6/1/2011 11:48 AM ET|
'Savvy' borrowers abandoning homes
Homeowners who walk away in strategic defaults are not necessarily the ones most 'underwater.' A different factor matters more.
Credit scores are designed to predict the risk of default. If your scores are good, lenders see you as someone who is likely to keep paying your debts.
But when it comes to strategic default -- which is when people who can afford to pay their mortgages don't, usually because their homes are worth less than their loans -- analysts have noticed a reverse phenomenon: Good credit scores can indicate a higher likelihood a homeowner will voluntarily bail on a home loan.
Somewhere around one in three mortgage defaults these days is strategic. Those strategic defaulters, when compared with other people who stop paying their mortgages, are more likely to:
- Have better previous credit histories.
- Have lower account balances.
- Stay under their credit limits (they're less likely to have maxed-out accounts).
- Use less of their available limits.
"People who make the decision to strategically default tend to be more savvy," said Andrew Jennings, the chief analytics officer for Fair Isaac, the company that created the leading FICO credit score. "Most of the people who walk away from a mortgage are saying, 'This is not a contract that makes sense anymore.'"
FICO analysts looked at a population of borrowers who started out current on all their bills but wound up 90 days or more behind on their mortgages.
The people who stayed current on their other bills but stopped paying their mortgages had better initial FICOs and lower credit balances, and were less likely to have gone over their limits -- all signs of responsible money management.
- Had been in their homes for shorter periods than other defaulters, a possible indication that they were less attached (emotionally or financially) to the properties.
- Were more likely to have opened credit accounts in the previous six months -- perhaps in preparation for the periods after their defaults, when getting credit would be tough.
Intriguingly, one factor that wasn't a strong predictor of strategic default was how far "underwater" these homeowners were. What mattered far more was the future trajectory of home prices.
In other words, whether the borrowers owed a lot more than their homes were worth, or only a little more, wasn't as key to predicting strategic defaults as whether home prices were predicted to continue falling.
Another, perhaps surprising, point that didn't matter: whether the homeowners lived in states that allowed lenders to sue borrowers for unpaid mortgage balances. FICO's research indicated that 40% of strategic defaulters lived in "recourse" states, where they could face lawsuits over debts that remained after foreclosure. It's not clear whether defaulters didn't understand the risks or whether they had bet that their lenders wouldn't come after them.
FICO researchers examined credit files for over 3.2 million mortgage-holding homeowners, including about 50,000 they identified as strategic defaulters and 150,000 as non-strategic defaulters.
"While the answer is probably a little different for different people, our feeling is that people take this action without fully understanding the consequences," Jennings said. "The action is encouraged because there are any number of websites for companies that help people plan and execute a strategic default. The message coming from them is that if enough people take this action, there is no way the banks are going to come after us, and even if they do, you can declare bankruptcy."
FICO analysts teased out what's predictive of strategic default, and what's not, as a way to sell another product to lenders: a formula that could help them identify which of their loans are at risk despite the lack of other red flags, such as maxed-out credit cards and other skipped payments.
Lenders increasingly need this help, since strategic default dumps the traditional "payment hierarchy" on its head. In the past, lenders could count on people skipping other payments first before they reneged on their mortgages. Skipped payments caused credit scores to plunge, alerting mortgage servicers to the upcoming problem so they could intervene -- with counseling, workout proposals, threats of lawsuits and so on.
Fair Isaac is selling its new product as a way lenders can start tracking loans at high risk of strategic default and perhaps start intervention earlier.
There's likely to be a need, because the trend seems to be growing. A study at the University of Chicago's Booth School of Business found that 35% of mortgage defaults in the U.S. were strategic in September 2010, compared with 26% in March 2009.
If you're thinking about skipping out on your mortgage, here's what you need to keep in mind:
- The foreclosure process varies by state and by lender. Don't count on other people's experiences to predict your own. Attorney Stephen Elias' book "The Foreclosure Survival Guide" is a good primer in what you should expect and what your alternatives might be.
- Your risk varies, too. Some states, including California, prohibit lenders from suing you for mortgage balances you owe on a primary residence if you used the loan to buy the property and didn't refinance. Many other states allow the lawsuits. Before you stop paying, talk to a bankruptcy attorney who is familiar with the credit and real-estate laws in your state as well as industry practices. You can get a referral from the National Association of Consumer Bankruptcy Attorneys.
- Understand what a foreclosure does to your credit. The higher your credit scores, the longer they will take to heal. Read "Bounce back from bad credit" for details about how much a hit your scores can take and how you can rehabilitate your credit.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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I had been doing loans for over 5 years. It's the same story everytime. It is shady loan officers/lenders/brokers/realtors plus ignorant, lying, dreamy borrowers; add inflated home prices and shake what do you get? Mortgage meltdown.. Good for the savy borrower who is smart enough to walk away with their retirement money and/or getting a better house for cheaper. Good for them. I mean they arent getting bailed out with billions in golden parachutes. Morality is gone when it comes to finance, its eat or be eaten. If you like your home and you have a sound investment plan to stay long term and it fits your budget; then so be it stay there. If you are upside down on a house you bought and you think it isnt fair the CEOs that brought your neighbhoods value crashing down walked away with enough of your tax dollars to buy their own island, then yes if your pissed enough walk away live to buy another day!!
This is absolute BS at best. Why is there an article showing people how to cheat and steel? Everyone wants to blame the banks but I don't recall any loan officer coming to my house with a gun to my head forcing me to sign a contract. What is wrong with you people? What if everybody did what the author is saying? The market would be much worse than it is now. And since when is your house an absolute investment? How many of you have a car that you owe more on that what it’s worth. Did you drive your brand new car off the lot and then realize that it’s now worth $5K less than it was yesterday and just quit paying for it? My god people grow up and take responsibility for your own actions and quit playing the blame game. Not being able to make your payments is one thing, but to be able to make them and making the choice not too makes you a thief plain and simple. If you bought a house for the simple reason that you thought it was going to go up in value you were speculating and in this case you lost. The last time I checked I still needed a roof over my head so regardless of what’s it’s worth now, I still have to have it. Pushing your losses onto the tax payers is shameful at best.
stuff your "morality" up your butt. Morality? Wall Street screws us in the worst way possible, are given cash injections to stop a global economic meltdown and proceed to do exactly what they were NOT supposed to do with the money...hoard it and give out record breaking bonuses to the clowns that caused the crisis in the first place. Morality? Our government has none. The financial industry has none. The only loser here is the average citizen just trying to survive. Why are they allowed "strategic defaults" but the average citizen is not? Explain this to me. If you can. Why are the banks allowed to essentially give away all of their toxic real estate assets to the government (again, on the shoulders of the taxpayer) but the taxpayer is "immoral" if they ask for the same thing. I agree with a previous poster here. The government should have given the money to taxpayers. The banks would have recieved their payments, and the taxpayers would be shouldering the same debt burden anyway, but at least there would be fewer of these same taxpayers suffering. Oh, but let us not forget, the banks have paid us back? Really? No, they actually have not, google it for yourself. Now banks are threatening higher rates and fees? Are these people so damned blind they cannot see they are throwing fuel onto the fire that is burning down this country? Oh, wait, I think they understand completely, they just don't care. Morality? Please...this country doesn't even know what that means anymore.
I think that we have to look at the big picture. Home buyers were not purchasing for the traditional reasons: (1) A place to see their kids come of age. (2) A place to retire during their golden years. (3) Plans to ever pay off the mortgage.
The vast majority of loans were being made for investment purposes. And what does any business savvy person do when an investment stops producing acceptable rates of return? They dump it.
With all of the brain power on Wall Street, you mean to tell me that they no idea this could happen. This is not the first time that America has dealt with the fall out of a real estate bubble.
When the Banks get over on the little guy, it’s called making a profit. When the little guy gets over on the Banks (Strategic Defaults), it’s called an economic crisis. Ponder that???
It's the banks themselves who created the bubble/crash, and some loaned knowing it would crash, sold derivitives knowing they would be worthless, yet no one went to prison. So is the homeowner 100% liable for an amount that his lender caused to drop?
Banks are still closing left and right, but it's their fault. We have fractional banking, and that is what is sinking them. If you put $10,000 in a CD, they loan it out at 10X's, they loan $100,000 on your $10,000, so they pay you 1% on your 10 K, but make 6% on the 100K, so they make $6000 a year off of your $10,000 CD.
Contrary to what some believe on this post, they don't need to "loan" money to make money, the bailout is an example, they didn't loan out the bailout Money,Obama even lectured them to do so.
Here is how they did it... The "bailout" was from the Federal Reserve, they were charged 1/4% (.25%) for the amount they borrowed. They took the money and bought US Treasuries, which pay 4%. The interest on tresuries is paid by the taxpayers, so we, the taxpayer, paid the banks 3.75% on the amount they borrowed from the Fed.
So now folks, those of you who bring up the moral issue.... Just which one of us (lenders/borrowers) is the least moral?
Don't believe me? - google "mortgage bankers association strategic default"
Since "Morality" is being brought up, here's one for you. I had a friend who worked for.....hmm not sure if names should be mentioned, but it rhymed with Ameripest. He went to this house for signing of docs. When he gets there this 80+ year old woman answers the door. She invites him in and it ends up she's the one getting the loan. Her husband had recently died and the credit cards they had were in his name and she was 2nd on the accounts (it's the old school way of doing things, my grandparents did it this way) which means she has ZERO credit history now. She's taking out $25,000 on her home that's paid for because she's not able to make it on the income coming in. The company was charging her $40,000 in fees because she doesn't have a credit history, though they don't exactly tell her how much the fees are. Now before you go spouting "contract" crap, remember she's 80+ years old and I'm sure most of you don't even understand everything in the contracts the way they're worded. My friend also tells me the way contracts are written are SUPPOSED to be confusing so you don't understand all of it. And that's where they put the extra fees. He can't tell her she's getting railroaded because he'll get fired.
So if "Morality" is your arguement you best be looking at both sides of it.
I personally don't care if someone "strategically defaults" or not. Maybe it's more Karma on the banks for all the wrong they've done.
Setting the morality issue aside, a mortgage is a legal contract, and you can and should be sued for intentionally breaching it. Another thing that I was wondering is where were all of these individuals 5 years ago when home values were sky-high? Did the bank come back to you and put a higher mortgage on your home because it was worth more than you paid for it?
How about those neighbors left behind? The "savvy bailers", gutted the two adjacent townhouses I live in and have not maintained the lawns or landscaping since they had left. It has cost me in the hundreds of dollars to keep my home presentable. These "savvy bailers" have no character or integrity. This is a "moral" issue, it only appears that it is not, since morality is becoming more and more rare in the US as time passes. God help us.
Chucky, a very passionate response and strong opinon that you are entitled to. Banks shoulder a lot of the responsibility for the current debacle...no... not exclusive responsibility. Gone are the 1960s when ma stayed home and dad's job at the pencil factory was sufficent to raise 13 children in a 2 bedroom house with a state of the art black and white TV and an ipod er uh...I mean iphonograph...
I'm of the persuasion that, while I have not strategically defaulted, I see the logic in it and in some cases, changing life circumstances may make this a reasonable option for some. I'd argue, if made for the right reasons, strategic default can be a responsible long term decision with respect to long term financial well being of the defaulter. I'd ensure I make myself whole any day before I'd make the bank whole...
I'm glad life has been good for you and you've been able to keep up with your mortgage and all your other financial responsibilities. I hope it continues to be so... Unfortunately life isn't scripted...individual results may vary...
Strategic default makes sense...disregard all the "moral" preaching (from banks and bill collectors of all entities) and look at your finances as a business would. If an investment becomes a liability, do what businesses do...shed the liability in the most economically advantageous manner that benefits you...
The nation is changing...workforce demands are requiring people to become increasingly mobile. Job security is diminshing. A house can represent an anchor that holds you down. If the jobs leave your area 5 years into your 30 year mortgage...you're stuck!
The housing debacle will continue until banks are forced to write down all the non performing loans on the foreclosed overvalued homes that are clogging their balance sheets. Government meddling just prolongs the agony and postpones the inevitable. Only when home prices reach what others are willing to pay for them will the problem be solved. Isn't it amazing a bank will keep a foreclosed home on the books valued at $200,000 but when a perspective buyer applies for financing the same bank will only provide financing as if the home were worth $150,000. (removing down payments from the equation)... the banks trying to have their cake and eat it too...
In several areas it stinks to be a home owner right now as you watch your home value steadily float lower and lower...
By the way...anyone else still steamed that the banks are still too big to fail?
Anyone else still upset no one has been prosecuted for the financial mess?
Anyone else think if the government gave the TARP money to the tax payers they would have paid off their mortgages, the banks would have received thier huge cash infusions via the payments and there wouldn't be so many distressed properties on the market?
OK I'm done rambling now...
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