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."
Yup, the article conviently skipped over the fact that in a number of states, you cannot simply “walk away” from your mortgage loan scot free.
The loan servicer will come after you, just like if you “walk away” from any other legal debt.
I like how people are thinking they can “stick it to the banks”, as though the banks hold mortgages any longer (they are almost all securitized). And, even if that were true, there was absolutely no representation by the bank or anybody that the home would not decline in value.
Rationalization abounds these days. We see it every day, when Zero begins reading nonsense from his ObamaPrompter....
I won't flame you, but I will disagree.
I believe that the actions that the Fed have taken combined with the Obama Administration's spending will create runaway inflation as a previous poster stated. Everybody will be a millionaire (probably on a weekly paycheck basis) and your piddling little $3000 monthly mortgage payment won't even equal what you spend for beer money.
Just be very careful and don’t try to “outsmart” the financial system. KISS.
;-)
Yep...that’s what they have in mind. The creation of hyperinflation is deliberate. Even if you own the house because the mortgage became cheaper, you still won’t be able to buy things to repair it.
Not necessarily. We tried to buy a short-sale house several years ago and the owner got the bank to sign away their need to pay the difference. After waiting a year, we still didn’t get the house because the bank holding the second mortgage wouldn’t accept a similar deal. I would NEVER ever again bid on a short sale.
The lender voluntarilly signed a contract with the only recourse in case of default being foreclosure.
Because you had the option to NOT buy a house with a usurious variable rate.
The lender had the option not to loan the money.
Because maybe you shouldn’t have been thinking along the lines of an investment.
BOTH parties viewed it as an investment. Both parties assumed that perpetually rising house prices would make it a profitable investment. Both parties were wrong. House prices DIDN'T keep rising. Since both parties viewed it as an investment, why should only one party actually be at risk if the bet on future property values was wrong?
“So lets see we walk away from our mortgage, because really since it was probably a no money down sub prime mortgage it’s no skin off our back. The poor sap next door who put 20% down and struggles to keep current on his mortgage is now living next to a foreclosure. His home value now goes down more than it would have. He’s still paying though but you just wiped out a good part of his net worth. Good plan. “
Either way the house is worth less, the price of a house doens’t fall because the neighbor sells his house for less. The sale just registers the fact that housing prices have already fallen. BTW the housing isn’t going to recover to the previous highs for many years. Nor should they. It took all kinds of mortgage fraud to pump the market up to those levels. We should let them correct to their natural level which is probably at least 25% lower than they are now.
That's the sad part of all this, that these Marxists are enabling these borrowers into believing that they are victims and providing the means to accommodate it.
Leave your 401k alone. The bank and creditors took a risk and were well aware of the potential consequences. Your retirement accounts cannot be touched by creditors, so whatever you do, leave them there for your future.
If I were trying to outsmart anyone it would involve the IRS building, a guy in a turban and a smoking vest
No penalty if you're over 59.5 years of age.
The problem is that banks are not permitted to go back to the old days because of laws passed by Clinton, Barney Frank, and crew.
The bank shafted you by loaning you money at a low interest rate to buy a home?
Actually, the penalty for early withdrawal is waived if the withdrawal is used to pay back-taxes, so the IRS share is penalty-free.
Additionally, the income tax due is based upon this year’s income tax rate. As Cowman is facing unemployment, it’s not unthinkable that his income will be significantly reduced, meaning he may end up making $20,000 or less for the entire year, and his tax rate may be less than 15% (and may in fact be zero if he can get his AGI down to zero which is possible). With the penalty for early withdrawal, he may only have a 22-25% hit on the non-IRS-payback share of his withdrawals.
For some people (especially those with little or zero AGI), it is actually wiser to pull out from your 401K, pay the 10% fine and pay down other debts. If you have 4 years left on an 7% car loan, but this year you could adjust your AGI down to zero, you would actually be money ahead to take a one-time 10% penalty to pay off your car; the compounded interest of the car payments would be larger than the penalty paid.
No, I’m not a tax attorney or even a CPA, but I have gone against the IRS several times (and won - the reward being my annual audit now), and know for a fact that the penalty is waived if the withdrawal is used to pay off back taxes.
You have seen the effect with mortgage originators tightening underwriting standards. The only place you can get a low down loan now is through the FHA or VA. Whether it is immoral or not, people are doing this. Since BK laws were reformed, people who are responsible in paying their obligation pay for the losses creditors suffer when individuals file for bankruptcy. Society through its legislature decides how losses from people who cannot or will not pay will be distributed. Back in Victorian England you could be thrown into debtors' prison until your debts were cleared. Society thought this was too severe a punishment so BK laws were reformed essentially shifting the costs to society at large.
Amazing, isn’t it? Heck, we have lost equity in our house (we moved to FL during the boom, not quite the top but certainly on the way up). However, unless we hit a point where for some reason we cannot pay (I don’t expect that to happen, but I suppose something unforseen could happen) we will continue to pay our mortgage payments. We seem to be the sort of idiots other people rely on to take up the slack.
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