Anybody ever seen studies which quantify why people are defaulting on their mortgages?

[dkf]

I'd be curious to know if it was due to layoffs, rate resets, option arms, or if they simply bought too much house.

[Indi Guy]

1. I get you...

To blame the borrowers is insanity.

It's the job of the lenders to judge the risk of the many applicants.

[dkf]

2. I'm trying to figure out what the problem is and how many more we will see.

Geez louise. Is foreclosure always the borrowers fault? OBVIOUSLY NOT. What an idiot.

[leftofcool]

6. It is also the job of the borrower to not only read the fine print

on any loan app, but to know they can't afford a hundred thousand dollar home on a 30 thousand dollar a year salary. It is bullshit to bail out every stinking borrower who doesn't understand their own financial limitations.

[readmoreoften]

3. Cuz they're evil and lazy and stupid just like all the other people I'm supposed to hate:

like the Hurricane Victims
poor people
all the displaced Katrina folks I'm supposed to pity but fear
the homeless
undocumented workers
the obese
smokers
pitbull owners
people who eat in grocery stores before paying even if they pay
people who drive cars
bad people
terrorists
oh yeah... GANGS
people who selfishly want the stock market to fail
the unhappy
anxious people who set off terror psych profile alarms and delay our flights (oh wait, that's 5 years from now, sorry...)

[dkf]

4. Why doesn't anyone take this seriously?

Don't you think that there are certain trends you can understand better if only you knew the data?

I tell you now I have no idea what the predominant reason is. Certain things are recoverable from and certain things aren't.

Is there no room for a decent analysis of this problem on this board? Or is there only room for reflexive defensiveness?

[readmoreoften]

9. I wasn't being defensive. I'm telling you the reason why there is no data.

We are supposed to be angry at those with subprime mortgages. Divide and conquer has become fragment and conquer.

I'm sure there are many analysts--particularly in even the most centrist econ departments--trying to assess the data. I'm not qualified to do so. Neither are most people here.

I think it's safe to say that the problem originates in the greed of those who gave loans to people who did not understand the terms of their contracts. It is also in the hands of the prideful who wanted large second homes to impress.

I also know from personal experience another reality: fraud. I receive almost weekly offers to consolidate by scam operations using the same name as my mortgage holder. I believe my cousin lost her home to one of these. She bought a $54K home, then 'consolidated' and suddenly her payments went up to $1500 a month. I didn't believe her until I bought a home last year and started receiving the scam. I have been scammed by BoA so many times that I don't even really know what to say (at one point a teller in Manhattan stole my $400 cash deposit and it took a month for BoA and a confrontation in a bank to get someone to meet with me finally--and I had all transactions receipts proving the theft. When I called customers service I was literally told: "Who cares? You'll never get your money back." My own mortgage company scammed me *once* so now I keep extensive records on every transaction. I do a screengrab whenever I pay online. I can't be the only one having this happen. Others who are more harried with two jobs and three kids...I can't imagine how they keep up.

[dkf]

11. That is ironic because I just had to cancel my credit card after

someone put 4 .com charges on my card.

The person down below had some good info, but mostly from the origination end, which is how the professionals look at it I would imagine.

[galileoreloaded]

5. Here is a murky Credit Suisse chart I marked up....

If the line is an example of the beginning of declining home values starting with subprime, then you can figure out the additional rapidity that most people with Alt A and Option ARMS will be mailing their keys in as well, as they continuously face an underwater position. Sobering.

A link to a chart I marked up.

http://cl1p.net/cs/

[dkf]

7. Sobering indeed.

I didn't realize how many subprime resets there were in relation to the other types. And I see why you are concerned about the Alt-As and the Adjustable Options.

Thank you for showing this to me.

[magellan]

8. From the articles I'm reading on this topic

...across 2006-2008, the same theme rises again and again: unable to keep up with the adjusting ARM on a house that is now worth less than it was bought for.

The reasons behind the inability to keep up with payments aren't detailed in these articles. Too much house? Or did someone lose a job, or face unexpected medical bills, or were they the victim of a shady lender who juiced up their income info without their knowledge to qualify them? We've heard all these stories.

Our next door neighbors were promised a fixed rate loan by Countrywide which turned out, after the documents were signed, to be an ARM. They weren't stupid, they were scammed. They tried to re-negotiate when they found out and were turned down. The house is now in foreclosure.

I also knew a couple of guys from up north who were buying houses to flip and finally got caught out when the market evaporated in FL. Suddenly they were the proud owners of a house they couldn't sell for what they'd paid for it, and couldn't afford to continue paying for.

I suspect that many, perhaps a majority of people were using homes as temporary ATMs. But whether that means 51% of them or 90% we'll probably never know.

[dkf]

12. Where is the recourse for fraud?

My sister had something like your neighbors but less serious. The promised closing costs and discounts she had been told about disappeared when she went in to sign the final docs. I was surprised she caught it because her husband is the one with the business degree but she did a good job. Although I guess an extra $5000 in costs would make a lot of people take notice.

And this was at our very reputable local bank. I still wonder if that was carelessness or if they were trying to cheat her.

I still think an assessment of causes would be valuable information, if only someone would gather it. On the other hand, if we get pissed enough at our financial institutions, that would make it harder to give them their bailout and save the economy.

[magellan]

13. The same as always, I guess

If you can afford a lawyer, you get one to take a look and see if you've got a case. The family next door to us didn't have that kind of money. Both working 2-3 jobs with a teenager and a new baby at home (the teen often looked after the baby).

About your last sentence, I'm wondering how you think the bailout will save the economy. The last several haven't. And the one in the pipeline is so huge it's already devaluing the dollar.

We're headed for very bad times, bailout or not.

[dkf]

15. Oh, I think the bailout will save the economy for the next few weeks at least

Until some other shoe drops. I'm wondering what will happen to credit default swaps. If we put any kind of regulation on them I imagine we will find a whole lot of people promised more than they can deliver, ala AIG.

Of course I only hear how messed up we are because of some derivative I never heard of after it becomes a catastrophe.

The Federal Government sure is running out of bullets though. And that instant conversion of Goldman and Morgan into commercial banks was crazy.

Lastly, I mentioned my concern for the dollar to a colleague last week. The amount of debt we are going to carry makes me very nervous indeed.

[magellan]

21. Definitely, a few weeks at least

I'm thinking more around Christmas-time we'll all be feeling it keenly. I hope the Dems DO put some teeth into this bill. Why should we little people suffer alone?

It stuns me, the number of people who should have known -- who are paid to know -- who keep saying they had no idea. Who the heck is in charge? Anyone? (Rhetorical question. They knew. This was and continues to be pure unadulterated theft.)

I'm hoping the Dems come through for us with some regulation. But in the long run I think it's best to batten down the hatches. Anyone who isn't very nervous at this point is rich or senseless.

[dkf]

22. Short sale rules are until when?

Also, how are hedge funds weathering the storm. Cost of $ is going up I'm sure.

[magellan]

23. Oct 3, effectively

11:59 p.m. on Oct 2.

I don't know a thing about hedge funds; my knowledge of the stock market is very rudimentary.

[glowing]

16. When we went to closing, there was a bunch of stuff messed up on it..

They would have liked us to pay the amt (the more amt), sign the papers, and then get refunded. We walked out the door, and I was swearing like a drunken sailor... So, a week later, the fixed the paperwork... I also had to find a mortgage broker who would give me a fixed loan... their were many who were pushing junk mortgages that someone like my family who wanted to live in the house and neighborhood for 5 to 7yrs, didn't want to deal with.. like resetting arms.. I told each one, I don't want to have to move because the rate is adjusting.. that's too stressful, and the bubble is going to burst.. FL was the worst at regulating fraudlent mortgage brokers.

[readmoreoften]

18. Oh! Another scam I witnessed.

When I bought my home, the Mexican family who owned it (only the kids spoke English) were given an equity loan on their mortgage in excess of 15% of what the house was worth by their own mortgage company. When my broker and agent heard this they looked at one another in disgust.

[creeksneakers2]

20. I wondered about that

I remember hearing a couple years ago that one out of four home sales were to speculators. Nobody is mentioning speculators now but they must be a big part of this. They probably figured they could buy and quickly sell to get out. Lots of these people were probably amateurs who bought $300 get rich quick courses.

[Waiting For Everyman]

10. Uh... b/c they're being charged twice the going rate?

Might have something to do with it.

[dkf]

14. Well if that is really the only problem then why can't we

give them the going rate and recalculate how the loan should have worked based on that rate and credit them for any extra they paid.

[Waiting For Everyman]

25. That would be the way to fix it. It's what has to happen.

If we were getting the debt notes in this bailout, we could do that. But we're NOT getting them. And that's the stupidest part of this whole thing. We're paying all this money and not even getting the security notes, which if we had, we could fix a lot of this mess. The slicing up of these debts has made them almost impossible to straighten out.

The banks are refusing to modify or do workouts for the same reason, and they won't refi b/c they're scared to take a risk (so they say). They're just keeping people locked into the impossible terms (often 9+% with prepayment penalties and other absurd fees) and filing foreclosures - which truth be told brings them even MORE fees, which is where the bulk of their income comes from, they don't get the interest (the sliced up investors do). Fees are where it's at for servicing banks (Wells Fargo, etc.)

They're basically doing nothing about the problem. Except continuing it.

[Turbineguy]

17. It's not an unreasonable question,

but the main problem does not lie with borrowers, it lies with the lenders and those farther up the food chain. For example, WAMU was pushing appraisers to value high so as to lend more and collect commissions.

For the past 6 or so years the entire housing market has been propped up with leveraged credit. People were buying houses they could barely afford in the expectation of selling them even higher. They had to compete with speculators in for a quick buck.

Loans were bundled into leveraged packages that would take the riskiest loans at a 30-40 fold ratio allowing for very little downside price movement or default rate.

It was a house of cards.

It's probable that fees and commissions actually ate up what little equity existed in the leveraged deals even had nobody defaulted.

Conservative banks did not play a part in this. A conservative bank will require a down payment of at least 15%. This leaves them plenty of margin to sell the house in the event the borrower runs into a problem. While conservative banks made sub-prime loans they only did so in a quantity that could not endanger their total portfolio.

The entire structure of fees to loan brokers, and others in the process helped create this. Risk was thrown out the window because the portfolios were sold and then re-marketed as leveraged investments by investment houses to individuals and mutual funds.

Are there some borrowers to blame for this? Yes, but I think they are mostly the speculators. Obviously a family does not buy a house with the expectation they will default. But it is incumbent upon borrowers to read the fine print or take it to somebody neutral to have it explained.

[dkf]

19. I was wondering if there is some predictive value by understanding

the causes of default and if that helps us to figure out how to fix things.

But I understand you to be saying the odds of default lie more in who gave the loan rather than who took the loan.

[slackmaster]

24. I pretty much agree with Turbineguy's assessment

To really understand the root causes you would have to look at each individual situation in detail, but the lenders definitely have the upper hand most of the time. There are legitimate reasons for borrowers to take out interest-only loans, or loans that start out with a low fixed rate and then adjust - It all boils down to those instruments being appropriate for people who do not plan on owning the property for very long.

Unfortunately, a lot of borrowers lack the perspective and wisdom to understand the simple fact that banks pushing adjustable-rate loans is a strong indicator that interest rates are likely to increase. Nobody was trying to sell those loans the last time the market was on its way down in the early to mid-'90s.

I keep returning to this ultra-simplistic "anti-Rush Limbaugh show" model for predicting financial trends: Avoid anything that is being pushed agressively on AM radio, especially Rush.

If they are pushing mortgages that adjust after two years, it means interest rates will already be going up when yours comes due to adjust. If they are pushing precious metals, it means the prices of those commodities will peak very soon if they haven't already. If they are selling land in Arizona, saying this may be the last opportunity to buy a piece of the great outdoors, it means they are dumping less desirable property that has been on the market too long and is losing value because nobody wants to live there. Those mattresses that can be adjusted for your individual comfort almost certainly make noise and are bound to develop leaks.

[Turbineguy]

30. There are always a number of people

who end up in default. While it's a personal tragedy for every one of them, it's actually a very low number. The margin implicit in the leveraged loans was not high enough to cover the additional defaults brought on when people in zero down situations started walking away from their mortgages, when their house values dropped a little.

The news shows banter around numbers like "100% increase year to year" increases in defaults but don't actually say how what the actual number of defaults is. If they had, we would have been aware much earlier just how precarious things were.

Then as is usual, banks want to sell a house in foreclosure for the mortgage due plus their fees and costs. Impossible when the house is valuation is less than the mortgage alone. Thus there was a slowly building over-supply of unsold houses (again news people call that a "glut"). The prices had dropped a little 7% or so (news people announce prices were "crashing"), this got more sellers into the market (news people call that "a panic").

Sure there are areas in the country where speculation ran rampant creating a localized shortage of houses for hungry people buying with cheap credit.

In a normal market none of these problems would have caused more than a ripple.

In a market turbocharged with leveraged credit it created a disaster.

[Ichingcarpenter]

26. We do know that catastrophic illness and lacking health insurance

has been the cause of those people losing their homes.

[El Pinko]

27. IN huge swaths of bubble country, millions are underwater on their mortgages.

All the people who bought stucco boxes in California burbs like Tracy, Sacto, Fresno, Inland Empire, as well as Vegas, Phoenix, South Florida and other areas for $300 to $500K are now sitting in houses that cannot fetch half that. Even if they can afford the payments (many can't - they were counting on flipping within a year for a tidy profit) the incentive to continue paying outlandish payments on a depreciating asset no longer makes sense. They're better off taking the hit to their credit rating and walking away.

The subprime crisis is already over. But unfortunately, millions of Alt-A loans are resetting in the next 2-3 years, and defaults on prime loans are now soaring (due to the above reasons)


Sure, the loss of jobs plays some part in it, as does the soaring prices of goods and fuel, and the stagnant wages of the last 20+ years, but I think being underwater is the straw breaking the camel's back in most cases.

[Naturyl]

28. Too much house, in some cases.

Everyone I know who is struggling with a mortgage bought above their means. They were encouraged to do so by a culture that values comparison and competition as well as a mortgage industry ready and willing to exploit them.

Very sad. By the time it's over, some of them are going to wish they had bought within their means, even if that meant a trailer.

[Waiting For Everyman]

29. Before this, average Americans moved every 3 years.

When the market stops functioning nobody can do anything sensible. Divorces, deaths, job transfers... everybody's locked in now and can't sell. So they can't do what's right for them in given situations, and that in turn causes more problems, and that will continue and get worse as time goes on because the market isn't working anymore. It broke down. So people who otherwise would've sold their homes and done what they had to do (whatever it was), now cannot. The reasons for default are widening now, just like its impact.

People can't make appropriate decisions in a climate like this. The only way not to lose a lot is to stay put for a long time and hope to ride it out until it stops dropping. But those who can't do that are getting chewed up. It's really random and unfair, b/c it usually hits those who have a different kind of difficulty too, which this market is making worse.

This is similar to what happened in the 1970s, when interest rates were between 10-20%. People were locked in then too, and those who had to move got wiped out - often stuck in expensive bridge loans or holding two mortgages at once, their old home which wasn't selling and a new one. There were ghost towns then too, and it took about 5 years after rates dropped to settle down. But lots of people never really recovered from it.