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."
Developers don’t just walk away. The end up bankrupt. Returning the collateral (typically ALL of the developer’s assets) to the lender intact is a better solution than a pointless chapter 11 or a chapter 7. In either case (giving back the property or the chapter proceeding), the borrower typically doesn’t leave with assets that the lender has a right to. With the developer’s assets in hand, the income stream then goes directly to the lender.
The “little consumer” who “walks away” is often getting away with something the developer can’t - he has trashed the property and retains income (and sometimes assets) that were obligated to the lender. In any event, these “little consumers” aren’t victims, and the developers aren’t getting away with anything.
BK law?
Pay them off and be done with them if you don’t like their business practices.
its even worse than that their are lawyers out there that for $1 per day $30 per month will intervene and deliberately delay a foreclosure action, which is not all that difficult given the overwhelming backlog of cases, at least for the near term indefinitely.
My apologies BK = Bankruptcy.
Ahhh, The Forgotten Man or maybe we are Obsolete Man. So what happens to the system if everybody (and I mean everybody) decided on Friday I stop paying?
The lendrs weren’t allowed to use normal credit standards, because those are “racist”. Just ask Barney Frank and Franklin Raines.
It would collapse and make a few people very happy.
I agree that banks should not be able to simply change the terms of the credit card agreement. But that’s a bit different. First off, the agreement with the credit card company will disclose that the terms might change (not that its right.) For the mortgage, the terms did not change one iota. The house declined in value.
A prudent purchaser would have not assumed that home prices would continue rising astronomically. Like in the old days, you put 20% down and made sure that the payments were no more than 25% or so of your take home pay. Had we stuck to that old-fashioned principal, much of this real estate blow up would have been avoided, IMO....
Add to this: "And, your knowledge isn't worth as much as it was when we contracted with you. With the economy, there are lots of guys who would do it a lot cheaper, so we figure why should we pay that price for something that is worth less? So, we're walking away."
Short sales are a joke. The banks often take so long to realize that they need to stem their losses NOW, vs haggling into the future. Went through all the ways to buy a cheap home, tried REO's, Shortsales, Foreclosures, and then I finally scored by going downtown and purchasing a house at auction. Not for the faint of heart.
I owe nothing on this house, except taxes and insurance, and my payments are very, very low. My sister, who is of similar means in a town 90 minutes away, pays something like $3000 per month on her just purchased home. I have another sister who re-fi'd her house to add improvements, but now she is upside down by hundreds of thousands. I must say that it is tempting for them to just walk away and start over, do something like I did.
But not in all cases. I've seen all types, actually mostly non-minorities, trying to pull the same stunts. I have no doubt though that it was the credit standard policies that got the ball rolling, especially if Fanny and Freddie "had your back".
You’re right. That is exactly how my father and grandfather explained it to us kids 35 years ago. Save 10%, Tithe 10%, House 25%, put 20% down on the loan.
That is a good formula, IMO.
Its not that people aren’t hurting, and that some have to walk away from the mortgage. I understand that.
The point of the article, though, is that this is some kind of good strategy to homeowners who find themselves underwater.
Absurd. Its like saying if I finance a car, and then the car gets dented up and declines in value, I’ll just “walk away” and screw the greedy banks.
Pure rationalization of welching on your debts, intentionally, IMO. And screw someone else, like the bondholders (who might be someone elses pension fund investment or similar important asset).
Yes, some of them tried and did pull the same stunts - but that was because the new “standards” forced the banks to do it (the regs couldn’t be lawfully written to require only uncreditworthy “minorities” to get loans)
For those with strong hearts, I recommend what you did. And congratulations! I envy savvy buyers. But it was not for us and we resolved never to try that again. Fortunately, we found the house we wanted soon after, and we had been looking for over 10 years. We tried to be smart on this one. We hadn’t sold our house and had to carry both for a year. When we sold the first one, interest rates had gone down, so we refi’d at lower interest, put half of the proceeds from that sale on the new house and are using the rest to update our new property. So for less than $100 per month, we have a 15-year mortgage and we plan to pay it off as quickly as possible. So we purchased the traditional way, but plan to make it work for us.
Well for the last 2 weeks banks have become the new demon in the Dear Reader's world. They paid back the money they took (sometimes after being forced by congress to take it). They paid interest on it and now they have to pay an extra tax as punishment. No wonder it's fashionable to stiff the banks especially among 0bamas core supporters.
Why should individual homeowners have any moral or legal qualms about walking away from a $200,000-$400,000 mortgage when a private equity firm can walk away from a $3 billion mortgage on a major apartment complex in New York City like that?
Some people made a fair amount of money from flipping houses. The lenders made money on them too, through origination fees on a relatively short-term loan. A prudent lender probably wouldn't have assumed prices would always rise, or assume they didn't need to require a 20% down payment because prices were always going to go up.
I don't see a problem with having a system where borrowers and lenders can take a risk where they see they might be able to make a profit.
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