Bloomberg provides a summary of a report by Morgan Stanley that has tried to quantify the level of strategic defaults. The analysis seeks to identify borrowers who walk away from mortgages that they can arguably afford, and defines that group as those who go from paying on time to missing three mortgage payments in a row, while still paying on time on other consumer debts that are greater than $10,000.
This definition highlights some interesting issues. First, it’s a reminder of how pervasive consumer indebtedness is in America. In the 1980s, it would be almost unheard of to get a car loan or run a credit card balance. Second, it also suggests that some of these strategic defaulters are simply “pre defaulting”, as in recognizing their ability to service the mortgage is tenuous (as in they may be straining to stay current, and recognize that one shock will put them in arrears) and they’ve decided, with the home under water, that it’s better to face the inevitable early. Third, and perhaps most important, the defaults again illustrate the perverse side effects of securitization. In the old world of a mere 20 years ago, most banks would work with a borrower that was facing financial stress and needed a mortgage mod. The lender would recognize that as long as a mod left it with appreciably lower losses than getting the house back, principal reduction was a sound move. And as we’ve argued repeatedly, deep principal mods have been shown to produce lower redefault rates than payment modification programs.
The report contained other findings:
A fifth of U.S. homes carrying mortgages were worth less than their loans in the fourth quarter, according to Seattle- based Zillow.com, which runs a real estate data Web site. Home prices in 20 metropolitan areas tumbled 33 percent from July 2006 through April 2009, then rose for five months before falling for the next five, leaving them up 2.8 percent from lows, according to an S&P/Case-Shiller index….
For mortgage-bond investors, the data signals a problem with prime-jumbo debt and strengthens the case for investing in subprime, the analysts wrote. That’s in part because strategic defaults are less prevalent among borrowers with subprime characteristics and they may benefit from government-aid programs that don’t target large loans, the analysts wrote.
Yves again. This indirectly raises an issue that Tanta wrote about, that many subprime borrowers did not initially borrow as subprime, but as their financial condition deteriorated, refied into subprime.
And this problem is not going away…..
Housing won’t recover for three to five years as mounting foreclosures hold down prices, mortgage-bond pioneer Lewis Ranieri said yesterday in a panel discussion at the Milken Institute Global Conference in Beverly Hills, California.
“There’s another big leg down,” he said. “You can’t have much of a rally when you’ve got this big overhang.”
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I have been patiently renting in the SF bay area (east bay suburbs) for the past 6 years, waiting out the bubble. Recently, for the first time, I noticed that rents on single family homes seemed comparable to 30 year mortgage payments, in suburban east bay. This is the first time in more than 10 years that has been true. I have been wondering whether to take the plunge now and buy or wait for further declines. There is plenty of inventory out there, with even more shadow inventory (foreclosures) not yet listed. Another refreshing change – realtors are not at all pushy. In fact, many seem downright apologetic about the homes they list; listing realtors say things like “This is an old house, it would look nicer with some care”, in the hope of earning my trust – and the fun part is that the house looked just fine to me!
Should I wait or buy?