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Rate Update and Strategic Defaults

Mortgage rates ended the week lower during a busy week that included a Fed meeting, Treasury auctions and other economic data. The Federal Reserve restated its intention to keep the benchmark interest rate near zero for an “extended period” and said the labor market is “beginning to improve.” US central bankers have kept the benchmark rate in a range of zero to 0.25% since December 2008. The Treasury enjoyed a slight increase in demand for $118 billion of 2-, 5- and 7-year notes auctioned during the week. The turmoil in Greece led investors to seek the relative safety of US Treasuries and mortgage-backed securities. The Gross Domestic Product report showed 3.2% growth in the US economy in the first quarter of 2010 after growing 5.6% in the final three months of 2009. US Consumer Confidence fell in April from the month prior, but was higher than previously estimated. The S&P 500 experienced its 12th positive monthly gain in the last 14 months. Stock market watchers are hoping that history repeats itself during the upcoming month. May has been the best performing month for the S&P 500 over the past 2 decades, gaining an average of 2.1%. Currently, the 30-Year Fixed sits at 4.750% (4.898% APR) and the 15-Year Fixed is at 4.125% (4.387% APR). The important employment reports are due out on Friday and Pending Home Sales will be announced on Tuesday.

The number of homeowners deciding to default even though they can afford to pay their mortgage is growing, according to new industry studies. “Strategic defaults” occur when a homeowner decides to stop making monthly mortgage payments when the value of a homeowner’s  mortgage exceeds the value of their house, even if they can afford to pay their mortgage. Researchers at the University of Chicago and Northwestern University found these types of defaults dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31% in March 2010, compared to 22% in March 2009. A separate report released last week by Morgan Stanley, showed a similar elevation of the number of strategic defaults, although the bank’s figures are substantially lower than that presented by the universties. Morgan Stanley reported about 12% of all mortgage defaults in February were strategic, up from about 4% in the middle of 2007.

The US housing market still remains weak despite new and existing home sales bouncing up from the record lows hit in the first quarter of 2009, spurred by low home prices, low mortgage rates, and federal tax credits for homebuyers. The concensus forecast calls for national average home prices to fall through 2010, pulled lower by a sluggish labor market and the failure of governement efforts to keep more homes out of foreclosure. An estimated 15.5 million mortgages are under water, representing about 20% of all homeowners. Nearly 9 million of these borrowers owe at least 25% more than their properties are worth.

A home mortgage was typically the first household bill to be paid each month. In recent years, however, credit cards and auto loan have taken priority over home mortgages. Homeowners are generally willing to sacrafice financially to keep up the mortgage payments on a home where the value is likely to rise in the future. Those who purchased homes at the peak of the latest housing boom may not see prices return to those levels until well into the next decade, if ever. Strategic default may be more attractive in areas of the country hit hardest by the housing troubles. In California, where house prices have fallen 44% from their peak, it could take six years before many borrowers can claim any equity in their homes at all, and nearly 12 years to break even on their initial down payment. Additionally, the social stigma attached to foreclosure is steadily eroding as delinquencies become almost commonplace, and the prospect of qualifying for institutional financing (Fannie, Freddie and FHA) just three or four years after a foreclosure is looking more attractive than waiting for home values to rebound.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile