Banks are again encouraging strategic default with their policies. This time they are reducing the FICO score impact because they want to keep the credit card business going with strategic defaulters.
Irvine Home Address … 8 CARMICHAEL Irvine, CA 92602
Resale Home Price …… $790,000
This is a thing I've
never known before
It's called easy livin'
This is a place I've
Never seen before
Now I've been forgiven
Easy livin’ and I've been forgiven
Uriah Heep — Easy Livin'
One of the major fears people have concerning acclerating their mortgage default is that they will be cut off from future borrowing by a lowered FICO score. This fear is important to the functioning of the system because if people do not fear the ramifications of default, many more will default, and bank losses will mount.
Back in April Io wrote Fannie Mae Encourages Strategic Default by Reducing Punishment Time for New Loan. Now, lenders are succumbing to pressures from the credit card side of their business to lessen the impact of mortgage delinquency. Will make enough on the credit cards to make up for what they will lose by encouraging strategic default?
Are Mortgage Defaulters Getting a Pass?
Posted by Stephen Gandel — Tuesday, December 14, 2010 at 1:13 pm
It appears not paying your mortgage won't hurt your credit as much as you think.
The New York Times reports that banks, in an effort to boost their credit card business, are courting customers who decided to default on their home loans. So-called "strategic defaulters," who walk away from their mortgage loan because they owe more than their house is worth, are now apparently considered to be good potential customers. Voluntarily choosing foreclosures was once seen as financial suicide. It was assumed that banks would shun those that didn't end up paying back their home loans. But it turns out that was more of a threat by the banks. That's good news from the millions of Americans who are underwater on their homes. But if banks are truly giving strategic defaulters a pass that could lead to a new wave defaults, and more pain for their mortgage lending divisions and the housing market in general. This seems like another dumb move for the banks and for our economy. Here's why:
The banks' credit card businesses have taken a hit from the recession and new financial regulations. So they need new customers. The question is where will they get those customers. In the past two years, many people have had problems paying off their debt. Others are already over leveraged. So in that context it would seem that people who walked away from their homes would make good candidates to be new credit card customers. First of all, they could have kept paying their loans. Second, most strategic defaulters are now all of a sudden much more debt free, especially if they chose to become renters. That may mean they are even a less risky borrower.
The truth is, strategic defaulters probably are better creidt risks after the default. It will be much easier for them to make payments once they don't have to pay the huge mortgage.
The problem is that while there have been a significant number of strategic defaulters, there are millions more who are underwater and still paying their mortgages. On Monday, research firm Corelogic reported that there are nearly 11 million homes around the country that are worth less what borrowers owe on those houses. That was down from a peak of 11.3 million homes in the beginning of the year. But it is still a lot. According to Corelogic, 22.5% of all homeowners with a mortgage are now underwater. Worse, home prices have started to fall again. If values were to drop another 5%, Corelogic estimates the number of borrowers who owe more than they own would jump 2.4 million.
Not all of these people will end up defaulting. Many borrowers, out of love for their house or obligation, will choose to continue to pay even if it makes more financial sense to walk away. Still, we have come a long when from the moral outrage that was once associated with walking away from your mortgage. And that makes sense to me. When a bank makes a home loan they should realize they are taking on real estate risk as well as credit risk. They share the risk of falling home prices along with the consumer. So individuals should have a right to stop paying on their mortgage if it will improve their finances. If banks want to keep them paying, they should have to offer incentives, like the very good Responsible Homeowner Reward Program.
I don't think banks should run special programs that encourage people to keep paying their debts. People should do that anyway. If they don't repay their debts, they are not extended credit in the future. Obtaining future credit is what motivated borrower behavior. People will do whatever they have to in order to obtain that next loan. Usually that means continuing to pay the last one.
Yet, I think shunning those customers that do end up walking away from their mortgages is a good thing as well, for the banks and for the economy. For the banks, even offering tacit approval for strategic defaulting seems like another dumb move. Even if many of the loans were sold off to investors, banks lose money when people stop paying their mortgages. And while I haven't done the numbers, my guess is that they would lose more money from the added defaults than they gain from the new card business.
Second, one of the problems that led to the financial crisis was too much risk. Strategic default should be one of the mechanisms that helps to deleverage the economy. But if the people who walk away from their mortgage just become the pool from which banks pitch high-cost credit cards, then financial healing process we need won't happen.
Lenders don't want to see deleveraging even if it sit he best thirng for our economy. The banks don't care about the economy. They only care about making the most money they can by keeping people in a state of indentured servitude. Bankers would be elated if people could borrow their way to prosperity and keep all their bad debt alive and active.
In many cases, second mortgage debt including old HELOCs simply become revolving credit debt that is no longer secured by real estate. Strategic defaulters opt to continue paying on second liens to keep access to the line of credit.
I agree with this author that the banks shouldn't be giving strategic defaulters access to easy credit so soon after the default. Word will get out, and people will have one less reason not to walk away from their mortgages.
Irvine Home Address … 8 CARMICHAEL Irvine, CA 92602 
Resale Home Price … $790,000
Home Purchase Price … $876,000
Home Purchase Date …. 4/26/2004
Net Gain (Loss) ………. $(133,400)
Percent Change ………. -15.2%
Annual Appreciation … -1.5%
Cost of Ownership
————————————————-
$790,000 ………. Asking Price
$158,000 ………. 20% Down Conventional
4.87% …………… Mortgage Interest Rate
$632,000 ………. 30-Year Mortgage
$161,165 ………. Income Requirement
$3,343 ………. Monthly Mortgage Payment
$685 ………. Property Tax
$267 ………. Special Taxes and Levies (Mello Roos)
$132 ………. Homeowners Insurance
$146 ………. Homeowners Association Fees
============================================
$4,572 ………. Monthly Cash Outlays
-$812 ………. Tax Savings (% of Interest and Property Tax)
-$778 ………. Equity Hidden in Payment
$296 ………. Lost Income to Down Payment (net of taxes)
$99 ………. Maintenance and Replacement Reserves
============================================
$3,376 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,900 ………. Furnishing and Move In @1%
$7,900 ………. Closing Costs @1%
$6,320 ………… Interest Points @1% of Loan
$158,000 ………. Down Payment
============================================
$180,120 ………. Total Cash Costs
$51,700 ………… Emergency Cash Reserves
============================================
$231,820 ………. Total Savings Needed
Property Details for 8 CARMICHAEL Irvine, CA 92602
——————————————————————————
Beds: 3
Baths: 2 full 1 part baths
Home size: 2,249 sq ft
($351 / sq ft)
Lot Size: 3,701 sq ft
Year Built: 2001
Days on Market: 16
Listing Updated: 40522
MLS Number: C10124820
Property Type: Single Family, Residential
Community: Northpark
Tract: Cust
——————————————————————————
According to the listing agent, this listing is a bank owned (foreclosed) property.
BANK OWNED HOME!!! Beautiful Home in Highly Sought after Gated 'NORTHPARK' Community. Desirable Corner Lot Location! Home has 3 Bedrooms Plus Downstairs Office/Den that Could be Converted to 4th Bedroom. Tiled Entry/Living Room, Guest Bath Downstairs with Pedestal Sink, Open Modern Kitchen with Granite Countertops & Center Island with Space for Wine Refrigerator. Kitchen is Open to Family Room with Granite Fireplace, French Doors Open Up to Back Patio/Dining and Family Room Area, Spacious Master Suite with Walk In Closet and Dressing Area, Two Sinks Separated by Corner Bathtub with Tiled Floors in Master Bath. Upstairs Separate Laundry Room. Crown Molding and Ceiling Fans Included in this Exquisite Home! SUBMIT OFFERS BEFORE IT GONE!!!
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,
Irvine Renter
I wonder if the issuer of the card, Citi, Wells Fargo, BoA care if the strategic defaulter gave up on one of their loans, or one of their competitor’s. Say someone’s defaulting on a $1M home that had a $7500/mo payment. They get 6 mo to a year w/o payments. That is potentially $45k – $90k that could be brought to the new bank as a deposit. Tying the cards to other accounts: savings, brokerage accounts serves two purposes and is the key point. The tying again serves as collateral, but the bank would have instant updates and can cut off the credit if the card becomes upside down. But the tying also brings deposits and other businesses. I would guess it would be cheaper for banks to offer higher rates to attract deposits, but that would be a dollar paid today, while credit card losses represent two dollars tomorrow.
Remember, these are the same banks that didn’t verify incomes, pushed loans to outrageously high levels relative to income, gave 2, 3, 4 or more loans to specuvestors, lured borrowers to higher cost loans to boost their incomes, conspired with appraisers to make the numbers work, used accounting tricks to make themselves look solvent, then rush to pay back gov’t bailout money so that they can get back to paying outrageous bonuses. Is any action by a bank surprising?
Most of the folks that I know who are currently in default of their homes whether strategic or not have already cashed out of their credit cards and have spent every dime of the credit limit and have stopped paying the min. payment as well. Most said that when they defaulted on their payments, within few months they got letters from their credit card companies lowering their credit limits and in some cases they even closed the inactive accounts citing risk. Now take that for another real fact on what is going on there.
Is their goal bankruptcy? If their incomes are above median-area incomes, they’re in for a rude surprise. Also, there are fraud protections in the Code when filers charge-up their cards right before their BK.
i.e. This plan might work well if your income is way down AND you expect it to be for an extended period.
Currently in Orange County, CA, if you have a household of 3, and make more than $70,000, you cannot, I repeat *cannot* file Chapter 7, instead you have to file Chapter 13, which is paying a portion of your debt back based on your income, either through 36-60 monthly payments.
This was very predictable. I recall arguing this years ago on here that when every other person has a foreclosure under their belt – it is not going to raise the same flags as before.
In reality, many of these strategic defaulters are good little monkeys when itcomes to paying the monthly credit card interest. They may have stopped paying on the foolish mortgage but they will pay their other bills and the banks clearly understand this.
From the bank’s point of view, the defaults give them a great excuse to start raping these debtors with high interest rates on credit cards. Why not take advantage of these folks and get back some of that money they walked from?
Preventing these people from getting a credit card sounds like a good slap on the wrist punishment but a foolish cutting off the nose to spite the face business decision for usurers.
92602: in its census tract, 48% of mortgages consume > 30% of income per census 2005-2009 community survey. Change since 2000, up 13%. Change in median monthly rent, -17%. Lots of fun maps:
http://projects.nytimes.com/census/2010/explorer
That home sold for $474k in 2001… then $876k in 2004.
It’s now selling for $790k… only 10% less?!?
What happened to 1999 prices? Heck… this will probably will never get to 2001 prices.
Apply 1999 interest rates and watch what it fetches.
It’s going to take more than 7% interest rates to drop this below $474k.
Irvine is not Riverside, Vegas or Arizona.
And since when did your “1999 prices theory” depend on interest rates?
and don’t forget to apply 1999 income levels too since nominal wages haven’t moved a budge in 11 years.
Should I apply the 1999 price of commodities too? 😉
As for wages… not too sure how that works since most of us should be making more than we did in 1999. I know for our household, wages have budged quite a bit.
Irvine HO –
Stop being dense. IR_Fan is not saying that nobody has gotten a pay raise since 1999. The point is that people still make the same amount of money on a relative scale. A senior level engineer makes in 2010 about the same as a senior level engineer in late 90’s. When you foolishly talk about your salary having increased you are just showing that you have gone from one pay level to another (moved from Jr level to Sr level). If you are smart enough to be worth a pay raise then you should be smart enough to understand what was meant.
lol @ David
I was being sarcastic. Talk about dense.
In nominal terms, people are making more than they did in 1999. We have argued about this multiple times. You always like to say there is no reason why prices should be higher than 1999 and that incomes have not gone up since 1999. In nominal terms, the income of people has gone up since 1999…
this is too funny.
But But But
and don’t forget to apply 1999 income levels too since nominal wages haven’t moved a budge in 11 years
You were being sarcastic? LOL! If only it were not true.
For some additional humor, check this out.
Whose yer daddy?
Dave –
You miss my point which is why I said I’m not sure how we can accommodate for the exact scenario I mentioned — and you so “astutely” pointing out.
There is a percentage of the population that could be above the mean disproportionately compared to 11 years ago. The same could be said for below the mean. I know for a fact that the jobs some people are holding now pay 40% or more than they did in 1999. Heck… realtors and brokers at the height of the bubble probably made 200%+ more than in 1999.
So… a Sr. level salary in 2010, could have budged much more than a Jr. level salary comparatively. To illustrate, a Jr. makes $40k in 1999, and makes $45k now, while a Sr. could have made $60k then and $95k now. And since Irvine probably attracts more professionals than neighboring cities, the demographics now are different from 1999. Does that explain what I was saying better? Or am I still being dense?
you still don’t seem to understand the difference between NOMINAL and real earnings. house prices are in nominal terms. the wages I said in NOMINAL terms have gone up. you are clearly my daddy since he is 92 and has bad eye sight and can’t read either.
The median household income in Irvine was 72k in ’99 and is ~92k now per the census. Numbers not adjusted for inflation. You could factor in interest rates, but for this median family you cannot account for a 2x’ing in prices mentioned below. However in 1999, 22% of Irvine had SELECTED MONTHLY OWNER COSTS AS A PERCENTAGE OF HOUSEHOLD INCOME IN 1999 > 35%, while in their most recent survey, that was 38%. So you have some portion of price increases from income increases, attribute a little more to interest rates, but a big factor is people putting more income towards a mortgage. I’d say the median DTI went from a shade under 25% to a little over 30%.
Rising incomes are the way for home prices to rise sustainably. Counting on continuing low interest rates, and actually for prices to continue to rise, you need ever lowering rates. And increasing DTI is unsustainable.
The county I grew up in is one of those near-nightmare areas of FL (not as bad as SW FL, but it has an 18% delinquency rate, even after a ton of foreclosures. Its median household income rose about 25% nominally, but the percentage of households putting > 35% of their income to a mortgage went from 22% to 44%.
For my current county, the >35% of income to mortgage group went from 13% in 1999 to just 7% now…
You don’t need ever lower interest rates. If you have a permanent shift in interest rates down where the norm is now 5% instead of 7% because of a global saving glut that is partially cycled through the US bond market, then prices will be about 30% higher across the board. Add in the NOMINAL higher wages, and the home prices should be about 60% higher. Far cry from 100% appreciation but even a further far cry from returning to ’99 prices because “wages haven’t budged” mantra that AZDave keeps advocating.
Maybe in AZ their NOMINAL wages have gone down over the last 10 years.
My point about interest rates was for them to fuel continued appreciation (or limit the decline of prices), they need to keep going down. Low rates can partially explain current prices, but unless rates are moving, they should have no ability to move prices. If you attribute higher prices to lower interest rates, then you have to be ready for the lower prices if interest rates rise. Counting on interest rates never getting back to 7% is like counting on home prices never falling.
The thing that will cause the most trouble is the increasing DTI. That explains a lot of the price increase and is something that will have to come down.
You ever buy a place over in Phoenix, Dave? Sorry, I have not kept up with this blog much so not sure if anything has changed for you in the last year or so. Assuming you must have picked up a bargain by now? With the accelerated plunge of real estate in the desert, the low interest rate environment — not to mention the “GO” signal on your area from everyone’s favorite house flipping bear, it would seem to be the right time.
So curious if you jumped in. And if not, when will be the right time?
Prices are still high in Scottsdale (where I live). They are being stubborn similar to Irvine but not priced as WTF badly. The neighborhood that I want to buy into is currently priced about 300K for 3BR 2BA 1600SQFT to 1800SQFT. I am waiting for them to drop to 250K which I believe will be the bottom. Once they get there, I’ll put down 50% and get a mortgage that is about half what I am renting for right now. I have counting on the bottom coming in at about 2012. It looks like the high end areas will hold out another couple of years but I am not looking to buy a McMansion as my goal is to pay of the house before I turn 40 and have plenty of money to go buy beer at the bar and retire early rather than slave to a house for 30 years.
Dave:
How much was that 3br/2ba 1800sft house in 1999?
About 225K I don’t mind “overpaying” slightly if the rental equivalent is not that far off.
In Irvine, a brand new 3br/2ba 1800sft house was $300k in 1999. Now, a brand new detached condo in the same class (not SFR because they don’t make them that small anymore), is about $600k.
The difference in appreciation magnitude is another factor you haven’t considered. Do you still think we’ll see 1999 prices across the board in Irvine? Even the 80s/90s bubble didn’t get back to the baseline prices.
applying 1999 interests rates to 1999 pricing and adjusting for inflation, $300K now at current interest rates might be very close to the same affordability.
$790k is an asking price, yes. Sales price back then v. asking price now isn’t perhaps a useful comparison. But who knows? Someone might just snap up this super duper deal of a lifetime.
Do we need to convince each other? What will be, will be. I could have shouted at the bubble as it formed with all my might. And still it would have inflated. And now as it painfully squeezes and wheezes its way out in different ways in different markets, we may shout at it again. Or at each other. And still it’s going to do what it’s going to do.
I come here to watch what it is doing, which is why I wish there was more Irvine specific analysis. I’m neither bull nor bear. I just want to know the local numbers and maybe hear a little conservative analysis on them. Hearing emotionally invested home owners tell us all how absolutely insane any price drops would be when in fact price drops have recently happened, even in Irvine, is as obnoxious as sanctimonious bear-growling.
@Bryan:
I don’t think I’ve ever said there were no price drops in Irvine… but maybe you’re not directing that particular part of your comment at me. At the same time, I don’t think there will be as huge drops as there has been elsewhere… especially across all segments of Irvine housing and not down to a prediction of 1999 levels.
If you want Irvine specific analysis… the IHB may not be the best place to look because I think IrvineRenter is more interested in other areas.
As for asking price vs. sales price, homes in that tract have recently sold above $800k (one at $910k) so it’s priced in line with comps.
Do I expect price drops in the future? Yes… but not as drastic as those who do not live in Irvine think. While I hope they are as drastic because I do think pricing is way too high in Irvine (and because I do want to move up)… I have a bad feeling that it’s not going to be much less based on current demand.
IR still hasn’t addressed his “no strong demand” comment about Irvine and whether his “sales rate” numbers included new homes sales. So here is what I could find:
http://www.ocregister.com/news/irvine-280528-homes-number.html
Apologies for the html typo:
http://www.ocregister.com/news/irvine-280528-homes-number.html
And I do want to add the disclaimer that the article was written by a realtor.
Recently, a few Irvine companies that mostly rely on highly-paid foreign employees have expanded.
Broadcom – mostly Chinese-Indian, Kia – mostly Korean, Blizzard…
These Oriental employees have a so-called sense of dignity that forces them to buy a personal house and pay for it through the nose.
I can tell you for sure at least one of these three companies has no particularly “foreign” hiring component. Not sure where you’re getting that kind of idea.
and these oriental employees will take your job so you need to go to your kkk rally now.
They do it already. Jobs gone overseas, this is the main reason of the current Depression.
I predict that in 15 years Broadcom will relocate to India or China. Nobody will prosecute its founders there for inviting prostitutes or saying bad words to their assistants.
Oh my gosh! This is hilarious.
I do not know how to link here, so either Google “Xtranormal You Should Buy a Home Now” or go to the Coto Housing Blog Post, “You Should Buy a Home Now.”
http://www.cotohousingblog.com/?p=15161
Oh my gosh! This is hilarious.
I do not know how to link here, so either Google “Xtranormal You Should Buy a Home Now” or go to the Coto Housing Blog Post, “You Should Buy a Home Now.”
No my real estate classes took 2 weeks to finish would you like some business cards with my picture on them?
LOL!
Depends … are you wearing your Gold Jacket? 🙂
Why can’t banks lobby for legislation that allows to store indefinitely all information about defaults, bankruptcies, foreclosures that a person filed for?
Why can’t a future doctor file for bankruptcy the next day after his graduation to wipe out all his student loan debts and “repair” his credit after a few years?
Student loan debt is non-dischargeable in bankruptcy. A BK filer would need to prove “undue hardship” in order to discharge their student loan debt. That standard is even higher than it sounds. You basically have to prove that there is no way you will ever be able to pay it back (permanent disability or terminal illness).
This is one reason why the Mrs. and I will not pay an extra penny to the mortgage debt before our student loans are paid in full. In a worst case scenario, we could walk-away from the mortgage debt, but those student loans are following us wherever we go.
But what is the reason for this disparity?
I understand that 90% of students would file bankruptcy to avoid paying enormous debt before their career starts. But now the number of people in foreclosure is also enormous.
If mortgage debt were also non-dischargeable, house prices would be much lower.
That’s a complicated question, but it’s politics basically. There’s movement right now to make private student loan debt dischargeable.
Whether or not mortgage debt is dischargeable is a complicated issue. In CA, home-debtors are well protected regardless of bankruptcy (federal law). The policy argument is that we want to place the burden of loss on the lenders. They’re the more sophisticated party and they should maintain lending standards that protect themselves.
A lot of home-buyers made very poor decisions, but they’ll be allowed to move-on with their lives, for the most part. I think this is fair.
IR, with respect I think your title and first few paragraphs are very misleading, re: “FICO”.
Where does the (cited) article say anything anywhere about FICO or “reducing FICO impact”? It doesnt.
Your FICO is still reduced; you will still be ‘impacted’ the same as ever (think auto loans, job apps, rental properties, any prudent lenders, etc.)
The credit card departments of zombie banks are reducing/adjusting ‘their lending standards’, not ‘FICO impacts’.
Big difference.
Exactly. Your credit is still shot but they use that as an excuse to charge extra fees and interest. These bankers aren’t so dumb.
Vincenzo…”Oriental employees”?
Seriously?
You should understand Oriental customs.
For example, for the Japanese buying or selling a used thing is a dirty sin. They buy new cars and after only 5 years unload them at auctions for 10% of the original price. The auctions are owned by Pakistani, for the Japanese it would be a disgrace.
That’s why they prefer new houses in the new communities of Irvine.
My point was you calling them Oriental which is very 1960’s.