Archive for February, 2011
Analysts at Barclays Capital believe many overestimate the amount of borrowers who strategically default on their mortgages.
Additionally, they said the trend of walking away from one's mortgage obligations has been reversing in recent quarters.
Though there is no universal definition, borrowers are considered to have strategically defaulted when they stop making mortgage payments even though they have the means to do so. Because no fiscally sound borrower would deliberately choose to walk away from a home while there was still equity in it, being underwater on the loan – meaning the home is worth less than what is owed on the mortgage – is a necessary requirement for strategic default, according to BarCap.
Analysts looked at loan-level data from Equifax and found 1.9 million loans with enough payment history to determine if the borrower strategically defaulted or not. They found that 8.4% of these mortgages, nearly 150,000 loans, were strategically defaulted on.
"Some studies routinely classify all borrowers who default on their mortgage obligation while continuing to service other debt as strategic," BarCap analysts said. "However, we classify them as non-strategic if the borrower chooses to default on just the mortgage, but there is clear evidence of extraneous economic shocks (income/payment shock)."
They broke down the definition into two types of strategic default: passive and active. Passive strategic defaulters walked away from the mortgage without any change in their ability to pay. These were 10 times more prominent than active defaulters, who took out a new mortgage before walking away from the old one. The loans are usually cash-out refinancings or second liens.
The share of strategic defaulters peaked at 12.5% in 2009 and dropped in recent quarters (see chart below).
"We think the recent decline in share of strategic defaults stems from stabilization in the housing market," BarCap analysts said.
They added that the biggest signal for strategic default has been the borrower's FICO score. Just 4% of 600 FICO borrowers strategically defaulted, compared to 11% of those with 720 FICO.
Analysts gave an explanation.
"Intuitively, weaker quality borrowers likely have limited means and hence default on most of their obligations when their means are restricted," they said. "One could also argue that higher-FICO borrowers tend to be more sophisticated and thus more likely to consider economic arguments to default, even if they had the means to pay."
States with no or limited recourse do not tend to have higher levels of strategic default. Though this goes against reasoning, lenders have shown lax enforcement. There was no difference between states that have a judicial foreclosure process compared to nonjudicial ones. Analysts did note that there is more incentive to walk away in judicial ones since there are more benefits to taking advantage of the longer foreclosure timelines and living rent free in a nonjudicial state.
"Strategic defaults are real, but the magnitude is smaller than what typically gets quoted in surveys," BarCap said. "We think that the overall effect of strategic defaults is rather limited."
Write to Jon Prior.
Follow him on Twitter: @JonAPrior
JPMorgan Chase & Co. Chief Executive James Dimon received a 2010 stock bonus valued at $17 million, the biggest bonus for a big-name Wall Streeter so far this year.
According to a Securities and Exchange Commission filing, Mr. Dimon was given 251,415 units in restricted stock, half of which will vest in January 2013 and the rest a year later. The restricted stock at Thursday's closing prices would be worth just over $12 million. Mr. Dimon was also awarded 367,377 in stock appreciation rights, worth an estimated $5 million based on the Black-Scholes model.
Allonhill recently hired Megan Von Wald as managing director of credit risk management. In her new position, she will oversee the day-to-day operations of the company's credit risk management services for the private and public sectors.
Prior to joining Allonhill, Von Wald served as director of operations for Statebridge Co., a Denver-based mortgage servicing firm, where she focused on developing the firm's servicing platform.
"We are very pleased to welcome Megan to the executive team," said Sue Allon, chief executive officer and founder of Allonhill. "She is perfectly suited to lead our credit risk management practice and advance our mission of reinventing the mortgage industry by better protecting investor interests."
Von Wald also previously worked for The Murrayhill Co., which was founded by Allon herself.
Allonhill is a Denver-based company that specializes in due diligence and credit risk management.
Write to Christine Ricciardi.
Follow her on Twitter @HWnewbieCR.
The securities portfolios of banks rose by 3% in the fourth quarter, as the lenders added mortgage-backed securities and municipal bonds while shedding Treasurys, agency debt and asset-backed securities.
Amy Hsi of JPMorgan Securities Inc. said MBS holdings at domestic banks rose by more than $50 billion last year with all the activity in the second half and essentially evenly split between the third quarter and fourth quarter. The level of residential mortgages increased by more than $10 billion in the fourth quarter, she said. (Click on chart to expand.)
Total deposits at all American banks climbed 2% during the fourth quarter to $7.4 trillion, according to JPMorgan Securities.
"Some growth in loan holdings could indicate that securities purchases could be lower; however, we find that historically securities purchases continued to grow for some time after loan growth picks up," JPMorgan analyst Hsi said in the financial services giant's weekly note on securitized products.
JPMorgan said the Fannie Mae and Freddie Mac pass-through holdings in available-for-sale and health-to-maturity accounts rose by $30 billion in the final quarter of 2010, and Ginnie Mae pass-through holdings climbed by $980 million. Banks also added some $24 billion of agency collateralized-mortgage obligations during the period.
Write to Jason Philyaw.
