THE BASIS POINT

Wall Street Take on Homeowners Walking Away From Mortgages

Strategic Defaults Today
A recent Barclays report (via HousingWire) said: “Most popular studies overestimate the level of strategic mortgage defaults. We think that the strongest cases of active strategic defaults are less than 1% of total defaults. These borrowers are clearly capable of making mortgage payments, always remain current on all non-mortgage debts and actively take out a new mortgage on a new home before defaulting on the existing mortgage.” Barclays defines ‘passive strategic defaulters’ as those who have not experienced income or payment shocks and remain current on all non-mortgage debt outstanding. Another segment of the population defaults on their mortgage obligations while continuing to service other debt, but display clear signs of income or payment shocks—these are ideal candidates for modifications. Barclays also notes that “Borrowers with high FICO scores at origination have a higher share of strategic defaults in total defaults. Higher loan balance and limited documentation borrowers display a higher share of strategic defaults but that merely reflects high-FICO concentration in those loans.”

Strategic Defaults Tomorrow
But is it too early to start writing stats on strategic defaults? Let’s not forget that during testimony Q&A back in July 18, 2007, Ben Bernanke told congress subprime losses would be contained to “$50 to $100 billion,” then a few weeks later he said it could be “several multiples of that,” then one year later financial markets imploded. If banks and regulators don’t get more aggressive about loan modifications, strategic defaults could be several multiples of what they are today.