Friday, September 25, 2009

Strategic Mortgage Defaults

The L.A. Times reports that a study shows borrowers with good credit are actually more likely to default on their mortgages than borrowers with lower credit scores. These "strategic defaults" appear to be done based on a simple business analysis and with full knowledge of the consequences: if the property is seriously underwater, just give it up.

When I first read this, my thought was the defaulters were mainly people who bought investment properties during the bubble and were now giving up This does not appear to be the case, however. "Two-thirds of strategic defaulters have only one mortgage -- the one they're walking away from on their primary homes." And, not surprisingly, the study found "Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006."

One site I was reading opined that this would make loan modifications harder to obtain. But I'm not sure that is a bad thing. A report published in April showed "Fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent... [while] nearly one in four loan modifications in the fourth quarter [of 2008] actually resulted in increased monthly payments."


Best Home Mortgage Rates said...

This is something unbelievable for me. But, why they are loosing there credential on credit score.

Vancouver Rentals said...

these reports really confusing

Team Aguilar said...

This is very interesting information. I have heard that many are just walking away from real estate, but wasn't aware that this was how it was being done. In the long run, I think this is a bad idea for credit and for future investments in the economy at large. I try to show the different options through my own real estate company. This can be seen at

Anonymous said...

Shawn - Great blog. I look forward to reading each installment. I have a few HML questions if you don't mind.. Do you require hazard ins on the properties during the loan term? Who is responsible to pay taxes or municipal assessments during the loan period? I read that the Fed Reserve amended Regulation Z (Truth in Lending)July 14 2008-- did this change your lending guidelines? Have you made any HML that are int + princ, or are they all balloon? Thanks... I am learning a lot from your experiences.

Shaun said...

Thanks for the kind words. The deed of trust I checked does not explicitly state insurance is required, but it does say the borrow must promptly restore or rebuild any portion of the property that is damaged or destroyed, which pretty much means he needs insurance. The borrower is responsible for all taxes and assessments. Reg Z doesn't affect us. We use none of the stuff it is worried about - variable interest rates, negative amortization, prepayment penalties, etc. All our loans are fixed interest, interest only, balloon payment loans with no prepayment penalties. There is no escrow account. They are about as straight-forward as you can get.

commercial real estate said...

Its kinda confusing at first but this is whats happening..and yeah, i agree with some points of it..

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