Strategic Defaults are the Next Big Wave

One of my lead sources are Mortgage Advisors and Brokers and they are calling me all the time telling me about a homeowner that called to try to refinance. The borrower is looking for a rate term refinance with good credit scores, excellent debt to income ratios, no late mortgage payments and a steady work history.

That is an A Paper Loan we dream about all day so why can’t they get him approved – because his loan to value is too high. Yup, he is upside down and through no fault of his own. Housing prices in his neighbor have fallen do to scattered foreclosure in his area and they can’t get the value they need in the appraisal.

Thousands if not millions of homeowners are stuck in upside down mortgages and they are not happy. You have the family that bought their house two years ago and put 20% down to help reduce the mortgage payment and get a better interest rate. That money is gone, the little equity they had is gone and in some cases so is the homeowner.

In 2007 the sub-prime market was to blame for the issues with housing crisis, but not anymore. Most of those sub-prime mortgages have worked their way out of the system although there will be some 3/1 Arm and 5/1 Arm mortgages adjusting this year.

Unemployment is the reason for the current housing crisis and although the rate of unemployment is starting to taper off the repercussions of this last year will stay with us for the next two years. Add that with the 4.5 million borrowers with Arms that will re-set right about the time interest rates will be on the rise and we have another rise in foreclosures that will most likely extend into 2011–2012.
 
Once unemployment rate stabilize the next wave of default mortgages will come from homeowners that are upside down or under water. That would be the homeowner that can’t find a good reason to stay in a home that does not make financial sense to pay for.

That would be a non performing asset – and if you can’t convince a homeowner to stay in that home and continue to make the mortgage payments how will you entice people to purchase homes that are overpriced? You can’t with the proper incentive.

The government has already started to do that by extending the $8,000 tax credit for first-time homeowners and a new $6,500 credit for existing homeowners who move into another home. As industry insiders have been saying for years, the reduction of housing inventory is the only sure way to economic recovery.

Giving people incentive to buy will not eliminate their fear of reduced home values, but if the market can adjust itself with more reasonable home values then the fear can be minimized.

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