Why do borrowers default? Many have assumed it’s because mortgage payments are too high. But a new paper from the Federal Reserve Bank of Atlanta argues that unaffordable loans—with high mortgage payments relative to income from the time they’re originated—are “unlikely to be the main reason that borrowers decide to default.” Instead, unemployment and future home price declines are likely to play a bigger role. (The paper looks at loans that are unaffordable from the time they’re originated, and not at loans that may start with low “teaser” rates before jumping higher.)
The Fed paper estimates that a 1-percentage-point increase in the unemployment rate boosts the chance of a 90-day delinquency by 10%-20%, and a 10-percentage point fall in house prices raises the probability of a default by more than half. A 10-percentage-point jump in the debt-to-income ratio, meanwhile, increases the chance of a 90-day delinquency by 7%-11%.
Tuesday, June 02, 2009
Why homeowners default on their mortgages
From The Wall Street Journal:
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My best friend who bought didn't get in over her head with the cost of the house and got a 30-year fixed lost her job just before Christmas. She was very proactive about calling her credit card company to lower the monthly and tried calling the mortgage company to work out a lower payment. The credit card company was willing to work with her but the mortgage company wasn't. She has been able to make the payments but is seriously thinking of stopping because the mortgage company has basically said that until she is underwater by X number of days they aren't going to bother. Obviously this can't go on much longer for her but it seems like the company either because they don't want to deal with the paperwork or because they would rather fewer months of full payment that a few months of smaller payment with the potential of full-payments and non foreclosure. So it seems like as the bad employment situation goes on it would seem likely that more of the foreclosures are going to be because of unemployment.
ReplyDelete"Obviously this can't go on much longer for her but it seems like the company either because they don't want to deal with the paperwork or because they would rather fewer months of full payment that a few months of smaller payment with the potential of full-payments and non foreclosure."
ReplyDeleteWell, when they kick her out and I buy the house at a realistic price the bank will get both. A lower AND a full payment every month.
You think it will continue while unemployment continues, I think it will continue until prices are realistic. I have a job and a down payment and I wouldnt think of paying a mortgage until prices in my area drop at least 40% more.
Anonymous said:
ReplyDelete"You think it will continue while unemployment continues, I think it will continue until prices are realistic. I have a job and a down payment and I wouldnt think of paying a mortgage until prices in my area drop at least 40% more."
I agree prices in DC have to come down at least 40%. But I don't think it is going to happen soon. It may happen over three years Where do you live Sir?
I should have bought in 2000. I just got cold feet then 9/11 hit....
I kick my self for not buying.
"Where do you live Sir?"
ReplyDeleteI moved here 3 years ago, so I dont kick myself for not buying. I live in potomac. Im a renter.
We've found similar results in Minnesota. The MN Home Ownership Center published a report on families seeking foreclosure prevention assistance in 2008.
ReplyDeleteThe data shows that for families seeking assistance - job loss or loss of income was cited 50% of the time as the reason for default - while increasing loan payments was cited only 9% of the time.
There's more info here:
http://hocmn.blogspot.com/2009/06/causes-of-mortgage-default.html