Monday, January 31, 2011

[Video] CBS News - Even More Millionaires Strategically Defaulting

Hmmm... according to this CBS News report, 1 in 7 with loans over $1M are in default versus 1 in 12 with loans under $1M.  Must be all those darn ACORN loans to millionaires!   Some 15 months ago I flagged the 'self created' stimulus plan Americans are fashioning for themselves, before it became well recognized which is yet another steroid to stoke the 'recovery'.  [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats]  Obviously the banks need to make up the losses from said 'stimulus' plan one way or the other - and that's where The Bernank comes in and our savers our ripped off to the tune of $750B a year (per analysis by Chris Whalen)   [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]  

That said, it is quite fascinating to see it play out this heavily in the top end ... and you wonder why Tiffany's is doing so well? [Oct 8, 2010: No Recession in High(er) End Retail]  This one gentleman in CA has saved $240,000 in 2 years by living 'rent free' in his ocean view home.  That buys a lot of Mercedes, European trips, and Tiffany earrings.  Would you give up 200 FICO points on your credit report for $240,000 (and counting?) I'd say it's an easy decision. 

I contend that the worst thing for consumer spending in the U.S. is for the foreclosure disaster to wind down.... if all these households (7M+ and counting) had to actually pay for a roof over their head, just imagine how much money would be sucked out of the economy. ;)

(In case you are wondering, yes it is a very viable action to default on your mortgage loan per our non recourse laws - big businesses do it, so people can do it too.  That is not the argument.  The difference is when businesses pull the trick they vacate the premises, unlike our fellow citizens who are enjoying the high life sitting in their a home, playing the system.  More frightening is what bad condition the country would be if we were like Ireland or Australia where you cannot walk away from your mortgage debt.... ever. )

2 minute video - email readers will need to come to site to view

  • In wealthy communities like La Jolla, Calif., living near the ocean is a privilege that many homeowners are willing to pay millions for.  For Darren Thomas that ocean view was quickly losing its value. He says, "I bought it for [$1.385 million]. It is worth less than [$800,000], maybe less."   Thomas bought his townhome in 2006 but after seeing its value drop steadily he stopped paying. 
  • "I haven't made a payment in two years," he says. "It was business decision. It was an easy decision. I have a property worth six or 700,000 less than when I bought it. I was making payments of 10,000 a month." 
  • Thomas has gone into strategic default. He could make payments but is refusing to put more money into a home that is worth less than his mortgage. Among luxury homeowners he is not alone.
  • One in seven homeowners with loans over $1 million are seriously delinquent compared to one in 12 with mortgages below $1 million
  • The more you owe, it seems, the better off you may be. Darren Thomas continues to live in his home because banks are often slower to foreclose on million-dollar homes. "Banks are less willing to take those homes back because they are harder to move on the market, harder to sell and much more of an up-keep," says You Walk Away Real Estate's Chad Ruyle. "These properties come with maintenance costs." 

This is the part Mr. Thomas is just not getting - as if there are no costs to the rest of us for his actions and the banks (and the Fed) are not taking actions to make sure they are made whole, in full, elsewhere in the system.
  • "People like myself, business people, are going it is silly to throw good money after bad," says Thomas "The loss is not mine. The loss is the banks."  When it comes to real estate, the rich are different. They can be just as ruthless as the bankers.

[Jun 2, 2010: (Even More) Anecdotal Benefits of Strategic Default]
[May 4, 2010: Strategic Defaults in Q1 2010 Rise to One Third of All Foreclosures v One Fifth a Year Ago]
[Apr 15, 2010: More on Anecdotal Benefits of Strategic Default]
[Apr 13, 2010: One out of Ten US Mortgages is Now Delinquent ... Which is Great for Consumer Spending]
[Feb 18, 2010: Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending]

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