0 Jumbo Loan Strategic Defaults on the Rise

When Tracy Bremmer, director of decision sciences at Experian, talks about mortgage defaults, she has more than reams of data behind her. She has personal experience. She tell a story, embellished slightly but still representative, of a "neighbor" who bought their house near the height of the boom only to see it lose 40% of its value, plunging their mortgage so far underwater it would take years to surface. Then they noticed the house across the street from them for sale for roughly half of what they paid for theirs. So they bought it, and just stopped paying their original mortgage.

This family is semi-fictitious but is not alone. Ethics, morality and possible straight-up savvy aside, we started thinking about these "strategic defaulters" as a newly trending consumer segment, as they tend to become a strange new class of renters:

Data being released later today from Experian will show that in the first half of 2010, an estimated 275,000 people just walked away from mortgages they could afford to keep paying because they had become such awful investments. That adds up to roughly 17% of defaulters. While that figure is down 35% from the first half of 2009, as evidence of a double-dip housing crash mounts, "we expect the incidence of strategic defaulting to go up," said Ms. Bremmer.

Estimates of the number of mortgages under water in the U.S. hover just over 1 in 4 but that could jump to half in the coming years. Recent data from Corelogic suggests that almost 10% of mortgages originated just last year are already in the negative equity range. The Federal Reserve shows average homeowner equity at just 38% down from 61% a decade ago. We could go on, but you get the idea. A lot of home owners are hosed.

These are no deadbeats in a traditional sense. The Experian data show that they are more likely to have had a jumbo loan mortgage, have had excellent credit scores, have had more than one house or investment property, and have a higher than average household income. They also stay current on all their other bills. If you look at the incidence in these charts, the proportion of strategic defaulters keeps going up.

They should be owning and spending like home owners. But they're not, and for up to the next seven years they might have a hard time finding a mortgage while their credit recovers. "As many strategic defaulters as there are," said Ms. Bremmer, "there are many more people who are short-selling. Those people are renting, too."

For more great information and to contact the team that created the report please visit Experian Decision Analytics

Detail: Jumbo Loan Strategic Defaults on the Rise

0 Jumbo Loan Default Rate Moving on Up

Standard and Poor's released their report on various RMBS(jumbo mortage loan pools), we read the report and wanted to highlight a few of the more interesting points related to jumbo loans.

The percentage of delinquent prime jumbo RMBS transactions issued in 2004 climbed to 7.97% in November, up from 7.8% in October. Delinquencies in the 2005 vintage increased to 10.65% in November from 10.2%. For the 2006 vintage, delinquencies grew to 15.25% from 14.67%, and for the 2007 vintage, delinquencies increased to 14.74% in November from 14.24%, according to the report

Unfortunately, for the banks(read:US GOV) and investors that bought these loan vintages things are not ageing well at all. Reminds me of the bidder who bought decades old Rothschild wine only to have purchased the world's most expensive vinegar. Book was "The Billionaire's Vinegar"

Now who are the crazy lenders/banks that did these loans. Surely, it was those pesky subprime guys. Not at all my friend:

The 2007 vintage showed notably worse deterioration after 24 months of “seasoning,” according to the report. After the 24 months, delinquencies totaled 10.65% of the current aggregate pool balance compared to 2005’s 1.53% and 2006’s 4.57% delinquency rate after the same amount of seasoning. But 2006 showed a poorer performance than its prior vintages. After 36 months of seasoning, delinquencies accounted for 11.2% of the current aggregate pool balance, a 185% increase over the 2005 vintage.
Delinquencies and losses varied among the issuers and securitizers of prime jumbo RMBS transactions. For the 2005 vintage, the percentage of delinquent transactions reached 18.68% for Countrywide, the most among issuers. For 2006, the leader was Washington Mutual’s 22.2%, and for 2007, Bear Stearns’ 20.25% led all issuers.

Remember the overall delinquency rate for jumbo mortgages of all vintages is running about 12%. Meaning at least 12% of loans are at least 60 days late. Realtors.... start calling the REO department of BOA, CHASE, etc as they now hold these loans that are surely to be nice foreclosure listings/deals in 6-9 months.

If you are so inclined to read the wonkish research of S&P it can be found here.

Detail: Jumbo Loan Default Rate Moving on Up

0 Jumbo Default Rate: 2x Conforming Loan Levels

Homeowners with jumbo mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”

Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7% a year earlier. This continues to pressure luxury home prices throughout the country but especially so within the 1-2 million dollar segment of the market of the "working rich".

As defaults on the biggest jumbo loans rise, borrowers such as Steve Holzknecht, 53, are turning to short sales to exit loans that now are larger than the market value of the house. Last month he cut the asking price for his 7,280-square-foot home in Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages.  Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

With the fire sale of assets causing luxury real estate markets to implode and very probable future increases in the rates of LIBOR based ARM loans; doing nothing and going about your life is not an option. Get your financial house in order as this ride will last many more years.

Detail: Jumbo Default Rate: 2x Conforming Loan Levels