Posted on 05/31/2010 12:22:29 PM PDT by Lorianne
In areas hardest hit by plunging real-estate values - including the San Joaquin Valley - some people who can afford their mortgage are opting to walk away from their loan and let their bank repossess the house.
"It's very stressful to get to that point," said James Graham, a 48-year-old power-plant worker who walked away from his home in Bakersfield last fall. "You're raised up to do the right thing and pay your mortgage, pay your bills."
"But when you get to that point where it's time to walk, it's time."
It's called "strategic default," and experts say it stems from frustration with home values that have plummeted since buyers bought or refinanced at the peak of the real-estate boom, and banks dragging their heels on loan-modification requests.
(Excerpt) Read more at fresnobee.com ...
Agreed.....
.....I only say the activity will artificially intensify the decline, injuring those who's homes were bought at prices that would have otherwise been OK.
I see this activity as the negative of the loans that got us into the overheated housing market in the first place.....
.....It may be legal and by contract, but it will cause a larger slump than would otherwise happen.
The result is the same in the negative direction.
What if the loan contract allows them to stop payments, hand the house back to the lender, and just walk away with no deficiency? If the contract allows them to do it (and in CA it does, at least in the context of purchase money mortgages, for what possible reason should the borrower not stand on his contractual right and walk away if and when it suits him?
Hey, give me a break, I’m busy defending these deadbeats here. I can’t find the time to type out ‘The Powers That Be’.
“Nevermind the fact that we never asked to be in the Federal program,”
You asked by applying for a loan modification.
All loan modifications are a federal program, no bank would consider talking to you on their own!
Hey genius, I never said anything about the link you posted to by hypocritical about. And no, I’m not for ANY BAIL OUTS AT ALL. And if businesses want to screw each other, let them have at it as long they don’t get bailed out with taxpayer dollars in the process that’s their business.
Trying sticking to the subject which is what my comment was about in the first place.
Yes, that is true as well. The value of the “forgone” loan is an imputed income to those who default.
Same thing applies in a short sale or mortgage reduction.
As you say, people doing a ruthless default had better consult an attorney first.
Just keep the government out of it and they will never borrow another cent unless it’s at payday loan for 50%!
What I find interesting is that there is no mention of the CA tax law change which makes it even more likely that those who can afford their mortgages will walk away.
http://www.ftb.ca.gov/aboutFTB/Newsroom/Mortgage_Debt_Relief_Law.shtml
Mortgage Forgiveness Debt Relief Extended - Updated 04/13/10
On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before January 1, 2013.
Take a break...then help your friend DB “defend” Morgan Stanley.
Your arguments are sound and compelling.
LOL, and that "LEGAL REMEDY" is part of the terms and conditions OF TEH CONTRACT.
If the borrower gives the property back, as allowed for, upon non-payment, BY THE CONTRACT, exactly what part of the contract has been "breached?"
I don’t disagree with that.
A civil free society is based on self governance and mutual honor between individuals.
More old fashioned out of date concepts...
He's not breaching if he's acting within his rights under the loan agreement.
Take for example a sale of goods contract under which I agree to sell you widgets for $X. You figure that you can re-sell those same widgets at a 10% mark up. So we agree to include in the contract a "liquidated damages clause" that covers your profits in case I breach on delivery for some reason. In other words, if I have to pay you $.01X for each widget that I fail to deliver. Along comes GOP Lady who offers me $2X for the same widgets.
In that case it makes tons of sense for me to avail myself of the liquidated damages clause, pay you $.01X. At the end of the day, you get your anticipated profits, I get a nice windfall, and GOP Lady gets her widgets.
Note here that economic theory wants me to do liquidate damages. Why? Because GOP Lady presumably has a much more efficient use for the widgets in mind. So not only do you, GOP Lady and I profit, but the economy overall does as well, according to Adam Smith's "invisible hand."
It's the same situation in these housing defaults. The law and the loan agreement allows the borrower to "liquidate damages" by limiting his losses to the current market value of the house. The borrower is completely free to avail himself of this clause and to spend his money on things that are more valuable to the economy. The borrower's credit takes a hit, imposing economically valuble discipline on him. The lender takes his lumps, and the economy benefits by imposing its discipline on the system, and by getting all of the houses back to the buying public under their true market value.
It's not only good sense for the borrower to do a "strategic default", it's also good economics.
I'm amazed at the people who try to combine the two concepts. This isn't John the farmer refusing to pay Bill the shopkeeper in 1950's Iowa, which seems to be where Free Republic's collective mind is stuck.
Most of these supposedly "wronged" banks are in fact gigantic neo-criminal enterprises possessing only a tangential relationship to genuine capitalism. They took advantage of government preferences (and government's deliberate decision to overlook violations of existing law in return for campaign contributions) to rig the housing market. They borrowed money into existence, loaned it out with no terms to unqualified sheep who were deep under the spell of realtors' "Your last chance to buy...ever!" propaganda, then securitized and sold off the loans with fraudulently purchased credit ratings and obfuscated details to hapless foreign and domestic buyers, including most American pension funds. To whom the concept of "due diligence" seems to involve where to drop the ball after a bad second shot on the 7th hole.
It was, vast, unsustainable, inflationary Ponzi scheme, enabled by government at all levels, including many idiot Republicans who wanted to take credit for this phony economic growth the easy way, without doing the hard work of cutting taxes and regulation to enable real growth.
Everything is going to have to be crammed back down to fair market value, including the outstanding loan balances. Meaning houses will be 50% off. Stocks will be 50% off. 401K balances will be 50% off (guess who owns all those suddenly cheap houses? You.) Salaries will be 50% off. For decades.
Yes, this means some bad actors are going to get away with borrowing $500,000 in play money and only paying back $50,000 in real money. As someone who paid cash for my house in early 2004 and now sees it worth 30% less than I paid even back then, this annoys me, too. But that ship sailed when the loans were made. Those of us who did the "right" thing may feel like idiots, now, but it's our own fault for not paying attention to what was really going on.
Good point!
Why would they?
AIG had ‘em covered with an interesting product called a “Credit Default Swap”
(AIG was bailed out to the tune of $170 Billion)
Bump for future reference. Great post, excepting only the use of the prefix “neo-”
You don’t understand contract law.
Argue with post #79.
I agree with you 100% in theory. My husband and I got totally taken on a car when we were young and dumb. It cost us several thousand dollars, and while not happy about it, we paid in full.
Despite two inspectors when we bought our home, we got screwed on that too because the homeowner put a piece of thin plywood over rotting foundation boards. We're in the process of ripping out all the bad wood and replacing it with new wood. I would never dream of doing that to someone else!
But when you're talking about the value of several college educations, with jobs being shaky, and the economy set to blow to hell, I'm not sure I wouldn't protect myself from devastating losses if doing so wouldn't send me to jail.
The problem is, when everyone does it we all lose.
There is no way we can ever "win" again until we flush the all the bubble valuations out of our asset markets.
do you walk on water too?
get a grip. Housing prices are gone. It is not just lower tax areas. The ONLY places prices did not collapse was in DC because all out tax money went to new gov. workers.
Walking away makes TOTAL sense. The bank gets the house, there is no deficiency income throught 2012 based on the temporary law.
The credit rating will come back. If they do a bankruptcy they begin to rebuild in MONTHS not years. A new mortgage can be had in two years from a fed agency and from a regular source at any point they have a down payment.
Banks are pushing modification scams and some people I have seen have put forth the papers three times because the banks play games.
This is the contract. The bank recieved the house rather than the payment EXACTLY as promised.
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