"strategic default"

[sharon j]

60 Minutes did a segment last Sunday that just pissed me off. They claim approximately 1 million americans walked away from their homes "underwater or worth less than their mortgage even though they could afford the payments.

 

A young family from Phoenix tried to get their bank to re-negotiate their loan.

The bank, of course, saw no reason to do so and now they will simply let the loan go into default. They will live there payment free until the foreclosure is completed. They were excited at the prospect of renting a much nicer home for the same amount of money. They didn't feel the least bit guilty about damaging their neighbors home values or not fufilling their loan abligation. They figure in a few years they will just buy something else.

[jjbrr]

So you're saying people should buy homes they can afford, and banks shouldn't lend money to people who can't afford to pay it back? At whom or what are you pissed off, exactly?

[PassedOut]

Didn't see that 60 Minutes yet (it's recorded, but haven't had the time), but it sounds like (1) the bank considers foreclosure preferable to renegotiation and (2) the homeowners consider foreclosure preferable to continuing the payments. So this seems like a pretty natural resolution.

[babalu1997]

this whole affair of mortgages was usurious

 

the investors and mortgagers were usurious

 

the real estate sellers were usurious

 

even some buyers were usurious

 

now thew taxpayers paid for the big guys losses

 

the big guys still will not budge and continue to charge me what they will

 

you would think they would pass their bailout on to the mortgagees , but no

 

they get a double bail out

 

people are simply cutting their losses, they have lost too

 

they purchased overpriced homes, they paid over the years

 

they let go-- are the neighbours going to pitch in and help foot the bill?

 

this is akin to writing off a lemon of a car:

you might have paid good money for it and then suddenly, after 3-4 years or so the repair bill is not worth it, you scrap it for $200, you let it go

 

this is akin to walking off a dead end job:

you have invested time and you hold some stock, the conditions of your appointment become obsolete and the knoobs start getting better compensation for strategic reasons.

the boss wants to continue increasing your workload and will try to reduce your compensation on top of it

quit, let go of the stock, if they do not pay you, let them pay to trsain new people to do your job, let them be forced to hire them at higher salaries.

I did that once, have never regretted it, as one freind of mine put it, it was a job well quit.

 

i think that is a mortage well quit, if yoiu are healthy and can evenetually rebuild.

[sharon j]

It pisses me off that people who can afford their payments are walking away from their homes and their obligation.

[Aberlour10]

It pisses me off that people who can afford their payments are walking away from their homes and their obligation.

I wonder all the time, how easy is it to discharge a duty in the USA, you give the keys back and that settles the matter. Here in Germany f.ex. is such a "thing" unthinkable, you have to pay your debts till the last cent, whatever you gonna do with your house.

[PassedOut]

It pisses me off that people who can afford their payments are walking away from their homes and their obligation.

It does not seem unreasonable to me that, when circumstances change dramatically, folks try to renegotiate deals. And the bank has every right to decide that it is better off taking the foreclosure than renegotiating with folks already in the home who are known to be able to make the payments.

 

Like any contract, a mortgage includes provisions for the termination of the agreement. I don't see any "obligation" beyond that.

 

If the buyer agrees to pay every last cent regardless of what happens to the house, then that's a different situation.

[Winstonm]

It pisses me off that people who can afford their payments are walking away from their homes and their obligation.

It sounds to me like you are more pissed off that you cannot impose your beliefs about duty and responsibility on someone else.

[Phil]

I really don't have a problem with any of this.

 

The bank lent money on the premise that it would be repaid, however, the loan was secured by the real property. The interest rate that was charged was based on the persons credit, income, job / job history and the likelihood of a default based on the property's value at the time of the loan. All of these factors are considered when the bank determines its risk.

 

In a normalized housing market, values increase at a slow rate, which increases the bank's security. If I took out a mortgage five years ago and my home is worth $100,000 more, can I go to my bank and say "please lower my rate, because the conditions have changed when you funded my loan, and your risk is lower". You have the opportunity to refinance, but the bank has no obligation to match any offer another lender may give you.

 

I believe that California is similar to most other states in the country, where a lender has the choice between a (relatively quick) trustee's sale to get the property back, or a more drawn out judicial foreclosure. In the latter case, a bank can recover a judgment for losses that exceed the value of the real property. In nearly all cases, it is more expedient and profitable to simple go through a trustee's sale, take its lumps and resell the property at a loss.

 

I do not know how other cultures deal with this. Its quite possible that the likelihood of default in lower because of a different social norm which reflects a lower rate.

 

In the end, I do not believe there is an ethical, moral or even social obligation to pay a debt on a property that exceeds the value of the asset. The homeowner usually (but not always) put in some sort of down payment that is the first thing that gets wiped out in a declining market. To ask this homeowner to continue to pay a mortgage, even if they can 'afford' to, when it doesn't make economic sense to, is judgmental and wrong.

[Lobowolf]

The obligation is to make the payments or give back the house.

 

Granted, foreclosure is a contingency and not the primary focus of the contract, but lenders are big boys with a knowledge disparity in their favor; in many cases they permitted (or encouraged) people to buy houses they couldn't afford, and they made loans that were insufficiently collateralized at the time they were made (with bogus walkthrough appraisals), or in principle (by having a narrow enough margin that a downturn in the market could reduce the value of the asset enough). To me, it's kind of like a more experienced pair making an incorrect ruling at the table and insisting that a less experienced player has to, say, lead a minor penalty card, or make a bid sufficient, then complaining that it worked out well for the inexperienced pair. Can't muster up too much sympathy.

 

They set the rules...they picked the amount they were willing to lend, and what they wanted in exchange was a lien on a specific house that they had an appraiser look it. Good enough for me; I hope they enjoy their house.

[kenberg]

I like to think that I would have enough regard for my neighbors, and for my reputation, that I would try to find a solution short of foreclosure. Easy to say, I suppose, when I am not faced with the reality. Which of curse is part of the issue. Shortly after learning to swim (I was a late learner, about eleven0 I swam across a lake. Further than I thought, Idamn near drowned. As an adult, I try not to do really stupid things such as buy an overpriced house that I cannot afford.

 

We are told that unforeseen events are the cause. Sometimes they are, i suppose, and such folks have my sympathy. And I don't mind if they get some substantial assistance, either. Usually, I think the explanation is different. A house on our block is vacant. Neighbors who know more than I do about other neighbors tell me the bank foreclosed. Apparently the owners previously had a different, bigger house that they couldn't afford, so they sold that and bought a house in my neighborhood that they couldn't afford. Good move!! I only tried swimming across that lake once! Some friends are helping someone in their family,. Apparently the homeowner, a widow, has a (grown) son that consumes money and now the widow has come on tough times. They sent her some money to bring her payments up to date and enough to cover a few more future payments. She made the payments that were immediately needed. The fate of the remaining money is unknown. Now she is facing foreclosure.

 

 

Well, some people can't handle money, so what else is new? Totally irresponsible lending practices qualifies as new, I guess. And getting the taxpayer to pick up the tab for their idiocy is also new.

 

There but for the grace of God go I. Maybe so, but it still seems that there are some real idiots out there borrowing money and and other idiots, or maybe clever opportunists, lending money.

 

 

The rest of us need to figure out how to stop supporting their lifestyles.

[helene_t]

The OP was about people who can afford the payments but just realized they could profit by walking away from the house.

 

This is a different issue than the more often discussed issue of people buying houses that they can't afford.

 

I dunno what to think about this since, as Robert says, from a non-US perspective it is a weird system. I wonder what the reason for this system is. Is the option of walking away from a house considered a kind of insurance against falling estate prices, something one is entitled to even if not in need? Or is it considered a last resort, an option meant to be used only by people who have no alternative?

 

I suppose it makes life simpler to have the principle that if it's legal then it's ok.

 

OTOH, as I understand it, a foreclosure give you a lousy credit rating, which sorta suggests that creditors don't consider it a legitimate option to walk away from a house.

[hrothgar]

Honestly, I don't see anything wrong with this type of behaviour.

 

"Strategic default" is considered perfectly acceptable in the business world. Management has a fiduciary responsibility to walk away from a bad investment.

 

I understand that home prices are linked. Having multiple foreclosures in a neighborhood is going to drag down the prices of other homes in the area. However, I don't think that it is reasonable to establish modern day indentured servitude to prop up the tail end of the housing bubble.

 

I'm sorry if you bought in at the wrong end of the market.

I'm sorry that your asset prices are deflating.

However, you better get used to this because things are going to be painful for a while.

[y66]

No problem here either.

 

It is heartbreaking to see so many homeowners and so many others taking it on the chin because of problems in the housing market and the impact of these problems on the larger economy. But I don't blame walkaways for any of this.

 

It seems to me that market societies work best when all participants honor their contracts and act with enlightened self interest and that homeowners who make payments that are not consistent with their financial self interest and are not required under the terms of their contract are acting irrationally (anti-market) and so are those who count on their doing this.

[kenberg]

Often I find it more useful to ask what can be done about a problem rather getting bogged down in right versus wrong. For example: As I understand it, after a foreclosure a person cannot get an FHA approved loan for a certain period of time. I believe that this period of time has recently been shortened. If we would like to discourage walking away from a mortgage, shortening this period is not the way to do it.

 

It is not necessary to say "The person walking away from the mortgage is an immoral person and must be punished", it suffices to say "Having a large number number of people walking away from mortgages is a social problem, and linking this action to future ability to get a mortgage will presumably discourage it at least in some cases."

 

Suppose: Someone bought a house for 500K, fair market value is now 300K, the mortgage is 450K. In theory, everyone should work cooperatively to solve this problem. There is no way in hell the bank can recoup the 450K. Forget it. Nor will the owner be living in a 500K house. Forget that too. In fact, as I get it, the bank is not really going to be getting 300K back. Foreclosure takes time (time=money), the house may not be well cared for duriong the legal proceedings, and when the bank sells it, it usually goes for quick rather than maximal sale price.The owners erred by buying for 500K, the lender erred by lending 450K, what is too be done? Some negotiation seems practical, sometimes it happens, usually it doesn't. A pity. I gather that foreclosures are up very substantially from a year ago, with no end in sight.

 

Really we need to focus on how to keep these wild and crazy guys from screwing things up for those of us who are not in this game.

[spotlight7]

Hi:

 

I) Banks were loaning money(to buy houses) to people that could not pay it back.

 

II) Everyone should be a home owner. :)

 

III) Taxpayers were forced to pay the bills when the whole thing failed. :)

 

Regards,

Robert

[jjbrr]

Everyone should be a homeowner? :)

 

What else do you think people should do? Have as many kids as they want?

[spotlight7]

Hi:

 

One lady had 14 kids and she screamed genocide when it was suggested that she stop producing more children.

 

"I love my babies and I want more."

 

Regards,

Robert

[babalu1997]

Hi:

 

One lady had 14 kids and she screamed genocide when it was suggested that she stop producing more children.

 

"I love my babies and I want more."

 

Regards,

Robert

was that th octopus mom who was on welfare and whose home was about to be foreclosed?

 

albert bartlett talked about that

 

[cherdanno]

I am a little surprised about the opinions expressed in this thread.

Let's assume for the sake of the argument that the borrower is someone who is well-informed and bought a house he could afford and still can afford. I assume the mortgage contract doesn't say the "borrower can choose between continuing his payments and going into default". Rather it spells out an obligation how to repay the loan, and what will happen in case the borrower is unable to keep his obligation. I would also claim that this ethical obligation is also priced into the original loan.

A business that starts a subcompany which later defaults has to pay higher interest for the loans it obtains.

[mike777]

I am more concerned that about 145 billion and counting of our tax dollars poured into FMNA and Freddie MAC...

 

congress just voted to keep sending an endless supply of even more money....no end in sight.

 

 

If basically one million-two million people want to walk away from their homes in the USA when they can still pay the mortgage....they must be really unhappy to stay.....the faster they leave the faster the pain ends and the bottom in the housing market comes.....

 

In the 60 minutes piece I think one tiny home sold for around 400K and is valued at around 89K now.....

 

Keep in mind I think in Canada there may only be 5 banks in the whole country and almost zero offer 30 yr fixed mtg....

 

30 yr fixed mtg are pretty rare in rest of world. the reason is they are very risky to offer.

[mike777]

btw moral hazard played a big part in all of this..

 

In many cases the new owners never moved into these homes..homes that were called their primary residence.

 

I grant that most banks never figured that 1-2 million people would simply walk away but then most banks sold these mtg as fast as they could. so who cared....

 

It seemed the sellers did not and the buyers just looked at the AAA ratings..

[kenberg]

The situation:

 

At the high end we have Goldman-Sachs: Our job was to make money for ourselves and our shareholders, we did that, end of story.

 

At the other end of the scale we have people who handle money very badly. For reasons that are incomprehensible to me, they seem to be able to get loans and credit cards.

 

In the OP, we have people who could pay but see it as not in their best interest to do so.

 

To the extent that these are a few small scale individual cases, I am content to say "Looks nuts, but none of my business". But it is not a few individuals, it is pervasive, and it is causing some severe problems. They are, perhaps, following their own best interests. So perhaps we should take a tip from them, follow our own best interests, and screw these people to the wall.

[Phil]

They are, perhaps, following their own best interests.

Not a big Ayn Rand fan are you?

[luke warm]

Everyone should be a homeowner? :blink:

 

What else do you think people should do? Have as many kids as they want?

it's hard to tell with the written word, but i think he was saying that tongue-in-cheek... some people say a lot of the problems were, in part, because of just such an attitude