The risk of ***strategic default is rising among loans that have “always performed,” according to the credit analysts at Moody’s Analytics. They say as home prices have fallen over the past year, the loan-to-value ratios (LTVs) of so-called always-performing loans – or those that have remained current – have begun to approach, and in many cases surpass, average LTVs for loans that have defaulted. This dynamic, Moody’s says, raises the likelihood of a renewed increase in strategic defaults. [DSNews.com, July 18, 2011]
I bristle every time I hear some so-called “authority” comment on the increase in “strategic defaults.” This pejorative term is a creation of the lending industry to place certain borrowers in a special “Rogues Gallery” category all their own. Depending upon the expert, a “strategic defaulter” is one who is in arrears on their mortgage for X or more months, although they ostensibly have the financial capability of making their payments. The press picks up these reports and dutifully circulates them as news.
What is remarkable is that not one of these so-called “authorities” has ever asked “Why do homeowners who might otherwise be able to pay their mortgage stop doing so?” Since no one has sought to explain this phenomenon, I will do so. What follows is not an epiphany. The answer requires no special insight. It has been in plain view for years. But the lending and credit industries have never chosen to address it – or more correctly, to admit it.
One of the major reasons many people intentionally default on their loans is because their lender told them, “If you want our help, you must stop making your mortgage payments.” You see, the lending industry, aided and abetted by the federal government’s farcical programs like HAMP, decided at the inception of the foreclosure crisis, that mortgage relief would be treated as a sort of “life preserver.” However, if one stayed on the ship as it was slowly sinking, they didn’t get a life preserver. Rather, they had to jump overboard, and only then would a preserver be tossed to them. [Mind you, these life preservers came in all shapes and sizes. Some were better than others. Many were useless, as they barely kept one afloat. Most ultimately failed to preserve anything. – PCQ]
This metaphor is correct and fair. It makes little difference to the lender whether the borrower has struggled mightily for the last three years, trying to stay afloat. Unless they jump overboard, they don’t get the life preserver. Here is the reality:
- If a borrower is current and calls their lender today about a loan modification program, the lender will tell them that they have to be at least two or three months in arrears before they can talk to them.
- If a borrower is current and inquires about doing a short sale, the lender will tell them they cannot help, since the borrower is not in arrears. If they want the bank to consider them for a short sale, they must stop paying the mortgage.
So back to “strategic defaulters.” Is there any wonder folks are not making their payments? If that is what it takes to get help, that is what borrowers will do, since that is what their own lender instructed them to do.
But the irony doesn’t end there. Once overboard, borrowers are now learning the reality of their leap of faith. After defaulting, their credit spirals downward. The lender begins piling on draconian late fees, force-placing outrageously expensive casualty insurance on the home, and generally making the loan modification process almost impossible to recover from. And just to add a dose of the absurd, the lender repeatedly loses the paperwork – making the homeowner struggle all the harder and all the longer.
So there should be no surprise that folks jump overboard. The ship is sinking, hope is gone, they probably stayed aboard too long anyway, and besides, that is the only way for them to get their own life preserver.