio house will never rent for 14K. These folks think it's 2006. What are they smoking?"

Me -- Um, yeah, you couldn't be more wrong. That's not a denial. It's an assertion.

Or, "Just wait until 2014. Ooooh boy. Then look out for the ARM reset tsunami!"

Me -- Huh. 2011, 2012, we hardly knew ye.

Or, "No banks are doing loan mods outside of HAMP"

Me -- Um. Wells is. That's what the article atop the page is about.

Or, " A chorus of, Thief! Charlatan! Call the state board and report this contractor's license! They stripped that furnace away."

Me -- Huh. That furnace looks awfully new. I'm pretty sure nobody had a look at the contract here.

And of course, pick a day and you'll find a pretty accurate sales prediction by yours truly amid a chorus of wayward CW doom and destruction guesses.

Seems like it all amounts to assertion, and not so much denial. Just 'cause everybody likes to talk a certain way on here doesn't mean that their words are worth much.

Posted by: anonn at December 11, 2009 2:19 PM

My understanding is that California law allows the homeowner to default on the 1st Mort without penalty outside of their credit rating; however, aren't the homeowners still financially (legally) responsible for the 2nd / HELOC ? Weren't all these 0 % down loans done with a 1st and 2nd/HELOC? Can't they be taken to court by the 2nd lender for default?

Posted by: curious at December 11, 2009 2:25 PM

Personally I don't know any who are ready to walk away but many I know in my age group (early 30's) are "trapped" so to speak in suboptimal situations. They are either underwater or have lost their downpayments and are stuck in town homes or condos that they need to move up from becuase of growing familes.

I think there is few move up buyers currently. Not sure how all of this shakes out but time is going by

Personally the blazed path in CA of the starter home is dead right now in my mind.

Posted by: zig at December 11, 2009 2:33 PM

"Seems like it all amounts to assertion, and not so much denial. Just 'cause everybody likes to talk a certain way on here doesn't mean that their words are worth much."

indeed. well asserted.

Posted by: bobTrouser at December 11, 2009 2:50 PM

I thought this comment was funny:

"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests"

Indeed, isn't that the whole point? It seems to me that would be the best possible result - for the bondholders and investors, anyway. Why else would there be such a program? This is a small investment intended to head off the need of making a much larger one (in the form of bank bailouts)...

Posted by: Po Hill Jeff at December 11, 2009 2:56 PM

[stuff anonn paraphrased]

Of course, lying about what other people said, works equally well too. bobTrouser was right the first time.

curious -- with respect to the 2nd mortgages, if they are purchase money, then deficiency judgments aren't allowed. If it's not purchase money, then they can pursue a deficiency, but it's expensive, and the banks risk not collecting on it.

Posted by: sfrenegade at December 11, 2009 3:03 PM

Um, "lying" now? Naw. Now, paraphrasing, for the sake of ease? sure. Guilty as charged. But it's all just a scroll down today, not even an archived search away. I'm surprised. Didn't expect to see your callow web self here today. 'Cause you, um, said some weird stuff yesterday bud. I wish you nothing but the best of luck with that willfully ignorant stance you've adopted.

Posted by: anonn at December 11, 2009 3:44 PM

Well, you seem too dense to figure out:
1) modifications don't work because re-defaults are high
2) banks are loathe to do remodifications to recognize losses, and only tiny percentages have been done, despite your anecdotal evidence to the contrary
3) you're the only one obsessed with HAMP, and that was just one example of a failed remodification program, of which there will be many more
4) Wells Fargo has the Option ARM loans that will be out to 2014-2015, but others have loans that recast earlier

But since you can't figure that out and just try to confuse people, I thought I'd summarize what I said for the rest of the crowd.

Peace.

Posted by: sfrenegade at December 11, 2009 3:47 PM

BobTrouser, I'll let you in on a little secret. When I take a stance opposite somebody's uninformed made up crap it's not denial or paranoia. I'd liken it to more like, oh, I don't know, taking a stance against some uninformed made up crap. Another little secret: I've been wrong on here, like, once, because I exaggerated something when goaded.

Posted by: anonn at December 11, 2009 3:48 PM

Fronzi, I don't even know where to begin with that stuff.

1. How the hell would YOU KNOW when yesterday you were denying they were even happening?
2. They're doing them left and right and WHY you're denying that is absolutely not known. Entire brokerages are now putting loan mod packages together these days.
3. You were providing HAMP links while thinking you were talking about something else. I showed your that repeatedly.
4. Big deal. I explained to you that the chorus was "Wait till 2011, 2012! then get yer surfboard, the tsunami, she's a comin'!" -- I also pointed out that these self same loans are getting modified right now.

You don't want to process, or digest, those true things I've said. I get it. But you're playing yourself out. You're somehow in denial that a loan mod industry is in full force. It's pretty weird. You're in the dark, and I don't really have anything else to say.

Posted by: anonn at December 11, 2009 3:56 PM

REpornaddict:

I'm commenting on "tipsters" personal attack on "anonn".

After several years of reading posts on this site, I don't think I can recall a time when someone has "nailed it" quite so successfully as you did above:

"I find this comment amusing, though.
You and many others routinely laugh at the financial plight of others. Just because you know them, why should that make it any different to those who do not know them?"

Nobody demonstrates more satisfaction than tipster in the financial misfortunes of others.

The greedy wall street bankers crammed this money down the throats of regional loan servicers ....... yet those like "tipster" continue to throw rocks at the people who got caught up in the shit storm of the aftermath - he and those like him fail to see the bigger picture of what's going on, preferring instead to persist with their self righteous rants.

Way to help keep it real REpornaddict!

Posted by: keepinitreal at December 11, 2009 4:15 PM

I have two sets of friends who bought at the height of the boom, both married couples with kids. The first bought in Oakland in 2006 for around 550k, nothing down. Home is worth around 400k now. They voluntarily stopped paying their mortgage after a short sale failed and lived rent free for at least six months. They recently moved to a nice rental in Alameda.

Second set of friends bought in San Mateo in late 2006 for around 680k. Home is now worth around 500k. They put 10% down. Home is way too small for them since they had a second child but they are stuck and can't sell it. They consider it a moral obgligation to pay the mortgage and don't want to uproot their family into a rental.

Posted by: MikeW at December 11, 2009 4:37 PM

These comments are becoming more and more like a cross between the Suze Orman and Jerry Springer shows...what a bunch of pompous divas you little queens are!

Posted by: NC at December 11, 2009 5:10 PM

Zig,

You're absolutely right about the "dream" of a starter home being dead for many young Americans. But maybe this is for the better. Many young professionals that would have owned in previous generations may be wiser to develop a different dream for the future--a dream of prudently financing one's shelter, which probably means renting for the near future (hey, I didn't promise that my dream would be sexy).

Americans have been sold a romantic dream involving education and home ownership and it has cost the younger generations dearly. Many thought they were being responsible by going to the best college they could get into, taking out loans to pay for it, then getting a high paying "professional" job, and buying a home and purchasing all the trappings that we are told a young professional should purchase. There appears to be many young people stuck paying too much for housing and they can't move up to the starter home they would traditionally be purchasing. Heck, even if we could get people unstuck from their old housing, I bet many, even those making nice incomes, can't pay current starter home prices if we were to apply old-fashioned rules of total debt to income. The article I cite above describes how even on a salary of $100,000, how an American that would be pretty well-to-do in most parts of the country, can be really cash poor because of total debt and paying too much for housing. That applies to San Francisco even when we double that salary. There are plenty of poor rich people in San Francisco.

Stubbornly staying stuck in a home for moral reasons is going to dearly cost many families. Having the income not to default seems to be just enough motivation to keep some people on the hamster wheel long after their little hamster hearts should have given out.

And it's not so bad. I was just required to watch the OC housewives show and one of the couples lost their home and had to move into a rental and were worried about what their teenage daughters would have to go through and they brought in a counselor (or youthologist--they do things differently in the OC). The girls didn't seem to be embarrassed about their parents' financial situation at all but instead seemed concerned with normal teenage stuff (one girl enjoys drinking and partying and her parents make her feel bad about herself and the other doesn't get enough love and attention, etc.). Neither kid seemed upset about being a "poor" family. I bet most kids will be better off having financially stable parents in 5 and 10 years time than they will be by being protected from the "humiliation" of renting.

Posted by: SFHawkguy at December 11, 2009 5:17 PM

People thought that they were being responsible by living beyond their means? That is pretty stupid. Better to learn that lesson early on in life though, when you have time to recover from it.

The responsible thing to do is to live frugally, save as much as you can, and then only buy what you can afford. I guess perhaps that some thought the ladder to career success required living a big house and having a nice car, but that is not really what it is all about, unless perhaps you are in sales and you have to impress clients. You still don't need to bring them over to your house.

Posted by: NoeValleyJim at December 11, 2009 5:47 PM

Hey can we talk about the rapid rise of strategic "stonewalling" by banks?

You know, the banks who were given bazillions of taxpayer dollars to modify exotic mortgages into fully amortizing mortgages?

Of course that's not as fun as "stoning" the "reckless fools" who got us into this mess all by themselves ...... your next door neighbor .... the woman who sits next to you at the office .... the deacon at church .... let's stone them all because we can see them and we know who they are ....

Forget about the wall street investment banks and the loan servicers they created all over the country to funnel trillions into no doc loans .... forget about those guys - lets stone our neighbors!

Posted by: keepinitreal at December 11, 2009 6:08 PM

What about the tax implication of walking away from your mortgage?

This seems to be the one thing that everyone doesn't consider; if you let your house go into foreclosure, you will have to pay tax on the amount of the mortgage. This will be a tremendous burden as well to the defaulter.

I wonder if anyone has taken that into consideration?

Posted by: UncleSam at December 11, 2009 10:07 PM

It is not that simple UncleSam, I am currently trying to untangle my father's finances and dealing with that right now. He recklessly bought a bunch of SFH in the Joshua Tree area during the boom -- against my advice -- and a few years later sort of went around the bend health wise and mentally and is now in a board and care facility. He was underwater and cash flow negative on all of his three "investment properties" so I decided that he should just default on all of them. He was 1099'ed but my accountant says that since he has capital loss to offset the gain, it will all be a wash.

We still haven't filed his 2007 and 2008 taxes though, it will be interesting to see what the final tax bill looks like.

He doesn't have any money anyway, and even the IRS can't get blood from a turnip, so I am not worried. What are they going to do, put a 67 year old man with dementia and a bad heart in the hoosgow? Probably not.

It might be different if he had some assets to go after, but I kind of doubt it.

Posted by: NoeValleyJim at December 12, 2009 9:32 AM

I recently completed a successful strategic default. My unit was hopelessly underwater over a year ago and I had to move. I did the finances and, like most anyone who purchased a home in the last 5 years, defaulting was the most financially responsible decision.

I stopped paying my mortgage and HOA over a year ago, I moved out and moved a renter in and I enjoyed getting rent payments for about ten months. Then I moved the renter out, who understood the circumstances when he moved in, and marketed the property as a short sale. I presented a fair short sale to the bank with the open understanding that I would gut the place one week before foreclosure if they failed to take a fair offer. They took it. And, at my insisting, the offer included payoff of the back HOAs. Things worked out pretty great with nice passive income for ten months and now my debt is gone!

Here are some additional relevant facts. Your first and second, even if it is a HELOC, are gone in foreclosure or typical short sales so long as the money was used to purchase the home (in CA). In other words, be cautious when you refinanced. Some banks are trying to include language in the short sale agreement to hold you personally liable for the debt, don't let them. You are personally liable for HOA dues even after foreclosure. Get them expressly included in the short sale agreement. Finally, if you are not insolvent (many with student loans are) and the home is not a primary residence, there may be tax implications. In most cases, they do not change the decision, but they will decrease the benefits to some degree.

Best, of luck to those other people who can make financially savvy decisions.

Posted by: Sold at December 13, 2009 10:56 AM

Well done "Sold".

Now, I'm sure posters will attack you for "gaming" the system, because that's what most posters on this site do - attack others to contrast and elevate themselves - this site is one of the best places to experience narcissism in it's purist form.

The American public was "gamed" big time by hot shot wall street bankers and underpaid, poorly trained government regulators ..... and you simply stuck to your guns and helped move things through in a manner that caused the least amount of "pain" to all parties - well done!

Posted by: keepinitreal at December 13, 2009 12:36 PM

Awesome comment Sold.

You dealt with the situation in a very savvy manner--just like a banker would.

Seems like you covered all the bases.

Lot's of people will be making similar calculations. Those that bought in 2005 and are underwater in 2010, will be calculating where they will be in 2015. If you're spending $1,000 extra a month, or even $2,000, we're talking about the difference of having an extra hundy thousand or so in the family bank account in 5 years versus . . . . . stubbornly staying stuck and not having that hundy thousand . . . .

Posted by: SFHawkguy at December 13, 2009 2:01 PM

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