Wednesday, June 30, 2010

80% of no-money down buyers in 2006 default

Colleague & friend John Wake found a wopper of an article yesterday, quoting a Federal Reserve study on negative equity and default decisions.

“The study examined borrowers in Arizona, California, Florida and Nevada who bought homes in 2006 with no money down.  Nearly 80% of those borrowers had defaulted by September 2009.”

Wow.  Not entirely surprising, but still a very big number to see.

A couple of thoughts as to why this group defaults more than others:

1. No Savings – no down payment probably means no savings which means either the borrowers don’t earn much money (comparatively weak borrowers) or they don’t have the discipline to save money (also a weak borrower trait).  It also means they don’t have a safety net for the times when things go wrong.

2. No Initial Equity means these borrowers were upside-down at the first sign of market depreciation.  For comparison, borrowers who put 20% down watched their house depreciate 20% in value before they were upside-down.  (they lost their own money first.)

The study also examined tipping points at which defaults were driven purely due to negative equity – in other words, how far upside-down to people have to be before they decide a strategic default is their best option?

According to the study, there is a big change in attitudes at the 50% upside-down mark.  For those who were upside-down by less than 50%, only 20% of the defaults were considered purely strategic.  For those who were more than 50% upside-down, that number increase to 50% – half of the people who defaulted when they owed twice what their home was worth, did so specifically because of this reason.  (that’s not to say half of those 50% under water will default – we’ll have to wait and see on that one.)

Very interesting stuff indeed, and I expect all of these numbers to rise during 2010 and at least the first half of 2011.

Your blown away every day by the idiocy of the people who made these loans in the first place Realtor,

Chris Butterworth