Tuesday, May 4, 2010

Strategic Defaults in Q1 2010 Rise to One Third of All Foreclosures vs One Fifth a Year Ago

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As predicted in multiple pieces since November [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats] ... America's hottest trend (no, not Twitter... or vampires) is catching on. Once word passes among the neighbors of how easy it is, and "keeping up with the Joneses" becomes much harder to do when Joe and Sally down the street are living the high life due to no longer bothering with the small detail of a housing payment, well more people want in. [Apr 15, 2010: More on Anecdotal Benefits of Strategic Default] This is the stealth stimulus plan that just keeps on giving. [Apr 13, 2010: One out of Ten US Mortgages is Now Delinquent ... Which is Great for Consumer Spending]

While it is impossible to know the EXACT figure of strategic default vs true distress as a % of all foreclosures (but it's pretty easy to guess, just look for the folks who are making all their other payments and only sniffing their nose at the mortgage pymt), we have some solid roundball figures from this study.


Via University of Chicago/Northwestern study:
  • The researchers found that the number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, dramatically increased compared to just a year ago.
  • The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009.
  • “There is a contagion effect, it’s like a disease,” said Paola Sapienza, one of the professors who conducted the study. (correction - it's like a blessing... see monthly consumer spending figures and consumer discretionary stocks)

Any why not... the government/Fed is actually sponsoring the whole affair - the master plan is working to perfection. Keep bank funding rates at zero to demolish U.S. savers (the lowest caste of Americans)... hence letting banks out earn the losses on their balance sheet by taking money from the Fed for essentially free and buying US Treasuries (or speculating in the markets) for risk free return. Heck they might even make a loan or three - old school style.

Of course those mortgage losses don't even have to be observed under new accounting rules the lobbyists (via politicos) pushed through in spring 2008, until the actual taking back of the home. Up to that point whatever the banks judge the value to be, it is; and we all know about banks judgement by now, right? So why would the banks be in a hurry to go after delinquent mortgage holders? Answer - they are not. Hence scores of suburban (and city) America are scorched with squatters... not for 6 months or 9 months, but 18, 24 (or more).
  • One likely reason for this growing trend is the increasing perception that lenders are not going after borrowers who walk away.
  • “With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments.” said Sapienza.
  • Even in recourse states, where banks have the legal means to go after delinquent borrowers, the evidence shows that they are doing very little,” Ms Sapienza said.
Moral hazard baby! Now coursing through every vein of society from business to peasant.

Even more ironic... the strategic default probability increases when neighbors see neighbors bailed out by government riding to the rescue to those who took out that "can't miss" option ARM with zero percent down (we'll roll in the closing costs too!). Once they realize there is "no soup for you" if you are a responsible America... they have more incentive to join the party themselves.
  • The results also indicate that the likelihood of strategic default increases by 23 percent when homeowners learn that their neighbor with negative equity has received a partial loan for forgiveness.
Ah, unintended consequences.

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Conclusion: Everything is going along perfectly. Banks win (as they always do). Consumer spending can surge [Apr 14, 2010: SPDR S&P Retail ETF (XRT) Approaching All Time High] even without any real adjusted gains in income. Many don't even need jobs anymore to shop since the government ATM is on full blast. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] Working just takes time away from going to the mall anyhow. As for mortgages, we're up to 1/3rd of foreclosures by choice, and if things progress hopefully this can get to 50% by 2nd half 2011. The old house ATM of 2004-2007 is replaced with the new house ATM (2009-?). In the perfect nirvana economy, everyone will take out a mortgage and default on it within a few quarters (if not immediately wink wink) - thus driving consumer spending to the stratosphere and giving the U.S. a few +20% GDP quarters. Banks will take massive losses but have no risk of failing because they are "too interconnected" (at least if you are the top 6-7 banks). We'll print more money (remember that solves everything), create more housing programs (of which half the money will be immediately p***ed away) [Mar 26, 2010: Half of US Home Modifications Default - Again], and then quietly each quarter we can funnel another $10-$20 billion into Fannie, Freddie [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] to keep the perfect ponzi going forever. When a debt obligation is only a piece of vaporware - your economy can truly surge to unprecedented heights. Granted it's banana republic-ish but we've passed that rubicon a long time ago folks.

The only loser in this game is the lowest caste in American society: the saver. Thankfully she does not raise much fuss other than writing incensed comments on newspaper websites, but that's only the portion of the caste who even understands what is going on. Most simply shake their head each time they roll over that 1 year CD and wonder in abstract form "what is going on?"

My favorite quote from one of the myriad stories on this study:
  • “People are starting to change their way of thinking. It’s almost become trendy to walk away from your home,” he said.
Boo yah fellow Banana Republic citizens... boo yah.

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