Loan owners who shed their debts are being targeted by marketers who recognize this group now has greater disposable income, and they remain committed to repaying consumer debt.
Irvine Home Address … 10 LEDA Irvine, CA 92604
Resale Home Price …… $449,900
My sister got lucky, married a yuppie
Took him for all he was worth
Now she's a swinger dating a singer
I can't decide which is worse
But not me baby, I've got you to save me
Oh yer so bad, best thing I ever had
In a world gone mad, yer so bad
Tom Petty and the Heartbreakers — Yer So Bad
Lenders want to portray strategic defaulters as unreliable deadbeats and frighten by claiming they will never get another loan. The truth is that strategic defaulters are tomorrow's new business. In the short term, these former borrowers will have more disposable income as their debt service payments are eliminated. In the long term, this group will be targets for lenders looking to grow their businesses again. The cycle will repeat.
I have long maintained the economy will not recover until the excess debt of the housing bubble is purged. I noted in Foreclosures are essential to the economic recovery:
As long as the debt on real estate is excessive and capital is tied up in non-performing assets, the economy will suffer. It's really that simple. The solution is equally simple: foreclose on delinquent borrowers wiping out the debt and extract the remaining capital value. With the excess debt removed, borrowers can use their wage income to buy goods and services rather than giving it to the bank. When the mis-allocated capital is returned to the market, new investment will be spurred in areas where capital is most needed. Right now, we don't need more real estate.
Lower debt service obligations create more disposable income. During the housing bubble, debt expansion created disposable income, but with that stimulus gone for the foreseeable future, people are going to have to buy goods and services with their wage income — the way it's supposed to be.
Strategic Defaulters: Your Strange and Growing New Market Segment
High-Income Earners Move From Owning to Renting. This Can't Be Good
[Why? Why is owning superior to renting? The HELOC booty?]
By: Matt Carmichael — Published: June 27, 2011
When Tracy Bremmer, director of decision sciences at Experian, talks about mortgage defaults, she has more than reams of data behind her. She has personal experience. She tell a story, embellished slightly but still representative, of a “neighbor” who bought their house near the height of the boom only to see it lose 40% of its value, plunging their mortgage so far underwater it would take years to surface. Then they noticed the house across the street from them for sale for roughly half of what they paid for theirs. So they bought it, and just stopped paying their original mortgage.
Yes, that story is fictitious. Buy-and-bail was common during the 90s, but lenders cracked down on the practice early in this bust by requiring the borrower to qualify to make payments on both properties. There has been very little buy-and-bail this time around.
This family is semi-fictitious but is not alone. Ethics, morality and possible straight-up savvy aside, we started thinking about these “strategic defaulters” as a newly trending consumer segment, as they tend to become a strange new class of renters:
Data being released later today from Experian will show that in the first half of 2010, an estimated 275,000 people just walked away from mortgages they could afford to keep paying because they had become such awful investments. That adds up to roughly 17% of defaulters. While that figure is down 35% from the first half of 2009, as evidence of a double-dip housing crash mounts, “we expect the incidence of strategic defaulting to go up,” said Ms. Bremmer.
The double-dip will almost certainly bring about more strategic default. Many people who will strategically default over the next few years delayed their defaults in 2009 and 2010 due to the bear rally. This group believed house prices were coming back, and their denial gave them false hope of future equity. As they realize their shortest path to home equity is through strategic default, many will opt to quit paying their mortgages.
Estimates of the number of mortgages under water in the U.S. hover just over 1 in 4 but that could jump to half in the coming years. Recent data from Corelogic suggests that almost 10% of mortgages originated just last year are already in the negative equity range. The Federal Reserve shows average homeowner equity at just 38% down from 61% a decade ago. We could go on, but you get the idea. A lot of home owners are hosed.
But back to those strategic defaulters. These are no deadbeats in a traditional sense. The Experian data show that they are more likely to have had a jumbo-sized mortgage, have had excellent credit scores, have had more than one house or investment property, and have a higher than average household income. They also stay current on all their other bills. If you look at the incidence in these charts, the proportion of strategic defaulters keeps going up.
Not just are these renting-former-owners a good target market for traditional marketers looking to sell product, lenders will also come to see them as a good target for new credit. Creditors want borrowers who pay their bills. By and large, this group will. They defaulted on their mortgages because lenders gave them bad mortgages and in the process inflated the bubble which burst and put these strategic defaulters so far underwater that default was their best option. For as much as lenders would like to punish this group, they won't. They are a source of profitable new business.
They should be owning and spending like home owners. But they're not, and for up to the next seven years they might have a hard time finding a mortgage while their credit recovers. “As many strategic defaulters as there are,” said Ms. Bremmer, “there are many more people who are short-selling. Those people are renting, too.”
The short-sellers are not necessarily in as strong a financial position as the strategic defaulters, but they're still joining this new own-to-rent class.
During the foreclosure process, which can take 6 to 18 months, they will live in their house essentially for free. So they'll save for a new down payment, eventually get kicked out and rent, and fundamentally behave differently than their demographic rightly should. The list of product categories impacted by this is lengthy.
Realistically, very few will save the money for a new down payment. Most will blow it and become accustomed to an unsustainable lifestyle without a housing payment. Those that do manage to save the money will be the rare success stories. And they will also become targets for lenders trying to recoup the lost mortgage debt.
How big of a deal is this for marketers?
Each year roughly 5% of homeowners move. That number has been down the past few years and is now closer to 4%. As the housing crisis drags on, more people are going to want to move for traditional “non-market” reasons such as new jobs, better schools, kids, divorce etc. They might have been stuck in their under-water house but eventually that pressure will build, and if they aren't able to sell or even short-sell, this will seem like a more and more attractive (or perhaps only) alternative.
Many people will strategically default because they feel they must move regardless of the mortgage debt on their home. At first they will try to reason with the bank and attempt a short sale, but when those fail, they will walk.
Experian's report is aimed at helping banks identify the strategic defaulters so they can head some of this off and either press them harder to make the payments they can afford or at least start the foreclosure process more quickly on those who have no interest in ever making another payment.
In the meantime, we think it's a fascinating new segment and we're going to keep an eye on this and the marketing implications of a potential shift in our fundamental notion of what it means to be a homeowner.
Our fundamental notions of what it means to be a homeowner changed once people began to regard their homes and investments and piggy banks. Rather than being a stable foundation for family security, a house became a commodity to be bought and sold, and an ATM machine to be tapped when money is needed. This perversion of home ownership will take years to correct. The only antidote to this kool aid is a long and painful decline in house prices where the perceived investment value falls to near zero.
$232 SF in Irvine
By Irvine standards, I consider this house a relative bargain. The cost of ownership at $2,517 for an FHA buyer is near rental parity. For a conventional buyer, this property is well below rental parity.
Communities like El Camino Real with no Mello Roos and low or no HOAs are the best values in Irvine. This property has a relatively high HOA for El Camino Real as it is located in the condo development between the shopping center on Culver and the high school. Foreclosures in this development are common, and low prices abound.
With 4.31% interest rates, the low cost of ownership near rental parity will find buyer interest. Prices here may still go lower, but buyers looking to save money versus renting will help put in the bottom.
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 10 LEDA Irvine, CA 92604
Resale House Price …… $449,900.jpg)
Beds: 3
Baths: 2
Sq. Ft.: 1943
$232/SF
Property Type: Residential, Single Family
Style: Two Level, Traditional
Year Built: 1977
Community: El Camino Real
County: Orange
MLS#: S668162
Source: SoCalMLS
Status: Active
On Redfin: 8 days
——————————————————————————
* * * * The Most Popular, Spacious Family Home With Huge Family Room and Great Value For The SQ/Footage In Irvine. 3 Bedrooms & 2.5 Bathrooms, Catheral Ceilings, Wood Flooring Thru-out Downstairs, New Carpet, Fresh Paint. Large Living Rm with Fireplace, Formal Dining Rm, Kitchen with New Appliances. New Blinds and Ceiling Fans Tru-out, 2 Fireplaces NEWER ROOF, Large enclosed Backyard Facing the Greenbelt. 2 Car Attached Garage With Work Bench and Ample Storage Cabinets. * * * * Walk to 2Pool, 2Spa, 2Tennis Courts, School, Park, Library and Shopping * * * *
——————————————————————————————————————————————-
Proprietary IHB commentary and analysis
Catheral Ceilings?
Resale Home Price …… $449,900
House Purchase Price … $135,000
House Purchase Date …. 12/29/1993
Net Gain (Loss) ………. $287,906
Percent Change ………. 213.3%
Annual Appreciation … 6.9%
Cost of Home Ownership
————————————————-
$449,900 ………. Asking Price
$15,747 ………. 3.5% Down FHA Financing
4.31% …………… Mortgage Interest Rate
$434,154 ………. 30-Year Mortgage
$129,638 ………. Income Requirement
$2,151 ………. Monthly Mortgage Payment
$390 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$94 ………. Homeowners Insurance (@ 0.25%)
$499 ………. Private Mortgage Insurance
$215 ………. Homeowners Association Fees
============================================
$3,349 ………. Monthly Cash Outlays
-$341 ………. Tax Savings (% of Interest and Property Tax)
-$592 ………. Equity Hidden in Payment (Amortization)
$25 ………. Lost Income to Down Payment (net of taxes)
$76 ………. Maintenance and Replacement Reserves
============================================
$2,517 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,499 ………. Furnishing and Move In @1%
$4,499 ………. Closing Costs @1%
$4,342 ………… Interest Points @1% of Loan
$15,747 ………. Down Payment
============================================
$29,086 ………. Total Cash Costs
$38,500 ………… Emergency Cash Reserves
============================================
$67,586 ………. Total Savings Needed
——————————————————————————————————————————————————-
The first people to default were the speculators building real estate empires. I would imagine that the defaults started in 2008, 3 years ago. I also imagine that the BMW or MB dealerships would be willing to extend them new credit.
Lenders, especially the credit card companies, don’t want people who pay off their debts. They want people who accumulate lots of debt and carry large balances. The people who use their credit cards a lot, but pay them off every month are not the best CC clients. The ones who keep their balance near the limit all the time, racking up huge interest fees, they’re the best. $50k in credit card debt, with a 18% rate (substitute a going rate for someone with a high balance), is equivalent to $200k mortgage debt at 4.5%. That $50k fun debt is a vacation condo you don’t get to visit. Do you think CC companies are happy with declining equity levels so people don’t do cash-out refis to pay off their cards?
And the CC companies are sucking an additional 2-5% per transaction from the merchants or businesses from which these people are racking up continually more and more CC debt. The responsible guy who pays his bill every month in full still provides them with the 2-5% in fees, but only a fraction of the total transactions each month since he’s not going deep into debt. And yeah, no 18% interest charges!
Sometimes I wish I owned a BMW dealership… so even if the debtor defaults on those payments, I’d send out the Repo Man to get my car back and then re-sell a “pre-owned” marked up vehicle or lease it out to a poser willing to pay more monthly debt service than he can afford. Then when the lease expires, sell it “pre-owned” again. What a deal!
I have long thought that BMW lease and sales rates – hell, just lease rates, since sales are inconsequential – would be a grand indicator of the health of the higher end of the real estate market, maybe a leading indicator.
Does anyone have any information on this? How are the BMW dealers doing? Audi? Mercedes? Infiniti?
In the cc world, the people who pay off the entire cc balance every month are call deadbeats. People who carry balance are the good customers, who get more cc offers and raised limits.
A CA BK question: How often does the court liquidate the house with high equility to pay for non-secured debt (even when the filer applied for Ch.7 instead of Ch.13? Is it scamer who get the house-owner to file Ch.7 to pick up the house on the cheap?
…Lenders, especially the credit card companies, don’t want people who pay off their debts…
In other words:
Doesn’t matter what your are buying, whether it be a house, car, vacation or whatever we [lenders] want you to spend the most expensive [interest rate] money possible and die broke.
It appears that an amazing number of people are very successful at doing just that.
And the rest of us get to subsidize such behavior via taxation.
It’s not all the same because of the different interest rates that are charged. Mortgage lenders for the most part want you to pay because it’s just more trouble if you don’t – even when lending standards were better. If a home is underwater, they need you to keep paying because of the magnitude of the loss. With responsible lending 10-20% down, and healthy market appreciation rates, homeowners sell if they can’t pay anymore, and if the home does go to foreclosure, the bank will move quickly to save any equity they have in it.
“Buy-and-bail was common during the 90s, but lenders cracked down on the practice early in this bust by requiring the borrower to qualify to make payments on both properties.”
While not as common this time, you can’t say it’s “fictitious”. I know someone who did this in the summer of 2008 just before the new rules kicked-in. They bought a nice SFR, then dumped a significantly underwater condo thru short-sale.
Good move for them!
My neighbor just did that last May, he dumped the underwater condo in lake forest, after he bought a nice SFR in Costa Mesa…good for him too…so banks still let this happened up until now?
$232 a square foot may be inexpensive in comparison, but I like to use a baseline sale and calculate what the price SHOULD be based on an assumptive return rate. In the long run, housing should really only appreciate based on current inflation or real wage growth; If you assume a long term 3.5% inflation rate (which, in itself is a bit higher than the avg 3%), this house should be selling for about $251k based on its 1993 selling price of $135k.
I have a business that would love to have my marketing target strategic defaulters. Any idea where I can get my hands on that demographic info?
Mwahahahaha…
I was hoping for another Hedonic Wednesday.
Do 3/2s in El Camino really rent for about $2500? Seems high to me but I haven’t been tracking the rental market in other areas of Irvine in the last year or so.
Jaysen and I are meeting this evening. I think he plans to write about rentals next week.
IR and/or Shevy,
Can one of you please explain to me how you can endorse or allow this blog to be used to endorse a 2/2 condo selling at $521/sf, presumably with a large HOA fee and Mello-Roos on top of that? Has this property reached some sort of sensible, fundamental value? I find that very hard to believe, even in Turtle Ridge. Does this not violate either of your consciences, given the events of the past several years? I know that you’re not forcing anyone to buy this property, but New Century Financial didn’t force anyone to sign any of their loans, either.
Please help me to understand the moral authority that you have on this property while you blast corrupt and greedy loanowners, realtards, and banksters on a daily basis. (Having personal bills to pay and needing a commission/referral will not be sufficient justification, I’m afraid.)
https://www.irvinehousingblog.com/blog/comments/irvine-2bd-2.5ba-turtle-ridge-599900/
-Darth
It seems kind of funny to be selling real estate on a bear blog. This blog is essentially saying “don’t buy now, real estate has more to drop, however, I do have this nice house over here you wanna buy it?”
weird man.
It doesn’t mean your advice isn’t appreciated IR.
Hi Darth;
Thanks for the note. That is a great question. Both Larry and I practice what we preach, we both lease. In addition, if a seller asks us we give them fair and honest advise just as we do for buyers and just as the blog has done since 2006, when we see properties selling out of line with rental parity and we feel there is a bubble we advise our clients based upon what’s in their best interest, in some cases they are better of selling than holding a property.
Most of our clients are buyers and if they asked us if they should buy a property that is not in line with rental parity and does not make sense for them financially we would tell them not to buy it. We do this weekly. On this flip side, many readers follow Irvine real estate because they own properties, some of which are still inflated, if they ask us our advice given their situation and property, it sometimes make more sense for them to sell. This blog helped dozens of people encouraging them not to buy during the bubble and for many people it’s still better to wait, in addition, it showed others that they would likely be better off selling during the bubble, renting, and waiting for prices to come down.
Many sellers’ wish they would have started reading in 2006 and sold their house(s). If our advice and reach can help one of our clients that contact us for advice and services and give their property more exposure, then we do what is in our clients/readers best interest. Sellers’ recognize the value of the reach of the blog. We have thousands of well educated readers and clients, and hundreds of clients that seek our advice, however, there are also thousands of people that visit the site everyday that have an agent and/or do not want and will not take our advice, and many do not want our advice or do not agree with it. We do not know their financial situation and we may feel that some of our listings are not good purchases for the buyers, however, our duty is to our clients and those that want our advice, listen, and contact us for our services.
The listings that we post are not on the MLS some will not be on the MLS for a short period of time, others will not be on the MLS for a longer period. Our goal is to provide market insight and value to our clients. If we have a client that wants to sell and can sell for above rental parity it is our duty and obligation to give them the best exposure that we can and help them sell their home faster and for more money, we do not refuse to give them advice or offer them service if we can provide them value, we give them our honest opinion and advice just as we do for buyers that want to work with us.
The difference between what we do and New Century financial is that we advise buyers not to buy when it does not make financial sense and advise owners of real estate to sell when it does not make sense to hold, New Century, had a duty to their client, in that case the person getting the loan who was getting screwed.
“If we have a client that wants to sell and can sell for above rental parity it is our duty and obligation to give them the best exposure that we can and help them sell their home faster and for more money…”
Anybody else besides me that finds this phrase a regular “realtorspeak”?
Shevy,
Thanks for the response. That actually does make a lot of sense, and I do feel a lot better about your involvement and the IHB’s involvement. Being a future first-time buyer, I guess I get kind of fixated on the buyer side of the equation and forget that there are people out there that own inflated properties and would be wise to sell them while they are still inflated.
In all seriousness, thank you for the response. Take care and best of luck.
-Darth
P.S. My apologies if the New Century analogy came across a little harsh. I’m still a bit angry at times about the whole situation (both the obvious mistakes of the past and the corruption and mismanagement that’s continuing to occur in the present).
The anticipation of future appreciation is not the only reason to buy a home, and the knowledge that home prices will continue to depreciate does not necessarily keep those in the know from buying. It won’t stop me from buying when I want to buy.
I do not ask real estate agents for their advice on the real estate market. I may ask IR, but that has nothing to do with his being a broker.
Hi Darth;
Thanks for the note. The question made a lot of sense and I’m glad that you asked. I’m sure that there were others that were wondering the same thing, moreover, I appreciate that you took the time to review my response and the opportunity to communicate.
Larry and I have had conversations regarding real estate organizations and the fact that everything/most of what they put out serves owners/sellers and is meant to create a false sense of urgency, keep prices high, and help seller’s to get more for their homes. What is unfortunate about that is that circa 50% of the transactions that the agent’s that belong to these organizations complete is for the buyer (some people represent themselves either when they buy or sell and I’m not sure what the break down is exactly), yet little to no time or effort is put into accurate and truthful information that will help buyer’s to make the right decisions. Just as listing agents have a duty to help their client sell their home for as much as they can I believe that buyer’s agents have a duty to their client to share information that will help them to see the big picture, assist them make a decision that is smart for them financially, and when they purchase, to negotiate to get the property for the least amount possible. The current marketing put out and legislation that agent organizations lobby for does not reflect this.
This is a reason why I think it’s really tough for an agent to double end a transaction ethically and I believe that buyer’s that go direct to the listing agent need to be cautious, and ideally experienced in negotiating, market analysis, have the ability to put their emotions aside, and have access to the best comps and market information available.
I believe that the blog and community of readers and dialogue does a good job of showing the bigger picture and counteracting some of the spin. That said, as a result of the market for the past 8+ years or so, the information has been much more useful and appreciated by potential buyers, renters, and those waiting to buy and/or considering selling and leasing.
We have discussed the value of creating a larger/national organization that strictly puts out information for buyer’s, without the spin, similar to the blog, however a larger network that can create greater influence and counter act a lot of the bad information out there. The current agent organizations and the information that they put out and policies that they lobby for, generally only help sellers that are going to rent and not re-purchase and listing agents. Balance is needed and with the help of our readers we do our best to fill that void.
Darth, there’s another one for $800/sqft.
The prices are going up, I tell ya!!!
This is a slight twist on the older practice of targeting those who are just past bankruptcy.
Lenders have – or once had, anyway – a captive audience among the just-bankrupt demographic, because most such borrowers have not only demonstrated a taste for debt, but will be eager to pay whatever fees necessary to rebuild a credit history. Even better, the limitation on how often one can declare bankruptcy means that lenders, for the first few years, are guaranteed most of their money back.
Bankruptcy reform may have changed this dynamic – the debtor is now steered toward something more like Chapter 13, which does not erase all unsecured debt – but the pre-reform bankruptcy market is a template for what lenders will be doing with these post-default homeowners.
There may be an upside to this: those who can’t handle debt will be pulled away from homedebtorship forever, or at least until prices go low enough to allow even flakes to come up with 20%.