Report: Strategic Defaults Decline; Fact: The Data is not Current

June 25th, 2011
in econ_news

mcmansion Econintersect:  The headlines blare:  "Overall Strategic Defaults Decline" (Housing Wire - Financial News for the Mortgage Market, June 23, 2011) and "Fewer Borrowers Strategically Defaulting" (Realtor Mag - Official Magazine of the National Association of Realtors, June 24, 2011).  Strategic defaults are those that occur when the mortgagor has the means to make the mortgage payments but simply makes the financial decision not to. 

Wow!  Things must really be getting better.  But wait a minute - the data being reported is one year old.  The numbers are from the second quarter of last year.

Follow up:

From Housing Wire

A study from credit reporting agency Experian and consulting firm Oliver Wyman showed 17% of all 60-plus day mortgage defaults in the second quarter of 2010 were due to strategic default. While this is down from a peak of 20% in the second quarter of 2008, it is more than double the number of strategic defaults in 2006.

Editor's note:  But even if the news were being reported when it was current, the headlines are gross misrepresentations.  Below are the actual data being reported.

Housing Wire presents the following graph:

mortgage default types

GEI News offers the following statistics from the table above for the latest five quarters reported (Q2 2008 through Q2 2010):  The average is 18.0% with a range of +/- 2 and a standard deviation of +/- 1.6.  The number of samples is too small for a rigorous determination of probability, but the data implies that very roughly 2/3 of the time the number of strategic defaults is expected to fall between 16.4% and 19.6%.   And all of the data falls between 16% and 20%.

Editor's note:  It is GEI News' position that there is no reasonable basis for saying that there has been any significant change in strategic default rates during the period from Q2 2008 through Q2 2010.

 Not all of the data presented in the Housing Wire story is misrepresented as is that for total strategic defaults.  There was a steady progression of increasing percentages of strategic defaults with increasing size of the mortgage, with 33% of defaults for mortgages of $1 million or more being strategic.  See the following graph:


An interesting part of the Housing Wire article:

Another characteristic of strategic defaulters is the ability to stay current on all other debt obligations including credit cards, auto loans and any other revolving debt. This includes new mortgages. Experian found that 47% of strategic borrowers in the second quarter of 2010 opened a first mortgage on another property in the six months prior to their default.

Experian said strategic default will continue to plague the market until home prices rise.

"These percentages aren’t likely to decline much unless residential housing prices increase and remain at higher levels," said the report. "Homeowners have to see for themselves that their neighbors' houses are selling for higher prices."

It seems that nearly half of the strategic defaulters took steps to avoid having to deal with lowered credit ratings after the default.

More recent data than that producing the two articles above was reported by real estate expert Keith Jurow in GEI Analysis at the end of April.  At that time he reported on studies by Morgan Stanley and the Federal Reserve and concluded that strategic defaults were still increasing.  Jurow went on to project that they would continue rise in number going forward.  

Sources:  Housing Wire, Realtor Mag and GEI Analysis     

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1 comment

  1. Keith Jurow says :

    Nice reporting GEI. The Housing Wire report doesn't even cite the important Morgan Stanley and Fed reports which I focused on in my April article. Or my article for that matter.

    Any talk of strategic defaults declining is the usual wishful thinking. As prices continue to slide, strategic defaults are climbing. Period.

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