Strategic Defaults

With tougher mortgage underwriting rules a virtual certainty under Congress' new financial reform legislation, lenders have begun confronting still another vexing issue: Can home buyers who have high credit scores really be trusted not to pull the plug — strategically default — when the economy hits a rough patch and home values tank? New research based on data from 25 million active consumer credit files suggests that the answer might be no. Though people with the highest credit scores are less likely to default compared with people with lower scores, when they do default they are much more likely to do it strategically — that is, simply stop paying with little or no warning.

Walkaways. Jingle mail. Strategic defaults. Those of you already experiencing nostalgia for the cliffhanger days of the housing crisis will remember those terms. They were applied to homeowners who were supposedly so distressed at the collapse of the homes' values that they were abandoning the properties to foreclosure, even though they still had the wherewithal to keep up their mortgage payments. These borrowers were just "walking away" from their homes; "jingle mail" was a fanciful way of describing the sound made when they mailed their keys back to the bank; "strategic default" was the sober, nonjudgmental way of describing the phenomenon in financial journals.

Walkaways. Jingle mail. Strategic defaults. Those of you already experiencing nostalgia for the cliffhanger days of the housing crisis will remember those terms. They were applied to homeowners who were supposedly so distressed at the collapse of the homes' values that they were abandoning the properties to foreclosure, even though they still had the wherewithal to keep up their mortgage payments. These borrowers were just "walking away" from their homes; "jingle mail" was a fanciful way of describing the sound made when they mailed their keys back to the bank; "strategic default" was the sober, nonjudgmental way of describing the phenomenon in financial journals.

Do you have a big mortgage and good credit scores but not much equity — maybe you're even underwater? Do you see little chance that your home's market value will improve a lot during the coming three to seven years? If you answered yes to both questions — and thousands of homeowners across the country could do so — new research suggests that you are in a category that lenders need to worry about most: prime jumbo borrowers who once were thought to be among the safest bets, but who now are the most likely to opt for a strategic default and walk away from their homes.

Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert home, even though she could afford the payments. Bloch paid $385,000 for the two-bedroom in 2006, when prices were still surging. Comparable homes are now selling in the low-$200,000s. At 66, the retired psychologist doubted she'd see her investment rebound in her lifetime. Plus, she said she was duped into an expensive loan. The way she sees it, big banks that helped fuel the mess all got bailouts while small fry like her are left holding the bag. No more.

The collapse of the housing market has pushed more than 11 million homeowners into the uncomfortable position of owing more to their lender than their house is worth. A third of the mortgages held in California fall into this category, according to housing market analyst CoreLogic. Many of these borrowers are voluntarily defaulting on loans even though they could still afford their payments, calculating that their homes will never regain their value. During debate last week on a bill (HR 5072)

That some underwater owners -- whose houses are worth less than what they owe -- are walking away from their homes even though they can still afford to make their mortgage payments has been well reported, if not well documented. But just how prevalent are these "strategic defaults"? And what are the social and moral ramifications of jumping ship? The answer to that first question is difficult to measure, if only because people who do make a conscious decision to ditch their mortgages, although they can still pay them, have every reason to disguise themselves as people who can no longer afford their loans.

Re: " 'Strategic' defaults on loans increase," Sept. 20: It is very saddening to hear that people who intentionally abandon their mortgages have an almost perfect credit score when it comes to applying for a loan or another mortgage. It just shows how unjust the credit system really is. Most people in the U.S. are often denied a loan or mortgage due to simple things like a DVD that was returned late or a $50 cellphone bill that was overlooked. Yet people who choose to cheat the system are allowed to borrow more money.

In a push to simplify mortgage modifications, federal regulators announced a streamlined process that doesn't require borrowers to prove a hardship. "This new option gives delinquent borrowers another path to avoid foreclosure," Edward J. DeMarco, acting director of the Federal Housing Finance Agency, said in a statement announcing the modifications Wednesday. The new modifications, however, would not include reducing the loan balance, a move promoted by housing advocates and others but resisted by DeMarco, who says it would end up costing taxpayers money and would encourage defaults.

In a push to simplify loan modifications, many borrowers who become 90 days or more past due on mortgages backed by Freddie Mac and Fannie Mae will be offered lowered payments without having to prove hardship, the federal regulator of the home-finance giants said. The streamlined modification program, to be put into effect in July, would reduce monthly payments by about 30% on average, officials said in announcing the program Wednesday.  Eligible borrowers would receive letters explaining the modification offer and specifying the reduced payment.

With tougher mortgage underwriting rules a virtual certainty under Congress' new financial reform legislation, lenders have begun confronting still another vexing issue: Can home buyers who have high credit scores really be trusted not to pull the plug — strategically default — when the economy hits a rough patch and home values tank? New research based on data from 25 million active consumer credit files suggests that the answer might be no. Though people with the highest credit scores are less likely to default compared with people with lower scores, when they do default they are much more likely to do it strategically — that is, simply stop paying with little or no warning.

The collapse of the housing market has pushed more than 11 million homeowners into the uncomfortable position of owing more to their lender than their house is worth. A third of the mortgages held in California fall into this category, according to housing market analyst CoreLogic. Many of these borrowers are voluntarily defaulting on loans even though they could still afford their payments, calculating that their homes will never regain their value. During debate last week on a bill (HR 5072)

Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert home, even though she could afford the payments. Bloch paid $385,000 for the two-bedroom in 2006, when prices were still surging. Comparable homes are now selling in the low-$200,000s. At 66, the retired psychologist doubted she'd see her investment rebound in her lifetime. Plus, she said she was duped into an expensive loan. The way she sees it, big banks that helped fuel the mess all got bailouts while small fry like her are left holding the bag. No more.

That some underwater owners -- whose houses are worth less than what they owe -- are walking away from their homes even though they can still afford to make their mortgage payments has been well reported, if not well documented. But just how prevalent are these "strategic defaults"? And what are the social and moral ramifications of jumping ship? The answer to that first question is difficult to measure, if only because people who do make a conscious decision to ditch their mortgages, although they can still pay them, have every reason to disguise themselves as people who can no longer afford their loans.

Re: " 'Strategic' defaults on loans increase," Sept. 20: It is very saddening to hear that people who intentionally abandon their mortgages have an almost perfect credit score when it comes to applying for a loan or another mortgage. It just shows how unjust the credit system really is. Most people in the U.S. are often denied a loan or mortgage due to simple things like a DVD that was returned late or a $50 cellphone bill that was overlooked. Yet people who choose to cheat the system are allowed to borrow more money.

Do you have a big mortgage and good credit scores but not much equity — maybe you're even underwater? Do you see little chance that your home's market value will improve a lot during the coming three to seven years? If you answered yes to both questions — and thousands of homeowners across the country could do so — new research suggests that you are in a category that lenders need to worry about most: prime jumbo borrowers who once were thought to be among the safest bets, but who now are the most likely to opt for a strategic default and walk away from their homes.

Home prices gained for the seventh consecutive month in December, with Los Angeles and other West Coast cities posting the biggest rises, according to a closely watched index released Tuesday. The Standard & Poor's/Case-Shiller index of 20 metropolitan areas scored a modest 0.3% increase on a seasonally adjusted basis. That's not huge, but analysts were cheered that prices didn't dip and that 14 cities posted increases, including hard-hit markets such as Los Angeles, San Diego and Phoenix.