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."
mortgage company makes mortgage. bundles and sells. Banks start very small percent, out of about 36 in legal notices, only 3 from persons purchasing homes were started by banks.
Seven of bank started mortgages, were from developers/builders.
I understand the issue; I don't condone walking away from a mortgage- the only way it makes sense to let people off the hook when the value of their property goes down is if they are willing to split up the gain with the rest of us if the value goes up.
To me buying a house is a funny thing~ people buy to have a stable home to live in but also as an investment. No investment is foolproof, it is always possible to lose money. The people still have a roof over their heads if they continue to pay.
All of these people signed a contract to pay the mortgage and I am sure not one of them signed a contract that said if the value goes down you don't have to pay.
It would be interesting seeing some stats on what percentage of the mortgages being walked away from fall in the category of "equal opportunity" loans, and what percentage are second, third, or fourth houses people bought with the intention of flipping them.
Interestingly, it was this simple reality that helped Michael Milken make billions of dollars in the bond market back in the 1980s. His rationale was that AAA+ rated bonds were a bad investment because a lot could happen over the life of the bond to make the borrower who was rated AAA+ at the time the bond was issued turn into a much higher risk later.
His rationale was that owning a bond for someone who was an abysmal credit risk made more sense -- because over the life of the loan the credit rating for that borrower had nowhere to go but UP.
I hear you. The problem with this topic, and there have been several threads on it, is that it eventually devolves into a business decision or two wrongs make a right, when in my opinion it is an honor and integrity thing... IMO. Maybe I AM Obsolete Man. I still believe in handshakes; a man’s word is his bond; and all you have is your name, so you better protect it.
This is what I'm finding out about dealing with IRS. It's like dealing with the Mayer Lansky or Al Capone mobs. Once they get the idea that you need to be destroyed they will do whatever it takes to destroy you -- regardless of the law. Think of fighting a forest fire with a gas can.
The IRS is clearly the most evil organization ever brought forth by man. Even the Nazis would leave you alone once they killed you.
+++++The two parties have a contractual arrangement: the party of the first part has the option to either pay X amount to the party of the second part each month, or to surrender possession of a building. As circumstances change, the latter option may become preferable to the former. It’s a business decision, nothing more, nothing less.+++++
Banks are the big boys and knew they were handing out fraudulent loans. Hell every Yahoo financial Blog on the internet has been/were calling a bubble since 2003.
I do not believe for a min. that the high IQ Ivy League boys did not know what was going on and they respond with “Hey nobody could have predicted this” BS
Standard practices in appraisal and qualification were ignored solely because of greed.
I am a self employed capitalist through and through but the banks gains are ill gotten, a white collar theft. People should be going to jail instead are being bailed out preserving their wealth while everybody else get poorer.
We have become a nation of debt slaves, to mortgages, school loans, health care. Fine them, Tax them unequally, limit bonuses, put them in jail. The banks profit was not a fair one let them suffer.
Rather than become a debt slave or peon I believe the only moral thing is to walk, they lose and in the future they will make damn sure that everybody qualifies for that loan.
Tide is turning with the latest election results and the country has no more appetite (or cash) for the bailouts time to let the banks die.
“No penalty if you’re over 59.5 years of age.”
Good point. I was making the assumption that the other poster was not yet of that age....
Neither do I. The banks will assume a certain amount of mortagees will default. They will not assume that people who are able to pay, but unwilling, due to declining asset values, will walk away in large numbers. I see the problem on some of the banks' side as lending recklessly, as you suggest, largely because they make their fees when the loans are booked, and then "sell" the loans to Fannie or Freddie, mostly, so they aren't on the hook (or so they assumed) when the loans begin defaulting.
Again, the problem I have with the article is that it promotes an intentional strategy of simply walking away from a debt when circumstances change for the worse.
Won’t flame you, either, but I would like to borrow some money from you. Will sign any number of appropriately-negotiable notarized acknowledgments of debt, payment schedules, etc. I’ll promise to pay you back, really. So can you spot me $50,000 or so?
By not requiring a larger down payment, they show they were assuming there wouldn't BE a significant decline in asset values. In addition, they were assuming there was some invisible "moral obligation" clause somewhere in the contract.
They were wrong on their assumptions. Thats the reality of taking risks. The future is uncertain.
I’ve also had trouble bidding on short-sale houses with no results for months. On the other hand, it looks like one will close in a month or so at a great price.
As a retired banker, I can say that short-sales are a huge and growing problem for banks. Not only is the loss on each one of them generally in the 100’s of thousands, they often have a second attached by a different lender that must be dealt with as well. The thing is - money is so cheap at this time banks are not losing that much by keeping short-sale houses on the books - closing sales results in a huge hit to capital which is a lot harder to manage with capital ratios so low at this time.
Bottomline - government regulators are allowing banks to keep these loans on the books at the amount owed versus market value even when loans are past due - only the worst case scenario loans are charged off and settled within the short sale environment each month to preserve capital - buyers are just left pissing in the wind.
That's how I feel about voting.
Ultimately, the costs of the Great American Real Estate Get Rich Quick Scheme are going to be borne by all of us, in two ways: 1) Taxes will go up to bail out the politically-connected financial institutions. 2) Retirement account values will go down as bonds and mortgage-backed securities will lose a great deal of their value. The nearly-retired who had much of their money in "safe" fixed income instruments are in for an ugly surprise. So walking away is a good short-term solution only if you are starting your own business and use the money you save to invest in yourself.
Go back to playing the job-holding/401K-owning "safe" game and they'll end up getting back everything you walked away from and then some.
Thanks for a short and lucid explanation, it all makes sense now. I know the banks are really getting hosed. I bought my house for %15 of what was owed, at auction..
This is brilliant from the Realtor’s perspective - ABC - Always Be Closing.
Buy a new house, walk away from the second, short sell. Two realtor represented transactions. Not bad.
How anyone would qualify for the loan on the second home is beyond me, but whatever.
No. Actually the banks shafted me and many others by stealing our tax dollars to reward themselves with bonuses, arbitrarily lowering or eliminating lines of credit and raising interest rates on some accounts to 20% interest. As far as loaning money to home buyers, they made a business decision with the idea of making money. If it didn't work out, too bad. It concerns me as much as customer problems concern the banks.
Who stole your tax dollars? Do you mean the TARP capital injections that have to be paid back with interest? Did all the “banks” pay big bonuses with “stolen” tax money, or are you just referring to some of the investment banks (which are MUCH different than your typical commercial bank)?
Some of the credit card banks did jack up rates. Interest rates are reflective of risk, so the higher the risk (as evidenced by increasing losses), the higher the rate. The same will be true of mortgages in the near future. No longer will be a mortgage be considered a safe asset for a bank, and thus rates will rise.
You’re right...the banks assumed they could make money and made a business decision to lend. I’m not suggesting you shed any tears for them. But don’t assume one who walks away is sticking it to the bank alone. Such actions impact everyone who wants to borrow in the future through increased credit costs, lower deposit rates, and a general decline in the value of homes.
Me, I bought my home for what I thought it was worth and assumed I would pay that amount back as long as I was able. That may make me a “sucker,” but I just view it as living up to my end of the deal.
Yup, and those that lent recklessly are experiencing higher rates of default.
I’m not arguing with that. What I’m arguing about is that people who can pay, but won’t, because the house price declined.
No one forced a person to take a mortgage for 100% of the value. The borrower signed the papers. There was no invisible “moral obligation” to pay - the terms were in writing, and repayment was not contingent upon the value of the house.
I think the blame should more properly be placed on Congress than the banks for tax-related issues.
... arbitrarily lowering or eliminating lines of credit and raising interest rates on some accounts to 20% interest.
My lender didn't renew my line of credit when it expired and I've had credit card issuers raise my interest rate over 20%. I don't feel shafted in the least by that.
What if you weren't able to? What if your RE decreased in value 50% through no fault of your own? 75%? 90%? What if the shoe were on the other foot? What do you think your bank would do? I don't fault people for doing what they need to do any more than I fault you for doing what you need to do. The banks aren't naive innocents in this whole situation and they have shown quite clearly what they would do if the positions were reversed. Will it have repurcusions across the board? Sure. That's life
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