In an article posted last Fall -- Strategic Defaults Threaten All Major US Housing Markets -- I discussed the growing threat that so-called “strategic defaults” posed to major metros which had experienced a housing bubble. With home prices showing renewed weakness again, now is a good time to revisit this important issue.
According to Wikipedia, a strategic default is “the decision by a borrower to stop making payments (i.e., default) on a debt despite having the financial ability to make the payments.” This definition has become the commonly accepted view.
I define a strategic defaulter to be any borrower who goes from never having missed a payment directly into a 90-day default. A good graph which I will discuss shortly illustrates my definition.
Trepp puts out a lot of good data on the commercial (real estate) mortgage backed securities (CMBS) market. They also have a handy page of statistical data regarding CMBS issues. The reason I follow it is that most of the economic problems in the country relate to real estate, and especially commercial real estate. CMBS are those CRE loans that were securitized into big pools of debt and sold off to investors.
If you keep an eye on the status of CMBS you can get a good idea of what is happening in the CRE markets. Also Trepp analyzes bank loan data and has a bank credit watch based on the performance of bank loans, especially their real estate related loans.
Many have criticized the government for lack of diligence in pursuing mortgage fraud. An article in The New York Times gives details about just how extraordinarily diligent the DOJ (U.S. Department of Justice) can be. The story involves how a multi-year, expensive investigation brought to trial a perpetrator of so-called "liar loan" fraud. This fraud produced mortgages with improperly documented incomes. To be more blunt, mortgage applications were submitted that were alleged to declare incomes that did not exist.
The trial which followed resulted in a prison term for the exposed felon, the ultra-marathoner and reformed drug addict Charlie Engle. And Engle was responsible for two loans -- unlike former Countrywide Financial (CFC) CEO Angelo Mozilo, who paid a fine and went free after running a scheme that produced tens, if not hundreds, of thousands of liar loans.
Last Tuesday, the House, dominated by Republicans, voted an end to the current program, known as HAMP (Home Affordable Modification Program). Last week, the NY Times lamented the fact that the government's attempts to solve the housing crisis have failed miserably. It isn't through want of trying.
Here are some of the programs listed under the government's MakingHomeAffordable.com site (888-995-HOPE):
Commercial real estate loans and residential housing will continue to be a significant drag on economic performance. Until the mass of over-built homes and commercial properties are liquidated, credit will remain tight and unemployment will remain high.
The unfortunate fact remains that credit for most of America is still tight, banks are still trying to repair their balance sheets, and the overlying problem is real estate, the detritus of the Fed's reckless monetary policy. Credit expansion fueled by the Fed's easy money policy of the early 2000's drove private debt to fuel housing over-production, and drove commercial debt to fuel commercial real estate (CRE) over-production. It was the greatest such expansion of money and credit the world has ever seen and it went primarily into real estate. We are now facing the consequences of that expansion and boom: The bust.
Total lending fell for the ninth time in the past 10 quarters, with the largest reduction in real-estate construction loans and non-credit-card consumer loans, the FDIC said. Credit card and home mortgage lending grew. Total loan and lease balances fell 0.2%, or $13.6 billion, while total assets for the industry fell 0.4%, or $51.8 billion. Real estate construction and development loans were largely responsible for the overall loan decline, falling more than 9%.
The problem with the data is that most of the positive news was restricted to the big money center banks. However the FDIC did report that 62% of all banking institutions (7,657 of them) turned a profit in Q4. Most of their bottom line improvement wasn't related to loan growth but rather to loan write-offs. As banks report loans to be in default, they are required to reserve a certain amount of funds to account for the loss.
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