With all of the talk in the news lately about a housing market that has suddenly become more stable, the 800 lb gorilla in the room goes largely ignored.
But huge, hairy and mean, there he sits. And he's getting hungrier by the minute.
That's because behind the headlines, the much bigger problem here is actually the continuing decline in values that could push as many as 50% of all mortgages underwater by 2011.
So sure, while government giveaways and the push to lower interest rates may have made for some recent sales, it will also chain a fair share of borrowers to that big gorilla—an asset whose value is dropping.
And for those willing to take on those heavy chains, the price of "ownership" is that they will find themselves hopelessly upside down as prices continue to slide.
That, of course, is a no win situation and the big reason why falling prices drive far more foreclosures than higher payments ever will.
Unfortunately, that is a number that will continue to grow as even borrowers with great credit scores begin to "strategically default."
From the L.A. Times by Ken Harney entitled: Homeowners who ‘strategically default' on loans a growing problem.
"Who is more likely to walk away from a house and a mortgage — a person with super-prime credit scores or someone with lower scores?
Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to "strategically default" — abruptly and intentionally pull the plug and abandon the mortgage — compared with lower-scoring borrowers.
Among researchers' findings are these eye-openers:
* The number of strategic defaults is far beyond most industry estimates — 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year's fourth quarter.
* Strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. This is in stark contrast with most financially distressed borrowers, who try to keep paying on their mortgage even after they've fallen behind on other accounts.
* Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006. In California last year, the number of strategic defaults was 68 times higher than it was in 2005. In Florida it was 46 times higher. In most other parts of the country, defaults were about nine times higher in 2008 than in 2005.
* Two-thirds of strategic defaulters have only one mortgage — the one they're walking away from on their primary homes. Individuals who have mortgages on multiple houses also have a higher likelihood of strategic default, but researchers believe that many of these walkaways are from investment properties or second homes.
* Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore — a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion — are far more likely to default strategically than people in lower score categories.
* People who default strategically and lose their houses appear to understand the consequences of what they're doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters "are clearly sophisticated," based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line."
This is nothing more than business decision, plain and simple.
And the smart ones are walking away. After all, who wants to be chained to an 800lb. gorilla?
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