Borrowers who default “strategically” on their mortgages – because they think it is in their financial interests – are influenced strongly by media coverage of the depressed housing market and by housing experts who suggest that walking away from an underwater loan is a rational response to a bad investment, a recent study contends.
“The overwhelming media coverage of the current financial crisis has made homeowners aware, or at least alerted them to become aware, of their equity position in their home,” according to Michael Seiler, who co-authored the study analyzing the role social networks play in their decision to default on mortgages homeowners can afford to pay. Commissioned by the Mortgage Bankers Association, the study suggests that social networks, intensified by the rapid-fire exchange of information on the Internet, “create the potential for much faster spread of strategic defaults,” as one strategic default triggers others in a destructive domino reaction.
According to recent industry reports, nearly 29 percent of homeowners with mortgages are currently underwater on those loans – up from about 27 percent in the second quarter. Zillow, which compiled those statistics, attributes the increase largely to the prolonged foreclosure sale process. Although foreclosure rates have been declining, the time required to complete the foreclosure process has been steadily lengthening since the rob-signing scandal brought foreclosure filings virtually to a halt.
“We’re in uncharted waters,” Stan Humphries, Zillow’s chief economist, told MSN.com. “More than one in four homes underwater and about 9 percent unemployment is a recipe for more foreclosures.”
Against that statistical backdrop, analysts warn, strategic default risks are growing ― a concern underscored by the MBA’s recent report. Housing pundits, “with a far-reaching sounding board” can reach and influence many borrowers, and in “fragile markets,” the MBA study cautions, “advice by those considered to be experts can result in a flood of strategic defaults, causing a contagious downward spiral of home prices and potentially a market collapse.”
“From a policy standpoint,” Michael Fratantoni, vice president of research and economics for the MBA, notes in a press statement, “the research supports the contention that opinion and information (or disinformation) can move markets. More specifically,” he adds, the research demonstrates that “policymakers and mavens have the ability to stabilize or de-stabilize markets.
Shrinking Nest Eggs
The economic downturn has taken a huge bite out of the retirement asset pool. Job losses, salary reductions, and battered stock market returns have combined to reduce aggregate retirement account balances by 7.5 percent, from a record high of $18.4 trillion in June of 2011 to $17 trillion at the end of September this year, according to an Investment Company Institute (ICI) report.
IRAs took the biggest hit, declining by 8.5 percent, while defined contribution plans lost 7.5 percent of their value. For analysts concerned that Americans on the whole have not been saving enough to fund a comfortable retirement, this report was hardly good news. But Peter Brady, a senior economist at ICI, doesn’t think these statistics indicate a looming retirement crisis.
The primary goal for retirees is to maintain their standard of living, “and that will mean different things for different people,” Brady told Daily Finance. “There’s certainly variation within the population,” he added, “but a good number of people are on track to have a secure retirement.”
American consumers don’t appear to share Brady’s confidence about their retirement prospects and recent studies suggest that retirement anxiety spans the income spectrum. The rich may be “different,” but they appear to be just as concerned about having sufficient retirement income as middle income consumers.
Forty percent of the affluent investors responding to a recent survey by Wells Fargo & Co. said their greatest fear is that they ‘will do all the right things today and it still won’t be enough for tomorrow.” Nearly 10 percent said they fear that they “will have under saved and won’t recover” before they retire.
Retirement appears to be as dim a prospect for the affluent as it is for the middle class. Nearly 20 percent of those with investable assets of between $100,000 and $250,000 say they anticipate having to work until they are at least 80 – close to the 25 percent of middle income workers who have the same expectation.
Insuring Santa
If the presents under the Christmas tree seemed a bit skimpier this year than in the past, the battered economy may not have been entirely to blame. It may have been rising insurance cots that forced Santa to cut back on his deliveries this year.
Lockton Insurance ran the numbers and concluded that it Mr. Claus had to pay more than $1.2 million to insure against a litany of risks, ranging from possible injuries to his reindeer and airborne sleigh accidents to pollution resulting from the delivery of coal to the “naughty” kids on his list.
Lockton’s special report estimated that Santa’s premiums would include: $100,000 to cover Santa’s workshop and its contents; $754,000 for worker’s compensation for Santa’s elf employees; $10,00 for liquor liability related to Santa’s Pub (“Many elves are not aware of their eggnog tolerance and may hold Santa’s bartenders responsible” for any personal injury or property damage resulting from “elf intoxication,” the report explains); $50,000 for equipment breakdown; $50,00 for “hull and liability” coverage for Santa’s sleigh; $100,00 in “ocean marine” coverage for overseas shipments by air; $16,000 in “exotic animal” coverage; $5,000 for a Lloyd’s of London policy to cover Santa’s beard; and $46,0000 for a $5 million umbrella policy.
“Santa felt it was best to have these additional backup umbrella limits in place [in order to] safeguard Christmas,” the Lockton report explains. “Santa has never been sued,” the report adds, explaining, “just taking precautions.”
Credit Union Correction
Credit unions reaped a mother lode of favorable publicity when the Credit Union National Association (CUNA) proclaimed that 650,000 consumers, infuriated by the barrage of new fees their banks are charging for basic services, had responded to a campaign urging them to transfer their accounts from large national banks to smaller community banks and credit unions.
All that favorable publicity turned a bit sour, however, when CUNA was forced to admit that its calculations weren’t accurate; the transfer total, it turned out, was closer to 214,000 ― about a third of what CUNA had claimed.
Bill Hampel, CUNA’s chief economist, blamed the rush to compile and report the data for the error.
"Because there was so much hubbub, we went out with a quick survey to pick up anything [since CUNA’s regular tracking report]. When we came back and got more routine data, we tried to reconcile it and find out why it would be different."
They discovered that the hazily worded survey questions produced responses that counted both new members and new accounts in the estimate of account openings, often resulting in double-counting. Credit unions also used varying cutoff dates in their tallies, Hampel noted.
“We were not precise enough in drafting the questionnaire,” he admitted. On the other hand, he emphasized, this is the first time in the 30 years CUNA has been compiling population data that it has had to make dramatic adjustments in the data.
And even though the totals were exaggerated, credit unions say they still acquired thousands of new members in the weeks leading up to “Bank Transfer Day.”
“Regardless of the impetus for credit union growth ― either through new memberships, new checking accounts from existing members or a combination of both,” CUNA President Bill Cheney, said in a press statement, “it is clear that consumers made a significant movement to credit unions.”
Who Laughs Last
While banks no doubt enjoyed the spectacle of credit unions backpedaling on their claims to have covered hundreds of thousands of former bank customers into credit union members. But the banks didn’t have long to relish the public relations discomfiture of the industry they love to hate. Within days of CUNA’s data correction, the New York Times was reporting the litany of new fees banks have begun to charge in an effort to boost revenue without infuriating their customers.
“Facing a reaction from an angry public and heightened scrutiny from regulators [after an abortive attempt to charge for debit card use],” the Times reported, “banks are turning to all sorts of fees that fly under the radar. Everything, it seems, has a price.”
According to the Times analysis, banks are trying to recover between $15 and $20 per month from each depositor, in order to offset revenues lost as a result of new restrictions on overdraft charges and caps on debit card swipe fees.
“They have got to make up the income some place,” Vernon Hill the founder of Commerce Bank, told the Times. “I think we will see a lot more fees,” he predicted.
Banking industry executives anticipate that consumers will complain about the fees – if they notice them. The key question, one banker told the Times, is whether customers “complain and move, or just complain.” Maybe credit unions will have cause to conduct a new survey later this year.
