Posted on 11/01/2009 5:59:26 PM PST by FromLori
The Richmond Fed produced a report that provides some useful information on the issue of non-recourse mortgage loans and their default rates. The report includes a State-by-State breakdown of the rules for defaulting.
This report was over my head. For example, the following calculation describes the probability of a short sale in a Recourse State:
The conclusions are easier to read. I found this interesting:
“For homes appraised at $300,000 to $500,000, borrowers in non-recourse states are 59% more likely to default than borrowers in recourse states. For homes appraised at $500,000 to $750,000, borrowers in non-recourse states are almost twice as likely (100%) to default as borrowers in recourse states while for homes appraised at $750,000 to $1 million, borrowers in non- recourse states are 66% more likely to default.”
California is the largest State that is also a non recourse State. It is also a place where a significant amount of properties are worth >$300k. Given that the anticipated default rate is 70+% greater then in another State it tells you what is happening and what will continue to happen for Cali-jumbo mortgages. It is a black hole. Given this, why would anyone be willing to lend in California?
Also from the conclusion is the following. It took me a bit to understand the double negatives. When I see words like this I just assume that it is an effort to obfuscate something.
“We cannot reject the hypothesis that recourse does not have an effect on Loans held by the Government Sponsored Enterprises.”
In the body of the paper is a better explanation:
“Recourse does not have a significant impact on the probability of default for mortgages held by a GSE.”
I found that to be a startling observation. What this means is that people will more likely default on a GSE loan than a private lender regardless if they are in recourse or a non-recourse State. This can only be attributable to the following mindset:
“I owe this mortgage to the Feds. Even though they have the right to go after my bank account to pay this off I know they will not. So screw them, I‘m not paying. There is no downside”.
The confirmation for this comes from the Richmond Fed:
“The probability of default by foreclosure increases by 7% for mortgages held by a GSE as compared to the mortgages held by private lenders.”
This report was sent to Congress. I doubt they will read it. Barney Frank, one of the chief ‘deciders’ on all of this should read it. The conclusion is obvious. When the government makes mortgage loans they are encouraging defaults. As lenders they appear to have no teeth. This is a hell of a predicament given that the D.C. lenders are currently 95% of the new mortgage market. The total value of mortgages held by Uncle Sam is $7.5 Trillion.
The most significant contribution from this piece is a well-organized discussion of who can do what to whom and when can they do it on a State-by-State basis. That information can be downloaded at this site. The information on the individual State Laws starts on page 43 and ends on 54.
The following is a summary of that information. If you are thinking of defaulting on your mortgage you might take a look at these sources. Who says the government doesn’t provide useful information?
What the article fails to point out is that many recourse states such as NY have become defacto non-recourse states by virtue of judges refusing to issue deficiency judgments and also the fact that lenders generally don’t move for a deficiency judgment in the belief that they are generally uncollectible and the belief that the court will not issue one. Therefore, the belief is why bother paying the attorneys a couple thousand more to try to get a judgment, just get the property and sell it off and take your losses and go on to the next.
You can’t get blood from a turnip.
parsy, who had no recourse but to say this
In most states a full foreclosure allows the bank to sell the property below the loan balance, they then sell the defaulted amount to a collection agency, that will hound the borrower to the grave.
And if the bank defaults and is closed by the FED, they immediately reverse this and sell the defaults for collection.
bump
Not happening in NY
This is statistics talk. "Rejecting the null hypothesis" means that you infer an effect where none is present, based on some analysis. So you say to yourself, "suppose I was presented with data where no effect is present, what is the probability that my method will lead me to infer an effect?" in which case I will be rejecting the null hypothesis. The complement of this probability ( 1 - P ) is what you see quoted as 99%, 99.9%, etc. where it's interpreted as the probability that the effect is really there, even though this is not formally what it means.
In this case we can see that the null hypothesis is "recourse does not have an effect", but the statement that "We cannot reject" this hypothesis, taken as an evaluation, means ( I would think ) that there is insufficient evidence that recourse has an effect. Paradoxically, this means that a conclusion from the analysis that there is an effect would lead to a HIGH probability of "rejecting the null hypothesis" i.e. making an erroneous judgement when presented with null data.
All the comparison says is that foreclosure is never worse for the borrower without recourse than it is with recourse.
Here's the paper ( pdf ).
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