Thursday, March 8, 2012

Overpaying Leads to Default

A little note to those who can't see past the bank fraud in mortgage issuance as the cause of the U.S. housing mess. The credit bubble, and rise of prices over fundamentals was the root of the problem. All the rest (subprime, ratings agencies rating junk as AAA, brokers being coached to fudge loan applications, prime borrowers getting subprime mortgages because brokers made more money on those . . . etc. etc.) were merely symptomatic of a broader problem, which is deregulation leads to shadow banking, which leads to a credit bubble. People buy houses with leverage, so the bubble shows up there most prominently.

If you think your market is going to escape because banks only issue prime mortgages, here's a stat for you: 40% of Prime Jumbo mortgages (i.e., too big for Fannie and Freddie) are in strategic default.

Strategic Mortgage Delinquencies as High as 27%
For Alt-A loans, considered between prime and subprime in terms of expected defaults, the share is about 35 percent, up from about 30 percent. For subprime loans, the amount is about 25 percent, up from less than 20 percent, their report showed.
The ratio is about 15 percent for loans less than $100,000, compared with almost 35 percent for mortgage larger than $400,000, according to the analysts. The share among borrowers with the highest credit scores was more than 40 percent, compared with about 20 percent for those with the lowest.

Why do people default? Very simple. Because they paid to much for their house.

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