patrick.net

There is a non-linear correlation between neg-eqty and decision to walk. Few would do it if equity is slightly negative. I read that for most house-debtors LTV 125% is the trigger. Beyond 150 they are either financially illiterate or stuck.

The rich will bail on a bad real estate deal faster.
http://articles.moneycentral.msn.com/Banking/YourCreditRating/the-rich-bail-faster-on-mortgages.aspx

Billionaires have no problem bailing from money losers.
The likes of Sam Zell, Bill Gates, Dan Snyder.
http://www.slate.com/id/2239555/
Smart money or Dumb money?

Bravo, azrob00.

If there is a moral obligation involved in whether or not the decision to continue to pay for a mortgage, the moral obligation is to one's family.

Strategic default is when you can afford your payment but you're upside down and the investment just doesn't work for you any more. You're not hurting at all, but you go & buy a house down the street for less and then walk away from your mortgage. It's a strategy for holding onto your money - but the end result is that the banks get screwed over while the people keep the money.

I'm not a big fan of the banks being bailed out and taking huge tax losses while freely spending my money. But they didn't ask my opinion. I'm not a big fan about a lot of things. But especially someone who feels that they're in the same category as those people who are struggling and truly need help.

Many people are upset that their choices have affected their credit - and don't believe that their retirement accounts should count when it comes to qualifying for a mod. An example would be someone who has $100k in a retirement account and yet claims they lack the funds to catch up on their mortgage - and expect to be modified to a lesser payment. Just like when applying for Medicaid, all of your assets should count when it comes to applying for help.

I don't believe that wealthy people like Donald Trump should be able to file bankruptcy and screw over people to whom he owes tons of money, and yet live like a king. It happens, but I'm not a big fan.

I’m not a big fan of the banks being bailed out and taking huge tax losses while freely spending my money

Are you capable of separating the concept of strategic default and taxpayer bailout?

Seriously! Are you?

You and Austinghousingbubble seem to completely muddle the two.

elliemae says

But especially someone who feels that they’re in the same category as those people who are struggling and truly need help.

If you are a homeowner you are already in the category of people that does not need government help for your housing needs.

Mark -- You're doing a fine job of distorting the premise to make it seem like I'm conflating the "concept" of strategic default with taxpayer bailout. Let me make things clear so that you have a better idea of what it is you're disagreeing with me about:

Present day policy is increasingly biased toward keeping mortgagors from defaulting, including bubble speculators - meaning the opposite of the Cleaver family. Part of this housing policy has expanded to include cram downs, again, INCLUDING would-be 'strategic defaulters' who are most typically speculators -- those who would walk unless they see some equity building in their hovels in the near term. In other words, they have no real interest or attachment to their home or the community, rather, they bought house(s) as cashflow generators. Now I think it's crappy policy to begin with, but doubly so to offer it to speculators/get-rich-quick schemers, especially if they end up defaulting anyway, and the balance of the crammed down loan ends up on the FHA's balance sheet - i.e., the taxpayer.

If someone can still afford the payments the same as when they bought the place, (including if it exceeds 3X their income), and they are living in the home and not treating it first and foremost as a cashflow generating asset, then the home is still providing the same value to its inhabitants, regardless of the depreciation/correction in market value. Depending on how much the price has gone down, if you are in it for the long haul, you shouldn't even pay any attention to short term price dips.

I'm fine with people walking away, (less fine with them squatting), and even payment deferment due to unemployment, but even that shouldn't be public policy, rather, an arrangement between the borrower and lender. I am not fine with subsidizing speculators in any way. I am bemused that you could possibly find anything disagreeable in any of that, nevertheless, that is where we disagree.

MarkInSF says

Are you capable of separating the concept of strategic default and taxpayer bailout?
Seriously! Are you?

Yes, I am. They're two different things. I was just talking about a few things that I don't agree with. I don't think that people who can afford their homes should walk away just because they're upside down.
But I also don't think that we should reward the banks the way that we have.

I think a lot of things, like there should be a national holiday to honor me (I'm still hurting over Sheriff John not wishing me happy birthday when I was 4. I didn't know that you had to tell him it was your birthday - I figured he knew everything). But that doesn't mean that I can't separate my disappointment over Sheriff John from my disagreement with the concept of strategic default.

I'll get over the Sheriff John thing someday... deep emotional scars...

Austin and Elliemae:
You are saying people (the market) should behave certain way, refusing to acknowledge what people (the market) will do as reality.
True, people should not have jumped into the bubble RE market.
Reality – if WAMU was waving a half million dollar loan in front of $45K income guy but inflated by LIARs loan app with no money down. He saw it as a once in a life time opportunity to the good life - what a great country. He visualize his family in the beautiful mcmansion and new Escalate in the 3 car garage. He grabs the gold ring. In the bottom of his gut he knows if he loses his job they can’t go after him.
I don't like the abusers anymore than you but we are in the 3rd wave of foreclosure with at least one more to come. My family's finances is too big to fail.

Who are the enablers that let all the animals into the chicken coup?
Don’t forget the banks do not own most of the mortgages anymore.
Remember the CDOs, MBS, FannyFreddie?
The reality most mortgages are chopped up and sold to investors worldwide.
So said house debtor made a bad investment, he walks.
The investor of his mortgage made a even worse bet and I say let him suffer the consequences. The banks made their money already.
BTW, the walker loses his down payment and takes a credit hit for a few years, so it is still painful.

"the banks made their money already" I've seen this sentiment expressed a bunch of times on here, and in regular life. In actual fact, not so much as we see banks being taken over by the fdic every week, and bailed out by the government all over the place. The banks lose plenty on defaults, as they often carry 2nd lines on the banks books. (remember the good old 80/20 loans? the cash out HELOC's?)

Let's see, if I juice my sales in 2003-2006 and make 100 million a year in that time frame.
I bought a villa in Italy and threw some really great parties.
Oops, 2007 I made little. 2008 I lost money, but hey it is other people's money.
The government swoop in and gave me bailout but I used it to invest in equity markets and now I am making record profits again. I am so smart.

azrob00 says

“the banks made their money already” I’ve seen this sentiment expressed a bunch of times on here, and in regular life. In actual fact, not so much as we see banks being taken over by the fdic every week, and bailed out by the government all over the place.

The correct statement is "BANKERS made their money already". That is a key distinction.

Bankers made cartloads of money, all the while driving their banks into insolvency. In any other industry this would be a criminal act: looting the corporate coffers through bonuses while leaving your creditors (which include depositors) and shareholders high and dry. But in banking, "profits" are just a matter of the way you do accounting. E.g. WaMu, which issued lots of option ARMS, claimed profits every month due to the balance of these loans increasing due to negative amortization.

I should have been a banker. It's just too damn easy.

Austinhousingbubble says

I’m fine with people walking away, (less fine with them squatting), and even payment deferment due to unemployment, but even that shouldn’t be public policy, rather, an arrangement between the borrower and lender. I am not fine with subsidizing speculators in any way. I am bemused that you could possibly find anything disagreeable in any of that, nevertheless, that is where we disagree.

OK, thanks for clarifying. I totally agree. I am disgusted by public policy on this as well.

I love that this is even called "strategic default". Failing to pay secured debt but still paying on unsecured debt is a sophisticated strategy?!
Your credit score gets punished regardless and banks slash credit limits as soon as they find out about a large default. A card with a $30k limit, for example, will usually be cut to whatever the outstanding balance actually is i.e. if you have $10,124 out on the card that exact number is your new credit limit. Pay down the card and the credit limit will usually fall to your new balance.
There is nothing strategic about strategic default.

The strategy is that banks apparently can't claim recourse on you, if you walk away, depending on state and what type of loan you've gotten. It doesn't mean you need to claim bankruptcy.

If you don't claim bankruptcy, then you've got credit card debt to still pay off. If you're defaulting there, they could take you to court, which is more than the bank could do.

Saving the banks was the prudent thing to do for us. Of course, we shouldn't have let ourselves get into this mess to start with. But I'm betting if we had 10X the banks 9X would have failed, due to chasing the same profits.

m1ckey6 says

I love that this is even called “strategic default”. Failing to pay secured debt but still paying on unsecured debt is a sophisticated strategy?!

I do agree on this. "Strategic default" is just a sugar coated word for "intentional default", trying to imply the shit is smart rational decision when the real intention was from selfish reason. People's ability to find fancy words and inability to accept as what it is, in order not to be look bad sometimes makes me amazed. That maybe is something strategic about it.

I don't blame any one for their actions. I am still wondering how they are getting away with giving people such large loans with no earnest money on the line.

Do people blame their dogs for running off when the owners haven't put a leash on them?