Tuesday, November 3, 2009

Nearly 600,000 Americans Walked Away from their Mortgage in 2008

Great news; I believe the number of mortgage "walk aways" is "better than expected" - now how do I buy stock on deadbeats? (DBDT?)  Look there was no problem buying these assets when all they did was go up; even better when one could serial refinance to live the "life we deserve", but nowhere in the contract did it say the house could go down in price.  Therefore, it's time (and our right) to walk away.  In 2007 and early 2008 we said this would be a big issue as masses of home owners became upside down.  In fact our prediction was eventually 1 in 4 homes would be underwater - we should be very close.  [Oct 9, 2008: WSJ - Nearly 1 in 6 Homes Underwater] [Mar 9, 2009: One in Five Houses Underwater]   Frankly I have not checked lately because what's the problem?  Let the taxpayer take care of it - if not through direct bailout of the banks [May 29, 2009: In 1 Year US Taxpayers on Hook for More than $55,000 per Household], then certainly through much higher fees.  [May 29, 2009: USA Today - Banks Find Ways to Boost Fees]

Anything that it takes to get this conspicuous consumption economy going again (and stock market surging) is fine by me - even people who live "rent free" for a year in excellent housing accommodations... that they put nothing down in the first place to "own" before slipping away into the night - I'm all for it.  All that money not "wasted" paying for mortgages simply means more moolah to spend on other items which will help us drive the market up on "green shoot" retail spending reports. Just consider it another form of stimulus - the Homeowner Self Stimulus Act of 2007-2011.

Via USA Today:
  • The home had been appraised at $390,000 when she refinanced in 2006, but she estimates it's not worth the $320,000 it initially cost in 2004. So Sakson did what a growing number of homeowners are doing today: She stopped paying and decided to let the bank take her home.
  • "I'm walking away from my house," says Sakson, 57, who stopped making payments about six months ago on her home in Pennington, N.J. "The bank can have it."  (that's six months of income to spend on shoes, jewelry, eating out, whatever is needed... multiply by a few million each year in some form of default... it soon adds up.  Better than a tax cut!)
  • What Sakson did is called a strategic default, or a voluntary foreclosure, and it's fast becoming a major challenge to the government's $75 billion effort to keep distressed borrowers in their homes. Walking away from a mortgage is serious business — it can knock 100 points off your credit score and make you ineligible for a new mortgage for seven years
  • Yet, about 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman. 
Now as we said a few days ago, with the government's new fangled $6500 handout to "move up" buyers, we are giving America's "future walkaways" an excellent chance to play the rest of us for fools.  If you can time it well, you can buy that new home for a price far below that underwater anchor around your ankle, collect $6500 at GO (smile for the camera), and then leave the anchor at the doorstep of your fellow taxpayer.  You win!  What's 100 points on a credit report if you were going to default in 6 months anyhow - you are in a shiny new home with a reasonable payment and your "mistake" is absorbed by the system, with $6500 fresh smackeroos to boot.  I know, I know - that sounds almost fraudulent - it could never happen. [Oct 22, 2009: First Time Homebuyer Fraud Called Disturbing]  Ahem.
  • While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into Sakson's predicament, owing more than their homes are worth and seeing little chance of rebuilding equity soon.  
  • Because of the time and expense involved in completing a foreclosure, borrowers who decide to walk away often wind up staying in their homes for months after they stop paying their mortgage.
  • Janet Speer, 51, isn't happy to be walking away from her 200-year-old home in Royersford, Pa., but she doesn't feel ashamed. Speer says she was paying about $1,400 a month for her home, which was appraised at about $155,000.
  • Speer stopped paying on her mortgage in September 2008.  She is still living in the home and waiting to be foreclosed upon. 
So Ms. Speer is on month 14 of living "rent free!"  After all, the banks don't want these darn homes - they'd have to admit to actual losses; much better to "mark to myth" which was the rule change in March 2009 (right about when the stock market went on an epic rally) because banks are "in the clear."  I am sure Ms Speer's mortgage is fully marked up on some banks balance sheet... no losses to be seen.

Do you think Ms. Speer is stressed? Nah, those pesky banks don't even bother her anymore.  Heck she might be able to live there for another year or two... helping to contribute to the economy through spending on other items not called a "mortgage".
  • "I got letters and calls from the bank at first, but they stopped,
  • I would never have chosen to do this, but it's going to work out."

More ...
  • "It's increasingly a more important factor driving the foreclosure crisis," says Mark Zandi, of Moody's Economy.com. "As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determine it doesn't make financial sense to hold on to their homes. That's going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time."
  • Not coincidentally, strategic defaults have been highest where prices have plunged most, such as California and Florida.  From 2005 to 2008, the number of strategic defaulters went up by 68 times in California, according to the Experian-Oliver Wyman study published in September. During that same time period, the median price for existing, single-family homes in California fell from $522,670 in 2005 to $346,410, according to the California Association of Realtors.
  • The mortgage unit of Citigroup says one in five borrowers who defaults does so willingly, even though they're able to pay the mortgage. "It's a very large number, and it's a very, very significant risk to the housing recovery," says Sanjiv Das, CEO of CitiMortgage....

Wow, that sounds awful... how could we ever bribe Americans not to walk away from their homes?  Aha, solution located!
  • ....adding that new government programs to curb strategic defaults may be needed.  (more! more! give deadbeats more of my cash - please take all of it, the whole piggy bank)
  • "A better way to do it may be an incentive to stay current for a period, and after two years of being current, they get a principal reduction," says Das.

Hmmm... as with all these
government programs, that sure will go down well to all those who have been responsible and paying their bills.  Oh I know.... I know... it's good for all of us, we "have to do it".  I learned all that dogma about 8 stimuli/handout/bailouts ago.  I can repeat it verbatim. 

Even more troubling it is the people with decent FICO scores who are more than willing to walk away as a financial decision... so this isn't your subprime folk.
  • The Experian-Wyman study found borrowers with higher credit scores when they applied for their loan were 50% more likely than other types of borrowers to walk away from a mortgage only because they were underwater, even though they could afford to pay.
And it's spreading like H1N1! Pssst... found a way to get out of that mortgage payment... wanna know how?
  • There also appears to be a contagion effect. Borrowers who know someone who defaulted are 82% more likely to declare their intention to do so.

There used to be a time in this wonderful country where people took care of their debts, and it was shameful to walk away.  Neighbors would "talk"... now neighbors appear to share strategies on defaulting instead.  The more you see people doing it, the less the stigma and soon Bailout Nation melds with Deadbeat Nation.  Everyone's doing it, it's cool!
  • "The most disturbing aspect of this is that it's becoming acceptable to do," says Joel Naroff, an economist with Naroff Economic Advisors. "What does that mean down the road for housing and the economy if people are happy to walk away and destroy their credit? They're saying, 'Why pay a high amount if they can get something, even a rental, for less?' " 
Surely these people must suffer far more than  simply a  FICO score hit?
  • In most states, lenders can go after homeowners for past-due payments, but many fail to take such action when borrowers abandon their properties, because the legal costs are so high.
  • Short sales, in which lenders agree to the sale of a home for less than the balance of the mortgage, is an alternative to a strategic default. Many lenders are now encouraging them, but Zandi says that alternative may seem too time-consuming for borrowers who want to quickly get out from under their homes.

Who has time or wants the stress of a short sale?  My gosh, all this non payment of bills is far too much work!  Much easier to send jingle mail... 

Expect a lot more walkaways in 2009.  You get to live for free for apparently year(s), society doesn't frown on it, and banks don't even bother you anymore.  Ehh... you take a hit on the credit score - oh well.  I believe we call that a win-win-win.  With all these non payers in the system we can only ask why retail sales are not shooting through the roof.

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