Saturday, May 22, 2010

Housing Continues to Deteriorate; Strategic Defaults on the Rise

Currently, about seven million homeowners are behind on their mortgages and their ranks are growing. Many have lost jobs or taken pay cuts and are no longer able to keep up with mortgage payments.

As the housing market has collapsed, millions of Americans are now holding mortgages that are higher than the value of their homes.

However, an interesting development has arisen over the last year or so. People who can afford their mortgages are "strategically defaulting", or making a choice to walk away rather than make payments on an underwater mortgage.

The CEO of Citibank's mortgage unit estimates that one in five borrowers who default on their mortgages are able to pay.

In the past year it's estimated that at least a million Americans who could afford to stay in their homes simply walked away.

For people who made no down payment at all, or who put down just 3%, 5% or even 10%, that seems like a reasonable decision, given the circumstances. Many of these people live on streets, or blocks, with dozens of other foreclosed homes, which only hurts their home values further.

By law, in ten states the bank cannot go after any of borrower's other assets. But their credit ratings will suffer. It's an outcome many are willing to endure.

Delinquencies are defaults are growing, and the numbers are only expected to rise. The Mortgage Bankers Association (MBA) defines delinquency as being at least one payment behind but not yet in foreclosure, which is initiated by the lender after three months of delinquency.

According to CoreLogic, more than 11 million homeowners across the country are underwater. It's estimated that number could double in the next year, which means nearly half of all American mortgage holders will owe more on their homes than those homes are currently worth.

There are federally-backed programs designed to aid struggling and underwater borrowers at risk of becoming delinquent or defaulting on their mortgages. But for whatever reason, banks have been slow to modify the terms of those loans. In particular, they have been unwilling to renegotiate with people who could pay, but won't.

People have seen banks foreclose on their friend's and neighbor's homes without compunction, and so they're making the same cold, calculated decisions in their own self interests.

Increasingly, Americans have come to view walking away from an underwater mortgage as a savvy business decision, the kind that banks and large corporations make all the time.

For example, Morgan Stanley walked away from five San Francisco office buildings they bought at the height of the boom.

And real estate developer Tishman Speyer defaulted on the huge $5.4 billion Stuyvesant Town apartment complex in New York City earlier this year when its value fell by nearly half, making it one of the biggest walkaways in real estate history.

In the most delicious irony of all, the MBA sold its headquarters for about $34 million less than the mortgage on the property. The trade group declined to state if it would pay off the full loan value, an implicit indication that it won't.

Last year, the group's CEO, John Courson, said he believed mortgage borrowers should keep paying their loans even if it no longer seemed to be in their economic interest.

“What about the message they will send to their family and their kids and their friends by defaulting?" Courson asked.

With examples like these in mind, millions of mortgage holders have stopped paying their mortgage, yet have remained in their houses for months at a time – for free – until the bank forecloses and evicts them. Some foreclosures can stretch on for more than a year

The problem doesn't seem to be improving. The MBA says the mortgage delinquency rate rose in the first quarter to 9.38 percent of all loans outstanding, from 8.22 percent in same period last year.

And 37 percent of new foreclosures in the first quarter were prime fixed-rate loans — traditionally the most conservative type of mortgage. Due to high unemployment, all loans appear to be at risk.

Roughly one-in-seven of the 52 million households with mortgages are in delinquency or foreclosure. And unfortunately, those numbers may rise.

In the latest of a string of declines, CoreLogic says home prices fell 0.3 percent in March from February. And the MBA says applications for mortgages to buy homes plummeted 27 percent last week, to the lowest level since 1997.

With all of this in mind, all hopes of any nascent housing recovery seem to be dashed. Even the Federal Reserve agrees.

Last month, the Fed said the housing recovery “appeared to have stalled in recent months despite various forms of government support.”

Where the bottom is remains unknown, but one thing is clear; we are still a long way from recovery.

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