Thursday, December 10, 2009

21M Homes Behind Payments, Defaults by Convenience: Yet More Huge Costs to Banks

There are 3.9M filing for foreclosure in U.S in 2009, and 4.8M homes who are behind 3 months or more in their payments. It is difficult to extract an exact number, but the homes in trouble represents somewhere between 10 and 20% of the overall U.S. housing market.

Among these, many are caused are strategic defaults. The Wall Street Journal reports on this today.

"Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental. Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways. ... Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Mr. Fernandez takes his girlfriend out to dinner more frequently. "We're saving lots of money," Ms. Richey says".

People choosing to default to have extra money to buy Disney season tickets. You have to wonder what is going on with a society where this kind of actions happens. One could discuss the kind of values being taught to the children. The title of this blog applies here, again. Shocking.

Back to economics. The costs to banks could reach another $0.5B to over $1T, if a fraction of the people who are behind on payments follow that path.

Map of strategic defaults:

These are people, according to Experia, that are able to pay their mortgage but choose to default. Why? Because they have little equity in their houses and their houses have dropped considerably in price. What they owe is worth more than what the house costs today. There will be 21M of these homes in 2010 according to DB.

If they have $100k in equity on a house they bought for $750k a coupe of years ago, then they owe $650k. The problem is, this house today may be worth $250k to $350k. Why owe $650k, when they can owe $350k?

Immoral? Yes, but the banks who created this mess were immoral too because they knew what they were doing. If they did not, they were plain incompetent.

This is a difficult problem, and a very costly one which is far from being resolved

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