The first group of defaulters were individuals who were conned into buying houses at teaser rates and had a very hard time making payments when rates reset to market rates. The next group were individuals with decent to good credit; this group started to default because one or both members of the family lost their jobs and therefore could no longer make payments on the mortgage. Now we have the next wave; the strategic defaulters. This group’s decision to default is based on cold logic. The value of their homes has dropped so much that it no longer makes sense to make payments on a house that is trading well below market value.
"Strategic" defaults accounted for at least 12 percent of all defaults in February, up from about 4 percent in mid-2007, according to a recent Morgan Stanley (MS) report. Analysts led by Vishwanath Tirupattur classified a default as strategic when a homeowner who hadn’t previously been delinquent made an on-time mortgage payment one month; skipped payments for the next three months; and stayed current on other consumer debt of $10,000 or more. Full Story
In a way this it’s payback time for the banks; the banks swindled millions of innocent homeowners when they turned a blind eye and even encouraged the sale of fraudulent mortgages via the liar loan application process. Then when the S**T hit the fan, they came running to Washington and like faithful concubines, Washington bailed them out with taxpayer dollars. Thus they were handsomely rewarded for their illegal activities. Now it appears that the individual home owner is deciding to stick it to them and if this new trend picks up steam, a massive wave of new defaults could hit the market, further souring an already weak real estate market.
Housing analysts say strategic defaults mainly occur when a home’s value has dropped below the balance remaining on the mortgage. A homeowner in that position may decide that continuing to make payments is throwing money away, or may default to get the lender to modify the loan. All told, borrowers who aren’t making mortgage payments are probably skipping roughly $100 billion annually, an amount equal to 1 percent of consumer spending, according to Mark Zandi, chief economist at Moody’s Economy.com. Zandi likens the money to "a form of stimulus, a little tax cut." Full Story
Zillow.com states that one in five U.S. homes with a mortgage has “negative equity” so the number of potential strategic defaulters is rather huge; what we have on our hands is a ticking time bomb and purchasing real estate now is one of the dumbest moves an investor could make.
Long term the trend for housing is still down. Individuals that are bearish can use strong rallies to short stocks in the housing sector such as Lennar (LEN), Beazer (BZH), etc. ETF players can open up positions in REK, SRS, and if you really want to take an aggressive position you can short via Direxion’s DRV. SKF is another option; it is an ETF that shorts the financial sector.
Disclosure: We have no position in the stated investments