Here is an example from Everett, Washington (emphasis added):
Deanna Skinner lives in her dream house in east Everett. But when she and her husband divorced last year, they knew they'd have to sell -- and at a time when the real estate market was crumbling.You lose half the earning power permanently in your household but get to keep the house? If banks are forced by politicians to offer loan mods now and in the future they have to account for the permanently discounted cash flows for death, disability and divorce? That sure seems like it would make mortgage credit very expensive.
When the Obama administration announced its affordable refinance program earlier this year, Skinner was inspired, thinking she'd found a way to keep her home through refinancing or loan modification.
My expectation is that the NPV test will determine that the above borrower is denied and loan mod and will be asked to short sale or face foreclosure. But it is an example, that I feel is rampant, of people not dealing with their current situation because they think a loan modification bails them out of their predicament. It increases the duration of the pain not shortens it. But the banks are counting on homeowners not realizing that for awhile into the future.
2 comments:
"But it is an example, that I feel is rampant, of people not dealing with their current situation because they think a loan modification bails them out of their predicament. It increases the duration of the pain not shortens it. But the banks are counting on homeowners not realizing that for awhile into the future."
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I think some borrowers are catching on:
SOURCE: http://www.financialtrustindex.org/
WHEN HOMEOWNERS WALK AWAY: NEW RESEARCH REVEALS MORE THAN 25 PERCENT OF MORTGAGE LOAN DEFAULTS ARE STRATEGIC
Financial Trust Index Researchers
Study Economic and Moral Factors In Strategic Default
CHICAGO (June 26, 2009) – While the Obama administration’s housing policy has been largely influenced by a study of the Boston housing market during the 1990-91 recession in which homes devalued by approximately 10 percent, new research suggests that a novel phenomenon is at hand in the fallout of today’s more severe housing crisis – strategic default on mortgage loans. Given that homes in numerous parts of the country have lost more than 30 to 40 percent of their value, many homeowners say they would simply walk away from their loans – without fear of repercussion.
A new paper, entitled “Moral and Social Restraints to Strategic Default on Mortgages,” looks at American homeowners’ propensity to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage. By using new survey data, the paper estimates that more than a quarter of defaults on mortgage loans are strategic, especially when home values have fallen by more than 15 percent.
The new research was led by Paola Sapienza (Kellogg School of Management at Northwestern University) and Luigi Zingales (University of Chicago Booth School of Business) – co-authors of the quarterly Chicago Booth/Kellogg School Financial Trust Index – as well as Luigi Guiso (European University Institute). With data collected from surveys conducted within the last six months as part of the Financial Trust Index, this paper is the first to examine the economic and moral implications of strategic default in the current recession.
Welcome to the blog Maggie.
I think strategic defaulters have done the calculus and have decided to fix the problem sooner rather than drag it out forever. There are also the strategic default seconds who, due to the single action rule in CA, are basically daring the seconds to foreclose or settle for pennies on the dollars.
But I think many, like the lady in the article, are unrealistic about holding onto the home long term but emotion is clouding logic. It is kind of the "subprime" mentality, just get "it" (loan mod) now and worry about what comes later. The loan mod is really designed to maximize the cash flow the banks can get from the homeowner but the homeowners have a mistaken impression it is some kind of "deal". They don't understand terms like recapitalization of arrearages and reamortization. They just see their Interest-Only interest rate cut to 6% from 8% and think they pulled one over on that bank. Where the bank actually extened the loan term to 40 years, put everything the owed back into the loan and started having them pay down the balance each month. Not bad for the bank for a asset that can be several hundreds thousands underwater.
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