If this behavior catches on nationwide, whole swatches of the US will mirror Detroit in the near future.
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."
I'm reading this thread, thinking, "These are conservatives?"
“... I am 100% against anyone, who can afford the payment, to walk away from their mortgage.”
Agreed. If one promises to pay, one should pay.
Sorry about the pooch. We are very attached to the boxer-great dane who with two more IQ points would engage in conversation, and the buck-fifty mastif who is now a retired country gentleman (and noisy protector).
You're right. I just want our race-pimping, freedom-killing, sadistic Marxist Mafia overlords to gain more control by weakening Americas so they can control even more of the globe. /s
Bingo, particularly considering the sheer number of defaults.
“What a SURPRISE that the LibTards would run with this, LOL!”
They want everything free because “the man” holds them down. They don’t even realize that they are “the man.”
Those darnded furry critters sure find a home in our hearts. It is joyous to experience such sadness....
“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.”
Or as Rahm said; never let a crisis go to waste? In case you are not aware; a major correction has already happened in some markets.
We need to get the Marxists, socialists, and left wing activists out of the discussion.
How do these idiots think they will get financing to buy these lower priced homes, if all the scum are allowed to default on the loans they signed up for.
I just get so sick of people wanting to blame their poor decision making on someone else.
They all get the same paydown.
If it pays off the house then it pays off the house.
better the money have gone to pay down mortgages than to DC insiders.
non-recourse loans mean you only can get the asset.
The problems arrose when the valuations became artificially inflated.
what needs to happen is home prices need to return to reality but that will only happen when the shadow inventory of the banks is released to naturally go to fair market.
Well, the Democrats have done it for yeas while I've worked as slave labor with little or no return. Works for them....
they live in the same house.
the banks have too many forclosures and there is a massive shadow UNREPORTED inventory.
forclosures are UP but forclosure SALES are at a standstill because banks do not want to do the credit bit to take posession of yet another property.
Careful, this has the makings of how Big government is going to try to pay off the debt. Just get everybody to walk away from their obligations, seize the material assets, then liquidate to other promises.
(At some point in time, a promise won’t have any more value.)
My understanding is that some bank are no longer required to do that. It would be impossible for you to prove differently.
If this behavior catches on nationwide, whole swatches of the US will mirror Detroit in the near future.
LOL! It’s impossible for you to prove your assertion as well.
Are you familiar with the Allowance for Loan Losses that all banks must carry on their books? Whether they write individual loans down or not, they must still recognize expense on mortgage pools in this account. The Allowance is not only reviewed by regulators, but also external CPA auditors. You’ll be hard pressed to find either auditors or examiners going soft on banks right now. In fact, in many ways they are going very far in the other direction.
Actually, I’m a life long banker - CFO so I know what goes on and what’s going on in the banking world.
Banks are not generally writing down 90 day past due RE loans to market as they have done in the past, period. If they did, lots more would go under - it’s a house of cards.
The Allowance for Loan and Lease Losses is only charged when a write down takes place. Auditors and examiners, especially examiners work in a very political environment - politics enters into the ALLL equation a lot more than it should. Outside Auditor are paid by banks, they are a huge joke - just look at Enron, etc.
Also, mortgage pools - held as securities are not written down to the ALLL - when they are adjusted to market - it’s a direct hit to capital and doesn’t go through the ALLL - because, they are not loans or leases.
This is your banking lesson for today.
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