Intentionally Default? Maybe. Read On. [Karl Denninger]

Market Ticker ^ | 4/8/2009 | Karl Denninger

[perfect_rovian_storm]

If you have any qualms about the morality of intentionally defaulting on your mortgage - not because you can't pay, but because the value of your house has declined to less than you owe, listen up:

“I can make the payments. That’s not the issue. It’s a business decision,” Watts said. “I tried to work with the lender. The lender didn’t help. They said, go ahead, do a short sale. It’s strictly business.”

Who is this guy?  He is not Joe. K. Random.

Watts, the chief prognosticator for the Orange County Association of Realtors, once was one of local real estate’s biggest boosters. Where others saw a market slump, Watts kept seeing price gains.

Got it?

Good.

It's strictly business folks.

The banks, Realtors and mortgage brokers didn't pump real estate, stoking the fires of starry-eyed profits, for your benefit.  It was not so your children would have a nice place to grow up.  It was not so you and your wife, husband or significant other would have a great place to live.

Nope.

It was strictly business.

That's right.  Every nickel of profit that those Realtors, Banksters and Brokesters could manage to connive out of your pocketbook, they did.  They issued rosy predictions like this:

• In 2006, Watts forecast a 15% price jump. Instead, sales dropped 28% and prices rose a meager 2.4%.
• In 2007, Watts predicted that local house prices would increase 7%. Following the subprime mortgage meltdown, and prices ended the year down 10%.
• In 2008, he thought gains of 3-5% were conceivable for houses. By year’s end, the whole economy had tanked, and Watts had issued an apology. Home prices fell 30%.

Yeah, he apologized, but you lost money.

This is not one random guy either.  Remember these books?

Google him. 

Look, I understand "it's just business." 

I'm a capitalist pig and I'm proud of it.

But back in the day of The Internet, I had plenty of cover to prognosticate 500% annual growth rates for the next 20 years if I wanted to.  Everyone else was.

I refused, because I knew that mathematically such a prognostication was dishonest.

It is rather clear that anyone who bothered to do the math on home price appreciation and compare it against income had to know that too, on a forward basis for any material length of time, was impossible to maintain.

I understand that this realization ultimately included you, the Home Buyer - if you bothered to do the math (and you should have.)

But the Brokester and Bankster made those loans knowing this as well, and they're the subject matter experts, with their HP12Cs and fancy computer programs.  They all had to know, if they bothered to look (and they had a duty to look, at least for the buyers of their "debt instruments") that the loans they were writing and the "affordability products" both weren't affordable and those loans had a high probability of exploding.

It's simply math.

So consider what Mr. Watts did.

Make a business decision, and only a business decision.

Do not allow yourself to be guilted by people like Sheila Bair of the FDIC or others, all of whom in the government also knew the math, into intentionally screwing yourself when in point of fact you should do what makes the best business sense for you and your family.

We cannot, ladies and gentlemen, get to the bottom of this economic morass until the excessive debt is flushed from the economy.  This means that it must be paid down or defaulted.

The market must clear this excessive debt in households, corporations and even government.

All the whining from government about the "horrible" effects of foreclosure on neighboring property (the value decreases) is in fact backward.  In order to return to sustainable home ownership we must get home prices down to 2.5-3x incomes on a median basis.  The sooner we do, the sooner we achieve sustainable home ownership.  True home ownership.

So while it sounds twisted, intentional defaults, where it is a proper business decision on your part and made in consultation with your own experts, help this process along.

The government is heavily invested in seeing the banks get the better end of this situation (of their own making!) even if it impoverishes you in the process.

Only you, in consultation with an attorney and CPA, can make a business decision on whether to attempt to renegotiate and/or walk away - that is, what the best business decision is for you - and only you.

Make that decision not based on the bleating claims of morality among those who either intentionally misled you or sat silently while firms and individuals over whom they had regulatory authority did so, but rather strictly as a business decision.

After all - they both did a few years ago and are again - here and now - today.

[Lorianne]

Rule #1 Realtors are NOT your friend. If you follow this one simple rule you’ll be better off for it.

[perfect_rovian_storm]

Rule #2: Don’t pay more for a house than you’re willing to pay to keep that roof over your head. Anything more and you’re overpaying.

[FromLori]

I think Denninger is one of the best! He was recently honored at an AIM (Accuracy In Media) Ceremony an award most the lying communist paid creeps would have to try and buy. Thanks for posting this.

[perfect_rovian_storm]

Yeah, I read his blog every day. I notice you usually post his stuff here at FR. :)

[FastCoyote]

[Rule #1 Realtors are NOT your friend. If you follow this one simple rule you’ll be better off for it.]

Actually, as a Realtor, I can tell you that is generally (not always) untrue. A good realtor’s number one concern is liability, so that alone means not pushing people into crummy deals. But here’s what I find, is that buyers have a hard time taking rational advice, they tend to think they know better than their realtor. For example, I’ve done a dozen offers lately where the buyer underbid by 20% on absolute steals and then got mad at me when their offer was rejected (don’t ask me to explain this, it makes no sense).

So yeah, if you go with your cousin, or you go with the guy on the Bus stop sign, you aren’t likely to gain a friend, but a lot of us actually enjoy making our customers happy and frequently take a shave on commission to do so.

[FromLori]

I think Denninger is just making some over all broader points with this article. He believes people who in reality committed Fraud to get these mortgages should be prosecuted.

http://market-ticker.org/archives/936-Why-I-Advocate-Prosecution.html

[Attention Surplus Disorder]

My 3 problems with getting so exercised over it are...

1: if this is so disgusting, then...bailing out thieving bankers is at least as disgusting. As is having your taxes and fees raised relentlessly to aid whole new classes of government-dependent workers and welfare recipients. As is having your taxes raised to support an administration so viciously pro-abortion (if that happens to be a hot button for you) and anti-freedom and anti-Israel and anti-Constitution.

2: it’s making an emotionally-charged decision

3: it potentially places you in a situation of serious emotional stress; not just from the financial standpoint, but from the standpoint of realizing that we, as a society, have become seriously debased in terms of honesty and fair dealing, like it or not. I find that as disgusting as you do. But it’s also a source of stress to judge (almost) everyone else a crook and place yourself upon a pedestal of moral superiority. To be clear, I am NOT saying “it’s OK because everyone else is doing it”. I am saying: Be selfish and consider your own health and sanity and price you may well pay for sticking to your guns, admirable as they may be. Is there a difference? Maybe not. Maybe if you take 15 years off your life stressing yourself out over a pile of wood and wire and pipe, that isn’t so good either.

Having never received a dime of government aid in the form of welfare or unemployment bennies, other than the normal tax breaks to which everyone is entitled, I support and applaud your stance of honoring ones’ agreements, and in the overwhelming majority of cases I act from that standpoint as well. But that mortgage agreement also includes a remedy for the lender as discussed in prior posts and which is no secret.

I just don’t support making this decision within a single dimension of thinking.

[Ann Archy]

I’m a Catholic...we don’t have shades of grey.....wrong is wrong.

[Centurion2000]

After all: If you’ve bought the home as a place to house your family, then it doesn’t do much good for that same family for you as breadwinner to beat your brains out, enslaving yourself for the next 27 years.

BINGO .... I'm dead even on value versus remaining equity but then I've been there for 5.5 years and I'm in Texas (which is still doing ok).

Bottom line is this ... if you're under more than 3 years salary ... WALK. Just business but there's no benefit enslaving yourself.

[Centurion2000]

I’m a Catholic...we don’t have shades of grey.....wrong is wrong.

Yes you are correct. And being taken advantage of, enslaved by a contract and punishing your family is wrong as well. Sometimes it comes down to choosing the lesser evil.

[Ann Archy]

Geesh....I’ll live my way...you live yours.

[CSM]

“It’s not really a ‘robbery’ to walk away.”

My comment is not very clear, so I can understand how it might be misunderstood. To clarify, my comment was in response to another poster that mentions the robbery perpetrated on individuals by the bankers, brokers, etc. My point is that this “robbery” is not executed until I leave the home.

It is just another way of saying that the paper loss is not realized until the sell, be it my 401K or my home, so it isn’t robbery until I decide that it is.

As a point of reference, I have been banging down my debt for the last 2 years and even with the paper loss of 40% on my home value and my 401K, I have increased my net worth by 12% in that time period. I will have it up to an increase of net worth at about 24% by the end of this year.

[ConservativeMind]

Actually, my first new car loan required a $2,000 down payment. Since then, none have.

Competition among banks, who saw home values heading upward, let their financial people say, “Heck, we can get by without as much down payment because the house will be worth 20% more in just one year.” So, the customary 20% went to 15%, then 10%, then 5%, then, in some places, 0% down (but may still have required mortgage insurance, which essentially insures against what a down payment would have helped with).

I personally believe all banks who did such things need to be held accountable and need to go under if they can't float their situation. This holds to even those who loaned based on a 20% down payment, for their stupidity of not insuring against a downturn in housing prices.

That said, I think anyone who attempts to walk away from a signed contract should have their butts in jail if they can't work it out with the entity that loaned them the money. That, and have their credit report decimated for life.

[Notary Sojac]

If you don’t pay, they get the house. If the bank wasn’t satisfied with this remedy, they shouldn’t have written the loan that way. Remember, they are the ones who wrote it.

Dingdingdingding!!! WINNER!!

[Notary Sojac]

anyone who attempts to walk away from a signed contract

They would be "walking away from a signed contract" if they stopped paying and tried to keep the house, or if they (as some have) walked away and trashed the property.

The signed contract calls for the mortgagee to make the payments, or return the collateral. Either one fulfills the terms.

[jusduat]

Back in 1988, I bought my first house that I still own.
I could have bought a bigger more expensive house according
to the banks and realtor. I knew that I might not always
have an income as high as it was then, so I bought what I
knew that I could afford even if I had to take a lower
paying job. For the last 7-8 years we’ve wondered where
all the people who could afford to buy the mcmansions that
have been built all over were working. Now we know, those
folks couldn’t afford 600thousand homes after all. But I
guess the rest of us will have to make up the difference.

[blam]

Lukewarm Verdict On US Financial Rescue Plan