Posted on 01/26/2010 8:16:22 AM PST by TheThinker
Big real estate developers do it all the time - like yesterday, when the owner of New York City's Stuyvesant Town complex decided to stop paying its $3 billion mortgage. So why are you still writing a check every month on that mortgage that's much bigger than your home is actually worth?
Good question, University of Chicago economist Richard Thaler says. Thaler tells New York Times readers that it's not just alright to walk away from one's over-sized mortgage -- it may actually be a moral imperative. (An earlier Times article, by Roger Lowenstein, said much the same thing.) After all, lenders had no second thoughts about lending more than many borrowers could afford or than the homes might actually be worth. It's just not fair to expect borrowers to follow rules that the lenders don't.
But why stop there? Some commentators are now calling on borrowers to start a mass mortgage strike.
"Remember burning draft cards? Burn your mortgage," the blog DailyKos told readers recently:
"The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that's what we must do. Doesn't have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment....just walk away Renee. Morality has nothing to do with it. You are a cog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced."
Now the call for a borrowers' revolt is being joined by folks who know an opportunity when they see it: real estate agents. Over the past month, agents have been rushing to declare 2010 "the year of the strategic default." Here's Connecticut Realtor Minna Reid:
Loan modifications do not address the real problem of heavy negative equity and are sure to fail most of the time. Even if the homeowner lowers their current payment they are left more trapped than ever. There will be no quick recovery this time. Years later when there is a need to HAVE TO move, the original problem of being upside down remains and the modified homeowner is left to short sell or foreclose once again.
Isn't it better to just cut the losses upfront ?
I know many will consider strategic default wrong or immoral, but as for me, I stopped passing judgment long ago.
Reid is far from the only real estate agent using mass revolt against the banks as a sales strategy. San Diego broker Bob Schwartz asks, "How many homeowners will suddenly wake up to the fact that their home is now worth tens of thousands of dollars less than their mortgage balance? Only the naive will believe that their San Diego home's value will bounce back anytime soon.... Defaulting "strategically" can entice more walk-aways by buying all the major items they may need in the near future, such as a car or even a house, right before they take a hike. As long as you stay current with other mortgage lenders, one could potentially have a good credit standing in 2 years after the walk-away."
And Phoenix agent Bob Stahl joins the chorus, assuring borrowers that a strategic default followed by a short sale won't hurt their ability to get a mortgage in the future.
Many of the agents calling for a mass movement of strategic defaulters specialize in short sales -- selling a home for less than the mortgage on it – something that mortgage servicers will often only consider once a borrower has begun to miss payments. It's ironic that after years of helping push prices up to maximize commissions, real estate agents are now pushing borrowers to dump their properties in short sales, so they can jump in and close a deal.
Still, they may be on to something.
Calling for mass strategic defaults is the equivalent of shouting "fire" in a crowded theater, prompting a stampede to the exits, and stampedes can leave a lot of people hurt – in this case, all the homeowners who live next door to the borrowers who stop paying, and suddenly see their property values plummet.
But there's also potential for millions of borrowers to gain if strategic defaults occur on a large scale. Nearly one in four borrowers nationally owes at least 20 percent more on mortgages than their home is actually worth, and in Nevada and Arionza it's more than half. The Wall Street Journal reports that about 1 million borrowers deliberately decided to stop paying their mortgages in 2009, or one in four of all mortgage defaults. When a critical mass of borrowers stops paying, it makes lenders – really, we're talking about the investors in mortgage-backed securities -- a whole lot more receptive to the idea of lowering the principal borrowers owe on their mortgages to persuade them that it's worth continuing to pay.
"People are spending far more on mortgage and ownership costs than they would to rent the same unit and there is almost no realistic prospect that there will ever get equity in many of these homes," says Dean Baker, co-director of the Center for Economic and Policy Research and author of the book False Profits: Recovering From the Bubble Economy. "Walking away will save them money and also free up money for consumption, thereby providing a boost to the economy. Banks will likely be far more forgiving of people who default in this crisis than they would ordinarily be. This isn't altruism -- they want to be able to make loans."
Yeah. They were all “tricked” into buying a house! Some lenders even held guns to heads! ~sarc.
Maybe if banks went back to the "bad old days" when mortgages were not given out like candy then this option would not even be on the table.
Hey, what works for developers, works for the little consumer...imho
It will be hilarious if these people (who can pay) who walk away from underwater homes find their homes above water in 3-4-5 years. And this just might happen when inflation sets in, in reaction to all the money being poured into the economy by the 0bongo administration
Correct, two wrongs DO make a right./s
I am going to get flamed, but I would tend to agree with this. We need a MAJOR correction in real estate prices NOW. We may have to start from ground zero. The present prices can NOT be sustained and very few seem to be appropriately negotiable.
Yep, good time for those of us with liquid cash and decent credit to snatch up some of these deadbeat’s abandoned properties and then rent them back to them at highly inflated rates. :->
Yes, by all means, let’s encourage people to be irresponsible.
Realtors and marxists uniting. Unreal. I am not sure who is more stupid. The libs enable free money telling bankers to lend to ACORN members and the system falls apart.
This is why Barney Frank , Chris Dodd and anyone who supported giving mortgages to people who couldn't pay them should be wearing orange jump suits. Instead they're on TV all the time lecturing us.
Government, corporate and personal greed with little accountability is a cancer on this nation. Those who are ethical and play by the rules are treated as chumps. But in the end living responsible lives has its reward. All about content of character.
it is not marxist.
if they walk away from the house, the bank gets posession of the house. EXACTLY as the parties contracted.
That was the contract.
no pay no keep house.
The problem right now is that the banks are doing nothing if anything to make this situation workable. Even in bankruptcy the banks tend to be penny wise and pound foolish.
(quite frankly we would have been better off if the stimulus money went to pay down mortgages in the same way that plastic vouchers were issued to pay for digital converter boxes)
Well, when business groups turn their back on their obligations, they are hailed as heroes making wise business decisions. I just don’t see the difference between them and the little guy. The government threw out the first match in this mess, but banks have thrown on the gas that has made the situation far worse.
No way....... I have SOLD one home, BOUGHT one and am now refinancing it and it is a H*llish process to say the least. Just try and get a loan now. I am cash positive, documented income exceeds by a longshot what would qualify I us, two credit scores around 800 and healthy retirement accounts.
The institutions are so afraid to lend that there will always be a line that you will want to be in front of otherwise good luck in the future. This author is writing in a wishful way and is the likes that are part of the problem not the solution.
My real fear is that the Big Gov comes in and forces lenders to forgive and forget by taking my tax dollars to make up for those whom were dishonest.
Socialization usually thrives when a vacuum is created by crisis. The collectivists want industry or markets to collapse so they can come in and ‘rescue’ it which really means take it over. These KOS kiddo deadbeats really just want big brother to pay for their homes.
Yup, the home won’t be worth more, money will be worth less, but the mortage stays the same. Also, there is the tax deduction to consider. Even with an underwater home, the actual payment, after the interest tax deduction, may be less than the rent you will pay after walking. Its no fun to be underwater, but it is no different than fluctuations in the stock market. People need to calm down.
And whose mortgage would have been chosen to be paid down?
No kidding. The real villains in all of this walk away unscathed.
IT MAY BE MORAL? I DON’T THINK SO, NOT EVEN IN THE YEAR OF JUBILEE. THERE IS A GOOD CHANCE THAT EVEN WITH A SHORT SALE THE BORROWER WILL REMAIN RESPONSIBLE FOR THE DIFFERENCE. ALL WE NEED FOR A COMPLETE COLLAPSE IS FOR PEOPLE TO WALK AWAY FROM THEIR MORTGAGES. THAT IS PROBABLY THE REASON FOR POSTING THIS THREAD!
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