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Strategic Defaulters as the New Welfare Queens

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A well placed Washington contact wrote:

I was in a discussion with the staff at one of the Federal agencies involved in housing to ask them about the new policies on strategic defaults. It became clear almost immediately that regulators obviously have no idea how to identify strategic defaulters except by asking big banks. They cited the Oliver Wyman study, which is garbage, and other than that had NO evidence except anecdotal reports from ABC News that strategic defaults are happening. Strategic defaulters, they said, are people who won’t even contact their servicer to renegotiate their mortgage. Now, a lot of people are saying that they can’t get in touch with their servicer, so I put the question about whether servicers would tell the truth about strategic defaulters, and they were just shocked that anyone could believe servicers might lie. In other words, the agencies and regulators are simply taking the word of Bank of America and Citigroup that people are strategic defaulters rather than the victims of predatory loans or abusive service.

But what was shocking was the extreme anger they showed. These are bureaucrats, so I expected a kind of boring process-talk. Not so. The guy in charge frequently dropped in lines like, ‘back when people used to actually PAY their mortgages and follow through on their promises.’

It was weird. People in Congress, except certain safe seat powerful Democrats, are afraid of touching the issue, because of the fear of being associated with deadbeats, but also because it is the explicit policy of the leadership of both parties and the administration to continue to squeeze as much blood from a stone as possible.

Yves here. What continues to amaze me is how fast the disinformation is being shoveled out:

1. The strategic default “trend” is almost without a doubt wildly exaggerated. First, while foreclosures are rising, it’s the result of banks finally starting to move on a seriously clogged pipeline. There hasn’t been an increase in the rate of serious delinquencies, despite the continued slide in home prices, to support this idea.

Second, the costs of default are high: a trashed credit record (which limits access to jobs, not just access to loans), having to move, and probably a tax bill if the home has negative equity. If the defaulter wants to rent, a landlord will generally seek a much higher deposit given the concerns raised by his credit history. These are all considerable offsets to the supposed economic advantages of a strategic default

2. There isn’t any clean neat way to determine if someone has made a strategic default. Colloquially, it is supposed to mean someone who is capable of paying the mortgage but suddenly defaults. The problem is I suspect that the alleged strategic defaulters are in the vast majority of cases anticipatory defaulters: they can, by dint of great struggle, make their mortgage payments, but they are falling further and further behind (say escalating fees and charges on credit cards), anticipate a fall in their income (they can read the tea leaves at work), or are so close to the edge they know even a minor spell of bad luck (say the need for car repairs) will put them over the edge, and they decide to exit what is certain to become an untenable situation now.

One reader argued that, as with student loans, one could easily get IRS data and determine ability to pay. That’s rubbish. Student loans cannot be discharged, even in bankruptcy, which makes them senior. And most people need a car to work (and in extremis, can live in a car) so auto loans will be given priority in payment over mortgages by many borrowers. So to determine whether someone can afford their house, you need to look at their total debt burden, not simply their mortgage payments.

A credit report similarly gives an inaccurate picture of debt loads. they merely show balances, not interest charges, so you cannot determine debt servicing costs. For small businesspeople, credit reports also do not show loans to their company, even though they usually have to guarantee them;

3. Fannie, Freddie, and their friends and allies in DC labor under the delusion that the push that the GSEs have announced to pursue deficiency judgments (as in, where state law allows, to try to collect from defaulting borrowers where the proceeds from the sale of the house fails to cover the mortgage balance) is something new. Au contraire. In bankruptcies, any shortfall is presented to the court to obtain a recovery from other assets. In other types of foreclosures, the bank (or foreclosure mill hired by the servicer on behalf of the trust that owns the note and mortgage) will use a debt collector to go after any shortfall

4. The misguided targeting of this effort is certain to backfire. To the extent the authorities try anything new (per 3 above, I’m skeptical, but we’ll at least see an aggressive push to find examples of bad behavior to put in stocks in the town square), their misguided targeting is almost certain to backfire. People do not trust their servicers. Why call them if something has changed or you have come to the conclusion that eventual default is inevitable? Moreover, many borrowers might be loath to try to work out a deal because the media has reported numerous cases where borrowers complied with servicer instructions, made higher payments to get a temporary mod, and failed to get a permanent mod, with the net result that their cash was even more depleted had they defaulted when they had determined they could no longer afford their mortgage. Moreover as the DC expert noted, servicers are often very hard to reach. So contact with the servicer is a ridiculous proxy for borrower intent and condition.

Moreover, anyone who is a true strategic defaulter (as I define it, can afford the mortgage but abandons it) is likely to have the savvy to hide financial assets from debt collectors, and given that the GSEs are letting people know that they are using contact with the servicer as the proxy for “good borrowers”, a savvy strategic defaulter will be sure to contact his servicer with a charming tale of why he is a hopeless goner financially.

So why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income.

Why would the banks oppose principal mods? It will force an end to extend and pretend, and when THAT happens, a lot of financial firms will be shown to be undercapitalized and in need of rescue or resolution (as we and others have pointed out repeatedly, Mike Konczal’s conservative analysis of second mortgage portfolios at the four biggest US banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo, shows that they probably need another $150 billion in equity among them, and others contend the writedowns on seconds should be much more aggressive than Konczal assumed).

This push could also be an effort by the GSEs to shift blame, Whocouldanode 2.0: “whocouldanode prime borrowers would default at such high rates?” It wasn’t our crappy procedures and unduly optimistic assumptions, it was the black swan of a change in values!

Now let us say I am wrong and the banks and GSEs are about to embark on new tactics versus defaulting borrowers, say by getting more aggressive in trying to garnish wages when recoveries fall short. That has the potential to backfire massively.

Right now, contrary to popular opinion, virtually the only parties fighting foreclosure are either people who think they can afford the house but are the victims of massive servicing mistakes (I could write a separate post on this, trust me) or people who have filed for Chapter 13 bankruptcies where the servicer (acting on behalf of the trust) tries to block the bankruptcy stay. In 45 of 50 states (this is a simplification but pretty accurate), the mortgage (which is a lien, in some states called a deed of trust) can only be enforced by the legitimate owner of the note (the IOU). Mortgage securitizations had very specific requirements as to what the trust (the securitization entity) needed to do to obtain the note. Trust are very brain dead vehicles, they can only do what their governing agreements permit them to do, nothing more. In short form, it appears to be widespread, if not endemic, that securitizations starting around 2004 began not bothering to do what they needed to do so that the trust had clear ownership of the note (the key item being proper endorsement of the note by all the parties in the ownership chain of the securitization prior to or on the day of closing. Limited fixes were permitted post closing, generally up to 90 days, but they were designed to be narrow and apply only to a small percentage of the notes in a pool).

Increasingly people who are fighting foreclosures are having good results by questioning whether the party who shows up in court to foreclose is entitled to do so (the legal concept is “standing” and is fundamental). Note the person fighting the foreclosure is NOT arguing that they don’t owe the money but whether the party who wants to take the house has the right to. And this is not a theoretical objection; there have been cases where the same note has been sold to multiple securitizations. If the wrong party forecloses, the borrower is at risk that ANOTHER trust will show up, and again demand that he pay the mortgage debt in full. Although decisions vary (usually by state, based both on state law considerations and the temperament of the judiciary), many judges are ruling for borrowers, typically dismissing cases without prejudice (meaning the lender can try foreclosing again if he can get his act together, but typically the issues that led to the unfavorable ruling are insurmountable).

So if the banks and Freddie and Fannie start on a big, and very badly aimed push to go after defaulting borrowers to extract more blood from stones, one outcome may be that they don’t get the headlines they want. Instead of “Greedy guy reneged on his mortgage when he has plenty of dough (be sure to include photo of deadbeat with luxury car or in front of very fancy new residence)” you will get “Cancer victim who had to abandon beloved home harassed by greedy banks.”

But more important, this sort of move will lead incorrectly targeted “strategic defaulters” who willingly gave up their houses to fight the efforts to extract more cash from them. That in turn has the potential to increase awareness of the widespread problems with mortgage securitizations, with the potential to shift to dynamic. What if the owners of private label mortgage bonds come to realize that in many cases, the instruments are effectively unsecured? What happens if Fannie and Freddie’s strategic defaulter push backfires from a financial standpoint (the cost of a badly-targeted collection effort exceeds any increased recoveries?)

And most important, what happens if the public comes to understand the hypocrisy of the banks’ stance, that they are demonizing borrowers for failing to live up to contracts, when they couldn’t be bothered to comply with the terms of their own contracts, which set up procedures for conveying notes to the securitization entity, and in many cases foreclosure mills have forged documents to cover up that fact? Whoever is behind the “strategic defaulter” push may well wind up hoist on his own petard.

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93 comments

  1. attempter

    This has plenty of ways to backfire, and I hope all of them do so.

    Most of all, since the historical data show that the number one indicator for strategic default except at extreme levels of negative equity is the contagion effect, seeing others do it, we can hope that a propaganda campaign implicitly claiming the practice is rampant can help become its own self-fulfilling prophecy.

    It would also help if we could somehow get a pro-default educational message out into the public consciousness. Everything in the MSM, while in a sense educational, is also usually anti-default in its ideological tone, so the osmosis effect will be slower if not supplemented with affirmative education.

    Brent White’s paper on the subject is excellent:

    http://www.sacbee.com/static/weblogs/real_estate/SSRN-id1494467.pdf

    I also wrote a series reviewing it, starting here:

    http://attempter.wordpress.com/2010/01/19/analysis-of-strategic-defaults-1-of-5/

    As for the bureaucrats taking personal offense, that sure sounds odd. Maybe it’s an example of a kind of bully who’s sincerely outraged if his victim dares to fight back in an “unapproved” way.

    1. the.Duke.of.URL

      @attempter,

      “an example of a kind of bully who’s sincerely outraged if his victim dares to fight back in an “unapproved” way”.

      Psychologically, you are on the money, as it were. Bullies tend to be cowards who often, though not always, back down when cornered or when they think they are being bested. Exceptions occur when bullies have a good sense that they are in pole position and thus a good chance of coming out on top. So far, bankers have been winning and their threats have yet to be called. Psychopaths and sociopaths will act similarly, though there are psychological differences between these three states of “mind”.

        1. Joseph

          Debtor revolt you say? this is music to my ears¡
          By the way, most societies, except our modern one from the 17th century, have done debtor jubilees; from ancient Egypt, to Babylon passing through the old mediterranean cathlic countries, they all have done it
          why our society is incapable of doing it? starting by the poorest, in Africa, whose ( up to very recently) commodities export dont even pay the interest ( again this has changed, Africa and SouthAmerica have the chinese factor now)
          keep well

          1. Gary Anderson

            I was advocating debtor revolt before debtor revolt was cool. Walletpop said that my website was the worst ever. Now they follow me on Twitter!

            What do officials expect? The loans were a scam in the first place. These are Tea Party hypocrites. I see Hennessey, the Tea Party founder, kissing ass with Larry Kudlow and the bankster promotors all the time on CNBC.

            The fault of this housing bubble didn’t lie with the builders, the borrowers, the state of Florida, the state of California, the state of Illinios, or your grandmother. The driver of the scam was the international financial community. The goal is to one day have perpetual mortgages like that 255 year mortgage in China. The goal is for total financial dominance by the international banksters.

            So when an official shows indignation, he is either stupid or trying to deflect blame, just like CNBC does, away from Wall Street. It is called Metaprogramming and I wrote about it here: http://seekingalpha.com/article/194512-cnbc-metaprogramming-and-the-rising-stock-market

          2. Joseph

            Congratulations Mr Gary Anderson if thats so; I am a newcomer, only in recent years, I started thinking like this
            Theres a side of the catholic intelectuals, and a fraction of the church, who always have thought this way, a minority of course
            eg, Maurizio Blondet, italian journalist of a certain age, who is banned in media, due to his radical economic thinking
            effedieffe.com, only italian, unfortunatelly
            keep well, regards from Barcelona
            ps,should you like to surf the web, there’s one of his releases, in 2007/2008 called Goldman’s Reich has started, which is translated into english, you will find it easily

          3. ECONOMISTA NON GRATA

            A strategic default is a rational business decision depending on the statutory requirements of your state of residence. Only a narcissistic fool could become indignant at such an event taking place. The system is currently overwhelmed with foreclosures as lenders strategically expedite those where a recovery of principal is most likely. In other words, they are moving hard on the borrowers that may have equity in their properties and neglecting those that are deep in the hole. They are saving what they can when they can… Don’t expect to negotiate a modification if you have equity in your property, it ain’t gonna happen, no matter what…. On the other hand, if you are deep in hole and you stop making payments, the likelihood is that you will be able to live in the property, rent free, for well over a year before a lis penden is filed. Yes, you will get a few phone calls from the lender threatening foreclosure, however, nine times out of ten, it will be an empty threat. The borrower who is deep in the hole has the leverage and they should use it.

            The fact is that the institutions in this country are dysfunctional across the board and unless you are a headline it is very likely that you can fly under the radar on almost any malfeasance you can conjure up. I’m not encouraging this of course but it appears to me that the whole bureaucracy has been paralyzed and overwhelmed by complexity. The SEC was not the only agency viewing porn, I can guarantee that.

            Anyway, this whole thing is hilarious to me, I mean really, you just have to laugh at these jerks that take themselves so seriously. It’s a grand comedy and everybody’s crying. Laugh…! For Christ’s sake…. It’s funny, it really is…

            Best regards,

            Econolicious

          4. skippy

            @Econo non grata…it is as you aptly describe, the play we endure, caricatures of such grandiose ineptitude to the title of ‘don’t Tread on my Stuff’.

            Complexity scribed upon a silicon chip inherent of our deficiency to control destiny, the jaw bone of an ass too avail our fears…Silicon Trading St, will save us!

            Skippy…time compression is a bitch, math says so, why do we whip our selves, self inflected punishment to gratify the gods for our wanting?

    2. Glen

      Long live the welfare queen!

      But all hail the almighty Welfare Kings!

      AIG
      Bank of America
      Citigroup
      Goldman Sachs
      JP Morgan Chase
      Morgan Stanley
      Wells Fargo

      I know it’s a longer list than this, so my apologies to those Welfare Kings I forgot!

      Feel free to add them.

      1. Joseph

        pls add the europeans, which are a legion, swiss, german, french,italian and spanish banks

  2. Neil D

    Great post! I personally love the concept of everyone just defaulting en masse. There is strength in numbers.

    I really don’t think that Americans will do anything about any of this. It is not in our national character anymore to care about such things as the common good. Oh sure, the scolds will tear their hair out with op-eds, blog posts, and silly comments online, but there really is no outrage. It’s all just great theater.

  3. Kevin Smith

    With regard to student loans being non-dischargeable, I have recently seen advice that other sources of credit should be maxed out, the proceeds used to pay of the student loan, then bankruptcy should be declared.

    If there is a house with a second mortgage, Chapter 13 should be used for the bankruptcy to improve the chances that the second mortgage will be converted to a non-recourse loan and discharged in the bankruptcy.

  4. But What Do I Know?

    I think you are on the right track with the jealousy comment, Yves. I’ve said it before and I’ll say it again: the only thing the average middle-class person hates more than someone above him/her taking advantage of the system is someone below him/her taking advantage of the system.

    1. NOTaREALmerican

      Absolutely true. Americans are only united in their self-loathing.

      Johnson said the civil right movement might destroy the Democratic Party, who know it would actually destroy the entire country.

  5. i on the ball patriot

    Another splendid example of the now not so misty ‘global conspiracy picture’ gaining clarity with a few more brush strokes of reality …

    This is just another facet of, and a continuation of, the top down intentional pitting of the prudent against the not so prudent for control and elimination (it goes well beyond instilling deflective jealousy and is more focused on creating anger and hate).

    It is an integral part of the larger global divide and conquer scheme whereby the rich eliminate the high resource consuming, expensive to maintain, and always threatening middle class, and replace it with a low cost, non threatening, low brow, law enforcement class, with the ultimate goal being a two tier ruler and ruled world. Its the warm and wonderful industrious Germans against those lazy shiftless Greeks. It is Pernicious Greed replacing good old fashioned Vanilla Greed. Its the same old shit in a different suit!

    All of life is politics. The backlash will be strengthened and hastened by having ready a fair alternative to the end of all of this socially destructive parasitic voodoo bullshit whereby economics is falsely and deceptively separated from politics — namely — a very transparent, INTEREST FREE, alternative utility banking system that is controlled by the people.

    Come on kids — it is time to pump up the volume of resistance while you still have a few resources remaining!

    It is time for election boycotts!

    Deception is the strongest political force on the planet.

  6. Bates

    Excellent post…

    “But what was shocking was the extreme anger they showed. These are bureaucrats, so I expected a kind of boring process-talk. Not so. The guy in charge frequently dropped in lines like, ‘back when people used to actually PAY their mortgages and follow through on their promises.”

    It is interesting that in a recent NC post one industry person quoted made the comment that “those holding large mortgages are usually wealthier and are more ruthless in their decision to default” (paraphrased). I commented that the word ‘rational’ should be substituted for ‘ruthless’.

    Perhaps the situation here is a simple matter of the large mortgage holders taking a course of action that was unanticipated by the banks sitting on securitized bundles of mortgages? Maybe the US Gov and it’s banker cohorts thought that the home mortgage holders, after witnessing enormous bail outs for the TBTF banks, would go quietly into the night, using up their retirement funds to continue to service a mortgage that would eventually be defaulted upon no matter what?

    At any rate, as you suggested, there is not much data to support the claims that ‘some large number of homeowners’ are defaulting strategically…and, this ‘news’ is probably a ploy in advance of an increase of foreclosure activity to deflect attention from those who enabled the mortgage debacle.

    I believe that everyone who can default in order to improve their financial situation should do so…after consulting an attorney to insure that their course is legal.

    The TBTF banks should be broken up and taken down to a size that will not allow them to have the funds to purchase votes of our representatives. Any action that we can take as individuals, be it defaulting on a mortgage strategically, defaulting on any revolving or non revolving credit through bankruptcy, cutting back on spending on non essential items…so much the quicker to bring down the predators that feast on transactions costs that were at one time only charged by loan sharks. When I was a boy a loan shark charging 17% interest would be jailed if caught, now some credit card companies charge far more and it is legal. Anyone who has owns an average well run small business knows that borrowing money at 8% or more will probably lead to bankruptcy. Can Joe 6pak run his personal finances better than a well run small business? I think not. Mellon was right…liquidate them all! If they are not liquidated they will continue to be a leach on all of us, hollowing out America until their is nothing left to steal.

    From Jesse… “The banks must be restrained, the financial system reformed, and balance restored to the economy, before there can be any sustained recovery.”

    http://jessescrossroadscafe.blogspot.com/

        1. V.M.

          Umm yes – the poor pavalovian beast. In the end it will all end by no one trusting another – even if this mass default takes place there will be no one will to lend next time around – look the prudent savers (zero interests looming hyper inflation etc)have gotten screwed too and will further get beaten if there is mass default so who will lend if there is a reset button option….. better let this mess melt down without encouraging intentional defaults at least then there is a slim hope that something of the ediface will survive.

  7. Transor Z

    Yves, the Philadelphia Fed’s paper from about a year ago arguing that mortgage renegotiation doesn’t work made me spitting mad. So many bad underlying assumptions, the principal one being that the data referenced had any relevance to the unprecedented needs of borrowers after homes lost 30% of value in a once-in-a-century event… ugh. So frustrating.

    Bank analysts seized on this report and made much of it. “See? It wouldn’t work anyway even if we tried!”

    And now to use the spin apparatus to paint the completely foreseeable and eminently logical steps taken by consumer borrowers as stupid/lazy/evil… it’s just too much, it really is.

  8. LeeAnne

    Said so well @killben, June 14, 2010 at 6:31 am:

    “My point is if government is going to suppress your right to default then all the people who are underwater on their homes should default ENMASSE (AFTER CONSULTING A LAWYER!!) for maximum impact and advertise to the world THAT THEY HAVE DEFAULTED AND LOOKING FOR MORE DEFAULTERS … we need more people power and therefore more people who understand government propaganda for what it is …”

    Worth repeating! wouldn’t it be wonderful?

  9. Peripheral Visionary

    Yves, I don’t know that I see much public ire over the “walk-aways”, that is, people who can no longer afford the mortgage on their home and so mail in the keys to the bank.

    It’s the people who continue to stay in their homes that are drawing the anger of the general public. Both the news and the local gossip channels are full of stories of people who have simply stopped paying the mortgage on their home, but continue to live in it, for months or years. That does in fact make people very angry, particularly when those paying their mortgages are often working very hard to do so–and it goes without saying that the working people paying rent have absolutely no sympathy for someone who is staying in a beautiful home they otherwise could not afford rent-free.

    I do think there is a morality angle to this. It is not immoral, in my view, to move to have debt discharged that cannot be repaid. I do see it as immoral, however, to take advantage of the system and use the delay in the time it takes for debt to be discharged to enjoy a lifestyle that the debtor otherwise would not be able to afford. If people need to have debt discharged, that is their option, and the courts will determine how much should be repaid; but I do not think they should have the option of continuing to enjoy a debt-financed lifestyle for years simply because the wheels of the system move slowly.

    If someone cannot cover the cost of his or her home, the honest thing to do is walk away; not continuing to stay rent-free while the neighbors and relatives slave away paying taxes that will go to covering the losses of the bank financing the rent-free lifestyle.

    As for the “jealousy” comment, jealousy is almost invariably the accusation that badly behaved people make when confronted with the unfairness of their actions. They didn’t behave dishonestly or unfairly–everyone else is just “jealous”! Spare me. This is an issue about fairness, and if I have found one thing out about Americans, it is that they are sensitive to issues of fairness, at least as far as they are able to perceive them. People who come from countries with strong social hierarchies may be willing to put up with all kinds of unfair behavior, but any appearance of unfair treatment among Americans will generate deep resentment. The very idea that some people are staying in their homes without paying a penny for the privilege while others are working to cover heavy mortgage payments or high rent is going to generate deep resentment, and charging that the whole thing is a propaganda ploy is only going to make people more angry.

    1. Doug Terpstra

      It is extend-and-pretend, mark-to-myth forbearance extorted from the FASB by savvy banksters that is key to the glacial foreclosure process— not some peripheral ‘system’ beyond their control, but rather, self-perpetuated fraud to avoid the accountability they demand of others.

      Wising up to this widespread double standard, ‘savvy’ defaulters, to their credit, are now turning the tables. Having rented since 2005, we have only peripheral skin in the game. So we don’t waste envy on our neighbors, but do admit some schadenfreude watching TPTB panic and their captive bureaucrats squirm as their house-of-cards casino collapses. IMO, your post best serves the divide-and-conquer strategy of these classist plutocrats and their minions. I trust you are well paid.

      See “Extend and Pretend: Manufacturing a Minsky Melt-Up” from April ’10 by Gordon Long.
      http://www.safehaven.com/article/16367/extend-and-pretend-manufacturing-a-minsky-melt-up

      Quoting Karl Denninger in the article: “I am constantly amused by those people who claim there is some vast “conspiracy” in this country when it comes to banks, balance sheets, and fraudulent lending and accounting. There is no conspiracy. It is, in fact, “in your face” fraud.”

      When they claim not to have seen the bubble or widespread fraud in the market, Greenspan, Bernanke, Paulson (& Company), Geithner, Rubin, Summers, et al, must necessarily fit one or more of three categories: liar, lunatic, or incompetent and unfit for duty, probably all three. We saw it very clearly without financial training beyond Macro-econ 101. As an aside, the Phoenix house we sold in ’05 is now under short-sale contract by the second buyer for exactly HALF his ’06 purchase price. This entire mess is a fine model of Yves’ ECONNED theme—“unenlightened self-interest”.

  10. ejackson

    I’m getting ready to strategically default. I have a condo that has fallen down in value by 50%. I can pay for the mortgage, but since there’s no hope that my condo price will double over the next 15 years, there’s no point in paying for it.

    Since I live in CA, my mortgage is non-recourse and I don’t need to worry about getting a tax bill for the deficiency. I bought the condo under my name, so I will trash my credit rating, but we can buy our next house using my wife’s credit.

    I don’t see anything wrong with doing this since it is clearly stipulated in our mortgage that this is an option. If the situation were reversed, the banks would do this to me in a heartbeat, I don’t see why everyone is getting their panties in a bunch over this.

    1. NOTaREALmerican

      Re: I don’t see why everyone is getting their panties in a bunch over this.

      I don’t either BUT many of the people I work with would say something to the effect of: “I (meaning you) have the responsibility to ‘do the right thing’ and act responsibly because that’s what I (meaning you) was (should have been) taught. (With lots of guilt)”

      Note that the word ‘responsibility’ is used allot (and guilt). Also note, I personally happen to agree with you: it’s a business decision. But, there’s allot of “mythology of American Free-Enterprise” mixed (up) in people’s brains right now, so that’s where the conflicts come in. In America, business is “goodness” and if you default you are “hurting” the “goodness of America”.

      Americans haven’t come to grip yet (if they ever will) with just how corrupt / immoral the system – and the society – is. The winners will be those that “gamed” the system the best – or game it the best in the future (which is basically the ONLY way to win in a socialist/fascist “state-ist” system).

      This is (also) why Americans resent union members, as they see other peasants getting benefits they are not getting (and as was stated above, the peasants despise each other much more than the nobility getting the loot).

      1. Nimrod

        If the shoe were on the other foot, I suspect your self-righteous coworkers would strategically default in a NY minute, like the well known anecdotes of anti-abortion protesters who readily justify having abortions upon finding themselves pregnant out of wedlock.

    2. davidrporter

      The outrage over walk-aways is bizarre to my way of thinking. People who stop paying their mortgage are not breaking their contracts. The contract says that if people stop paying their mortgage the bank has the right to take back the house. Defaulters are keeping to their end of the bargain by saying “fine, take the house.” Quite where that’s immoral I have no idea.

  11. DownSouth

    Yves’ well placed Washington contact wrote:

    But what was shocking was the extreme anger they showed. These are bureaucrats, so I expected a kind of boring process-talk. Not so. The guy in charge frequently dropped in lines like, ‘back when people used to actually PAY their mortgages and follow through on their promises.’

    As far as a turn of phrase goes, this one from Econned I believe captures the dynamic best:

    …a mandarin class that often is uninterested in and unresponsive to the concerns of the public at large.

    And perhaps the most stunning feature of this new mandarin class is its two totally different faces. There’s the face it shows the working- or middle-classed family that falls behind on its mortgage. And then there’s the face it shows to the Goldman Sachs of the world.

    One has to wonder how all this fits into the larger good government vs. bad government vs. no government debate. A person who has seen the ugly face of government—-the one the mandarin class shows everyday working- and middle-class Americans—-can seek relief from this bad government by advocating for either good government or by advocating for no government.

    But the banksters win with no government too.

    1. Bates

      Hello DownSouth…

      “And perhaps the most stunning feature of this new mandarin class is its two totally different faces. There’s the face it shows the working- or middle-classed family that falls behind on its mortgage. And then there’s the face it shows to the Goldman Sachs of the world.”

      The size of the US Government and associated appointed minions has grown under most US administrations. Lord Acton pointed out that once a government and associated beauracracy reaches a certain size, the only way to shrink it is by collapse.

      What are your thoughts on this? Do you see an alternative to collapse?

      “A person who has seen the ugly face of government—-the one the mandarin class shows everyday working- and middle-class Americans—-can seek relief from this bad government by advocating for either good government or by advocating for no government.

      But the banksters win with no government too.”

      I believe that the majority of Americans that think (those reading/watching events other than as portrayed by main stream media) have concluded that they are no longer being represented by their elected representatives.

      Since labor no longer has bargaining power what means are left to combat a government and financial system that have gone completely astray and are of little use to the Main St economy? Do you think boycotts of certain businesses/financial institutions would have the desired effect? Any effect? Boycotts were effective to some extent when used by black communities fighting for civil rights…but that was prior to large scale globilization.

      What good would come of US Citizens boycotting a popular soda pop or large bank when said businesses are garnering the majority of their sales abroad?

      Until someone shows me a better solution I will stick with frugality and will not use credit cards unless I must…renting a vehicle, airline, hotel, etc. I believe that if a small minority of Americans did likewise, stop needless consumer spending, we could change the behavior of our government and the TBTF banks.

      The only thing our government and these bankers take note of is a loss of revenue. Besides, what other tool is left to us?

      1. NOTaREALmerican

        What I find most disturbing in the US is that the liberals (progressives, socialists, leftists, whatever) continue to desire big-government though the agency of the Democratic wing of the Republicrat Party.

        Anything big is unmanageable and will eventually be run for the benefit of the smartest amoral scumbags.

        Yet (YET) the only solution the state-ist can think of is “more and more and more big-government”.

        As somebody said yesterday: The Romans had a saying of (something like) “Grow or Die”. Well, perhaps that’s all humans (including “intellectuals”) can “think” to do; which would ACTUALLY mean they aren’t “thinging” they are just “doing what it natural”.

        1. Fake American

          With all due respect, and speaking only for myself (and the liberals with whom I keep in touch) as a left-wing liberal, we don’t believe in big government, just a government that responds effectively to the needs of the people.

          As the population continues to grow, it strikes me as counter-intuitive to suggest that the way to respond to a growing population’s needs is to shrink the workforce, especially when the suggestion is made simply for ideological reasons. (I trust I don’t need to point out that the “small government” cadre of elected officials is currently doing all it can to “prove” that government doesn’t work by gumming up the machinery itself.)

          And, not to go all “originalist” on the topic, the U.S. government was originally envisioned as a “we the people” government. Seems to me that the people who deride “big government” are, unwittingly or otherwise, in favor of massive layoffs, which seems like an odd thing to root for at the moment ….

        2. Glen

          I find it disturbing that government debt and government size expand every time we get “conservative” Presidents.

          1. NOTaREALmerican

            I find it more disturbing that liberals (progressives, socialists, leftists, whatever) expect a big-American-government to be “responsive” to anything except politically connected insiders. Insiders who are able to purchase influence and (therefore) will be richer than the “poor-n-downtrodden” the liberals wish to help with their big-government.

            If 40+ years of big-American-government doesn’t prove that what we have now (in the way of government) is the only result possible, then – as the liberal bumper stickers are so clever at pointing out – “Repeating the same thing over and over again and expecting different results is insanity”.

            Agra-business has ruined the food-supply.
            The military-industry has turned the nation into an empire.
            The highway business has ruin American cities.

            All the result of capture by corporate-interests. Next-up is the health-care industry which will dream up clever ways to keep people alive with pills who are being poisoned with agra-business food, both paid for with unlimited taxes.

            Liberals like to claim they are smarter than conservatives. Well, it sure would be nice if their political fantasies showed some realism for a change.

            But, I know: Bring Steven Home, Four More Wars, Endless War, War is not the Answer.

            Deception is the strongest force on the planet (after self-delusion).

          2. Fake American

            Liberals don’t claim to be smarter than conservatives; just better-looking. It’s the conservatives who think liberals are smarter than them and resent it ….

  12. killben

    Yves,

    Whatever the difficulty with strategic defaults it is obvious that in the route to take if you want to survive this crisis.

    So given that .. would it not be better to strategic default enmasse .. so that the mass movement provides the necessary cover to avoid the various difficulties associated with strategic defaults and also take on the government in a meaningful way .. it is not so easy to come after millions of people …

  13. MinnItMan

    As a lawyer who represents foreclosed borrowers, I have to say that truly favorable pro-homeowner decisions are still out-liers. Furthermore, much of the consumer protection legislation (at all levels) is more illusory than not, given very short statutes of limitations and very low caps on damages. While the technical niceties may favor the borrowers occasionally, every judge I’ve ever been in front of eventually asks under what scenario the homeowner can afford the house. Too often, the answer is pretty shocking and this is the real problem the entire real estate dependent complex (developers, builders, property tax authorities, realtors, lenders, etc.) continues to pretend doesn’t exist. The last go-around of the market was saturated with people who had half my income (Jesus saw fit to relieve me of this burden, btw), or less, and ended up with twice the house, or more. I’m not judging (mostly) and I’m not envious, by the way. Judges see this, too, and they do have to judge. Near as I can tell, ideology plays very little role in how they do their jobs in this area.

    When I say the scenario is “shocking,” I mean people who have significantly less income than they did when they purchased (developers, builders, subs, realtors, appraisers, home inspectors, mortgage originators etc.), and couldn’t afford it in the first place even if they still had (or ever had) that income, which they don’t and won’t for quite a while longer. More concretely, even a 50% principle reduction wouldn’t get them where they need to be financially. (While I want to be a data-driven guy, I have the “feeling” that values need to drop to about 1/3 of where they were at the peak before I’ll take any call of a “bottom” very seriously. Different markets are different, but many markets are essentially the same – overpriced, over-built commodity housing). Anecdote: recently I stayed with some friends in Laguna Beach who have rented their house for four years at $2300/mo. This supports a value of maybe $300K. It’s on the market for $800K.

    On another note, using dischargeable debt to pay off non-dischargable debt in bankruptcy is not something you want to get caught doing. Abuse of the bankruptcy process can have dire consequences for a debtor, and prosecutors love scalps. I spend a lot of time disabusing folks of taking on the trappings of “working the system.” More often than not, I’ll end up not taking their cases, when it’s clear that that’s not what they want to hear. This is going to be a b*tch of a hangover for all aspects of society.

    That said, I do think the Strategic Defaulter Plus (defaulting with an extended squat) is not the reprobate these officials apparently believe he/she is. Furthermore, public officials better watch themselves on this, as they are one of the very few groups who have job and income security that is a vanished memory for most everybody else.

    I wish I wasn’t such a wet blanket, but with a few drinks in me, I sleep well at night.

    1. Ronald

      ” Different markets are different, but many markets are essentially the same – overpriced, over-built commodity housing). Anecdote: recently I stayed with some friends in Laguna Beach who have rented their house for four years at $2300/mo. This supports a value of maybe $300K. It’s on the market for $800K.”

      The heart of the matter, overpriced housing driven up by years of asset inflation used by the middle/upper class for financial speculation now morph’s into the new normal of RE deflation and rolling foreclosures.
      Thanks for your insights MinnitMan from the legal front lines.

      1. S Brennan

        If you take 800,000 * .035 it = 28000

        Take 28,000 and divide by 12 you get 2333 as an ROM monthly.

        With 3.5% available this may be overpriced slightly, but nothing like 500,000

        1. V.M.

          Hmm – And do Angela or Hans need to pay for RE taxes, insurance, repairs, buffer to replace roofs etc??

    2. PQS

      “That said, I do think the Strategic Defaulter Plus (defaulting with an extended squat) is not the reprobate these officials apparently believe he/she is. Furthermore, public officials better watch themselves on this, as they are one of the very few groups who have job and income security that is a vanished memory for most everybody else.”

      Excellent points, and would be in my reply to the commenter who mentioned the “immorality” of not paying and remaining in the home.

      I, for one, would rather have someone who is not paying and staying in the home just to keep the place occupied and kept up. Empty, boarded up houses, overgrown yards: what better markers of decay and depressed property values are there?

      The other issue is that yes, there are foolish people who will take their mortgage payment money and go on vacations or buy expensive things. Well, there are knaves on Wall Street who did the same things on massive scales and who, in turn, devasated far more people then just themselves. (401K, anyone?) None of them has been punished (except in their own minds.) I can’t believe that “the little people” who do these things won’t feel the wrath of the state and the banks someday. They will. Do these people make me angry? Not more than I’m already angry at those who engineered this fraud and continue to do so.

      But many people will take the mortgage payment money, save it up, and use it to rebuild their lives. How is this immoral? They’ve already taken the haircut (against their credit, any down payment they made, etc.) that the banks refuse to.

  14. jdmckay

    Another unintended consequence of near a decade spent utterly distorting an entire US economy, then trying to fix it w/duct tape. The debris is all over, the core problems unaddressed, and scant resources remaining misdirected.

    These things are hard enough to deal with in good times: eg. get the “stragglers” w/the program. In times like this, w/US gov/media flailing about like a kite caught in the trees, all the more difficult.

  15. Siggy

    Nice post and it gets to the heart of the matter. The loan and its companion mortgage/deed of trust are a contract certain and an contract contingent and as such are inseverable.

    All contracts have terms that are explicit and those that are implicit. In the loan/mortgage contract the borrower has the implicit right to default. There is no morality to be considered. Default is a provided for option.

    This propaganda program speaks volumes as to the inability of the banks to absorb the losses on the defaulted loans they are now carrying. It also suggests that the great body of impaired loans are nonrecourse.

    As to remaining in the home while ajudication sorts out who has standing to foreclose, that act has justification in that as the loan may have been sold thru several parties, it is important for the defaulter to maintain his position until such time as the party with standing to claim the property and lay claim for any deficiency is ajudicated.

    This effort to moralize the so called strategic default is an effort to keep people paying on contracts that have gone uneconomic. It is an effort to delay the loss that is all but inevitable. While there are borrowers who knew full well that they could not ultimately perform on their contract, the fact of the existance of the contract and the responsibility and liability for the contract’s value resides entirely with the originator and any subsequent buyer of the note. Quite simply, the loan did not have to be made. More cogently, the loan should not have been made. The great lie was everyone deserves a home. That’s only half of the entitlement, the part that is critical is; if you can afford one.

    The great difficulty that the GSE’s face is that in the process of securitization a clear chain of title passing from loan orginator to the securitization trust has not been established. In altogether too many instances the originator is no longer in business; or the has been absorbed into a much larger institition; e.g., B of A/Countrywide.

    This demonizing of so called strategic defaults is serious crap think that is being foisted on the public in the naive hope that very bad loans can be salvaged. It is serious in the sense that it reveals the ineptitude and desperation of the management of large lending institutions, the Treasury and the Fed.

    I very much believe in honoring the contract; but, when it cannot be honored we have a ready and equitables vehicles for the resolution of defaulted contracts, not the least of which is the bankruptcy court.

    1. i on the ball patriot

      Siggy said; “The great lie was everyone deserves a home. That’s only half of the entitlement, the part that is critical is; if you can afford one.”

      The great lie is that the wealthy ruling elite, through aggregate generational corruption, have hijacked; the government, the electoral process, the media, and the fed, and now oversee a societally negative process of deceptive ‘privatization’ (read gangster theft) and wealth extraction.

      The “part that is critical is” that in a fair and just society that served the interests of ALL, everyone would have a home and they would be able to afford it!

      Deception is the strongest political force on the planet.

    2. Eric

      “I very much believe in honoring the contract; but, when it cannot be honored….”

      This seems at odds with a most of the comment. It seemed that much of the comment was to the effect that default was a contractual option independent of the capacity of the borrower to fulfill the loan repayment terms. For example, you use the term “uneconomic” as some kind of implied justifiable criterion for defaulting. How does the concept “uneconomic” relate to the capacity to honor the terms of a loan? As a hypothetical, if a borrower has the free income to make the monthly payment on a mortgage, but is $200,000 underwater, is that a contract that should be honored? You say you “very much believe in honoring the contract”, but what do you actually mean by that?

      1. JTFaraday

        Well, obviously, it’s a floater. As opposed to those who experienced a decline in income due to job loss (and those who just never figured out they couldn’t afford it no matter what), the reasonably well off strategic defaulter *per se* is indicating that their mortgage should float with the market value of their house.

        That’s not the contract they signed, but they also signed the contract under conditions in which large financial institutions, that are now state subsidized, were rigging the market to rip them off.

        These strategic defaulters should make their case such a market driven writedown, and it should then be extended to those in the other two categories who can then reasonably be expected to “carry the water,” in the immortal words of Rick Santelli.

        Clearly the sta

        1. JTFaraday

          Clearly the state has the power to impose this contractual renegotiation on the errant footdragging banks that it’s already subsidizing.

      2. Siggy

        If you are the borrower, you have the option of defaulting at any point in time under any given circumstance. The ability to pay is not an issue. If the contract is underwater to the tune of $200,000 as you posit, the contract is uneconomic and it is generally not in you interest to continue making payments. Your considerations as to whether default is a viable choice revolve around; does the contract have a deficiency clause? If not consider the potential for forgiveness income and will the IRS come calling looking for unpaid taxes? If not default. and walk.

        Are you in distressed circumstances, or is reduced income in the offing? Default.

        My point is that if the contract has the implicit option of default, you are entitled to use it to your best advanatge. It’s not about morality it’s about the contract. Now the responsibility for protecting against default lies with the lender. It is true that many states prohibit deficiency clauses, that’s a problem for the states and not the federal government.

        The point of this thread is that we our being bombarded by a propaganda campaign that is intended to impute some artificial moral obligation when in reality we have within the contract every right to default when default is in our individual best interest.

        The morality of a contract begins when it is offerred and accepted, not subsequent to its execution. The current propaganda would have you believe that defaulting is an absolute moral failure. And if it is what is the morality of offerring a contract that the loan orginator knows the borrower cannot honor?

      3. ECONOMISTA NON GRATA

        “….As a hypothetical, if a borrower has the free income to make the monthly payment on a mortgage, but is $200,000 underwater, is that a contract that should be honored?….”

        Depends on the principal… If you’re 200k underwater on a 5m principal, perhaps you should stick it out, it probably wouldn’t be a big deal to you…. However if you’re 200k under on a 400k principal you would either have to be a fool or have a gun held to your head to honor it…. I own my house cash and I feel like a fool for not having re-fied in the market all the way up, I thought about it but never got around to it, the banks were begging for it, they would call me every day. One lender even suggested that I could use the financing as a put. I didn’t do it because I didn’t need the cash at the time. They appraised my house approximately 25% above it’s value and offered to lend me at 80% LTV. It would have been a great trade. I could have walked away with about 3 or 4m and if you think for one minute that I would feel one miniscule jag of guilt, think again…… No way Jose….!

        Ciao,

        Econolicious

  16. Diogenes

    I live in Phoenix.

    I know many people who can pay, but are preparing to walk.

    While Case-Shiller indicates that Phoenix is down 55% from the peak, I can tell you that, in many areas, it is much more than this. Case in point: a Scottsdale friend that bought a $950k house to live in, with a healthy down payment, now worth $350k.

    At a recent dinner party, this was all everyone discussed. Lots of people are buying new cars, some are buying new townhouses or small homes, and others renting apartments while their credit is good, in anticipation of defaulting. Perhaps this was why conumer spending jumped a month or so ago?

    Most of these poeple put 20% or more down, but are porfoundly under water, and may not see a recovery in their lifetime. And they see not a shred of hope coming from DC or anywhere else…

    1. killben

      Exactly!

      If you pay your mortgage you are digging a deeper hole for yourself … like throwing good money after bad .. So the only sensible course is walking.

      My point from beginning has been how to make it less troublesome for yourself .. probably power of togetherness will make the government hesitate to act .. it is not easy for any government to go after millions of people …

      Banks could put a gun to the government’s head and get away … why not people also do the same …

      1. CathyG

        If government officials and government affiliated entities keep making noise about going after strategic defaulters, I assume people who are considering default will move up their timelines to avoid any upcoming legislation that may seek to restrict strategic default or impose additional penalties.

        Anyway, I advised my way underwater sister to move quickly and discreetly after reading about Fandie’s announcement.

    2. Eric

      Well another way to describe the friend would be to say that he/she bought a house with x bedrooms, y baths, a kitchen with xyz appliances, maybe swimming pool, 3 car garage, a lot of xy dimensions and a certain landscaping. It was at a particular address in a certain school district, near shopping, church, whatever. Today the house has exactly all the same features, barring improvements and normal wear. Its utility as a house is unaltered, but now the friend is considering defaulting on a loan that I assume is within their capacity to pay-off (otherwise, why tell us their story?). I won’t lose any sleep over this course of events, and it is legal, but sympathy from me is very limited for these kinds of cases. The meteorite destroyed the house and the insurance didn’t cover it is a compelling story, but the getting exactly what you bought and then deciding that you paid too much isn’t so much.

      1. reskeptical

        Eric,

        if this story is true, this person bought the house for 950k, with 175k deposit and now it’s worth 350k. Obviously, a house bought in such circumstances doesn’t only have utility value. It’s an investment.

        The financial meteorite hit the house and took out 3 of the four bedrooms, their en-suits and the kitchen. Having sympathy with these people is ok.

        Questioning whether or not people need such big houses is another thread!

  17. Art Vandeley

    Great post Yves.

    Servicers won’t be able to determine who strategically defaulted nor do they have the time to hunt the info down to hand over to the Govt. If you’ve ever toured a large servicing shop, you’d realize it’s comprised of recent McDonald’s graduates and a few managers, overworked and underpaid. They don’t have the manpower to investigate who can pay but didn’t.

    The best way a borrower can get a principal reduction is if their (defaulted) loan gets sold off to a private equity fund that bought it at $.65-.70 of fair market value, negotiating a modification with principal reduction.

    Too bad politicians are wrapped up in the wrong issue. Until it changes, we’ll be bogged down by the extend and pretend charade for another 5-10 years.

  18. John Schilling

    …I am a moving salesprson in Orange County, CA…3 years ago a customer selling her $1,400,000 home in Ladera Ranch, CA to move into a rental down the street, stated that she and most of the people on thier block were “STACKING CASH” as they prepared for the downturn which was heading their way….these people were very financially savvy (CFO’s, Motgage Brokers, etc.) and at that time only the poorer areas were “in trouble”…but thes folks knew it was coming their way, so smaller cars, non-payment of mortgages, cutting expenses, etc. was their new way of life…that $1,400,000.00 house is now worth maybe (on a good day) $750,000…Ladera Ranch is a new upscale community…the LR Towne Center is a virtual “ghost town”

  19. Talton Embry

    If you are in the lending business and make bad loans, you are incompetent. Incompetent lenders should be forced out of business as their lax credit standards make it more difficult for prudent lenders to operate.

  20. Jim Haygood

    Most commercial real estate loans are non-recourse. If a project ends up with no equity, it’s just a rational business decision to walk away. The borrower’s reputation as a savvy developer may suffer, but no hard feelings or moral turpitude are involved.

    And then there are the massive business failures — AIG, GM, Fannie & Freddie — who demanded and received government indemnity for their losses.

    The Bush/Obama LooterFests established that there is NO moral obligation to lenders on the part of individuals. Do exactly what AIG did — stick other people with the costs of your bad bets, if you can. This is the officially-sanctioned moral standard now, and it’s a way of offsetting the taxes we’re paying to bail out corporate welfare cases.

    1. jdmckay

      Do exactly what AIG did — stick other people with the costs of your bad bets, if you can. This is the officially-sanctioned moral standard now,

      That’s actually more truth than sarcasm… unfortunately.

      and it’s a way of offsetting the taxes we’re paying to bail out corporate welfare cases.

      Yes. And it’s also another stress on US finance/economy which takes more out then it puts in. Among other things, given breakdown in honorable contracts, can’t help but wonder if (or when?… already there?) we have some kind of public acknowledgment that the courts/law are simply incapable of resolving this… the law does not fit circumstance.

      I am aware of cases that went before foreclosure court, and the property’s paper had been sold/repackaged/resold so many times that nobody could find the paper.

  21. Blurtman

    Is Tishman Speyer’s credit rating in the toilet now that they walked away from the Stuyvesant Town property?

    Is The Donald viewed as a deadbeat for the numerous defaults on debt of the Trump Organization?

    It seems as if there is one law for the peasants – someone must be compelled to pay the bill – and one law for the lords.

  22. Defaulter (not strategic)

    Thank you, Yves, for this post. And thanks to all the intelligent commentary.

    I have been torn for months as to whether to stay in our underwater, unaffordable home (which we bought in 04) on the off chance that SOMEONE would figure out a path forward: Washington, our lender (whoever that is), our servicer (just got a new one–third in two years), a militia group, etc.

    The closest we have come is this new servicer, who actually proposed dropping our interest (hence payment) substantially for year if we paid up our arrears. Clever strategy! Almost worked too. But we would use up our savings and then risk not being able to keep up with taxes (which have doubled since we bought), and at the end of the year our income would probably still not be back to “normal” and the house would still be $200k (or more) underwater. No thanks.

    We are trying to work out a Deed in Lieu and the servicer (to the surprise of some very well informed local experts) is interested. I get the feeling the ground is shifting daily, and desperation may lead to much more opportunity (sometimes good for borrowers, sometimes bad).

    I am a born fighter, so part of me would like to stay and see it out. But I have kids, so my main interest is in moving on and getting on with our lives before the new school year starts. I know many others who are staying put. We’ll see in a few years who had the right idea.

    1. Salt of the earth

      Nothing’s going to change until courageous people like you start calling the usurers’ bluff. Good luck to you, you’re a gutsy, resilient hero of this depression.

  23. Ronald

    It’s widely believed that we are experiencing a housing recession and once the foreclosures have subsided we can expect new housing construction and existing home sales to return to prior year levels. It should be clear by now that the past years of urban sprawl with its endless road building,shopping centers,strip malls and new and newer housing tracts are not coming back anytime soon no matter how low the mortgage rates,government mortgage workouts or wholesale cramdowns can bring back the build out.

  24. Eric

    Principal mods would be a non-issue with me if it were left as a matter between the two contractual parties. So long as the forgone principal comes out of the equity, creditors, profits and/or employee compensation of the lenders why would I care? But will it? Somehow I think much of it will be funneled back, via the Treasury, Fannie/Freddie, other entities to taxpayers. If that is the case, where is my share? What makes folks with one particular kind of financial problem worthy and others with other problems (kids in college, anyone?) not? In fact, if we are going to hand around money, why do you even need a financial problem to get some of it? Solvent renters deserve it as much as anyone else. It is probably too late to be credible, but an Administration pledge to never compensate lenders for principal reductions would possible accelerate principal reductions. Right now it is almost a fidicuary responsibility to extend and pretend as taking a rational, loss-limiting decision now to reduce principal might cut you off from future compensations for doing so later.

  25. ts

    Obama passed a bill early in his tenure that waives the income tax liability from debt forgiveness on housing, at least through 2012.

  26. anonymous

    I helped one of my relatives restructure his life after declaring bankruptcy. There are real costs. But it’s important to remember that one big advantage for all concerned is that the cards are laid on the table. Credit is trashed, but new credit can be rebuilt with a cosigner willing to stand for the delinquent party. (My role) The individual is now completely independent twelve years later and has rebuilt his life and credit.

    This isn’t going to be an easy time for many people. Those without jobs are almost certain to lose their homes eventually and that can’t be called good news. The question is whether we want to stigmatize individuals who have run up on the rocks. The answer clearly is no.

    I have absolutely no faith in either the Dems or Republicans lifting a finger to help the consumer. Banks pay big to sit at the table and that’s going to continue to be the case for some time.

    With luck there will be a complete housecleaning in November, followed by a thorough investigation of the role big business has played in policy decisions for the last two years or so.

    1. Rex

      “With luck there will be a complete housecleaning in November, followed by a thorough investigation of the role big business has played in policy decisions for the last two years or so.”

      Oh great! — housecleaning! You may be right, and I fully expect that if you are, things will get N times worse.

      We just did a significant housecleaning — “change you can believe in” — because things were going horribly and the majority wanted to see new leadership make real changes. The electorate sent the strongest message possible and the results have been some insipid legislation that probably did as much harm as good.

      There are a few significant scum bags I would like to see eliminated completely, but there’s a good chance the worst of them will prevail because they have the same ignorant voter base. If there is a housecleaning of incumbents the results will probably be a whole new flock of newbies who can easily be bent or slapped down by the remaining top powerful scum bags.

      So — “vote them all out” and expect things to get worse.

      As for more rational and effective policy in the “new” government, we haven’t seen much useful in the last two years, after a mega life lesson smacked us down. I would expect any major rearrangement of the political mix to just favor more of back to thievery as usual.

  27. awakened

    I know an injured and unemployed Vietnam vet. The military refuses to acknowledge his injury was caused in Vietnam; his injury ppwk is either missing or they won’t turn it over to the advocate he is working with, in order to obtain military disability. He came from a poor American Indian family and was put in the front lines where he received a back fracture. He painfully built his house with his own hands. His banking ended up all through BoFA, checking, mortgage and credit card. The unsecured credit card division took the money from his checking that was reserved for his mortgage. After falling behind, he then tried to get new terms on his mortgage after the election. He was told to stop paying his mortgage by the org that Obama’s admin was using for refinance purposes. Apparently they did not realize that he did not have a job. After becoming over 4 months delinquent the org told him they couldn’t help him because he did not have a job. He can no longer use his phone. BoFA calls harass his family by blowing whistles and sirens on the answering machine and over the phone if he doesn’t pick up or speak with them. Nothing has changed and he is still in his home. Not sure why he keeps a land line anymore. He could probably sell the house for what he has in it and break even, but is waiting to be evicted. His credit already trashed. This was over a year ago. Who could hate the guy and not feel bad for his family?
    My son is a pastor and underwater on his first mortgage. He spoke with the same org. The terms they gave him were not in his best interest, only for that of the bank. He will never default. He gets a generous housing allowance, pays no taxes and as a pastor, and is exempted from Social Security. He will be OK.

    If on the other hand I had a jumbo mortgage that I was upside down in I would be consulting my attorney, creating a trust if I had not already…and I may or may not be handing back the keys. Depending on how many times the mortgage was bought, sold and securitized the chances are pretty good that the real lien holder cannot be proved. And these people can afford attorneys. TeeHee, should have listened to Brooksley Born. She sounded the derivatives warning, but no one listened. Thank you Bill Clinton for that, she was a great appointment. Too bad you took the advice of Rubin and Greenspan, on the way out the door, over that of a very smart woman. You may have received your reward in this life, but what about the next? No one really cared about Monica, but this WE WILL NEVER FORGET, OUR CHILDREN WILL NOT FORGET, AND OUR GRANDCHILDREN WILL NOT BE ALLOWED TO FORGET.

  28. Paul Tioxon

    Not only is the conspiracy to soften up the image of financial disaster initiated and entirely fabricated by Wall Street, Hedge Funds and their republican enablers who destroyed all oversight by elimination of long standing Depression Era legislation that offered a measure of protection from the “business cycle”, there is the expected counter offensive. We are now seeing the battle of the Bulge. Against the American people, the deadbeats, the loans for liars crowd, the Acorn shakedown that extorted CRA loans for welfare chiselers, slavery reparation zealots, corrupt Chicago-type ethnic politicos of the swarthy races are being revealed for that they. Namely, get overs, broken down losers who could not hold onto their jobs, while the vast majority of Americans, kept their mouths shut, their heads down and their noses to the grindstone. These are the strategic defaulters. They are also the I want government entitlement unemployment benefits to extend out beyond the ever receding horizon of economic recovery. These posers thought because they could get a mortgage they should become homeowners, now that they signed on the line that is dotted, they need to play fair and square and honor their debts. Even if they do not have a job. Even if they lost their benefits for unemployment. Why? Well according to well placed anecdotes, that could only be heard by the ears of republican stalwarts, much like the frequencies that can only be heard by dogs and fruit bats, there are employers who can’t get people to contemplate life off of their sofa, until the public dole ends. So says Pennsylvania Republican Candidate for Governor, Tom “Space Cadet Corbett”:

    HARRISBURG – Republican gubernatorial candidate Tom Corbett on Friday accused some jobless Pennsylvanians of choosing to collect unemployment checks rather than going back to work, prompting swift criticism from his Democratic opponent and one of the state’s top labor leaders.

    “The jobs are there. But if we keep extending unemployment, people are just going to sit there,” Corbett told Harrisburg radio station WITF at a campaign stop in Elizabethtown. “I’ve literally had construction companies tell me, ‘I can’t get people to come back to work until . . . they say, “I’ll come back to work when unemployment runs out.” ‘ ”

    Strategic defaulters, loafers, drug addicts and parasites all. We need tough legislation to regulate that crowd, not play the blame game on bankers or who gets paid what princely sum. At least those bankers have enough money to pay their mortgage on time and not sit out the economic collapse in a taproom festooned with portraits of JFK and Barack Obama!

    This is a national counter offensive:

    At a June hearing on long-term unemployment, Rep. John Linder (R-Ga.) also trotted out the hard-luck business owner. “Even when businesses are willing to hire, nearly two years of unemployment benefits are too much of an allure for some,” said Linder, citing an anecdotal Detroit News story about landscapers having trouble hiring unemployed folks who would rather stay on the dole. “The evidence is mounting that so-called stimulus policies rammed through Congress are doing more harm than good.”

    To some on Capitol Hill, the jobless aren’t just lazy — they’re on drugs, too. Sen. Orrin Hatch (R-Utah) proposed drug testing the unemployed: “A lot of people are saying, ‘Hey, it’s about time. Why do we keep giving money to people who are going to go use it on drugs instead of their families?’”

  29. Diogenes

    Resetting principal to fair market value, and pursuing the parties culpabale for creating of this debacle would have been the way to go.

    It could have restarted the housing market and the economy.

    Instead the US has adopted Japan’s “post-1990 approach.” Note that home prices in Japan are currently at or below 1985 levels.

  30. Christine Springer

    Great post, but who really cares about credit anymore? No one’s loaning money anyway! In fact, why not just file bankruptcy and get rid of all your debt now? You can use the economic downturn as a great excuse to put yourself into a better financial position.

    Aside from that, this housing mess is a major game changer for the financial industry. I don’t see how FICO is even relevant anymore. Its scoring model doesn’t distinguish between people who can pay and who can’t, which, to me is a major issue with respect to the foreclosure mess. If you lose your job and can’t pay your bills, your credit is trashed anyway — it’s completely out of your control!

    A recent article (http://bit.ly/cKRAfE) says that nearly 25% of Americans now have a credit score below 600. At some point, someone is going to want to lend money again, but what do you do when no one can qualify for your loan products? You have to lower your standards or figure out some other way to make money off these people. 25% of the population is a huge segment of the market to ignore.

    I also don’t think the threat of losing a high credit score is enough to keep people from walking away. The lower income people don’t have a choice; the rich have other assets they can rely on.

    I just don’t see how credit scores are relevant anymore.

  31. F. Beard

    Underwater homeowners are exactly what one would expect from a government backed counterfeiting cartel, which is BTW, what we have.

    A solution is a distribution of new legal tender fiat sufficient to pay down every mortgage to market price levels equally to every US adult combined with leverage restrictions to prevent hyper-inflation to be followed by fundamental reform.

  32. Art Eclectic

    That people are still throwing around the “morality” canard of people not living up to their contracts is hilarious. The contract clearly states that the borrower either makes the payments as agreed or the asset goes back to the lender. That the lender made a foolish loan on an overpriced asset is the lender’s problem – not the borrowers. The borrower is fulfilling their obligation by turning the keys back over to the lender as agreed in the terms of the contract.

    I have no problem with strategic defaulters – they are following the terms of their agreement. I don’t even hate the people taking advantage of the free rent program, the banks set that situation up and I don’t blame people for taking advantage of it. What I do have a problem with is principal reduction, you can call it jealousy if you want but it simply infuriates me that people worked the system and get to keep the house and all the toys. I guess the free rent program doesn’t bother me so much because those folks will eventually be out on the street with trashed credit. The idea that the liar loan crowd gets to keep their ill gotten gains is galling….

    1. F. Beard

      What I do have a problem with is principal reduction, you can call it jealousy if you want but it simply infuriates me that people worked the system and get to keep the house and all the toys.

      That is why I recommend an equal distribution of new legal tender fiat (United States Notes) to every US adult sufficient to pay down every underwater mortgage to market price levels. This would:

      a. enable underwater home owners to pay down their mortgages to market price levels.
      b. compensate savers for years of artificially suppressed interest rates.
      c. Fix the banks in nominal terms.
      d. Fix state tax revenues.

  33. Mickey Marzick in Akron, Ohio

    “It became clear almost immediately that regulators obviously have no idea how to identify strategic defaulters except by asking big banks. … In other words, the agencies and regulators are simply taking the word of Bank of America and Citigroup that people are strategic defaulters rather than the victims of predatory loans or abusive service.”

    If we substitute FEMA, MMS, SEC/FDIC, FDA, EPA, OSHA, DOD/CIA etc and the corresponding industry group/adversary/enemy in the appropriate places would the thrust of Yves’ observation regarding the competence and expertise of the regulators be any different? A pattern has emerged whereby one federal agency after another, when called upon to respond to a disaster, mad-made or not, is found to be either asleep at the wheel, captured in bed with its “adversary”, or simply unable to respond immediately or effectively, if not all three.

    Explaining why this is the case and how it came about are crucial at this juncture if this pattern is to be reversed. Otherwise, it’s just a matter of time before it happens again. The cumulative effects of less regulation and the disinclination not to regulate by the regulators over the course of the past 30 years has certainly played a role but there’s more to it. Simply repudiating said policies will not create the expertise and competence required to effectively regulate the private sector. A deeply rooted sense of the “public interest” instilled in and by the regulators is also required if their expertise and competence is to restore the public’s confidence in government, a process that will take years which makes wonder if it’s even possible. But if REFORM is not an option then that leaves US with COLLAPSE or REVOLUTION, maybe both.

  34. Anonymous Jones

    Nice article. Well thought out and argued.

    I’m always slightly amused by the inability of most people to prioritize problems. It’s not so hard to identify problems! They are truly infinite. The difficulty is in having the savvy to determine which problems are more important and focusing one’s efforts on solving those problems.

    People go crazy hearing about one welfare queen getting an extra twenty bucks a week but shrug when it comes out that someone under-reported $10 million on their tax return.

    And yet economists insist people are “rational.”

  35. bobh

    What to do?

    It seems clear that our government and economic system are anti-democratic, and that the people who run both are gearing up for one last round of government-assisted wealth extraction without much concern for what comes after. The rest of us need to think about where we will be and what we will do in a third world society that has a tiny elite, a smaller middle class, and a lot more poor people with reduced prospects.

    If I were a young lawyer just starting out, I would consider setting up a legal practice with a focus on counseling people on strategic mortgage default and other legal and financial survival tactics for the coming decades. This business plan would be noteworthy and controversial, and the local news wouldn’t be able resist interviewing me, giving me free air time to recruit clients and make many of the points contained in this post and these comments.

    Hoping for a rescue from our current party-based, media-controlled and ignorance-driven democracy is probably futile. Our national politics seem incapable of addressing this occasion with reforms that might prevent or mitigate the coming crisis. We don’t, however, have to wait for a collapse to begin working outside the current system–and outside conventional political ideologies–to identify strategies and build communities and community-based institutions that will be there when they are needed.

    The goal should be to find non-violent ways to use this country’s significant resources—its educated population and educational infrastructure, its large stock of housing and buildings, its agriculture, climate and water resources—to ensure that as many people as possible have food, clothing and a warm place and adequate lighting to help their kids do their homework. From that start, a viable society and economy could develop pretty quickly.

  36. Jessica

    What I keep noticing in all of this is how closely the mainstream media work with the rest of the elite. I wonder what it is that makes people unwilling to see through this. Is it too scary to see the predatory nature of our entire elite? Is it a deep belief in a greed-driven economy? The weakness of countervailing values?

    I think the nations that will come out of this best are those that are able to muster some solidarity internally rather than play the game of “Who do we throw to the wolves”.
    In that sense, I think America is in quite poor shape.

    1. NOTaREALmerican

      Re: I wonder what it is that makes people unwilling to see through this.

      Despite what most Americans say to each other, they actually intuitively trust authority – which is (probably) true for most humans, unless there’s a recent event in their brains that causes them not too. The last recent event that caused some (but very few – ultimately) to distrust authority in the US was Vietnam.

      What we in the US confuse “questioning authority” with is the perpetual argument between the mean-gullible people (the right) and the nice-gullible people (the left) over which type of centralized government should exist. Of course, the mean-gullible people and nice-gullible people will have differences of opinions (the political stories). These “stories” are then repeated (“sung”) by the MSM to keep the dumbasses fighting over nonsense. The owners of MSM – the nobility – then run off with the loot (the ONLY story that matters and is never talked about).

      It’s wonderful to watch, if you can just accept it’s the natural way life must works.

      1. Jessica

        When I was in Russia in 1999 and 2000, they definitely did not trust authority. At all. Looked at their own government as an occupying power – which is the root of Muscovy after all.
        The result seemed worse than with gullibility though.

  37. threadkilla

    ‘back when people used to actually PAY their mortgages and follow through on their promises.’

    so what he’s sayin is people are acting like banks and CC companies…..shocker.

    and in repsonse to the post above:

    mean-gullible people (the right) and the nice-gullible people (the left)

    you my friend are brainwashed, most repukes i know are the kindest people ever and one dumbocrate i know is the biggest tax cheat i’ve ever seen… not sure where you get this from but it’s a pretty sad generalization

    1. NOTaREALmerican

      Re: mean-gullible people (the right) and the nice-gullible people (the left)

      Mean towards outsiders (“those people”) and nice towards outsiders (“the poor-n-downtrodden”). Guilt and shame are such wonderful human motivations.

      Of course, “those people” and “the poor-n-downtrodden” is open to “interpretation”.

      I think the “generalization” is actually pretty “realistic”.

  38. S Brennan

    I agree with Yves:

    “So why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income.”

    I touched on it the other day here and at Big Picture:

    S Brennan Says:
    July 9th, 2010 at 8:44 pm

    Rich/poor, moral/immoral is just more “look over there” BS.

    Jobs folks, without a job, you can not pay.

    Employer supplied medical Insurance in the USA makes the worker in his/her prime earning years much likely to be laid off, or fired.

    Age discrimination laws were made unenforceable by the Supremos re-writing the evidence rules.

    US hi-tech workers must compete against 3rd world global labor prices while paying 1st world rents.

    Was there a housing bubble? Yes. Is there a beggar thy neighbor bubble? Yes.

    With one in five workers not working http://www.shadowstats.com/ and a permanent class of 50 something’s unable to work.

    The moral failure does not lie with those reacting, but rather it’s due to systemic failure of our political/business elite to govern with a modicum of patriotism.

    FYI, I lived in Silicon Valley in the 90’s & early 00’s, I was offered a very high paying job by a company I was working as contract engineer to. The cheapest I could find within commuting distance was a two bedroom for 750,000 next to an autobody shop and a freeway ramp. The US worker is paying high rents and demanding a salary commensurate with their rent. Housing and medical are the two biggest gougers.

  39. Tom Hickey

    it is the explicit policy of the leadership of both parties and the administration to continue to squeeze as much blood from a stone as possible.

    That’s the plan.

    1. Andrew Bissell

      Yeah. Hey, let’s hand these guys a massive increase in monetary and fiscal power!

  40. mentalaftermint

    The Ownership Society has and never will include anyone except those with control of its wellspring, currency creation / manipulation.

    Debt does have rank and then there is its creator and we all should know whom we bow down to as debtors, pick your gods wisely.

    I like the term ‘lease on life’ for I fear that is all we are allowed as individuals, the commons was a sweet dream was it not…

  41. Joe Renter

    Great Post and reply’s.

    This economic meltdown has been in the working for many years. Japan was the crack in the dike. It took 15 years or so for the fallout to affect the rest of the markets. Market forces care not for justice or morality. It’s an energy that is the closest thing to evil on this planet.
    We are going to have to get use to a scaled down life style. One wear the basics are the prority for the masses of the west and east. The corrupt institutions that are in every aspect of life will need to be reformed or ended. A new model or sharing the resources will be implemented. Something on the model of the Brandt Report from the 70′s.

    http://www.stwr.org/special-features/the-brandt-report.html

    There will be a way out this mess. It won’t come without some suffering though. But who said it was suppose to be a cake walk anyway?
    Also, see Share International’s website for other information on what can be expected in the near future.

    Joe Renter

  42. Knute Rife

    I tell my bankruptcy clients that contracts are business documents, not religious documents, and that their lenders are pursuing them as a business decision, not a moral decision. Consequently, they need to view their response, including bankruptcy and default, as a business response, and anyone who accuses them of being immoral is probably being paid to say so.

    I have yet to see a coherent definition of “strategic default,” which leads me to conclude it’s just a jabberwock ginned up by lenders. What I have seen would include ANY rational decision by a borrower, including, “I don’t make enough to pay for food, clothing, and medical care and also cover this mortgage, so I’m bagging the mortgage.”

    What sort of contract purports to impose not just legal but moral obligations on one party and not the other? If we were to penalize this nebulous class of “strategic defaulters” as lenders are calling for, we might as well repeal the Bankruptcy Code and reinstate workhouses and debtors’ prisons.

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