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."
How can you really walk away from a mortgage? Aren’t you still liable? Let’s say I buy a $200,000 home, and put $40,000 down, so that my mortgage is for $160,000. If I walk away and the bank can only sell it for $140,000 at auction, am I not still legally obligated to come up with $20,000 to make up the difference?
Why rent to deadbeats? Just a huge headache and they will trash properties and pay late or need eviction. My friend in Fl.rents her homes and she has huge headaches with it and constantly evicts bad tenants.
Great idea. “Walk away” from your mistakes.
Run up too much credit card debt? Walk away.
That car that you loved, but now not so much? Walk away.
A loan from your brother in law to help with the down payment on the house? Well, you never really liked him that much anyway....
“(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)”
I agree, even though it would have made me just as sick as it did when the banks got the cash.
By that logic, the banks should foreclose whenever the property is worth more than the loan.
Oh, hey, and we should all just take whatever we want, because it will be ours when we’ve taken it, so it’s okay.
Here is what I found pathetic.. some of those "homeowners" would go to court and ask a judge to extend the time until eviction. The poor judge would say something like.. "you last paid on your mortgage 18 months ago, you have lived there for FREE for over 18 months, and you want ME to extend your time there? Are you nuts? Get outa here.."
All that said, you should see some of the people they gave these huge mortgages too. Some of them couldn't pay for a loan on a bicycle, much less a house, they were people of questionable employability, much less ethicality.. What the frak were lenders thinking?
Yes, plus whatever fees and interest they see fit to tack on. On top of that, if they can show your intentions at purchase were to not pay it back or you fudged anything on your app, you have the potential to be charged with fraud. When you get into this situation, red flags go up and they scour your app for any irregularities.
LOL! I remember shoplifting as a teenager and when a moral pang arose me and my friends would say “were sticking it to the MAN.” There is always an excuse for immorality, and we are really seeing them fly on this thread.
I’m sure some of the mortgage lenders were just stupid, but the government put pressure on banks to make loans easy to get especially for those who were traditionally underserved (and guess what? there is a reason they were underserved!). THEN they gave them an out in Freddie and Fannie. I know the bank my husband worked for could not expand (ie, put an ATM in a new location or build a new branch) if they could not prove they were making home loans to certain communities.
There may be plenty of blame to go around, but it all seems to come back to Cox and Franks, as far as I can tell.
I gotta think that if people buy a home for the price of about $500K but, realistically, could only afford a home that costs $300K and walk away from their mortgage, they should never be allowed to buy another home. When do we hold the buyer responsible?
That depends on what state you are in. Some states are non recourse, ie CA so if you lose the house & the bank sells it at auction, you are not liable for the deficiency as long as the TD being forclosed is a purchase money deed of trust, ie it won’t work for refis.
Strategic foreclosiures have nothing to do with subprime borrowers or easy money. These are buyers who qualified & could afford their loans. Now the loss of equity is so steep, in some places well over $100K, with no chance of recovery in the near future, ie 5 yrs. If we can stop being so judgemental, consider if it’s wise to squander more money & your kids’ money throwing good money literally after bad.
This loss of equity is unprecedented. These buyers are not all deadbeats; they are looking at being burdened with a debt while the property itself has lost 40-50% of value.
Some markets may turn around in a few years, some won’t for decades & not until the voters stop letting libs run things.
If I could walk away from this I would
Just call me J.P. Junta, or Goldman Junta, or AIJ.
There are a lot of people out there who refinanced their house and took out cash to spend..or invest. I don’t think letting them walk away if right. There needs to be limits on the walk aways. Those people who took cash out should be subject to requirements of bankruptcy.
There are lots of people who knew that things were peaking..refinanced and rented the place out. They continue to collect rent after they stopped paying..they should not be able to walk away.
I suppose I never looked at my house as a stepping stone investment, it was a tangible commodity, a real thing over my head that I wanted to own despite some financial numbers showing me right-side up or upsidedown.
So your tagline is just a joke, right?
Why rent to deadbeats? Just a huge headache and they will trash properties and pay late or need eviction. My friend in Fl.rents her homes and she has huge headaches with it and constantly evicts bad tenants.
A lot of these strategic foreclosures are driven by job losses. The borrowers were qualified when they bought, had good credit now have no income or severely reduced income.
Now the property has lost so much value that it can’t be sold & buyer is stuck.
The ideal outcome is the bank & borrower renegotiate their contract, but that doesn’t happen much.
No, but a system of banks, brokers, loose money, appraisers, developers, etc. inflated the costs. If you wanted a place to live you had to pay. It was a national scam. Nothing remotely approaching anyone's genuine notion of a free market.
****That was the contract = no pay no keep house***
Your comments are very logical - for a two-party contract.
However, the Gubmint stepped in with other people’s money and perverted the whole principle of *free enterprise*.
A home is first of all shelter on a daily/current basis. It is secondarily an investment in the longterm. A 5-10 year cycle should not be a basis for forfeiting shelter and lower monthly payments. That is short sighted and financially foolish.
(p.s. where are all these walk-aways living? With relatives and friends?)
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