Just Say No — Strategic Defaults Spreading Virus — Christian Science Monitor

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EDITOR’S COMMENT: Based upon the calls and emails I receive it would appear that strategic defaults are increasing at an increasing rate of growth, which is why it is being referred to as a virus. In 2010 the Mortgage Bankers Association calculated the increase to be 22% over the year before with 30% of all “defaults” being strategic — 1/3 of the people just ditching the mortgage and walking away.

In 2011, some reports indicate that the rate of growth increased from 22% to 35% bringing the total to 40% of all “defaults” being of the strategic  variety. I’m guessing that 2012 will increase by at least 45% raising the total to far more than half of all “defaults”.

Let’s remember that the so-called default may not be a default at all. If the servicer was paying the payments, even though the borrower was not paying the payments due under the defective note, then the mortgage loan, if it is exists and is enforceable, is not in default; but the borrower probably has some sort of liability to the servicer even though it isn’t in writing anywhere in a contract between the borrower and the servicer.

The calculation is really simple and there is nothing the Banks can do about it. If someone has a home that is financed at $400,000, the property is worth $200,000 and there is no likelihood of any meaningful increase in value, then they are going to walk. Who can afford to pay $200,000 for nothing? Hardly anyone. The obvious conclusion is that this is going to create more and more pressure on the housing market — which will add more and more homeowners to the ranks of those “underwater.”

The failure of government to deal with the essential realities is prolonging the pain and increasing the likelihood of more pain in the economy — although there is an offset for those who stay in the home and recoup some of their investment through nonpayment of mortgage or rent. As stated by nearly every expert who is truly independent, the ONLY remedy here is to scale back the principal to something that will make it less likely for someone to simply stop paying it. That figure is no doubt higher than the current fair market value, and it might well stabilize the market and allow for appreciation to occur.

Instead, the banks and servicers have their own agenda which is at variance from their duties to manage the loans for the benefit of the investors who funded them. As a result, the properties are driven, coaxed and even coerced into foreclosure leaving the investors with nothing.

The current death spiral is making some parties very wealthy, but for most of us, the impact of each new foreclosure “sale” is like a meteor shower hitting home — literally.

Why people are ditching their mortgages

 More and more, indebted homeowners are deciding to walk away from their mortgages, instead of facing forced foreclosure. Who will pay the discarded debt?

By Douglas French,

More and more underwater borrowers are deciding it’s time to walk from their mortgage. “Guilt and morality are one side, and objective financial analysis are on the other side,” 68-year old David Martin told msnbc. “They’re coming to two opposite conclusions. I wonder how many other people are struggling with the same question.”

Mises Economics Blog This is the institutional blog of the Ludwig von Mises Institute and many of its affiliated writers and scholars commenting on economic affairs of the day.

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Three out of 10 foreclosures in 2010 were of the strategic variety, an increase from 22% in 2009. The Mortgage Bankers Association believes strategic defaults are spreading like a virus. In a study entitled “Strategic Default in the Context of a Social Network: An Epidemiological Approach,” conducted by Michael J. Seiler of Old Dominion University, Andrew J. Collins of the Virginia Modeling, Analysis and Simulation Center and Nina H. Fefferman of Rutgers University and sponsored by MBA’s Research Institute for Housing America (RIHA) the authors found “One default does little to negatively impact the price of surrounding homes. However, as more and more mortgages in the neighborhood go into default, the negative impact is felt at an increasing rate. Much the same way as a disease spreads throughout a population, so, too, do decisions to ‘strategically’ default.”

Despite some experts projecting that the worst is over for housing, the immense shadow inventory of homes is casting a …well…shadow over the housing market. These estimates of the number of homes in foreclosure or likely to be in foreclosure are all over the map from Corelogic’s 1.6 million to 10.3 million estimated by Laurie Goodman of Amherst Securities.

Michael Olenick pegs the number at 9.8 million with the exposure being $1 trillion. He writes,

It is unclear where the money from these write-offs will come from, or whether they losses have been adequately budgeted. Obvious sources are Fannie Mae, Freddie Mac, European and US banks, none of which have reported anywhere near this level of reserves. We know that the Federal Reserve has been buying up MBS and related instruments in bulk; maybe the central bank plans to print more money to cover the losses and enable the foreclosures. Printing this much money, for this purpose, in this political environment, in secret, seems unlikely.

The Fed can keep printing, but it won’t keep homeowners from walking away.

Tags: bankruptcy, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, quiet title, rescission, RESPA, securitization, strategic default, TILA audit, trustee, WEISBAND
Posted in bubble, Corruption, Eviction, securities fraud |