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?
