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Guess who's really singing "Jingle Mail"?

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Or, to ask the question in a more sophisticated way, who are the "strategic defaulters"? The LA Times asked that question:

Who is more likely to walk away from a house and a mortgage -- a person with super-prime credit scores or someone with lower scores?

The answer may surprise you -- especially if this was your narrative:

[OBAMA] In the past, if you found yourself in a situation like this, you could have sold your home and bought a smaller one with more affordable payments. Or you could have refinanced your home at a lower rate. But today, home values have fallen so sharply that even if you made a large down payment, the current value of your mortgage may still be higher than the current value of your house. So no bank will return your calls, and no sale will return your investment.

"You can't afford to leave and you can't afford to stay. So you cut back on luxuries. Then you cut back on necessities. You spend down your savings to keep up with your payments. Then you open the retirement fund. Then you use the credit cards. And when you've gone through everything you have, and done everything you can, you have no choice but to default on your loan. And so your home joins the nearly six million others in foreclosure or at risk of foreclosure across the country, including roughly 150,000 right here in Arizona.

Except that's not what is happening. At all.

Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to "strategically default" -- abruptly and intentionally pull the plug and abandon the mortgage -- compared with lower-scoring borrowers.

National credit bureau Experian teamed with consulting company Oliver Wyman to identify the characteristics and debt management behavior of the growing numbers of homeowners who bail out of their mortgages with none of the expected warning signs, such as nonpayments on other debts.

With foreclosures, delinquencies and loan losses at record levels, strategic defaults and walkaways are among the hottest subjects in residential real estate finance. Unlike in earlier academic studies, Experian and Wyman could tap into credit files over extended periods to identify patterns associated with strategic defaults.

Among researchers' findings are these eye-openers:

* The number of strategic defaults is far beyond most industry estimates -- 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year's fourth quarter.

* Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. [#88] This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they've fallen behind on other accounts.

* Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.

* Two-thirds of strategic defaulters have only one mortgage -- the one they're walking away from on their primary homes. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.

* Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore -- a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion -- are far more likely to default strategically than people in lower score categories.

* People who default strategically and lose their houses appear to understand the consequences of what they're doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters "are clearly sophisticated," based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.

Strategic defaulters may know that their credit scores will be severely depressed by their mortgage abandonment, Tantia said, but they appear to look at it as a business decision: "Well, I'm $200,000 in the hole on my house, and yes, I'll damage my credit," he said of defaulters. But they see it as the most practical solution under the circumstances.

So, it looks like the smart money has figured out that Obama's not really going to help anyone. So they're bailing. Interesting data point, eh?

Not I blame them. As I wrote back in June:

I wouldn't call it "strategic defaulting" at all. I'd call it "inequity aversion". When the game's rigged to fuck you, why not (a) fuck the gamers first and then (b) stop playing?

NOTE Too bad we took HOLC off the table, eh? Another opportunity squandered.

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BDBlue's picture
Submitted by BDBlue on

This was part of the post I was working on that wasn't working, so maybe now I can just trash it and move on.

Or perhaps someone here would like to right it for me.

Title: Paper & Fire

Background: We're Now a Society Built on Paper

Idea: There are all kinds of ways to protest in a society built on paper, not all of them are in the streets.

There, that's about as far as I got. After two fucking days!

Submitted by lambert on

... but trying to come up with a new idea, so naturally it's hard. (And you can always take my link and reframe it.) And as Red Smith seems not to have actually said: Writing is easy. You just sit at your typewriter until little drops of blood appear on your forehead.

I love the central insight:

There are all kinds of ways to protest in a society built on paper

There are all sorts of ways to post imperfectly. You might just put down a list of unrelated ideas in any order and express your puzzlement and frustration. Then work it out in comments 'til things click, and post on that.

Were you playing with the FIRE acronym? Finance, Insurance, Real Estate?

gqmartinez's picture
Submitted by gqmartinez on

Which is why it can be used to stoke anti-poor sentiment. Everywhere I go, red or blue, the balme is placed on irresponsible poor people for getting in over their heads. They are part of the problem, but not the entire problem, as this post demonstrates. Its so frustrating to have to explain the intricacies of our financial problems over and over, but it a necessary endeavor.

Given what's transpired since HOLC was first offered up and then championed by Clinton, its not hard to see why Obama's Democratic Party were so eager to abandon democracy during the primary. In good times the rich get fabulously richer, during bad times they still get richer. In almost all cases, its off the backs of the workers. No wonder the Pibbers said fuck the Bubbas.

Submitted by lambert on

Too bad we gave the irresponsible rich $22 trillion. I bet the irresponsible poor could have gotten by on a lot less.