The Housing Chronicles Blog: "Jingle mail" appears to have been overstated

Saturday, May 10, 2008

"Jingle mail" appears to have been overstated

According to two stories in the New York Times and L.A. Times, the prevalence of 'jingle mail' -- which describes borrowers in foreclosure moving out and mailing their keys to the bank -- has been vastly over-estimated by the blogosphere. You mean to say angry renters who run blogs and are chomping at the bit for 50% price declines have overstated this phenomenon? Say it ain't true! First, from the New York Times:

Millions of Americans are “upside down” on their mortgages — they owe more on their homes than their homes are worth. So far, however, there is little evidence that people who have the means to pay are walking away from their homes as values sink.

The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet “jingle mail,” the term for those tinkling packages of keys, appears to be far rarer than many seem to think.

Freddie Mac, the big government-sponsored mortgage company, estimates that just 0.14 percent of the defaulted mortgages in its portfolio involved properties that were abandoned by borrowers. Fannie Mae, another mortgage company, puts the figure in the single digits. Both companies deal in relatively conservative loans, so the total rate may be somewhat higher. Industry officials say they have no way of knowing for sure...

The low numbers from Freddie Mac and Fannie Mae are consistent with past housing busts, like the ones that occurred in Texas in the 1980s and in the Northeast and California in the early 1990s. Homeowners typically do not walk away from homes they live in unless they are unable to pay the mortgage, usually because of job loss, a death in the family, divorce or a big jump in their monthly payments. Real estate speculators, of course, do abandon properties when prices fall.

In fact, researchers say the rich are no more or less likely to walk away — “ruthlessly default” is the economic term for it — than those of more modest means. A person’s credit history is usually a better indication of how he will behave than his income. How much money a person put down on the house when he bought it also makes a difference...

An estimated 9 million American households, or 10.3 percent of all single-family homes, owe more than their home is worth, according to Moody’s By comparison, 4.8 percent of home loans were in foreclosure or delinquent by 60 days or more at the end of last year, according to the Mortgage Bankers Association.

For a variety of reasons, most homeowners find walking away difficult and expensive.

A foreclosure can make it hard for borrowers to get other loans and sometimes even an apartment. Economists refer to these as “transaction costs” that offset the benefit borrowers might get from defaulting on an underwater home loan.

Lenders can also pursue deficiency judgments against borrowers to recoup the difference between what is owed on the debt and what the property is sold for after foreclosure. Such claims are time-consuming and expensive to win, so most lenders do not pursue them...

In an attempt to reduce the incentive to default, Fannie Mae recently increased to five years, from four years, the time borrowers have to wait after a foreclosure to get another Fannie Mae loan. The company will make exceptions under extenuating circumstances.

The Bush administration has said that the only people who deserve housing relief are those who cannot pay, not those who will not pay...

Jon Madux, a founder of the site, which helps borrowers leave their homes, said a majority of the site’s clients default because of financial hardships. But in the Southwest and Florida, more of its customers are investors who bought multiple condos or houses and are now not able to find renters or sell for more than they owe.

The Mortgage Bankers Association estimated that the owners of 18 percent of the homes in foreclosure as of September 2007 did not live in those properties. Many used riskier loans, which are defaulting faster than more conventional mortgages.

Next, from the L.A. Times article: reports and Internet postings are rife with stories about the trend and a supposed sea change in American attitudes toward debt. But there's a major problem with all this talk about the phenomenon of solvent homeowners "walking away": There doesn't appear to be any hard evidence that it's actually happening.

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce numbers figures.

Nor could the Mortgage Bankers Assn., the leading trade group for housing lenders. Spokesman John Mechem said he believed that walkaways by homeowners who could afford their payments were "becoming more prevalent." But he said that was based on "anecdotes we're hearing from our members and what we're reading in the newspapers."

Bank of America Chairman and Chief Executive Kenneth Lewis, whose company is acquiring mortgage lender Countrywide Financial Corp., complained about "a change in social attitudes toward default" in an interview with the Wall Street Journal in December.

In response to questions from The Times, Bank of America spokesman Terry Francisco said the bank had seen indications that some homeowners were taking pains to keep their credit card accounts current at the expense of their mortgage balances, often by raiding their home equity lines to pay their cards, a reversal of traditional customary customer priorities.

But he said the bank did not have "firm figures" on how many homeowners were unnecessarily defaulting on their mortgages...

At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing "folklore" about residential walkaways but said that the phenomenon was more likely connected to investors than people who live in their homes, or "owner-occupants."

"The vast majority of borrowers we find have been acting in good faith," she said. "If they get behind, they are interested in working with their lender."

Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

Marks and others assert that mortgage bankers have an incentive to blame the rise in delinquencies and foreclosures on borrowers skipping out on obligations they're financially able to meet, because that diverts attention from the lenders' own role in the mortgage crisis...

Experts say some supposed owner-occupants who are "walking away" may in fact be speculators in disguise: buyers who acquired properties as investments to resell for a fast profit. Investors, unlike genuine homeowners, will treat their purchases strictly as economic transactions; their decisions to abandon payments shouldn't be seen as a sign that American homeowners no longer feel obligated to pay their debts, says Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA's Anderson School of Management...

"If it's correct that there's a change in behavior, all the default and credit risk models will have to be recalibrated," Gabriel said. But he added: "I have not seen one shred of data that conclusively or systematically speaks to that point." On the contrary, analyses of the most troubled segments of the mortgage markets suggest that the problem is still rooted in borrowers' financial distress rather than their cynicism.

In a survey issued this week of Alt-A mortgages originated in 2006 and 2007 -- these are nonstandard mortgages often marketed to buyers with less-than-prime credit -- Fitch Inc. analysts found that a rise in delinquencies could still be traced to "borrowers who purchased a home they could not afford or those engaged in mortgage fraud for the purpose of property speculation." Legitimate homeowners, the analysts said, "rarely view the home as a short-term investment ... they do not default based solely on a drop in value."

Fitch has also found a high level of misrepresentation in loan applications "by borrowers, brokers, and other parties." When Fitch analysts subjected 45 sub-prime loans to detailed examination late last year, they found "the appearance of fraud or misrepresentation in almost every file," a situation they termed "disconcerting at best" in a report in November.

Some 66% involved "occupancy fraud" -- that is, the borrower misrepresented his or her intention to live in the home, rather than to buy it as an investment. That finding underscores the possibility that bankers are blaming owner-occupants for the more common, and not unexpected, phenomenon of "walking away" by real estate investors.

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