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Irvine loan owners pose highest risk of strategic default

Posted: 05 Dec 2011 02:30 AM PST

Borrowers with jumbo loans -- most of Irvine -- are most likely to strategically default a recent study shows.

Home Address ... 23 TIOGA Irvine, CA 92602
Asking Price .......  $850,000


Play no games he'd say to me when the light is gone
He is right he'd say to me, we know who is wrong
So please don't make no hesitation
There will be no recreation
Jumbo said to say goodnight, he's a friend of yours

Bee Gees -- Jumbo

Say goodnight to jumbo loans. The borrowers are going to default. Many jumbo loan holders have been hanging on despite the oversized payments because values have not fallen a great deal on higher priced properties. With the support from below being removed, the absence of a move-up market is causing higher priced properties to drift ever lower. This slow descent will continue, and as it does, more and more jumbo loan owners will see the futility in making huge payments and strategically default. Look out Irvine, this impacts you.

Jumbo mortgage holders pose highest risk of strategic default

A high number of jumbo mortgage owners — many located in high-cost markets hit by real estate deflation over the last several years — are stuck with persistent negative equity, a study shows.

November 13, 2011 -- By Kenneth R. Harney

Reporting from Washington — 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.

Yes, the futility of paying will cause many to strategically default.

Remember, strategic default requires two parts, (1) the payment must exceed the cost of a comparable rental, and (2) the hope of future equity must be fleeting. If it were costing loan owners less to own than to rent, most would stay where they are. After all, they are saving money versus renting even with the lack of equity. If prices were going up, loan owners would feel their mortgage had option value as they would soon be back in-the-money as the appreciation fairies would bestow free money on them again soon.

If loan owners have neither saving versus renting, or the fantasy of future equity, they have little to keep them strategically defaulting. In those circumstances, it is in their best interest financially to do so.

In a study released Oct. 31, ratings firm Moody's said that based on its analysis of mortgage-backed bond portfolios, homeowners with jumbo mortgages now constitute "greater strategic default risk" than any other type of borrowers, including subprime.

That's because an exceptionally high number of jumbo loan owners — many located in high-cost markets hit by real estate deflation over the last several years — are stuck with persistent negative equity. More than half of the jumbos analyzed by Moody's in which owners are still making payments are underwater, or have home market values lower than their outstanding loan balances.

In addition, since most of these people grossly overpaid, they have a cost of ownership exceeding the cost of a comparable rental.

Jumbo loans are those that exceed the conventional limits of Fannie Mae and Freddie Mac. Nationally, that ceiling is $417,000, but in high-cost areas between 2008 and Oct. 1 of this year, conventional limits ranged as high as $729,750. The maximum in those high-cost areas is now $625,500.

Meanwhile, Fair Isaac Corp., developer of the FICO credit score, says strategic defaults — in which owners can afford to keep paying their loans but see no economic rationale for doing so — continue to be a growing problem. More than 12 million mortgages are estimated to be underwater, and 30% of defaults on loans are strategic, according to Joanne M. Gaskin, FICO's predictive analytics director.

Is this really a problem? A problem for who? It's certainly a problem for banks, and it's a problem for those who don't strategically default who would benefit by it, but it's a solution for underwater loan owners, and it benefits everyone who wants more affordable housing.

Fair Isaac recently created a new type of score designed solely to spot potential strategic defaulters before they hand back the house keys. At least four of the top 10 largest lenders and servicers already are using it, contacting high-risk borrowers, offering financial solutions plus information about the costs associated with strategic walkaways.

Providing "information" on the costs of strategic default? In other words, they are bullshitting people with nonsense scare tactics to try to convince them it's not in their best interest to strategically default when in reality, it is.

The company says that its score can spot the riskiest homeowners, some of whom show telltale characteristics that make them as much as 110 times more likely to walk away than the least-risky borrowers.

Though FICO has not disclosed the specific risk combinations in the mathematical models supporting its proprietary score, the company confirms that among them are homeowners' good credit scores and payment performance on debts, low balances of outstanding revolving credit and a relatively short period of ownership of their current homes.

Gaskin lifted the lid on the FICO black box a smidgen more. Using a variety of data — including property values, historical valuation trends along with standard FICO scores and other information in credit bureau files — the strategic default score essentially tries to get inside homeowners' heads to predict their behavior.

"We're trying to understand from the consumer's perspective," she said. "How much have I lost on the value of my home? What is the velocity of change?"

When the answers are grim and the prospects for equity recovery are distant, the probability that the owners will plot a strategic departure — often characterized by an abrupt halt to mortgage payments while staying current on credit cards and car payments — goes up sharply.

As it should. Remember, lenders inflated this housing bubble with their shoddy lending practices. It is fair and just for them to eat the losses in the aftermath. Each borrower who does not strategically default is agreeing to pay the losses of the lender who deserves it. Strategic default is moral imperative to prevent future housing bubbles.

"Most consumers have a pretty good idea of what the market is doing" in their local neighborhoods, Gaskin said.

What they often don't know, however, are the penalties they face for walking away. These include triple-digit drops in their credit scores — which will hamper their ability to rent a house or obtain credit for years — plus the possibility that lenders will find a way to seek recovery of whatever they owe after foreclosure proceedings.

Strategic default will not hamper their ability to rent, nor will it stop them from obtaining credit for years. Lenders will give credit cards to people a day out of bankruptcy. Lenders are little better than drug pushers hanging out at the discharge door of a rehab center. They don't want the credit addicted to get away, so they make their product available when people are vulnerable.

About a dozen states, including California, restrict "deficiency" recoveries. But in most states lenders are free to pursue whatever assets they can locate, and often do so if the amount of unrecovered debt is large enough to justify the legal expenses.

Ultimately, strategic default for many owners boils down to a calculation: Are the costs, financial and otherwise, worth the relief from an albatross house and mortgage? If the Moody's study is accurate, thousands of jumbo borrowers are struggling with that calculation right now, and a lot of them are likely to bail out.

Distributed by Washington Post Writers Group.

The housing bust is over five years old now, and we still haven't found a durable bottom. Kool aid intoxication is dying, and so are the dreams of jumbo loan owners everywhere. One way or another, people will be relieved of the excessive debt burdens of the bubble years. Strategic default, short sale, foreclosure, and bankruptcy are all options we will see plenty of going forward, unless of course, they decide to forgive everyone's underwater principal balance... not going to happen.

Option ARM implosion

Now that we are five or more years into many of the bubble era Option ARMs, many are facing payment recasts where the loan converts to fully amortizing over the remaining term of the loan. When this occurs, even if interest rates are low, the payment is going to skyrocket. Many of these loan owners could never afford the property anyway, so when their payment goes way up, default becomes inevitable.

The owners of today's featured property bought at the peak with an Option ARM, and they have strategically defaulted.

Foreclosure Record
Recording Date: 11/04/2011 
Document Type: Notice of Default

They won't be the last.

Look for more supply like this home to hit the market over the next several years as high end prices continue to show weakness.

This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707 

Home Address ... 23 TIOGA Irvine, CA 92602
Asking Price .......  $850,000

Beds:  6
Baths:  3
Sq. Ft.:  3700
Property Type: Residential, Single Family
Style: Two Level, Mediterranean
Year Built:  1998
Community:  West Irvine
County:  Orange
MLS#:  S679690
Source:  CRMLS
Status:  Active
On Redfin:  13 days 
(no description)
Proprietary commentary and analysis 

Asking Price .......  $850,000
Purchase Price … $1,075,000
Purchase Date .... 9/23/2005

Net Gain (Loss) .......... ($276,000)
Percent Change .......... -25.7%
Annual Appreciation … -3.7%

Cost of Home Ownership
$850,000 .......... Asking Price
$170,000 .......... 20% Down Conventional
4.02% ............... Mortgage Interest Rate
$680,000 .......... 30-Year Mortgage
$175,704 .......... Income Requirement 

$3,254 .......... Monthly Mortgage Payment 
$737 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$177 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$371 .......... Homeowners Association Fees
$4,539 .......... Monthly Cash Outlays

-$754 .......... Tax Savings (% of Interest and Property Tax)
-$976 .......... Equity Hidden in Payment (Amortization)
$238 .......... Lost Income to Down Payment (net of taxes)
$126 .......... Maintenance and Replacement Reserves
$3,173 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
$8,500 .......... Furnishing and Move In @1%
$8,500 .......... Closing Costs @1%
$6,800 .......... Interest Points
$170,000 .......... Down Payment
$193,800 .......... Total Cash Costs
$48,600 ............ Emergency Cash Reserves
$242,400 .......... Total Savings Needed

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