Who is Defaulting?

Somewhat dropping knowledge:

The news media is very good at shaping a collective narrative of what’s going on in our economy.  Times are tough, Americans are hurting, etc., etc.  And while this is true for many, it certainly is not true for all.  We need to stay diligent of how we provide assistance, and to whom.

My international capital markets professor, in a lecture about mortgage-backed securities, shared a VERY interesting study done by Fitch ratings agency.  The study randomly selected 45 case files of homeowners who had recently foreclosed on their homes due to “an inability to pay.”  What did those homeowners look like?

• 66% fraudulently stated at the time of the loan that the home would be “owner occupied.”
• 51% fraudulently overstated the value of the property, or the condition of the home at the time of the loan
• 48% fraudulently stated they were first-time home-buyers, when a simple credit report showed past mortgage activity
• 44% could not pay their structured debt due to “payment shock,” defined as greater than 100% increase (i.e.  balloon mortgage)
• 44% questionably or fraudently stated income or employment
• 22% had fraud alerts on their credit reports at the time of the loan
• 18% had questionable ownership of accounts due to name or social security numbers not matching
• 16% Strawbuyer/Flip scheme indicated based on evidence in servicing file
• 16% Identity theft indicated
• 10% Signature fraud indicated

So before we go running to help out these “struggling homeowners,” let’s be clear who we’re REALLY helping out.  Dumb, or oftentimes fraudulent, speculators.