MSNBC had and interesting article yesterday about the increasing number of “strategic defaults” on mortgages. This is where the home owner has the money to pay their mortgage, but are so far “upside-down” (owing more than they can sell the house for) that they don’t see any benefit in keeping that home.
Even with the recent positive news about housing starts, the price of homes sold in the United States continues to decline. This is leaving more and more homeowners “upside-down” in their mortgages.
A recent study showed that in 2010 (last year that they have enough data for) the percent of mortgage defaults by folks who could afford their payments rose from 22% to 30 percent. When nearly one in three homeowners who default are choosing, not being forced but choosing, to walk away from their mortgage because they don’t see any economic upside to it, that is a big deal.
From the MSNBC article:
"It's a looming problem that's in the shadows," said Jason Kopcak, a mortgage trader at Cantor Fitzgerald who advises lenders on how to value the loans on their books. "It's very worrisome to mortgage lenders."
Researchers point to a number of forces that are driving borrowers to walk away from their mortgages. At the top of the list is the estimated 12 million homes that are underwater, meaning the owners owe more than they are worth.
Mortgage bankers should be worried. One of the reasons that the credit crunch happened was that banks had tons of loans on the books where the property securing it was not worth the amount loaned on it. When it came time to revalue those loans or “mark to market” they found themselves without enough other assets to be solvent.
The continuing drop in housing prices keeps this pressure on them. And now public opinion is changing as to what is acceptable in terms of personal conduct.
Having lost a house to foreclosure I can tell you personally that there is a lot of unreasonable guilt. We did everything we could (including dumb things like emptying our 401K) to keep up with our bills when both of us became unemployed in 2009.
In the end there was no alternative and the bank came and took our house of 15 years. Even though they refused a short sale and slow walked us through mortgage modification the old ethic of honoring debts you agreed to pay really gave me a few sleepless nights (I’ve since gotten over it).
Now that the numbers of strategic defaults is growing, the social pressure to honor your debts is changing. People have seen that businesses don’t push a bad situation; they go bankrupt even when they have capital to pay some of their debts and start over. After five years of housing crisis, the American people are starting to ask why they should not do that same?
"Most people who own a home know of someone -- a friend, a colleague a family member -- who has defaulted, especially in housing markets that have taken a big hit," said Chad Ruyle, co-founder of youwalkaway.com, a service that advises homeowners on walking away from their mortgage. "They realize these are not bad people. They're not deadbeats. They're just like them."
The Overton window on how we think about mortgages has begun to move and it has to scare the crap out of the bankers. But you know, I have exactly zero sympathy for them. There has been opportunity after opportunity for them to do the right thing by the communities that they have made so much money off of and at every turn they have either declined to act or dragged their feet when they were forced to by the Federal Government.
It is one thing to have some loyalty to a company that acts as though it is trying to help you, to make things work. It is quite another to expect anyone to have loyalty to a company that treats you like dirt and says no at every opportunity.
This is another example of the 99% waking up and realizing they have more power than they thought. As long as the banks seemed like they were acting in responsible ways and there were so few people who defaulted on their mortgages, people would hang in there, even if the terms were highly unfavorable to them.
Now that it is clear that the banks don’t care at all about their customers (with things like debit card fees) there is no reason why the what is good for the banks should be given any consideration.
To me this is a good thing. One of the aspects of this crisis that has not been given enough sunshine is the fact that the supposed experts in determining credit worthiness, the banks, took on huge amounts of risk, voluntarily. Yes, yes, no one sign up for something they obviously can’t afford.
However, there are two parties in a loan and the banks are the ones that have vastly more experience in terms of what kind of income and debt ratio it takes to successfully pay back a mortgage. Most people only buy two or three houses in their entire lives, but banks make millions of mortgage loans a year. The presumption of fault has to fall on those who are more expert.
So, it seems that the bankers are going to have another set of chickens come home to roost. They are in a box that they themselves constructed. By over-pumping the housing market with predatory loans and poor practices they created a bubble.
When the bubble burst the value of the property they loaned money on has fallen, costing them pretty big. Then their intransigence on mortgage modification made for more defaults and foreclosures.
The glut of houses on the market has pushed home prices down, making more mortgages fall underwater. Now some sensible folks are deciding that it is in their best interest to let the banks reclaim the houses that are not worth even close to what they agreed to pay.
Which will mean more foreclosures and more houses on the market, pushing the price down even further.
There is a solution to this, principal reduction. It would keep million of people in their homes and it would save the banks money in the long run. Too bad the banks have successfully purged their management ranks of anyone that can think long term. They have sown the dragons teeth and now they are going to reap the whirlwind.
The floor is yours.