When Tracy Bremmer, director of decision sciences at Experian, talks about mortgage defaults, she has more than reams of data behind her. She has personal experience. She tell a story, embellished slightly but still representative, of a "neighbor" who bought their house near the height of the boom only to see it lose 40% of its value, plunging their mortgage so far underwater it would take years to surface. Then they noticed the house across the street from them for sale for roughly half of what they paid for theirs. So they bought it, and just stopped paying their original mortgage.
This family is semi-fictitious but is not alone. Ethics, morality and possible straight-up savvy aside, we started thinking about these "strategic defaulters" as a newly trending consumer segment, as they tend to become a strange new class of renters:
'+ this.y.toFixed(0) + '%'; } }, plotOptions: { series: { events: { legendItemClick: function(event) { return false; } }, stacking: 'percent', dataLabels: { enabled: true, color: 'white', align: 'center', formatter: function() { this.series.options.dataLabels.x = -this.point.barH/2; if (this.y > 5) { return this.y.toFixed(0); } else { return ""; } } } } } }; var options3 = { chart: { renderTo: 'chart-container3', defaultSeriesType: 'pie', }, title: { text: "Distribution of Borrower's Income" }, subtitle: { text: '2010 Q1-Q2 DelinquencyEvent' }, credits: { enabled: true, text: 'Experian', href: 'http://www.experian.com/' }, plotOptions: { pie: { allowPointSelect: true, cursor: 'pointer', dataLabels: { enabled: true, formatter: function() { return ''+ this.point.name +': '+ this.y +' %'; } } } }, tooltip: { enabled: false } }; $.getJSON('http://adage.com/scripts/edit/data/mortgages-p6.json', null, function(data) { // the data series options1.series = [{ data: [], name: 'Pay-downs' },{ data: [], name: 'No Other Credit' },{ data: [], name: 'Distressed' },{ data: [], name: 'Cash Flow Manager' },{ data: [], name: 'Strategic' }]; //copy over setting from options1 to 2 $.extend(true, options2, options1); //alert(options2.subtitle.text); // the categories options1.xAxis.categories = []; $.each(data.loan, function(i) { options1.xAxis.categories.push(this.Cat); }); options2.xAxis.categories = []; $.each(data.income, function(j) { options2.xAxis.categories.push(this.Cat); }); options2.title.text = "Mortgage Default Customer Segments by Borrower's Income"; options2.subtitle.text = 'The 2010 Q1-Q2 Delinquency Event'; options2.chart.renderTo = 'chart-container2'; //put in data $.each(data.loan, function(k) { options1.series[4].data.push(100 * parseFloat(this.Strategic)); options1.series[3].data.push(100 * parseFloat(this.Cash)); options1.series[2].data.push(100 * parseFloat(this.Distressed)); options1.series[1].data.push(100 * parseFloat(this.NononRETrds)); options1.series[0].data.push(100 * parseFloat(this.Paydowns)); }); //put in data $.each(data.income, function(k) { options2.series[4].data.push(100 * parseFloat(this.Strategic)); options2.series[3].data.push(100 * parseFloat(this.Cash)); options2.series[2].data.push(100 * parseFloat(this.Distressed)); options2.series[1].data.push(100 * parseFloat(this.NononRETrds)); options2.series[0].data.push(100 * parseFloat(this.Paydowns)); }); //pie settings options3.series = [{ type: 'pie', name: 'Income', data: [ ['Under $40K', 6.2], ['$40K-59K', 25.2], ['$60K-79K', 25.68], ['$80K-99K', 14.97], ['$100K-150K', 13.73], ['>$150K', 12.05], ['Not Available', 2.17] ] }]; var chart = new Highcharts.Chart(options1); var chart2 = new Highcharts.Chart(options2); var chart3 = new Highcharts.Chart(options3); }); });
Data being released later today from Experian will show that in the first half of 2010, an estimated 275,000 people just walked away from mortgages they could afford to keep paying because they had become such awful investments. That adds up to roughly 17% of defaulters. While that figure is down 35% from the first half of 2009, as evidence of a double-dip housing crash mounts, "we expect the incidence of strategic defaulting to go up," said Ms. Bremmer.
Estimates of the number of mortgages under water in the U.S. hover just over 1 in 4 but that could jump to half in the coming years. Recent data from Corelogic suggests that almost 10% of mortgages originated just last year are already in the negative equity range. The Federal Reserve shows average homeowner equity at just 38% down from 61% a decade ago. We could go on, but you get the idea. A lot of home owners are hosed.
But back to those strategic defaulters. These are no deadbeats in a traditional sense. The Experian data show that they are more likely to have had a jumbo-sized mortgage, have had excellent credit scores, have had more than one house or investment property, and have a higher than average household income. They also stay current on all their other bills. If you look at the incidence in these charts, the proportion of strategic defaulters keeps going up.
They should be owning and spending like home owners. But they're not, and for up to the next seven years they might have a hard time finding a mortgage while their credit recovers. "As many strategic defaulters as there are," said Ms. Bremmer, "there are many more people who are short-selling. Those people are renting, too."
The short-sellers are not necessarily in as strong a financial position as the strategic defaulters, but they're still joining this new own-to-rent class.
During the foreclosure process, which can take 6 to 18 months, they will live in their house essentially for free. So they'll save for a new down payment, eventually get kicked out and rent, and fundamentally behave differently than their demographic rightly should. The list of product categories impacted by this is lengthy.
How big of a deal is this for marketers?
Each year roughly 5% of homeowners move. That number has been down the past few years and is now closer to 4%. As the housing crisis drags on, more people are going to want to move for traditional "non-market" reasons such as new jobs, better schools, kids, divorce etc. They might have been stuck in their under-water house but eventually that pressure will build, and if they aren't able to sell or even short-sell, this will seem like a more and more attractive (or perhaps only) alternative.
Experian's report is aimed at helping banks identify the strategic defaulters so they can head some of this off and either press them harder to make the payments they can afford or at least start the foreclosure process more quickly on those who have no interest in ever making another payment.
In the meantime, we think it's a fascinating new segment and we're going to keep an eye on this and the marketing implications of a potential shift in our fundamental notion of what it means to be a homeowner.
