Posted on 04/07/2010 3:52:06 PM PDT by TigerLikesRooster
Luigi Zingales
The Menace of Strategic Default
Homeowners who walk away from their mortgages undermine our financial system.
Eighteen years ago, when I bought my first apartment in Chicago, I asked my broker whether, if I defaulted on my mortgage, the lender could come after my income after repossessing the house. I had heard that some states didn’t allow that, and I wondered if Illinois was among them. To my surprise, the broker didn’t know, either, but she promised to find out. It clearly wasn’t a burning question for her, since she still wasn’t able to answer it the next time we met. Our ignorance wasn’t unique. Confident that house prices would never stop rising, most Americans never bothered to check what would happen if they defaulted. After all, who would walk away from a house worth more than the mortgage?
Today, the matter is far from theoretical for the 15.2 million American households holding mortgages that exceed the value of their homes. It will help determine how many of them choose to “default strategically”—that is, walk away from their mortgages even when they can afford them, because they’ve determined that it’s no longer worth it to keep paying. And that, in turn, will help determine the future health of the American housing market—and thus of the U.S. economy.
Many people think that we don’t have to worry about widespread strategic defaults. When I discussed the problem with a board member of one of the top four American banks, he categorically denied its existence: “The idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded.” A study from the Federal Reserve of Boston seems to confirm his skepticism.
(Excerpt) Read more at city-journal.org ...
P!
This is happening right now and will accelerate. I hear horror stories everyday how homeowners are trying to work with the banks and are being jerked around for months to no avail. They give up out of frustration and anger. In the beginning, they really wanted to work with the banks and stay. In the end, they want nothing more than to stick it to the banks.
Gee, it almost sounds like science, instead of sloth.
Tell me about it. I've been trying to refinance as well and thanks to my neighbor's short sale my house is worth 100k less than what it was when I bought it. I'm getting nowhere.
I just thank God I still have a job. I'm not hurting, thank God, but it would be nice to pay less.
Maybe I am just bitter, but when the rules were bent and we were made to bail out the banks, you would think they'd at least consider returning the favor to borrowers in good standing. But I guess only the people who willingly welch on their debts get all of the help.
If you lose your job, can't get another one paying more than half as much and are so upside down in the house you cannot sell it, it may not be sloth.
As this proceeds, look for more in this type of situation.
What the banks are doing makes no logical sense. If the reduce your payment so that you can pay it every month, even temporarily, market values would be supported. Instead, they’re being uncooperative and cratering real estate values.
So 2/3 of all defaults of homes where LTV ratio is 1.2 or larger are strategic. What about the strategic default rate for ALL loans. It would be nice to better quantify the magnitude of the problem being discussed here.
Yup, the banks get huge bailouts (and continue to do so), but we shame people who default because they are 100-400k underwater.
With rising taxes and grim forecasts for the economic future of the USA, doing “the right thing” is economically suicidal.
I have had this discussion with high-level bankers. They DO understand that households that are more than $50k upside down on their houses will likely default. Quote from someone in the top four: “$300K? That’s a medical school education and then some. And people will pay that off in a recession just because they promissed to do so? I call that acting stupidly.”
Weep not for the banks. They and the government made this mess.
banks inflated the home prices and now will not make the loads for market value.
cry me a river. HA!
the 2005 reform was premised that people would NEVER EVER surrender their home.
Home values outside of DC are at 25% of what they were.
I would think that states that allow deficiency judgements wouldn’t have participated very much in the housing bubble since the banks would probably go after borrowers with known assets such as house flippers. A realtor friend said that was why Texas house prices remained relatively stable.
The law firms representing the banks get 20% of the forced sale price.
If the loan does not go to sale, they only get about 3k.
also nobody knows who to ask for mortgage approval of modifications.
remember the banks only service loans they do not actually own them any more.
This is a nice emotional statement that gets the reader to want to read an article, but it is not an accurate statement. In fact, the author does not make an argument for this assertion, although he does discuss the morality of simply walking away from your debts.
The solution that is provided sounds nice, but practically won't work. Banks are not set up to keep track of what portions of what properties they have an interest in. Further, things get very complicated when mortgages get sold on the open market.
The banks are making very stupid decisions...
A neighbor of my mother’s has a house that he’s behind in payments and underwater. He recently got some money and he called the bank and offered them $30,000 cash (which would bring the mortgage back above water) if the bank would remodify the loan to payments he could afford. And the bank told him to get lost because his credit score is in the toilet.
So he gave the money to his son who bought a new house. And the guy now sent the keys to the bank. So now the bank has in their possession an upside down house and out all that money.
What is funny is the bank still calls him asking him for the mortgage payment EIGHT MONTHS after he moved out. They still won’t foreclose on it. He ignores the calls.
Oh it's been more than undermined for quite some time now. I'd say mainly via the whole process of putting those homeowners in the position to get those mortgages. Fraud every step of the way, at least ten guilty parties, all the way from the homeowner to the ratings agencies.
The goal is no private property. Read every article on housing, finance, and taxes with this in mind and try to see if anything disproves that theory.
No sympathy for the banks...since they took that near-trillion Business Socialist TARP bailout....if homeowners stick it to the banks...it was the banks own doing.
Probably the only way out of this mess will be bankers jumping out of their multi-story office buildings and going “splat” on the pavement.
They are still carrying the inflated costs as assets and higher payments as revenue on their books - and still being allowed to by government regulators, wildly inflating their current asset values. Adjust too many mortgage rates, or worse, write down the market values, and very many big banks suddenly become insolvent.
With the backing of both parties they are going to try to keep playing this great game of Let's Pretend in the hope that an inflationary trend gets going to stabilize their balance sheets.
Inability to meet your obligations despite your best efforts is another matter entirely. There is jurisprudence that addresses that circumstance.
see tagline.
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