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An interesting report in the Los Angeles Times shows that a person with super-prime credit scores is more likely to walk away from an underwater mortgage than a person with a subprime credit rating.
Inquiring minds are reading Homeowners who 'strategically default' on loans a growing problem.
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?Those set of facts may at first glance to counterintuitive, if not shocking, but if one explores the psychology of the situation, one finds it is quite logical.
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.
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. 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.
- Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances.
- People who default strategically and lose their houses appear to understand the consequences of what they're doing.
Psychology of the Subprime Strategic Default
The only "asset" many subprime borrowers have is their home. Although that asset has negative value, the homeowner may have nowhere else to go, especially if they have to put up a month's rent plus a 1-2 month security deposit in advance to rent.
Someone unable (or unwilling) to come up with 2-3 month's total rent in advance is stuck. Moreover, even if the homeowner is able and willing, landlords may screen out poor subprime prospects in advance.
Also note the psychological factor about "losing the only thing I ever had".
Finally, even though home may have negative value in a monetary sense, that home has real value in a practical sense, if the alternative is being homeless, unable to rent, with no place to live.
Psychology of the Superprime Strategic Default
In contrast, the concerns of the superprime homeowner are vastly different.
Such a person could easily land a rental, likely has other assets than the home, may have no psychological attachment to the home, etc.
The primary concerns of the superprime person is more likely to be the nuisance factor of moving and a credit score hit that for may be meaningless in a practical sense.
Making Home Affordable Deals
In light of the above, one should quickly conclude that current foreclosure prevention tactics are unlikely to be a rousing success.
Indeed, many subprime borrowers are unlikely to walk-away and superprime homeowners are going to do what they are going to do, depending on how far underwater they are, as opposed to payment amounts or interest rates.
The current HAMP (Making Home Affordable) success rate is 12 percent. However, "success" is defined as getting people into the program. The program is doomed to failure because the effort is concentrated on temporarily reducing payments and lowering interest rates not on reducing principle balances.
For more details and analysis on HAMP, please see Foreclosure Filings Top 300,000 for Sixth Straight Month.
Calculated Risk mentioned the LA Times Strategic Defaults article in Report: Strategic Defaults a "Growing Problem" .
CR comments: "This fits with recent research from Guiso, Sapienza and Zingales: See New Research on Walking Away and here is their paper: Moral and Social Constraints to Strategic Default on Mortgages"
I have talked about walking away dozens of times. Here are a few of the more recent ones:
Friday, June 05, 2009: Walking Away Revisited - Reader Mailbag - Moral Dilemma
Sunday, July 26, 2009: Preemptive Defaults
Wednesday, July 29, 2009: Emails from Housing Hypocrites about Ethics
Thursday, July 30, 2009: Many Chime In On "Housing Hypocrites" Post
Additional Foreclosure Links
Sunday, May 31, 2009: More Prime Foreclosures; More Re-Defaults
Sunday, June 14, 2009: California Foreclosure Moratoriums An Exercise Of Stupidity
Thursday, July 16, 2009: Foreclosure Filings Hit Record 1.5 Million; One in Eight Americans Delinquent; Obama's Mortgage Rescues Create ‘Confusion’
Wednesday, September 16, 2009: "New Rules" Hope to Stave Off Commercial Real Estate Defaults
The LA Times Article concludes with:
"The Experian-Wyman study does not try to explore the ethical or legal aspects of mortgage walkaways. But it does suggest that lenders and loan servicers take steps to screen and identify strategic defaulters in advance and possibly avoid offering them loan modifications, since they'll probably just re-default on them anyway."
Judging from the vast preponderance of evidence presented in the above links, one can conclude that offering anyone loan modifications is not likely to do much good except in isolated cases. Indeed, services are getting paid to modify loans at taxpayer expense, only to have the mortgage holder walk anyway (or in the case of some subprime loans, not walk away anyway) .
Still others, out of a job, cannot afford any mortgage payment at all!
Thus, the total benefit of Home Affordable Programs (as they are currently structured) is negative. HAMP should be scrapped. Unfortunately, the most likely thing to happen is Congress will expand the program still further, wasting even more money.
Mike "Mish" Shedlock
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