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Turns out strategic mortgage defaults weren't really strategic

Scorpio

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#1
Turns out strategic mortgage defaults weren't really strategic


Russ Wiles, The Arizona Republic 7:32 a.m. EDT May 7, 2016


(Photo: Getty Images)

One of the interesting things about the housing bust of several years ago — interesting in retrospect, not so fun at the time — was the many people who walked away from their homes voluntarily.

"Strategic default" was the buzzword phrase to describe owners who simply defaulted on their mortgages based on declining values rather than an inability to pay. Their actions fostered a debate centered as much around ethical implications as the financial causes.

A 2015 study, recently highlighted by Harvard's Shorenstein Center on Media, Politics and Public Policy, takes a much closer look at the types of homeowners who engaged in strategic defaults from 2009-2011. Many of the conclusions confirm what was widely assumed about defaults, but there are some surprising wrinkles.

The research team, which included Federal Reserve economists as well as academics at UCLA and Arizona State, found that unemployment and falling home values make for a toxic financial cocktail, especially if mixed with little or no household rainy-day funds.

A job loss, the researchers concluded, is probably the single biggest financial shock that can lead to a mortgage default. More than 40% of defaulting households who couldn't make payments were headed by an unemployed individual or one who went through a recent divorce or faced hefty medical expenses.

Nevertheless, most financially distressed households didn't default, which the researchers said reflected the ability of many of these people to tap resources such as friends or relatives to tide them over. Even among unemployed households lacking enough savings to make even one monthly mortgage payment, more than 80% stayed current.

"In other words, despite no income and no savings, most households in the group continue to pay their mortgages," the researchers wrote.

Another intriguing issue was centered around families who could afford to keep paying their mortgages but chose not to do so. Despite a lot of media attention at the time paid to strategic defaulters, they were rare, according to the study. Fewer than 1% of households with the financial means to pay instead chose to walk away.

"Most households in positions of negative equity with relatively high net worth choose not to default," the researchers wrote.

The study largely confirmed that personal financial shocks lead to mortgage defaults — job losses in particular — without citing negative housing equity as an overriding factor. It also showed that many homeowners struggle to hang onto their homes when times get tough, perhaps longer than they should.


People who walked away from their mortgages rarely did it for strategic reasons. (Photo: Getty Images/iStockphoto)

Stretched urbanites

Speaking of mortgage struggles, homeowners pay a price to live in big cities. Residents of most of the nation's largest cities tend to be over-leveraged with housing debt, according to a new report by WalletHub.

The personal-finance website evaluated average mortgage debts against median incomes and median home values in more than 2,500 U.S. cities and towns. Nearly all of the biggest cities fall in the upper half for high borrowing or leverage ratios, with residents of New York, Los Angeles, Dallas and Boston placing in the top 1 percentile. Atlanta, Detroit and Houston fell in the top 10% for housing debt burdens, with Phoenix, Miami, Pittsburgh, San Francisco and Chicago all in the top 20%.

Seattle and Washington, D.C., placed in the upper third. Only a few big cities, including Philadelphia, Baltimore and Minneapolis, were near the middle of the pack.

The WalletHub site includes leverage rankings for all 2,500-plus urban areas and provides a calculator to determine how much housing debt can be afforded based on a person's income, what the monthly payment would be and more.

Withering tax deductions

Americans like their real estate income-tax breaks, but fewer are being claimed.

The deduction for residential mortgage interest was was claimed on 33 million individual returns in 2013, the most recent year for which the IRS has released statistics, down from 41.7 million returns in 2007. The amount of interest deducted slipped by an even wider margin to $294 billion in 2013 from $543 billion six years earlier.

The decline in the nation's homeownership rate explains some of that drop. As another possible factor, more people might be paying down their mortgages or buying housing on an all-cash basis, reflecting an aversion to debt. But an even more decisive factor could be the sharp downturn in mortgage interest rates that came after the housing market collapse.

Rates on 30-year fixed mortgages, which averaged 6.3% in 2007, slid to 4% by 2013, according to Freddie Mac. They're even lower today, around 3.7% on average.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

http://www.usatoday.com/story/money/personalfinance/2016/05/07/strategic-mortgage-defaults/83555358/
 

Uglytruth

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Funny how the banksters like lending huge amounts to enslave people to pay for an overvalued house because they are thieves and want to be slave owners but didn't like it when people walked in & handed them the keys back.
Friends daughter did just that in FL. Bank was shocked but in reality she didn't walk away from much. Don't remember but it was a 150K house that was worth about 100K at the time. Had not lived there very long.
 

nickndfl

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If you held on in Florida you are back into equity right now. Market is hot. Buy property in Florida for retirement now before you get priced out of the market.
 

madhu

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If you held on in Florida you are back into equity right now. Market is hot. Buy property in Florida for retirement now before you get priced out of the market.
Have heard that so many times, I wonder is that a maxim they teach to real estate agents to tout when u have newbie looking to buy. the real estate market is fabulous for sellers w ho can sell and run with their profits. This is not a buyers market at all. I cannot understand this American fascination with Floriduh?
Yes you will be priced out of the market if the value of dollars gets lower and hyper inflation sets inn.
 

Fiat Metaler

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#5
the phrase strategic default may have been overused, but there was something different about this crisis. historically, people held their homes until the last moment. they defaulted on everything else - credit cards, cars, - first. Also, mortgages usually went 180 days in arrears before they were in default. what was different this time is a lot of folks paid their credit cards and let the house go. it may be because they lost their job, or had multiple house, i don't know. also, a lot of folks mailed their keys back to the bank. it was the borrower who many times accelerated default. this had an accounting impact on the bank and meant that it brought forward the default from the future, and resulted in a bunching of loss recognition 2006-2008 iirc.
 
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#6
I mentioned this in another post, but the whole "ethics" angle when it comes to defaulting on debts is completely inconsistent.

An individual is shunned and his ethics are questioned if he "strategically" defaults.

But, a corporation or bank is expected to strategically default on underwater positions - they just restructure or are bailed out, and then carry on.

As a society, we need to hold corporations and banks to higher standards than we do individuals - not the other way around.

In 2008-9, many individuals lost their livelihoods - due to no fault of their own - and then the rest of us expected them to make good on their debt while we bailed out banks who caused the whole mess? It's ludicrous..
 

GOLD DUCK

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I mentioned this in another post, but the whole "ethics" angle when it comes to defaulting on debts is completely inconsistent.

An individual is shunned and his ethics are questioned if he "strategically" defaults.

But, a corporation or bank is expected to strategically default on underwater positions - they just restructure or are bailed out, and then carry on.

As a society, we need to hold corporations and banks to higher standards than we do individuals - not the other way around.

In 2008-9, many individuals lost their livelihoods - due to no fault of their own - and then the rest of us expected them to make good on their debt while we bailed out banks who caused the whole mess? It's ludicrous..
QWAK,itchy166,The concept of "HONOR" does not apply to bankers or business it is a personal thing mostly lost in recent personal interactions since the 60s on. :thumbs down:

the DUCK :winks2:
 

the_shootist

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I've owned a number of homes over the years and I never, not once, let the bank tell me how much I could afford. It's called self responsibility. The bank would always say I could afford 'X' and I always placed my maximum mortgage at 'X-20%/30%' People don't take responsibility for their actions....that's the real underlying problem. If they did, the banks would be powerless to cause these issues. If you're willing to make a deal with the devil, you and you alone should be made to pay the price!
 

Uglytruth

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#9
1 weeks take home pay MAX including tax & ins. WITHOUT OVERTIME !
 

the_shootist

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1 weeks take home pay MAX including tax & ins. WITHOUT OVERTIME !
Mortgage:
Principle, interest, taxes and insurance </=25% gross monthly income (overtime excluded)

Overall debt limit:
All long term debt (mortgage, credit cards, car payment, etc.) </=33% of gross monthly income (overtime excluded)

Anything more than that is over what you can afford!
 

latemetal

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#11
States handle foreclosures differently, Florida allows the bank to seize the house AND go after you for the deficiency. We still had massive foreclosures...