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Posts Tagged ‘HELOC losses’

Strategic Mortgage Defaults Have Major Implications for Economy and Markets

Posted by Larry Doyle on September 21st, 2009 11:29 AM |

The Brave New World of the Uncle Sam economy has brought our economy and markets into realms very rarely seen or experienced. One of those realms which has received very little coverage, but will have major implications for the economy and markets going forward, is “strategic mortgage defaults.” What are strategic mortgage defaults and what will be the growing impact of this phenomena? Let’s navigate.

High five to KD of 12th Street Capital for bringing this development to our attention. The Los Angeles Times profiles this very troubling slope on our economic landscape in writing, Homeowners Who ‘Strategically Default’ on Loans a Growing Problem:

With foreclosures, delinquencies and loan losses at record levels, strategic defaults and walkaways are among the hottest subjects in residential real estate finance. Unlike in earlier academic studies, Experian and Wyman could tap into credit files over extended periods to identify patterns associated with strategic defaults.

The number of strategic defaults is far beyond most industry estimates — 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year’s fourth quarter.

Strategic mortgage defaults are nothing more than a very calculated financial maneuver primarily by people with high credit scores. These people are literally walking away from their homes – and the mortgages on those homes – with little to no warning or indication of stress typically identified by increased delinquencies on the mortgage payment or other credit payments.

Why are people doing this? To fully understand the reasoning behind people strategically defaulting, we need to understand why people bought these homes and took out these mortgages in the first place. Over the last decade, many people purchased homes, including their primary residence, for investment purposes as much as for shelter and protection. As with other investments, these high credit and financially savvy people are assessing the market value of their home relative to their carrying costs (mortgage payments, taxes, utilities, etc) and making the decision that they are financially better off walking away from the property and mortgage than continuing to make the payments.

Is there a moral failure in this practice, especially on behalf of those individuals who do have the financial wherewithal to make their payments? Perhaps, but we should not kid ourselves that people bring their morals – or lack thereof – into their financial affairs. (more…)

Wall Street Plays Washington

Posted by Larry Doyle on July 7th, 2009 5:15 PM |

Is the charade played out on Wall Street and in Washington anything more than the equivalent of a dinnertime show at a casino complex?

Politicians and bankers work the stage while the media maitre’d pretends to care how you really feel. Ultimately, the curtain goes down, the lights go on and you’re stuck with a bill that leaves you aghast.

Welcome to the Brave New World of the Uncle Sam economy 2009.

Today Bloomberg releases news that Delinquencies on U.S. Home-Equity Loans Reach Record:

Late payments on home-equity loans rose to a record in the first quarter as 18 straight months of job losses and a slumping economy left more borrowers unable to pay their debts, the American Bankers Association reported.

The ABA is not exactly timely with this news in regard to home equity lines of credit; Sense on Cents shared similar color on May 20th in “Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses”:

For those not aware, Turbo-Tim Geithner’s Bank Stress Test utilized an assumed cumulative loss on this product of 6-8% in the base case. The most adverse scenario assumed cumulative losses on HELOCs of 8-11%.

What did our 12th Street Capital friends learn in their analysis? KD writes:

What I find very interesting here is comparing the Cumulative Loss numbers on these deals versus the Government’s assumption of losses in the stress test. As a reminder, our friends in D.C. assumed in a More Adverse Scenario that Helocs on bank balance sheets would generate losses of 8% to 11%. Now I know their numbers represent the projections going forward for the next two years, but when you take a look at numerous ‘06 and ‘07 deals already ringing up losses north of 20% I find it hard to reconcile. I think the Treasury has a very rosy picture of the loss curve going forward.

This brings us to the topic of losses within the banking system and the integrity of the Bank Stress Tests. The Wall Street banks were more than happy to “put on a show” with Secretary Geithner leading the orchestra and the FASB in a supporting role given their relaxation of the mark-to-market. Now we get to revisit the fact that banks are still sitting on hundreds of billions in embedded losses. (more…)

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Posted in Bank Stress Test, Banking Institutions, Economy, General, markets, Wall Street, Washington D.C. | 3 Comments »

Bank Stress Tests: Vigorous or Sham? Let’s Review HELOC Losses

Posted by Larry Doyle on May 20th, 2009 9:26 AM |

If you want to know just how inaccurate government loss assumptions were in the recently released Bank Stress Tests, let’s enter the world of HELOCs (Home Equity Lines of Credit).

Before we address loss statistics on HELOCs, let’s go to the Federal Reserve for a clearcut definition of the product. What is a Home Equity Line of Credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage.

This mortgage product, often a second mortgage, developed as an enormously popular vehicle for homeowners to tap the equity in their home, especially during the period of significant home price appreciation earlier this decade. Make no mistake, though, it is just another form of leverage. (more…)

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Posted in General, helocs, Mortgage Crisis | 4 Comments »