Wednesday, June 2, 2010

(Even More) Anecdotal Benefits of Strategic Default

You renters are really missing out on the greatest wealth generating scheme in U.S. history. While I pointed this out in November of last year before it caught on with the masses, it has reached critical mass the past 3-4 months. Remember, skipping a $1400 payment for say 2 years? $33,600. That is going to take care of a lot of credit card debt, car payments, plus a lot extra for vacations, eating out and living the life all Americans "deserve". (spread over 7M households in Cramerica not bothering to make payments and you have a nice $230 BILLION stimulus - and this will be lasting for more than 2 years). What I love most in all of these stories, including the latest from the NYTimes is how "the banks deserve it". Just like many of these borrowers who cashed out refinanced multiple times, deserve the fun and toys they obtained...

Even better is "we're getting back at the banks!" ... not realizing that every saver in America gets hurt because Ben Beranke will happily sacrifice the U.S saver so that the banks can make up all these losses. [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors] [Apr 20, 2009: How Banks will "Outearn" their Losses] So there is a cost to "sticking it to the banks" - it is just borne by another part of society. But I guess you'd have to understand what the Fed is, and does to connect the dots. Then again, since most squatters don't bother to retain any savings I guess it doesn't matter much what banks pay in interest to said saver class.

Further who cares about future implications on mortgage costs of this behavior across millions of households? With the entire U.S. mortgage market now supported by FHA, Fannie, Freddie, and VA (go team government!) the increased costs to compensate for the new paradigm "strategic default" trend that is sweeping the nation, won't be borne in higher mortgage rates since private lenders (who actually need to be run at a profit) are nowhere to be found. And the government is very happy to run its mortgage scheme at a loss. [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] [Feb 1, 2010: Hockey Stick Growth in Delinquencies at Fannie, Freddie]

All in all? American Nirvana. We now have reached the point that said squatters are praying to stay in their homes as long as possible. (payment free of course) My only wish is more home owners would walk away from their mortgage (but stay in their homes of course) so domestic GDP figure could pop back over 6% and we can beat our chests to the rest of the world of how our economic system is just dominant!

  1. [May 4, 2010: Strategic Defaults in Q1 2010 Rise to One Third of All Foreclosures v One Fifth a Year Ago]
  2. [Apr 15, 2010: More on Anecdotal Benefits of Strategic Default]
  3. [Apr 13, 2010: One out of Ten US Mortgages is Now Delinquent ... Which is Great for Consumer Spending]
  4. [Feb 18, 2010: Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending]
  5. [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats]

Via NYTimes:
  • For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of. Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino. ($1837 extra a month - all positives for an economy that is 70% based on consumption!)
  • “Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.” (ah yes, the new house ATM which has replaced the serial refinance cash out house ATM of the past)
  • A growing number of the people ..... are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.
So obviously this is an innocent couple that got "snookered" - I am sure they put 20% down and have been diligently paying down their mortgage and just got hit by events outside their control.
  • ...the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers.
Ok nevermind... but the banks are still evil because they snookered them into their cash refinance! As Mr. Pemberton tells us - what a dumb move by the (evil) bank!
  • It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.
  • Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads. (other than a smallish % of mortgages with true "snookering" - let's be real here... a great majority of these mortgages were to willing participants who were just going to 'refinance' to a different mortgage once the 2-3 year teaser rate ran out, and of course their home value went up. Lack of financial education or just trusting the person across the table whose sole job is to originate mortgages is not an excuse... except in Cramerica)
  • “I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago. “They’re all crooks.” (nice! 2 years & running!)
Don't worry - mom was from another generation where you saved for a down payment, you paid down your debts and you did not use your house as an ATM.
  • Mrs. Pemberton, 68, refinanced several times during the boom
Oops! Oh well, no problem... we know the "cool kids" playbook now: you serial refiance (cash out) during the boom and then default on the bust. And blame the bank for the "snookering"!
  • The longer I’m in foreclosure, the better,” she said.
Amen sister. If only we could all live without paying for the roof over our head, America would be a much nicer place.


  • The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages. The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics. (we can do better than this, I am calling for at least 600 days nationwide ... have to get GDP up and this recovery revving)
  • ....real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.
  • In Pinellas and Pasco counties, which include St. Petersburg and the suburbs to the north, there are 34,000 open foreclosure cases, said J. Thomas McGrady, chief judge of the Pinellas-Pasco Circuit. Ten years ago, the average was about 4,000. “The volume is killing us,” Judge McGrady said.
  • In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high. (I'm proud of these 2 states and the attorneys working to extend to my goal of at least 600 days without a payment for every American home owner)

The above are rank amateurs - what we truly want to applaud are those are are delinquent on multiple properties. Can you imagine owning investment property where you charge the tenant RENT and then don't bother to pay the mortgage?? Talk about double self stimulus!
  • ....for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future. “I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties.
Excellent work - delinquent on 3 properties but deriving income from 2. Go Cramerica.
  • I need another year,” he said, “and I’m going to be pretty comfortable.
I hope you get 3 more years Mr. Tsiogas - you deserve only the best. If you are not "comfortable" after almost 2 full years of not making a payment on 3 properties I can only imagine the lifestyle you afforded yourself in the past decade (and debt you amassed living the life you 'deserve'). Whatever happens go forward you are going to be in much better shape in the decades to come versus that lower class we call renters / suckers. Or the silly class we call homeowners who pay their mortgage (i.e. the non snookered!).... so old fashioned, and so out of step on how to play the system.

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