A strategic delinquency occurs when a homeowner purposefully allows their mortgage payments to become 60 days late, usually shortly after property price drops eliminate much of their equity while they’re attempting to keep other debts repaid. In other words, as homeowners continue to lose equity in their homes because of the dropping property prices, many of them are making the strategic decision to not pay their mortgage in order to keep up with other financial obligations. According to JPMorgan analysts, approximately 12,000 to 14,000 strategic delinquencies have occurred per month during the past year. As a result, strategic delinquencies now comprise as much as 27% of the total new late payments in the United States, rising up from only 20% just a year ago.
Analysts believe that many Alt-A and prime borrowers are choosing to go delinquent even though they have the means to continue making repayments towards their mortgage. Amherst Securities Group Analyst Laura Goodman believes that lenders and financial institutions need to focus on reducing principal in order to provide incentive for homeowners to avoid delinquencies and begin stemming the current foreclosure crisis, which could threaten another 10 million properties if such measures are not taken.
According to recently released Bloomberg data pertaining to August bond reports, a record high of nearly 33% of the $1.2 trillion in securitized nonagency loans have either become at least one month delinquent, are currently in foreclosure, or have already been seized. These statistics not only reflect the decisions of homeowners to go delinquent strategically, they also indicated that there has been a significant slowdown in loan liquidation. According to a recent S&P index, home prices in and around 20 of the largest US cities have dropped more than 30% since their peak in July 2006.
According to Freddie Mac and Fannie Mae analysts, the number of loans that are larger than the limits defined by the federal government for which loans would be backed, is up to almost 40% from 30% a year ago. This statistic indicates that lenders are becoming increasingly dependent on borrowing by applying for more of these “jumbo” loans. The share of Alt-A loans that are expected to be defaulted on strategically has risen from 30% to 35%, while the number of subprime loans that are expected to be defaulted on strategically has also risen similarly from 20% to 25%. In terms of loan amounts, 15% of loans less than $100,000 may be of are at risk for being strategically defaulted on, while 35% of loans larger than $400,000 are likely to be liquidated due to strategic delinquencies.
Surprisingly, individuals with the highest credit scores account for approximately 40% of the strategic delinquencies, while individuals with low credit scores account for only approximately 20%, confirming the suspicion that some of the more sophisticated borrowers are strategically defaulting on mortgage loans to focus on repaying other debts. Because of the high number of strategic delinquencies on nonagency securitized mortgages, approximately 10,000 homes per month are being liquidated, a statistic that has been steady for the past several months. According to Federal Reserve data, the loans that have been strategically defaulted on account for approximately 12% of the overall US home-mortgage debt.
Meanwhile in late September, the California Attorney General said that she would reject the proposal for a nationwide settlement with banks pertaining to foreclosure practices, based on her opinion that the proposed agreement was “inadequate.” According to CoreLogic Inc. (a California real estate data provider), there are nearly 11,000,000 homes that may be foreclosed on within the near future in California, which comprises more than 22% of all the homes in the state have a mortgage. Unfortunately, J.P. Morgan analysts believe that property values will most likely drop another 7% before hitting rock bottom next year.