patrick.net

Clinging onto the hope of unrealistic price gain.

People forget this is the age of retrofitted laws.
People walking away and defaulting today, are most likely to be sued or prosecuted in the no so far distant future. I really expect that to happen as soon as interest rates goes back up, and the banks and economy is back to making money for them selves. Right now they are busy standing at the US teller window with a money bag, Ben Bernanke keeps filling up for them. But when that window closes, everyone from banks, to investors that lost tons of money investing in those derivatives, to the Government them self will be going after these strategic defaulters.
I mean the process has already started, the Banks are already being sued for their part for loaning money to people that could not repay. After that is over and precedence has been set, that someone has to be at fault.
I'm most certain, that those where it can be proven that people were able to pay for their house, and were not victims but were in fact made a greedy bad investment decision, and decided to take the easy way out, even if they could afford to pay back the loan. Will find them selves in the hot seat.

Don't forget, Minorities are always the victim,(They weren't greedy, they were preyed on, even if they did fabricate documentation) everyone else has to be held accountable for their actions.

Darrell In Phoenix says

liar

Liar, it was a prediction, like I predicted banks will eventually just become landlords rather than let home prices settle naturally to a level the free market will support.
That was treated like a big whopper too.

Let's look at this objectively from the perspective of the contract that each party signed:

1. The bank may foreclose on the home if the buyer is not making payments.

2. In most states, claims against the buyer for defaulting on the home are limited to seizing the home. In other words, if the buyer defaults, the bank can take the home but can't come after the buyer for the loan.

3. Realistically, the buyer will ruin their credit rating by defaulting on their mortgage.

All things considered, it can make sense for many people to simply default on their underwater home. Does that make them unethical? Go and pose that question to major US airlines and automakers. They'll tell you that bankruptcy was a good business decision.

The bank has its rights and can foreclose on the home. But trying to guilt-trip people who are underwater to stay in their homes is hilarious, especially when it comes from banks that received massive government bailouts.

It's just business.

WhatDoIKnow says

Homeowner insurance? Yes.
Maintenace? Yes (but get a home warrantee and you are covered).
Property taxes? No.

Thanks for spelling that out, I wasn't sure at all what would need to still be paid.

SkyPirate says

All things considered, it can make sense for many people to simply default on their underwater home.

It seems like on a case by case basis it would make sense for some owners to default and probably at a higher clip than we are currently seeing.

But I think that most people do have a sense of self worth attached to their home and credit score. Furthermore, we do live in a society that would consider it unfair to just leave a house, even if a bank would screw you over in a heart beat.

I might have glossed over a very important assumption at the begining - People are rational actors. I don't know if the average joe is smart enough to realize walking away from a home could be in his best interest.

SkyPirate nailed it. The banks entered into a contract with people who had little or no chance of realistically fulfilling the terms of the contract. As a landlord, I could rent to a Taco Bell cashier and his family of 4, but don't go holding your breath cause I know he can't afford it.

As for those that strategically default. Turn the tables. If you held the mortgage, what do you think your bank would do if they started having trouble paying the bill? (They'd squat and exhaust every legal option available to them to stay as long as possible, and do it in a heartbeat)

robertoaribas says

In Phoenix, you can be underwater and still paying a lot less than rent... that kind of changes the logic a bit.

Only to a certain extent. The option is to pay nothing for 2 years and then rent or continue to pay the (below market) mortgage.

Two close friends short sold recently to avoid forclosure. One was renting a house, the other was living in the house. It's been made so easy to short sell, why not just do that expect that residents must endure a move? I was surprised to be told that the recent government housing programs include subsidizing situations where a short sale doesn't pay back the mortgage such that the underwater amount is forgiven after the sale. Pretty sweet way to wash your hands of the decision to buy!

You're left with no equity. With the foreclose and squat, you build back some cash.

A short sale is definitely a more reasonable way to do things; but not as interesting as my thought experiment. :)

Man, you ask the good questions.

In a short sale you are required to provide financial information that may, or may not be contrary to your loan application, which would trigger fraud.

Give the banks nothing.

I think the jury is still out, at least for me, on whether these loans will stay underwater, or if banks will begin doing debt forgiveness in order to keep a loan.

Asking why people don't strategically default, even when they might benefit in the short term, is like asking why they save for retirement or why they keep saving even when interest rates are below inflation. People value security. Also, defaulting may not be a sound strategy, even for people whose houses are underwater. For example, in judicial recourse states, they can be sued for the balance and costs and fees, and they may end up losing other assets. Other people see it as a matter of personal character. It's the grasshopper vs the ant: the grasshopper might default, and might even benefit from that, but the ant doesn't. The larger question is, why is America as a society encouraging default and punishing savings, encouraging grasshopper behavior while punishing ant behavior. FIRE lobbying and bailouts are pushing us all towards collective default, and a profound shift in national character.

Few things...

- I am underwater on my primary residence property, but not enough for it to make business sense to walk away. There's a threshold obviously.

- Because I am acquiring more property, the savings of foreclosing and squatting for two years doesn't measure up to the potential gains of acquiring investment property. And a foreclosure black-eye could make things quite difficult for me to proceed.

- I am amused by the "moral obligation" mumbo-jumbo. Both parties went into a contractual agreement. One party lent money while the other party took on an asset. If, for whatever reason the party with the asset stops making payments, they give back the asset. And the bank is/was very well aware that if the financial system/economy collapsed, people would be exersizing that part of the agreement. And don't forget that the asset gets returned in full even though the owner paid for that asset for years! Oh how well positioned is that bank compared to the rest of us eh?

- The bank will ALWAYS exersize every possible legal avenue to extract the most money out of any particular contractual agreement. Sometimes the little guy will be smart enough to do the same. I applaud all of you who have improved your lives by moving on from your debts legally. And at the same time to be fair, I am disgusted in our system for continually offering the "outs"

curious2 says

The larger question is, why is America as a society encouraging default and punishing savings, encouraging grasshopper behavior while punishing ant behavior. FIRE lobbying and bailouts are pushing us all towards collective default, and a profound shift in national character.

Spot on sir.

Number one the bank writes the contract to suit them. The bank does the appraisal, and has all the data on larger economic forces that come to bear on the Real Estate Industry. The bank lends money on the value of the asset.

There may be a promise to pay, but the promise to pay is secondary to the whole foreclosure market.

Ask why the foreclosure market is overwhelmed.

Banks didn't care how much they lent, they were selling the Notes as fast as they were churning them out. Those Notes were sold to a secondary market without any regard for the value. Those loans were insured against loss, and resold as investment quality based on a rating system.

How could the entire financial market have missed the mark on the value of the assets.

Now ask yourself, if they didn't know how could you be expected to know. If they lied, or ignored, they should be the ones taking the loss, not you.

Either way, walking makes the most sense if the numbers make sense to you.

The bank is the enemy, give them nothing.

curious2 says

why is America as a society encouraging default and punishing savings, encouraging grasshopper behavior while punishing ant behavior. FIRE lobbying and bailouts are pushing us all towards collective default, and a profound shift in national character.

Could it be because the worst actors among us saw an opportunity? Instead of dealing with reality and investing in creating a workable, livable future they chose to: 1)Collude with a totalitarian government to avoid environmental laws, labor laws, accountability and US domestic competition and resurrect slave labor (Nixon in China). 2) Creat a totally fiat world currency run by crony banksters and their political puppets (Nixon again) 3) Expand irresponsible government spending agreed to in exchange for lowering of the top tax brackets which encouraged quasi criminal short term thinking and behavior aimed at accumulating vast personal fortunes that encouraged even more corruption of the poltical process. 4) Turn the natural desire and historical basis for middle class US property ownership into a tool to exploit the average citizen and resurrect the rentier class. By any objective measure we have arrived at a very f'd up destination.

Guys, this article is from almost a year ago. Dec 2011. Things are different now.

jon says

Guys, this article is from almost a year ago. Dec 2011. Things are different now.

For some reason the title of my thread changed and it got turned into a link submission. The focus here isn't at all on the article. Going to fix it now.

IDDQD says

E-man says

And lastly to echo what theoakman said above, some people have self respect & live up to their obligations. :)

Funny to hear it from the dude who openly stated that his investment plan includes walking away from his obligations if price of his investments plunge:

E-man says

If shit hit the fan, we walk away. Yes, we ruin our credit. We lose other people's money (the lenders), but we still have our cash and our knowledge. The beauty when shit hit the fan is that "cash is king." Then we take the cash and go for the next round. That's my investment model. :)

Thank you for proving my point about being short-sighted. Investors and I are buying properties in the Bay Area for 35-40 cents on the dollar. These properties are now worth 50%-60% of the peak value. In some parts of the country, you can buy them for 20-25 cents on the dollar. You bears are calling for another 65% drop from here.

If the bears' prediction comes to fruition, do you think you still have a job by then, or will the soup line be the norm? Ask your spouse if your first obligation is to put food on the table for your kids or pay mortgage to the banksters if SHTF? I hope your spouse dumps your sorry ass if your answer is the latter.

I know a couple of persons that are in a bind right now, but refuse to let the property go because they said "we know what we signed." You just have to respect that.

Nobody says

Clinging onto the hope of unrealistic price gain.

As unrealistic as their hope, it has come to fruition this year for some homeowners. Have you seen the double digit gains in some parts of the Bay Area? :)

E-man says

Nobody says

Clinging onto the hope of unrealistic price gain.

As unrealistic as their hope, it has come to fruition this year for some homeowners. Have you seen the double digit gains in some parts of the Bay Area? :)

I have. And as a homeowner and an active investor, I don't know whether to celebrate or cry.

People don't strategically default for the same reason that they vote for a democrat or a republican.

Path of least resistance, lack of knowledge, unwillingness to change. Actual answers from my under water friends and coworkers.

Sakman says

People don't strategically default for the same reason that they vote for a democrat or a republican.

Path of least resistance, lack of knowledge, unwillingness to change. Actual answers from my under water friends and coworkers.

In times of crisis, people generally don't judge others with as much scrutiny as they would in good times. How ever when the worm turns, and better times are ahead, and people can breath again. That's when they start to think about the stuff they saw along the way. It's then they want to hold people for what they did back then.

Those people that didn't strategically default, will hold them selves morally above those that did. It's no different than a college kid that will hoot an holler and cheer some college girl on as she strips at a patio bar wet T-Shirt contest.
How ever 10-15 years down the road, that girl wont stand a chance getting a job, when she shows up at that same persons office for a job interview.

"Hey I know you! Did you ever enter a wet t-shirt contest at the Elbow room on Las Olas back in '89?"

My parent's long time neighbor, got over 500K as a second on her house during the height of the bubble. She told my dad that she got her money, so the bank can have the house whenever they want it. She's been living rent free for over a year now. I double checked this on Zillow--she wasn't lying.

CaptainShuddup says

How ever 10-15 years down the road, that girl wont stand a chance getting a job, when she shows up at that same persons office for a job interview.

I would expect that she would be the #1 candidate for the job, ahead of you and I.