Dashing through the bills, with a mortgage debt at bay,
Underwater we go, laughing all the way
Bells on defaults ring, making spirits light
What fun it is to walk away from a loan that just ain't right
Jingle mail, jingle mail, jingle all the way
Oh what fun it is to write off a mortgage debt away
Why not walk away if you didn't have to put any or very little skin in the game. Value is going to perceived based on how much effort was needed to obtain it. How much value does a house have when it was harder to rent than buy?
The smartest folks holding this toilet paper will be those that offer folks with good credit a prepayment discount for their heloc, and offer to drop the payment or the total owed to induce key retention.
Smart investment and banking folks, my mailbox awaits your intelligent response.
(This could take a year- they do seem pretty dense.)
Am I wrong or have the crisis moments in the 80 & 90ies been about smallchange only? Is it not that many "better" companies alone now have lost already more than what was considered dramatic for countries then?
And still there is little excitement outside small circles (like on this most interesting blog).
If you subtract the total MEW for the last few years and you subtract say 800 billion in direct losses(rather than 1 trillion to be conservative), is there any estimate of what this number is and what it does for GDP assuming you spread the losses of several quarters?
(I have heard estimates that housing is only 5% of the economy and thus will only subtract maybe 1% from GDP, I never hear them add in the losses due to other factors such as the evaporation of MEW)
Those analyses are fundamentally flawed in that they ignore the leverage that mortgage securities have been used to support - this is the GS analysis of a $2 trillion crimp in lending even though the direct housing hit is $200 billion.
Does not Mr. Lewis realize that the reason that people's attitudes have changed is because the lenders themselves have decided that creditworthiness doesn't matter - that anyone can get a loan regardless of whether they have a track record of paying their debts or not? Why should creditworthiness be more important to the debtor than it is to the lender?
The truth of the matter is that if all buyers have been forced to put down more equity (the conforming 20% sounds about right), housing price inflation would have been much more muted. 3% down, 0% down, 110% mortgages were the rocket fuel for the housing bubble.
So, any so-called solution that does enforce a large downpayment on buyers leaves opens the possibility of a future bubble.
There's nothing special about mortgages. If people will walk away from their mortgages, they will walk away from their credit cards, car loans and student loans.
Those loans are always underwater -- i.e., you owe more on them than the collateral is worth. The credit card bomb is going to be enormous when it goes off. As lax as mortgage lending has been, at least there was SOME collateral. Credit cards were given out to almost anybody, especially the young, with no collateral.
"At least a few cash-strapped borrowers now believe bailing out on a house is one of the easier ways to get their finances back under control."
Presumably this is also a reflection of the comlpete disconnect between the cost of owning vs. renting. If you're having trouble paying the bills, and renting might save yo thousands of dollars a month, then it seems a strong incentive.
--
"Within the next couple of years, probably somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes are worth."
Looks like people are coming closer and closer to my forecast made 2-3 years ago. There has never been a more predictable outcome than what is and will happen to the US housing and how it will destroy the foundations of the system (rotten foundations, of course).
The price must be paid for harboring criminal financial gangs.
Back when Ben Stein was saying the subprime crisis was going to be insignificant in the scheme of things, I took a gander at the Federal Flow of Funds pdf to scope how big the debt overhang actually is.
Average Joe, when people say housing is only 5% of the economy, they are only talking about residential investment (RI). As a reminder, most of RI is new homes, home improvement and broker's commissions.
That 5% doesn't include less equity extraction (and the impact on consumer spending), and spillover effects (like fewer furniture purchases). And that 5% says nothing about losses from bad mortgages, and the resulting tighter lending standards.
We know there will be a significant impact on GDP, but it's hard to predict the size of the impact. It really depends on the psychology of consumers and homeowners. That is why this issue of "social acceptability of default" is critically important. If people feel comfortable going to a party and saying to their friends - "I mailed in my keys. Ha ha ha." - then the lenders are in deep trouble.
The same thing could happen to consumers. They could say - en masse - I'm getting my finances in order and cutting back on spending - and the economy will be in the tank.
Is everyone giving my tinfoil rantings about the new moral hazard a second look?
People with good credit were given a free lottery ticket. Is it any wonder that they throw it away when it becomes worthless? Whatcha gonna do? arrest them for littering?
Casey Serin remains free, that means no one is safe. That sounds like hyperbole but now I've got BACs CEO on my side as to the consequences. Let's be clear here Ken. It is your own damn fault. Millions of people have Googled Casey and know that you aren't going to do anything about lending fraud never mind lending mistakes. You destroyed the ethical considerations of the US financial system. Reap what you sow.
Anybody ready to reconsider my other wild idea induced default consequences of offering bailouts?
It may not even be a question of stigma. If I can make everything BUT the mortgage and could make everything AND rent then I may very well walk away just to make ends meet.
Ah, good old debtor's prison. Take the person who owes you money, toss him in prison where he'll earn a pittance (doing unskilled labor instead of whatever it may be he's trained to do), and confiscate the entirety of that through fees to pay for the prison (to reduce those terrible taxes the bleeding hearts insist upon)... Forgiveness upon death, of course. No sense being unreasonable and carrying unto further generations...
If you can't tell, that's sarcasm. Unfortunately it's also the way the debtor's prisons of the past worked.
I do believe that not all homeowners had the same 'going-in position' when they purchased their home.
Most bought homes for traditional reasons and will likely still regard a default as a calamity and will not resort to jingle mail.
Speculators bought homes to flip them and will treat them as a bad investment and cut their losses. I fail to see this as a change in attitude on their part.
All homeowners are not created or motivated to stick-it-out and live up to their end of the bargain equally.
Like everything else in this crisis, the pain will not be evenly spread. the bubble areas of Las Vegas, SoCal, Florida, etc... had a higher proportion of speculator/investor and will have a higher walk-away proportion as well.
I would venture that most posters are the responsible types.
Since these borrowers have little or no skin in the game, the biggest risk of walking away is their credit score, right?
Todd OBrien | 12.20.07 - 4:38 pm | #
For many with debt up to their eyeballs including the mortgage worrying about their credit rating is as sensible as hookers worrying about their reputation.
Isn't it interesting that these lenders facing jingle mail would be better off if homeowners declared bankruptcy?
They would get better than another hard-to-unload illiquid house. And the homeowners would--drumroll--no longer be underwater. Or able to just walk away.
So, clearly, they're going to oppose cramdowns with every fiber of their being.
I'm still trying to learn how much this loaning was fractional-reserve money-creation vs. being money-backed via MBS and CDOs.
That's a pretty easy one Troy - answer is in a fiat system with fully fungible money (and equivalents) its all backed by full faith and nothing more... read that as its all 'fractional reserve system' money. For good and bad it was designed to be that way.
CR:"If people feel comfortable going to a party and saying to their friends - "I mailed in my keys. Ha ha ha." - then the lenders are in deep trouble."
At my mother-in-laws house over Halloween a new-ish (8-9 months) neighbor comes over with their kid for candy. New neighbor informs MIL that they "Got a bad loan" and are walking away from the house. This is the first (and presumably last) conversation MIL has had with this person.
Social acceptance pails in comparison to financial ruin. Why take the financial hit when its a non-recourse loan?
From the rest of the article: "Such behavior was highlighted in a page-one Journal article this week about the housing quagmire in Corona, Calif. One couple bought a home for $557,000 in 2004 and then refinanced it for increasing amounts as property prices soared, eventually ending up with an $835,000 mortgage -- and extra cash for personal expenses. The couple then bought a cheaper home in Texas and stopped making payments on the Corona home in June. As the countdown to foreclosure continues, it looks increasingly likely lenders will be stuck with that house."...
This sound like people are begining to exercise their PUT option (sell the house back to the lender).
taken from another another article: the THE OPTION-THEORETIC APPROACH TO MORTGAGE DEFAULT When the house value is lower than the mortgage balance (commonly termed negative equity), the borrower gains financially if he stops paying the mortgage, surrenders the house to the lender, and buys a similar house for less than the mortgage balance. This cor¬responds to selling the house to the lender for the mortgage balance, since the borrower essentially gains the dif-ference between the mortgage balance and the value of the house.
The CR team has written about it in the past. Thoughts?
In the last two months there has been an avalanche of mid- and high-range properties ($300k up to $1 million plus) onto the Yahoo Foreclosure lists for Chicago's northwest suburbs. The count just for Palatine and Arlington Heights stands at around 75. (Most of these are just at the "Lis Pendens" stage -- not finished foreclosures.)
During the summer months, it was rare to see anything with a value even as high as $200k in the listings for these communities. Many were under $100k.
The Philadelphia Fed Index came in at -5.7 (consensus 6.2), a noteworthy and sudden drop, suggesting that the ISM manufacturing report will come in below 50 on January 2, signifying that the manufacturing sector is now declining.
Frankly, the Bloomberg economists blew this one.
Also, initial jobless claims came in at 346,000, very close to the 350,000 warning level. Continuing claims sustain the view that the labor market continues to soften.
Haha. Those with no scruples are going to have the game turned on them. Anybody know how much BofA makes on NSF shakedowns? It is a lot. It should be completely socially acceptable to say, "Hey, I screwed the bank on that deal," since the bank implicitly does the same thing on the other side of the trade. No hard feelings. It's not personal. It's just business, ya know?
The other factor that comes into play is the high turnover rate for neighborhoods in the bubble zone. Its just not as tight knit of community and so screwing your neighbor by going into foreclosure isnt as big of deal.
In Palatine and Arlington Heights you can now rent attractive 3- or 4-bedroom, 2-1/2 bath homes for around $2,000/mo. No problem finding a nice place to live after mailing the keys to the bank.
There has been $6 Trillion dollars of mortgages written since 2005 through mid 2007 alone. How many of those mortgages do you think are underwater? Add in the home equity loans and were are now at about $7.5 trillion.
If just 20% of the above loans result in loss, we are at $1.5 trillion. What about the morgages and MEW originated between 2003 and 2005?
In addition, once we factor the slowdown in the economy arising from no more free money, get ready for the business losses and business value dimunation.
THE NUMBERS WILL LIKELY BE STAGGERING!!! And we are talking about losses with counter party obligations-that ain't not no dotcom crash.
By the way, President Bush today signed legislation into law that will
eliminate tax liability for mortgage debt forgivess. Debt forgivness is only frozen until 2009 I believe.
I can guarantee this will make jingle mail more "socially" and financially acceptable.
"That 5% doesn't include less equity extraction (and the impact on consumer spending), and spillover effects (like fewer furniture purchases). And that 5% says nothing about losses from bad mortgages, and the resulting tighter lending standards."
Thanks CR, I just wanted to make sure I had this right...
From one of your previous posts I eyeballed a guess as to the MEW since 2003 and it totals roughly 3 TRILLION dollars in MEW. (16 quarters averaging 187 billion per quarter)
In a world where people are mailing in the keys, this MEW is basically gone over the next 4 years.
This was tax free money directly injected into the economy in the form of a monetization of phantom equity.
I haven't heard anyone combine the pain caused by the obvious direct losses by walkaways, to the damage caused by the oportunity costs of the reduced spending power of the consumer.
It seems that losses due to jingle mail will only really impact the financial world. The actual homeowners will be better off as they rent for less and have more spending money due to less overall debt service.
The losses suffered by the consumer will be all those who try to deal with the resets, and every else who cannot or will not pull out tax free money from an asset that's rapidly losing value.
If MEW was say 500-700 billion over the last few years....that's 500-700 billion that won't be injected into the economy over the next several years...That's excluding any measurable losses due to default.
The people who don't jingle mail will in general have much less money to spend over the next few
Wait, if you relax all the banking rules built up over generations things don't go well. I just find it laughable that a banking executive would be "astonished" about someone's decision to walk away from a home. I think the correct quote would be "I am astonished people would even sign up for these loans in the first place."
They have changed. This isn't a symetrical progression. We cannot go back. Tanta didn't think attitudes are different. Ken didn't either. The ratio of NODs going to REO are 2x 3x historical norms. Yesterday's story was about the couple that bought a Lexus, a SUV and a house in Texas then walked from their California house. I was stupid. I sold a house and paid stupid taxes. I could have Heloc'd the piss out of it and jingle mailed the keys for a $100k difference net. Well guess what, no more. 2007: Do the right thing == get screwed and then get taxed extra to cover the criminal costs of others.
The Philadelphia Fed Index came in at -5.7 (consensus 6.2), a noteworthy and sudden drop, suggesting that the ISM manufacturing report will come in below 50 on January 2, signifying that the manufacturing sector is now declining.
I saw that mp - I work with two companies from that district (one is my largest client)... they are both busy. One is so busy they had meetings this week on how to allocate production resources until they can get an additional machine in place (cost many millions and takes time to get in & running).
Anecdotal is not data but I would like to see more raw data from the region before I ate cyanide. I don't operate a lot out there so don't really know what's up. I do know there is a lot of mil contracting in the Philly region & Mid-Atlantic and wonder if that's the driver (congressional tie up).
Personally I expect the Midwest to be down even more due to automotive slump continuing if not deteriorating. We'll see on that one.
I've been winning orders lately - more than in the last year... but I'm non-real estate and non-automotive... it hasn't hit here near as bad.
"Does not Mr. Lewis realize that the reason that people's attitudes have changed is because the lenders themselves have decided that creditworthiness doesn't matter - that anyone can get a loan regardless of whether they have a track record of paying their debts or not? Why should creditworthiness be more important to the debtor than it is to the lender?"
AND
"Social acceptance pales in comparison to financial ruin. Why take the financial hit when its a non-recourse loan?"
I am astonished at how naive and stupid Keneth Lewis is. He has been promoted as one of the sharper minds in the banking business. So far he has called the bottom of the housing market last summer, and now is shocked that people with ZERO MONEY DOWN are walking away from homes they never owned in the first place? Why wouldn't they?
The fact that it is more 'socially acceptable' for homedebtors to leave the bank holding the bag is merely a reflection of the fact that many were in it for the financial gains they foresaw. They were in it to make a buck.....
Per our discussion yesterday, sounds like it's time for a government mortgage assistance program. Up to 50% of your mortgage depending on location for a low/no interest loan. You keep all the upside, of course.
There goes my personal bridge to nowhere, just when I was thinking I could request one over a trout stream.
The other factor that comes into play is the high turnover rate for neighborhoods in the bubble zone. Its just not as tight knit of community and so screwing your neighbor by going into foreclosure isnt as big of deal.
Cal | Homepage | 12.20.07 - 5:07 pm | #
Exactly. I've lived in my (non-bubble, non-suburban) neighborhood 20 plus years and half my neighbors were here before I was. Compare that with say - the Inland Empire?
That 5% doesn't include less equity extraction (and the impact on consumer spending), and spillover effects (like fewer furniture purchases). And that 5% says nothing about losses from bad mortgages, and the resulting tighter lending standards.
It likely does not include downstream effects like the Georgia Pacific lumber mill just up the road from me. They have ceased all operations, and may shut the mill permanently. Reason given: no demand for lumber (which apparently was going into all those new construction projects). So now there are a few hundred employees drawing unemployment. When that runs out, those people will be in a world of hurt, as that mill was one of the stronger local employers.
Masters of the Obvious like Kenneth Lewis may soon find themselves "surprised" when bailing out on your underwater house not only becomes more socially acceptable, but politically and legally acceptable as well.
In fact a lot of the reforms put forth thus far are in the controlled burn territory. For example, tightening lending effectively pushes house prices down.
I frankly think making debt forgiveness non taxable is asinine. Opens the door to all sorts of manipulation. All they had to do was allow people to recognize capital losses on their residence, and there would have been no issue.
"Does not Mr. Lewis realize that the reason that people's attitudes have changed is because the lenders themselves have decided that creditworthiness doesn't matter - that anyone can get a loan regardless of whether they have a track record of paying their debts or not? Why should creditworthiness be more important to the debtor than it is to the lender?"
I'd love to hear the response to those questions..
anyone know if this tax forgivness only applies to those that have some debt relieved and stay in their homes or does it also apply to those that just walk away and hand in the keys on a house that is worth less than the loan? if it is both then the govt is just encouraging more people to walk away.
Folks...you should know that most folks who walk away from mortgages they can't afford, have walked before from other creditors and haven't the least compunction doing so.
The change in attitude is skewed by the addition of folks to the (temporary) home ownership ranks by lowering credit standards to let in the riff-raff.
This will all be history by Dec 20, 2009 when the sloshing of dollars, euros, yuans and pretty beads has created inflation to where a burger flipper can afford a McMansion to fit the uniform.
There goes my personal bridge to nowhere, just when I was thinking I could request one over a trout stream.
MLM | Homepage | 12.20.07 - 5:17 pm | #
MLM - I expect crazy proposals like the 50 down you suggest as this deepens... lots of them. I just hope they don't screw up my local streams in the process... trout fishing is an expensive hobby for most but not for me. My streams are within a 5 minute drive, on public land and I already own all the equipment I'll ever need (I even tie my own flies).
It could become the most enjoyable 'depression' anyone could imagine...
Negative equity is going to be the difference maker in this particuliar RE boom and bust cycle since it includes not only new home buyers but also established homeowners using refi credit products that pushs them into negative territory. It does not matter whether the mortgage holder lives in a bubble state or not the credit bubble was national so it impacts established neighborhoods in KS or new developments in Vegas all suffer the same fate-negative equity. What makes this a crisis today and going forward is the market continues to deflate, capturing more and more homeowners in the negative equity position.
Mr. Lewis needs to check out the rental markets. You can rent in southern CA for about 40% of the cost of home ownership (after the tax benefit). In other states the figure is higher but still represents a big savings.
Also, with lots of vacant homes on the markets, the supply of quality rental homes seems to be increasing, at least in San Diego where I live.
So why should "homeowners" pay double to stay in their homes when they can rent? And why should the government try to keep them there?
Dryfly,
Trade you some avocados, limes and olives for a couple brookies. We can ship them using all these forever stamps.
Welcome to the new economy. Illegal? I already said I don't care anymore. Get us for "tax evasion" when they let bank robbers get special tax treatment? 2nd amendment fair warning Mr. Revenuer. You can come for me if you have any prison space left after convicting the financial fraudsters.
Can someone explain the comment about recourse/non recourse? Does this mean that if a homeowner "mails in the keys" they can go after him/her, i.e., garnish wages, for the second mortgage but not the first? I know they do that for student loans (my son is paying his off that way, much to his dismay).
OT: OC treasurer tripled stake in SIVs. Experts question appropriateness.
That guy was sounding intelligent on a Bloomberg show this summer about avoiding the CDO sales pitches knowing they were stuffed with bad loans. But I guess he never thought to check the collateral of those high-yielding but safe SIVs. Ouch!
If the question is whether these upside down borrowers will bail out on their houses, my answer is yes. They will. I am observing this phenomena right now out here, and the pace is increasing. Bear in mind that it is not all subprime loans either. The most recent person who discussed their predicament with me was in a 5/1 "liars loan" that doesn't reset until 2010.
Well, I probably won't do jingle mail myself, scruples yanno, but I encourage people to practice jingle mail. It ought to result in such tightness of money that I expect to be offered a buyout of my 15 yr 4.6x loan - half off anyone ?
Although its not like the old days is it ? Its not your local bank manager/thrift that's sweating. If my loan has gone into some MBS, into some CDO, into some CDO**2, tracking the owner of the loan is gonna get difficult. But for 1/2 off I'll do the work damnit..
"I would venture that most posters are the responsible types."
It is economically reasonable to walk away from a house, if you are underwater and have no current hope that your financial situation will improve by staying there. Is it responsible to your family to act economical foolish if the only real consequence of walking away from your house is being in a better financial position? I'd rather walk from a house and learn from the experience.
"Am I wrong or have the crisis moments in the 80 & 90ies been about smallchange only? Is it not that many "better" companies alone now have lost already more than what was considered dramatic for countries then?"
First things first. I have a small position in BAC bonds (goes back 15 years - they were originally Nationsbank bonds). 7.75% noncallable 20 year bonds.
Can anyone point me to evidence that BAC was involved in sleazy lending? Seems like no one was an angel here - but BAC seems like one of the better guys on the block.
If not - then - as a bondholder - I expect them to foreclose when appropriate - and seek deficiency judgments against borrowers who decide to walk away from their contracts.
I really have zero sympathy for a lot of people who walk away from contracts. The simple fact of the matter is a lot are deadbeats - heads I win - tails you lose - kind of people. Reminds me of conversations I've had about what goes on in nursing homes here - where people give their money to their kids so they can qualify for medicaid - and then when mom needs a new set of teeth - the kids refuse to pay for them - gosh - we'd rather spend mom's money on a new Lexus (yes - this actually happens). Simply stated - people like this are ethical eunuchs.
FWIW - Florida is a rich deadbeat's haven due to our generous homestead and other debtor exemptions. I have seen instances where people who have moved here to seek financial asylum have been shunned (excluded from golf and tennis and other social activities). It's time that the majority of us - who are financially responsible - speak up and act up. Perhaps for those of us who live in HOA's and condos - it's time that we act more like coop's in NY - i.e., that we make sure that people will pay their bills before we allow them to be our neighbors.
"Mr. Lewis needs to check out the rental markets. You can rent in southern CA for about 40% of the cost of home ownership (after the tax benefit). In other states the figure is higher but still represents a big savings."
Until the cost of buying comes down to 10-12 times annual cost of renting the same place, it's too high. A $500K home that rents for $2000/month has a sustainable price of at most $300K. And even then, renting's a bit cheaper all things considered.
Bush did this tax forgivness nonsense to gain votes next November. Compassionate irresponsibility!
Wait till Hillary comes out an tries to upstage Bush. She'll probably propose income tax credits to people who just went through forclosure. Why not throw in free health care too.
"Am I wrong or have the crisis moments in the 80 & 90ies been about smallchange only? Is it not that many "better" companies alone now have lost already more than what was considered dramatic for countries then?"
The 80's were most certainly not small change.
The S&L mess was really big, and the 'LDC' debt problem BK'ed the money center banks, although they got a mulligan.
If I could figure out how to post tables from large pdf's, I'd cite some statistics.
Since these borrowers have little or no skin in the game, the biggest risk of walking away is their credit score, right?
That 'skin' is a sunk cost. If they're underwater and it makes more sense to walk from the house, it really shouldn't matter how much money they put down.
In California, there were 39,992 foreclosure filings in November, down 21 percent from the previous month but up 108 percent from a year earlier. RealtyTrac said California cities accounted for five of the nations top 10 metro foreclosure rates last month.
Broker Steve Clark said he hasnt seen any signs that the foreclosure scene is improving. A lot of people still come into his office hoping to list their houses in hopes of selling to avoid foreclosure, he said. Typically, though, they owe at least $100,000 more on the house than they could get for it, he said.
We cant list it, he said he tells them. Nobody will buy your home and help you out of this mess.
We are only two years into this, once we factor MEW, credit card debt, auto debt, student loan debt, and commercial and residential mortgages, we could be looking at $3 to $5 Trillion as defaults lead to further defaults creating a credit death spriral.
First mortgages are traditionally non-recourse loans. Since the second mortgage and HELOCs are the first to be wiped out during foreclosure, they are normally recourse loans.
Recourse loans are loans in which the lender can claim more than the collateral as repayment in the event that payments on the loan are stopped. Thus, a recourse loan places the borrower's personal assets at risk.
In essence, those new-ish couple, and the Oropezas who bought Lexus and dumped their Corona, CA property in favor of Houston, TX will be hounded for years to come! Bwahahahaha!
I think all of the dead beats should hire slip and fall lawyers and sue to receive pain and suffering judgements againt the lenders for the mental hardship and indignation of foreclosure.
The loan forgiveness proviso was essentially a no-brainer. You are simply not going to collect fictional 1099 earnings that a borrower who just lost his house never saw.
It would behoove some folks to remember we did not get into this mess through an excess of government regulation.
In normal times, or normal societies, people accept the necessity of government regulation, and either work or hope to make it sensible and useful rather than counterproductive and stupid.
Here, of course, we've been following a different and decidedly cultish path, which involved dancing gleefully around our golden Alan Greenspan idol and engaging in mystical divine congress with Milton Friedman.
The person who rented the median home in Ventura County is up $67,000 in the past 12 months compared to the person who bought. People can do the math. They won't wait until they are upside down. People with equity will start walking. Well actually, they'll consume any remaining equity and live as long as possible for free. The scuttlebutt is that Countrywide is offering people money to stay in FCd houses just to keep them from deteriorating. The 410 Avocado, Camarillo embarrassment probably left a scar on their corporate psyche.
Regarding defaults of credit cards and student loans, do most of the for profit schools like Apollo, Strayer, DeVry, etc. have students that pay tuition by way of student loans? Will this particular sector be in trouble or do most of the students pay by some other means? Just curious.
In essence, those new-ish couple, and the Oropezas who bought Lexus and dumped their Corona, CA property in favor of Houston, TX will be hounded for years to come! Bwahahahaha!
Thanks for the effort Zigurrat.
I am curious and found a link that defines s&l costs: US Savings & Loan Crisis
"For some years the final bill for the S&L crisis remained uncertain. However, we know now that, setting aside ongoing legal action, the thrift crisis cost an extraordinary $153 billion - easily the most expensive financial sector crisis the world has ever seen. Of this, the US taxpayer paid out $124 billion while the thrift industry itself paid $29 billion." (1986-1995)
So a bit for the taxpayer and hardly a lot for the industry compared to todays players...
I would frankly be very surprised if too many people walk away from a mortgage they can comfortably afford and have a 30 yr fixed.
Say you have a 500,000 mortgage and houses like yours are selling for 400,000 or even 350,000, I think the vast majority would stay put. It's difficult to convince the wife to pick up and move to a rental that may change your school districts, or limit your ability to paint the kid's room bright pink. I think people overpay for assets all the time. Add in the unknowns as to what happens to your tax bill, how long it takes to recover your credit, and how long will the market stay low (especially with every optimist saying price rises are "just around the corner".)
I think for people to jingle mail will require a debt service they can't afford, or all the other typical reasons such as divorce, job loss, moving, etc.
Another significant and much overlooked side effect is inflation. Whereas home price appreciation translated into immediate liquidity through MEWs which caused inflation with a lag, the decline has a much slower opposing effect. There are only two ways out of this now. Lower rates back to irresponsible levels and bailout those in need, or take the pain free market style. Stagflation or severe recession, I'm not sure which one would be worse on the average American.
Someone should give Ken Lewis (who bought MBNA--iirc, after the bankruptcy bill passed)--a reminder of basic finance.
If I have $100 and three bills, one for $90, one for $50, and one for $30, all else equal, I don't pay the $90 bill.
I pay the $50 and the $30, and have $20 in my pocket. This is especially true if the interest rate and penalties on the $50 and $30 bills are higher.
When bankruptcy meant that mortgages can be maintained, but credit card debt was subject to cramdown, people paid the $90 bill, even though the interest rate was lower, because they might, just might, be able to keep their house at the end.
If nothing is going to be reduced, you pay the higher interest-rate bills, which means, post the Biden Bankruptcy Bill, treat the mortgage as pari passu, not Senior Debt to the Subordinate credit cards.
Ken Lewis may not realise that, but his borrowers appear to have.
My anectodal story on the SoCal rental market- I had my eye on two very nice places priced around $1m, both vacant (one held by an investor/realtor, the other by a family that already bought another). Both were on the market 9+ months with no real price movement. Both were pulled off the market and put up for rent at $3200 per month.
Even with 20% down, ownership would be about $6,000 a month. So why should I buy?????
DeVry and some of the schools are fine. However, the one's that advertise on daytime television (check out the ads on Tyra) for things like exciting jobs in fashion design, computer graphics, etc. is really horrible and borderline criminal, imo.
There is no question that, if there is any government bill to pay, it should be left on the table of those who profited from creating this mess.
The likelihood of that happening, of course, is best illustrated by what the rapid demise of the futile attempt to make hedges pay as high a tax rate as I do.
Look at the loan contract. The contract specifies that borrowers can stop paying and the lenders can take the house. The lender's right of foreclosure is a negotiated term-- it is what the lenders wanted.
It has always been legally acceptable to walk away from a house. The lenders knew this. In fact, it boggles the mind that BAC was relying on a social norm to protect their interests.
The people who walk away aren't deadbeats. The lenders who made the loans-- knowing full well the terms of those loans-- are idiots.
CR or anyone: I would like to ask a naive question. Of all the people in my social circle, there is not one I can think of who bought a home other than as a place to live and a solid long-term (10 or 20 years) investment. I was never at any party where the topic of discussion was how we were all getting rich from our homes. Am I weird or is the behaviour you are discussing limited to a sub-set and highly concentrated in some areas?
Also, I thought in my mortgage it said if I defaulted and the home sold for less than I owed, they could come after me for the difference?
Joe Everyman has learned a thing or two from watching the Masters of the Universe (and the similarly inspiring Tom Vu). The simple message, leverage other people's money to get rich quick and make sure you're not left holding the bag if things go South. Catch is, everybody has been playing the same game, and now we don't actually know who's holding the bag. Jingle mail works at the grass roots, and it will be used like never before. Why not, that's how the rich guys play the game.
So, its not so much that 'we're all subprime now', its 'we're all Gordon Geko now'.
Say you have a 500,000 mortgage and houses like yours are selling for 400,000 or even 350,000, I think the vast majority would stay put. It's difficult to convince the wife to pick up and move to a rental that may change your school districts, or limit your ability to paint the kid's room bright pink.
I'll call BS on this one. In my area, median people get out of bed each morning, leave their family, commute to work, put up with their bosses, drive home, and collapse for a median wage of around 45 k$ per year before taxes.
If median people can save a year's wages by walking away, the weekend or two that it takes to pack and move are well worth it.
"23 September 98: Goldman Sachs, AIG and Warren Buffett offer to buy out LTCM's partners for $250 million, to inject $4 billion into the ailing fund and run it as part of Goldman's proprietary trading operation. The offer is not accepted. That afternoon, the Federal Reserve Bank of New York, acting to prevent a potential systemic meltdown, organises a rescue package under which a consortium of leading investment and commercial banks, including LTCM's major creditors, inject $3.5-billion into the fund and take over its management, in exchange for 90% of LTCM's equity.
Fourth quarter 1998: The damage from LTCM's near-demise was widespread. Many banks take a substantial write-off as a result of losses on their investments. UBS takes a third-quarter charge of $700 million, Dresdner Bank AG a $145 million charge, and Credit Suisse $55 million. Additionally, UBS chairman Mathis Cabiallavetta and three top executives resign in the wake of the bank's losses (The Wall Street Journal Europe, 5 October 1998). Merrill Lynch's global head of risk and credit management likewise leaves the firm."
By the way. Robert Cote, I watched somebody make almost exactly that offer to their lender (Norwest Bank, part of the current Wells Fargo) back in the early 1980s... and they accepted the offer.
Zigurrat - Things have been pretty bad before. Only difference between now and then is the quantity and speed of information - and how fast people can act on it. In 1987 - not so long ago - when I wanted to redeem shares in mutual funds - I had to do it by mail. I remember the stagflation of the 70's - and the gas lines - and how little I was paid compared to rising prices (gas going from 20 cents a gallon to over a buck). During the Vietnam War - we gathered around a small TV set in the student lounge to see war footage that was 4 days old. Heck - when my parents were young adults - most people didn't even know FDR was crippled.
If you look at a really long term chart of the SP500 - you will see many times when things were looking pretty bad.
But you know - in the long run - at least from my perspective - since the Great Depression - things haven't been so bad for most people in the United States. We don't get shot for our political or religious beliefs. What passes for financial problems today (not being able to afford your McMansion - or luxury car - or your premium channels on cable) - would have been considered laughable 30 years ago. My husband shakes his head a lot. He grew up in a very typical middle middle class family in the 50's in Bergen County NJ. House was 1200 sf - 3 bedrooms - 1 bath. His father never earned more than $25,000/year. He worked summers at the Ford Motor Company on the line to put himself through college and law school. There are a lot of people like him. And when he sees people walking away from their obligations - whether they're financial or family obligations - he wants to give them a good kick in the a**.
Speaking of which - Kicking Myself - Apparently - from what some people here have said - if a lender forecloses on a mortgage in some states - it can't go after the homeowner for the deficiency. I don't know whether these statements are correct - but that is definitely not the case in Florida (where I live).
I've been predicting $2 trillion of hard losses for some time now, simply as a rough estimate based on outstanding home mortgages of about $10 trillon and consumer credit of $2 trillon plus. Add to that junk bonds, commercial mortgages, municipal bonds, miscellaneous lending, and it is pretty clear that $2 trillion of hard losses is really not stretching things. Also, $2 trillion is not a lot in comparison with GDP of roughly $14 trillon, especially if the losses are spread over 3 years (roughly $700 million of losses per year, or about 5% of GDP).
In addition to $2 trillion of hard losses, I'm also anticipating about $10 trillion of paper losses. $4 trillion would come from a 20% drop in nominal house prices, the rest would come from a drop in stock and other financial asset prices. Again, this isn't all that huge. These losses might be less in nominal terms if the government manages to cause enough inflation over the next few years.
The world has changed. In the past you were loyal to your employer, and in response they made some effort to keep you when times got tight. You paid the mortgage to your local bank, and if you got sick or lost your job, they worked with you to keep you in the house until you could get caught back up. Now it is all arms length. Companies will fire you at the slightest down turn, the mortgage holder is some group of distant bond holders that would toss you out at one missed payment. In this world, why this focus on the morals of paying your mortgage? There is no moral barrier to kicking out of a house those that lost a job or got sick, so why should there be a moral issue when we don't pay the bank? I do feel loyalty to my employer, and have always paid every bill, but it is a poor fit for today's world. I am opposed to a moral structure that only benefits the wealthy, eithter we all have obligations or none of us do and it is just "business".
In HS, I went to the foreign language teacher to rant about a bunch of us got C's and D's on a nasty test while the daughters of the vice-principal and school district super collaborated their way to an A when he left us "on our honor".
"Well, at least you have the satisfaction of knowing that YOU did the right thing".
If I understand this, there are some states where mortgage holders can go after you for more than the house ("recourse") and some where they can't. Any guesses on the fraction of underwater mortgages that are no-recourse?
I predict that there will be a race in no-recourse states between jingle mailers and legislatures changing the rules.
A walk-awayer in his own words (sorry for the Caps)
WHY IS IT THAT THESE MORTGAGE COMAPNIES ARE NOT WILLING TO HELP SOLVE THIS HUGE PROBLEM BY REFINANCING THESE PEOPLES LOANS...THAT WOULD EASE UP ON THIS MORTGAGE CRISIS THAT IS WEIGHING HEAVY UPON THE UNITED STATES, THEY SEEM TO BE MORE INTERESTED IN TAKING A PEOPERTY BACK THAT DOES NOT HAVE THE SAME VALUE IT ONCE HAD..PEOPLE ARE FINDING IT EASIER TO WALK AWAY THAN DEAL WITH THESE COMPANIES.......I DECIDED TO WALK, BECAUSE THERE IS NO HELP...BUSHES POLICY HELPS NO ONE AND ONCE AGAIN THIS FOOL FOR A PRESIDENT IS MORE INTERESTED IN HIS IRAQ WAR, THAN WHAT IS GOING ON AT HOME. I AM WALKING AWAY....AND WITH 10 MONTHS WORTH OF SAVINGS, THIS WAS ADVICE THAT I GOT FROM MY MORTFAFE CO...THEY SAID YOU HAVE TYO BE 3-4 MONTHS BEHIND BEFORE THEY HELP YOU....I PUT THAT MONEY AWAY...AND SINCE TEN MONTHS AGO WHEN I ASKED THEM FOR HELP, THEY SAID NO...SO TAKE THE HOUSE..JUST RENTED ONE FOR 1000 A MONTH WHICH SAVES ME 4500 DOLLARS...YES BELIVE IT OR NOT MY PAYMENTS JUMPED TO 6000 A MONTH.
Posted 12/20/2007 8:31:56 AM
4Runner - What part of the country do you live in? California? Sounds like a low median wage for California - but I am not very familiar with California (except that I know that real estate prices are very high - we have a similar median wage but much lower real estate costs here in NE Florida).
BTW - what makes you think that working hard and getting tired is somehow a huge hardship. It's what people have done forever when they can. The first full-time job I had - 1971 - I worked maybe 60 hours a week - no OT - for $8,000/year. And my parents and grandparents - all of whom lived through the Depression - when there were no jobs - thought I had it pretty good.
People who are upside down on their mortgage already should consider not paying their mortgage. Not ethical, but appropiate to save your future. They can save lots of money by sending those mortgage payments to themselves (under someone else's name, of course). By the time they get foreclosed many would have more money than BEFORE they bought their house. Credit issues? Are you kidding? #1 they are having FINANCIAL issues now which is a lot worse. And within a few years, everybody will be forgiven for losing their home in the toughest real estate bubble, credit crunch in history. If they continue making payments they are just going further and further upside down as properties continue to depreciate over the next few years. It's great for the lenders and wall street (even for the economy). But where will those already in trouble be in 3 to 5 years? Financially, emotionally, etc. Compare the choice of continuing making ends meet to saving your money now and working on rebuilding your credit for the future. It's a no brainer and people will figure it out.
I never said that working hard was a hardship. I said that it was a heck of a lot easier to pack up and move than to work for a whole year. Even if you have to repaint the kid's room once or twice.
Like I said, it amazes me that "socially acceptable" even entered into BAC's calculus. My grandmother wouldn't dream of wearing white after labor day. BAC was incredibly lazy for loaning out real money relying on such nonsense.
If you panic and want to unload your bonds.... Just kidding.
But there is still a big disconnect between the end of the world zeitgeist on the comment sections here and the fact that we aren't even in a recession yet (unless or until figures are revised) and C hasn't cut its dividend.
As far as war stories from the not so distant past, like the 80's, people don't want to hear how bad it used to be. I don't even like to think of some of it. But if you didn't experience it, it is hard to explain in a way that doesn't make you sound like your own parents. Yikes.
I am opposed to a moral structure that only benefits the wealthy, either we all have obligations or none of us do and it is just "business".
I was going to make this point but you said it better than I could. The social contract has been broken and actions have consequences. Look for more "screw the upper class" to come.
4runner: "I'll call BS on this one..... and collapse for a median wage of around 45 k$ per year before taxes.
If median people can save a year's wages by walking away, the weekend or two that it takes to pack and move are well worth it."
My turn to call BS 4runner. If your making 45k and your 500,000 mortgage goes to 350,000, you're gonna jingle mail because you CANT AFFORD the home even if you wanted to. Someone who can afford a 500,000 home makes $150,000 or so.
Secondly, people pay more than they have to all the time for stuff. Do you know how many 45k earners bought lexus's instead of camry's (essentially the same car) or bought name brand jeans for 140 bucks when you can get them at garage sales for 5 bucks. You overestimate the average person's financial intelligence.
Geographic distribution of bank and thrift failures by state, 1980-2000
Top 10 States (numbers in brackets represent market shares)
State Assets
$ billions Cost $ billions Number of Failures
1. Texas 196.9
(21.2%) 75.8 (40.2%) 850 (28.6%)
2. California 143.6
(15.5%) 21.3 (11.3%) 214 (7.2%)
From page 59.
On Page 67, cost in terms of percent of GDP, US S&L crisis, 2.1%.
There is even a section on US subprime from the 2000, when we had our first bank insolvencies from subprime.
The world has changed. The gap between the social classes is getting bigger & bigger, and the shark borrower can do something about it:
* Obscenely overpaid CEOs
* Grossly Incompetent CEOs getting parachutes when they are fired
* Billionaires with lower tax rates than their maids
* Government does not balance its books
* Government lies about its reasons for war
* Banks & Dealers lie about what is on their books
* Salaries don't keep up with inflation
* Inflation statistics don't jibe with reality
* Banks who you send your mortgage check to get bailed out by the Federal Reserve on a regular basis
What the current administration & business leaders don't realize is that the power of the contract depends on the evenhandedness of the two parties that agree to that contract. When your leaders act as ours do, you are begging Joe Sixpack to walk. I know I will if I have to.
Zigurrat
I am too young and in Europe anyway to really know something about the 80ies firsthand. Nevertheless the sums in play appear to have increased significantly and even in real terms.
I don't think the notional derivatives will be the big thing (like the 5 trillions between you and me, both of us can brush of the loss:) but the "small" amounts of tens of billions on each balancesheet. So I conclude that a significant potential for remarkable problems exist.
ex-pat in UK - Yes - as Paul Harvey would say - that is the other side of the story. My FIL sold fiber drums. He worked for one company - Continental Can - almost his entire working life. He had a good pension and generous health benefits. And sales in the 50's and 60's involved a lot of wining and dining customers - and playing golf with them.
Flash forward to my brother-in-law - also in sales - chemicals to auto companies in Michigan. Obviously a total disaster these days. In the beginning - the company tried to "adjust" things. Fire 1 out of 3 sales people - paying the remaining 2 a bit more. Then even that got unsustainable. There's a 401k instead of a guaranteed pension - certainly no post-retirement health plan to speak of. In fact - the company may well go bankrupt. At the age of almost 60 - my BIL is doing handy-man jobs to make ends meet (and if my SIL didn't have a steady job at UM - I think they'd be in big trouble).
On the third hand - my niece - their daughter - insists on trying to be an elementary school teacher in this depressed area. She has her whole life ahead of her - and this seems like a poor career choice to me. It is one thing to get stuck when you're in your 50's. Quite another not to explore one's options when you're in your 20's. Since you're in the UK - I will say that it reminds me of what I saw as a traveler in the UK in the 70's - when people up north were unwilling to explore more profitable opportunities down south just because they objected to "being uprooted".
BTW - I have had little contact with mortgage foreclosures here - but the lenders seem more forgiving than you indicate - more inclined to work with the borrowers.
As for the morality of some rich deadbeats - the Trumps of the world - it sucks. And it's galling to watch how they act. But we have to ask ourselves whether those of us in the majority would rather live in a decent civil neighborly law-abiding society - or one which mirrors that of these rich dead-beats. In the long run - I don't think our lives benefit from emulating them.
If your making 45k and your 500,000 mortgage goes to 350,000, you're gonna jingle mail because you CANT AFFORD the home even if you wanted to. Someone who can afford a 500,000 home makes $150,000 or so.
O.K.-- so the person who makes 150k$ only spends one year at work to make up the savings obtained by walking away, while the person who makes 45k$ spends three years at work to make up the same savings.
In either case, it is well worth the time and effort to pack up the boxes and move. Even if you have to repaint the kid's room.
As for people paying more than they have to for stuff, how often do they overpay on the order of a year's wage?
Another thing about the Texas meltdown. The depositors got repaid.
However the equity holders in the banks were wiped out, everyone that bought property using loans was wiped out.
Some people lived excessively, but there wasn't a lot of wealth that was both extracted and somehow buried in a tin can in the back yard. Everyone lost everything except people with brokered deposits who were made whole by the FDIC/FSLIC.
Most people who were reckless got punished. This story about stripping out all the equity and moving to TX -- true but it will be like welfare queens driving cadillacs.
They even nailed a few of the top executives. Milkin went to jail as well as Charles Keating. Not enough, but something.
"What the current administration & business leaders don't realize is that the power of the contract depends on the evenhandedness of the two parties that agree to that contract. When your leaders act as ours do, you are begging Joe Sixpack to walk. I know I will if I have to."
That's the fallacy of inside-the-beltway thinking. They -- politicians and the people they report to, which isn't us -- think that if they control legislation and the courts, they control everything. But once you breach the legitimacy of a way of doing business or an institution, it doesn't matter whether you rule it. People will walk away from it any way they can. They won't cooperate with it. They won't report to it. And it will cease to function.
Societies usually end up with the ethics they can economically afford.
So yeah, we're going to see a lot of "jingle mail", especially with all the new legislation making it harder to get out of credit card debt.
Banks get bitten? No--it's going to be the holders of the CDOs and SIVs that get whalloped.
Result of all of this: great suspicion of ratings agencies, great suspicion of any real estate debt. Probably legislation written to change real estate debt into recourse debt. Won't pick up this mess.
And yes, people will feel much less guilty about mailing the keys in. If they feel gypped at being sold something by a real estate broker who promised that real estate "could go nowhere but up", they're going to feel even less willing to hang around. "I trusted you and the bank and you got sold me stuff I really shouldn't have bought, stuck me in an ARM that's sucking up more than the money I make, took all your fat fees, and now that I'm in trouble you're unwilling to help me out, especially when I see the government bailing out all these banks? Go piss up a rope."
Well, if you start selling houses like they were used cars (and with the same ethics), at some point it's going to turn around and bite you in the bum.
My point is that even for a year's wage, they likely won't walk.
Firstly, they would have to be SURE it was a years wage. When you factor in the cost of the lost tax deduction, the cost of a realtor when you decide to buy again, the cost of the move, the cost of explaining to the family, the cost to rebuild your credit, the cost of future credit...etc, you would convince yourself you wouldn't save all that much afterall.
Besides, even if you save some money, you would still have "your" house which is worth something more than living in a rental. I'd pay more not to have a landlord.
Besides, walking away from your loan and renting doesn't mean that suddenly $150,000 appears in your bank account. Your savings would only come after years of renting for less. So it means that your monthly's may go down, but if you can afford the current mortgage then even a significant drop in monthly rent would not likely induce jingle mail.
Like I said, if they can afford it, the vast majority will continue to pay. (all bets are off in prices drop 70-80% of course)
BTW, has anyone seen the latest gem of wisdom from everyone's favorite real estate economist? Yun is now blaming everything on the media's reporting of the problem.
I've heard stories of people lying on their loan apps-- saying they have a renter for their current house, buying a house in the same development, and stopping payments on the first house. I can't verify if they are true, but such scenarios are a "sure thing."
It might not be money in the bank, but a chunk of change taken off your mortgage is pretty good. People drag their a__es to work for an entire year for the type of money that we are talking about. It is hard to imagine that any of the things that you are talking about come close.
CR's fascination with jingle mail becoming "socially acceptable"...fascinates me.
Social behavior can be described in many different ways: exemplary -> reprehensible...and our (not only mine, right?) job is to fit it in there somewhere.
Twas "socially respectable" to own a house, to be paying a mortgage and have left that slum of renting some abode...such is the pervasive clout of national advertising by Fannie and more. If you were not buying the Dream, you were suspect...not a loser exactly, just not in the trustworthy nest.
And the neighborhood can tolerate a few suspects, but there is a threshold at which their behavior becomes a viable alternative...makes you examine your own painful experience of paying mortgages on a depreciating property that could or could not continue.
And very likely the sheer numbers of suspects has more weight than any calculations you may wish to perform on future RE values and your capacity to pay mortgages.
It just takes me a little longer to see Cr's view sometimes.
the #1 reason why property values went up as they did, was not the rates, income levels, jobs, economy, etc. It was because ANYBODY could have bought a home. Bad credit (subprime), low income (stated), no job (no doc), no money (no asset and 100% financing). It artificially sent the balance of buyers to sellers out of whack. This is no longer the case. People must now qualify but prices are now way too high. So the supply to "qualified" ratio is now again out of whack but in the opposite direction. Only 3 things can save this market. 1: bring back all those crazy programs (that's never going to happen) 2: people's income must go enough to qualify for today's infaled prices (it will take many many years. 3: prices of homes must come down so people can qualify to buy them. Yep, that's it. That's the ticket. For those in trouble, you must weather this decline, wait for stabalization, and then wait on future appreciation all the way to today's values again. That's just for break even. Or you could walk away, save money, rebuild credit, and buy again when market has stabalized at a much lower price. Duh!!!
"Social behavior can be described in many different ways: exemplary -> reprehensible...and our (not only mine, right?) job is to fit it in there somewhere."
During Prohibition, it was socially acceptable to patronize a bootlegger or visit a speakeasy, even though illegal. Law enforcement often looked the other way.
To this day in certain parts of the country it's socially acceptable to smoke a joint in your own home, even put a grow light in the closet and grow your own. It's still illegal, but local government has "decriminalized" it.
When the law (or a type of contract, in this case) is at odds with the needs or desires of society, it will be flaunted. And the more out of whack that law or convention is, the more socially acceptable it will be to flaunt it.
In the face of a collapsing real estate market that they were assured they were making "a sure bet" on, I don't see why much of America -- not all of it, but certainly in pockets of the bubble states -- will nod and wink as their friends walk away from their homes.
What are the underlying numbers for your premise? I ran a similar analysis assuming a 1/3 loss per defaulted mortagage and came up with the same $2 trillion figure. I used $300,000 as the average house value, as opposed to the medium house value, which was closer to $200,000.
If you figure that foreclosures tend to occur in clusters and those properties tend to drop more than the overall market (plus transactions costs) your 50% figure could be more accurate. However, what is the basis for determining the average value of defaulting mortages is $200,000?
hopeinsd asked: "My anectodal story on the SoCal rental market- I had my eye on two very nice places priced around $1m, both vacant (one held by an investor/realtor, the other by a family that already bought another). Both were on the market 9+ months with no real price movement. Both were pulled off the market and put up for rent at $3200 per month.
Even with 20% down, ownership would be about $6,000 a month. So why should I buy?????"
Have you run the numbers to find out?
You can get 7.5% (or better) fixed-rate jumbo mortgages in CA. According to Case-Shiller, over the past two decades the CAGR for housing is 7.28% in LA, 7.01% in San Diego, and 7.44% in San Francisco.
What does this mean? You can borrow money at a slightly higher rate than the long-run expected return on the asset you're buying, and you get the utility of living in the house.
There are other costs/benefits, of course (taxes, insurance, maintenance, and the mortgage interest deduction) but not buying isn't nearly a slam-dunk decision as presented in your example.
Myself, I'd never be able to afford a $6,000 monthly mortgage, but affordability and investment return are separate issues. I couldn't afford to build an airplane factory, either, but that doesn't make it a bad investment for someone who could.
To buy a house for most average people meant you were getting ahead and building equity. Your house was your savings. This was the only form of real savings most thought they could access post dot-com bust. That was the implicit societal contract they thought that they were entering into. It did not matter what they signed. If the asset does not perform society broke the contract not them. This is the failure of Keysnian economics.
Average Joe said: "...Firstly, they would have to be SURE it was a years wage. When you factor in the cost of the lost tax deduction, the cost of a realtor when you decide to buy again, the cost of the move, the cost of explaining to the family, the cost to rebuild your credit, the cost of future credit...etc, you would convince yourself you wouldn't save all that much afterall...."
Holy smokes! Now there are two of us who live in the real world of, LOL!
Yawn. Predicted this about 2+ years ago over on HBB.
Wait'll the next wave hits, when...
1) Seniors seeing their retirement funds (i.e., home equity) evaporating; and,
2) Better-heeled "investors" throw in the towel.
4Runner - Embarrasing confession. I like to travel. When the US dollar is weak - I travel in the US. I think I've been in about 46 states (and every county in Florida!) - but I have never ever been in SD. So you are definitely the expert in terms of talking about what is happening where you live compared to me. All I know is SD is very big - and has fewer people than Jacksonville FL (where I live). I like to hear about what's going on in other parts of the US though. Sometimes I think I hear much too much about really big states like California - and much too much about really small states like Iowa and New Hampshire (with regard to the primaries). But one rarely hears about SD.
in 2005-2006, it was crazy the people who were buying homes! Dental hygentists would brag about their million dollar home, their lexus, while the idiots who went to grad school defaulted on their student loans and lived in apartments...
Robyn: no need to apologize. SD is beautiful- pretty dang close to perfect. You should make it a point to visit.
O-Joe: Only time will tell. For everyone's sake, I hope that you are correct and that Mr. Lewis is exaggerating. Suffice it to say that I'm not going to bet my money on these hopes.
Mr. Lewis says. "I'm astonished that people would walk away from their homes."
Mr. Lewis, I am astonished that banks would walk away from their obligations. Will B of A be repurchasing at face value all fraudulently originated mortgages which it sold? I thought not. On behalf of ShyCo investments let me introduce my associate Mr. "Fingers" McCrusher.
bigtrouble- Who is your dentist? My hygeinist certainly doesn't live in a million dollar home, and she drives a 5-year old Toyota.
What world do you folks live in? I don't know a single person who EVER flipped a home or walked out on a mortgage. Everyone I know (and I have ties in NY and Canada and my wife's family is in the midwest) buys a home to live in, pays the mortgage on time and stays in it for 10 or 20 years or more. It seems like you all live on some planet that doesn't resemble my world.
Avg Joe,
You could add to your list the possibility of a 1099R coming back in the mail from the bank. Unfortunately, I disagree with you though. I think many people will call it quits if they see others doing the same. I also think many will act irrationally to relieve short term pain. Same logic as credit cards.
Where do people get the idea they can walk away from mortgages? I don't know, perhaps they watched Edward Lampert take enough value from former K-Mart stockholders to purchase Sears. Maybe they watched United's management transfer the value of the airline from the 'owners' to themselves. Maybe they had an employer go bankrupt and not pay out one cent of vacation pay. These are all considered the tactics of smart business people. Why is walking away from negative equity any different?
Can't anybody help me? I really want to meet a genuine house-flipping mortgage-skipping, equity-stripping dental hygienist in a million dollar house and I can't find them. All the million dollar homes in my neighbourhood have doctors and lawyers and GE vice-presidents. I feel my life is incomplete. Please help me locate one, please....
I agree with you that for many people who own a home AND can afford the payments, the value of the home would not be enough to make them walk. They like their home, their location, their routine, and their neighbors. If they believe house values will come up long term, staying makes practical and emotional sense to them.
I have owned my house for many years and have significant equity. I could have moved up during the last few years and leveraged my money more, but I like my house and where I live. I plan to live here many years more so what it is worth now is basically irrelevant to me - it is my "home."
You can get 7.5% (or better) fixed-rate jumbo mortgages in CA. According to Case-Shiller, over the past two decades the CAGR for housing is 7.28% in LA, 7.01% in San Diego, and 7.44% in San Francisco.
What does this mean? You can borrow money at a slightly higher rate than the long-run expected return on the asset you're buying, and you get the utility of living in the house.
Nice choice of data points. The last two decades include two massive price-run-ups (the latest being by far the largest), and one, relatively modest, correction cycle.
Try it out to 3 decades, or 4 decades, or 115 years, like Shiller did, and you get a somewhat smaller number, closer to inflation. Not to mention that gains from the last 6-7 years are not going to last, and are not likely to be repeated anytime soon.
Alright, let me try this one. There are 30,000 Katrina evacuees still living in trailers. There was a riot in New Orleans today over plans to demolish public housing - NY Times
really want to meet a genuine house-flipping mortgage-skipping, equity-stripping dental hygienist in a million dollar house and I can't find them. All the million dollar homes in my neighbourhood have doctors and lawyers and GE vice-presidents. I feel my life is incomplete. Please help me locate one, please.
This is pretty close. Look for the subhead "Winning the real-estate game" and click on the link that says, "who's buying them?" on the following page from the Palm Beach Post, circa 2005:
Besides, walking away from your loan and renting doesn't mean that suddenly $150,000 appears in your bank account. Your savings would only come after years of renting for less. So it means that your monthly's may go down, but if you can afford the current mortgage then even a significant drop in monthly rent would not likely induce jingle mail.
Like I said, if they can afford it, the vast majority will continue to pay. (all bets are off in prices drop 70-80% of course)
The vast majority, or at least a large majority, aren't going to jingle mail their lenders.
The problem is going to be with what I call the "WMMP?" people. As in: "What's My Monthly Payment?"
Before the bubble these guys were eliminated through more stringent credit checks and having to have skin in the game, 20% down. They're used to walking out on other types of debt. There's no reason to think they won't do it for the mortgage. When they do the basic math that walking away from the mortgage and renting gives them more per month they'll do it.
Talking about fiscal time frames of more than a couple months is babble to them.
Holden- Thanks for the link. I don't doubt there are people like that out there. Jerry Springer manages to get guests for 5 shows a week, after all. The conceptual issue I have as I go about my life is that my friends, family and colleagues all buy homes to live in. Do they hope when the time comes to sell that it has appreciated? Of course. But mainly they live in them. And almost all my neighbours have lived here 20 years or more. Some are 2nd generation of their family in that house. So, while I don't doubt the existence of the phenomenon, I question how typical the jingle mail folks are.
Once folks that could not may the payments were restricted from owning. This may be because of bad credit or low income.
Then the great financial revolution happened. And these folks got houses they cannot afford. Now the only question is jingle mail or foreclosure or short sale. Now jingle mail, for better or worst, is the easiest and cheapest option in the short run- no lawyers, not living in a home without making payments or crapping up a house before foreclosure or being hassled by credit folks or other bureaucratic folk with more education. For better or worst it is a solution and not the worst one.
If you cannot afford to feed the family and pay the mortgage payment and you got kids, it is a reasonable solution. Once maybe someone would kill themselves with multiple jobs to make it. Not now for any number of reasons.
Alright, let me try this one. There are 30,000 Katrina evacuees still living in trailers. There was a riot in New Orleans today over plans to demolish public housing - NY Times? hp
Why not offer foreclosed homes to these evacuees?
A: Because the government does not care what happens to poor Americans living in trailers. The mortgage industry/REIC does not care what happens to poor Americans living in trailers.
They do care about keeping house prices, profits, sales and --especially-- their own fees and commissions high. Your lousy "plan" to help out poor people by "just giving away" empty houses does not accomplish any of these goals.
Don't you know for whom "your" government is actually working?
Here is my advice for the upside down borrower. First, go rent an apartment whose monthly cost is 1/2 of what your teaser mortgage payment was. This will give you breathing room later. Keep current on the car and credit cards. Now, stop paying the mortgage. Keep current on the apartment. Now your cash flow will increase mightily.
You can keep living in your house, but in case your credit gets wiped out you'll have the apartment which is costing you half of what you were originally paying on the house. Now, hire a lawyer to write letters to the state asserting that you are a victim of mortgage fraud. Lawyer letters should go to everybody. Your goal is to gum up the system so they can't foreclose easily. File a report with the local sherriff's office asserting mortgage fraud. You may be able to stay in your home for years if you keep firing the legal paperwork out and tangling up the system. SAVE MONEY DURING THIS TIME. PAY OFF YOUR CARS AND CREDIT CARDS WITH THE EXTRA CASH FLOW. If you do get evicted, retreat to the apartment.
They used the system to screw you over, and now it's your turn!
Until the cost of buying comes down to 10-12 times annual cost of renting the same place, it's too high. A $500K home that rents for $2000/month has a sustainable price of at most $300K. And even then, renting's a bit cheaper all things considered.
Bob Dobbs
I rent my house for $2200 a month is SoCal. The one a few doors down sold in September 2006 for 850k with 0 down. They walked two months ago.
So what are the consequences of such a sharp decline in housing values. Well for starters, there are going to be lots of people who have negative equity in their houses. In other words they will owe more on their mortgages than their houses are worth. As Chart Two shows, about 4% of homeowners with mortgages were upside down at the end of 2006. That number has certainly increased since then. Now try sliding the line over to account for a 25% price decline. It is easy to see how one third of all mortgages in the country could have collateral that is worth less than the amount of the mortgage within a few years. Now ask yourself, if you were living in a house worth $300,000 and you had a $400,000 mortgage on it, would you continue to send in your check every month? Would your brother in law? Your next door neighbor? Now some people will decide to continue to pay. They like their neighborhood, their kids want to stay in the same school, and they feel a moral obligation to live up to the contract they signed. However, as more and more people mail in their keys, it will become much more socially acceptable to do so. Negative equity is a necessary, but not sufficient condition for jingle mail or foreclosures. After all if your house is worth more than you owe, refinancing or selling the house is always an option. There may be some cases where it is better for people with very small positive levels of equity to mail in the keys or be foreclosed upon. The figures in the chart do not include the selling costs for a home (i.e. realtor commissions) which typically run about 7% of the value of the house all included. Its probably not worth the hit to your credit rating if the difference is just a few thousand dollars, however, if it is $100,000, well thats a good reason to walk.
However, lets say that half of the people with negative equity mail in the keys or are foreclosed upon. That would translate to about a cumulative foreclosure rate of 16%. With just over 51 million houses with mortgages in the country, that means about eight million households losing their homes. The table below shows the Census estimates of the breakdown of owner occupied houses and the size and number of them that are mortgaged for 2006. I would note that the value of houses with mortgages tend to be much higher than those with out a mortgage. Non-mortgaged houses by and large are owned by little old ladies who have lived in the house forever. Among non mortgaged houses, 37% are very modest houses worth less than $100,000, while among houses with mortgages only 18% are worth less than $100,000. Conversely, at the high end, 15% of mortgaged houses are worth more than $500,000, while only about 10% of non-mortgaged houses are worth more than a half a million.
Still more:
A 25% decline in housing prices nationwide translates to about $5 Trillion in paper wealth that is lost. Now to a large extent, they will be just that, paper losses. The house is still there and still provides shelter. Those who dont have mortgages will be basically unaffected particularly if they have no plans to move. Even if they do, the cost of the house they are buying has probably also come down. That does not mean that there will be no effect. Generally when people feel wealthier, due to gains in the stock market or the housing market, the tend to spend more freely. Economists differ on the magnitude of the wealth effect and the extent it is different for real estate as opposed to equity gains, but 4% is a fairly conservative estimate (in other words if your wealth goes up by $100 due to the good performance of your portfolio, you tend to spend about $4 a year more). Well, 4% of $5 Trillion is $200 billion. To put that number in perspective, it is about 2% of disposable personal income, and 54% of the revenues of Wal-Mart.
could read the comments section from these stories all day long; informative and entertaining! In fact, sometimes I do read them all day long.
Denzel | 12.20.07 - 5:39 pm | #
That was the implicit societal contract they thought that they were entering into. It did not matter what they signed. If the asset does not perform society broke the contract not them. This is the failure of Keysnian economics.
Tg | 12.20.07 - 7:22 pm | #
That is NOT Keynesian economice YOU NITWIT!
That is "I want mine, I'm gonna get mine and do it fast and easy and not have to work 'cause I'm entitled and anyone who doesn't jump in and be greedy, avaricious and play the game and be a winner and be the best is a loser " Republican economics.
Gotta wonder how many of these upside down McMansion owners voted in 2004?
could read the comments section from these stories all day long; informative and entertaining! In fact, sometimes I do read them all day long.
Denzel | 12.20.07 - 5:39 pm | #
I read them all night long.
Aheadofthecurve-Come to San Diego and I'll see if my 'hard money' lending friend can introduce you. The egregious flipping has to be done in a fast moving market, as San Diego county was. Apparently, your $1M houses are not moving, but did they make the move in $200,000 jumps every six months? Of course, these are still relatively rare stories. More normal is the 'average American' who bought a house because he/she could without thinking beyond the first months and then got that payment shock. Should they have foreseen it, of course,...did they? Nope. I don't see much evidence of a social order in San Diego that would be able to enforce a social code, other than the You-Tube generation. How deeply offended do you think they would be to know some one who walked away? How many unwed mothers are socially stigmatized? There was a time when it was actually un-thinkable, and now, no matter how you feel about it, it is in the range of normal.
I wonder if the social 'shock' is because of failing to meet contract obligations or just not wanting to rub elbows with a 'failure', or be taken advantage of by the same.
I am opposed to a moral structure that only benefits the wealthy, eithter we all have obligations or none of us do and it is just "business".
ex-pat in UK | 12.20.07 - 6:06 pm | #
Social norms sounds suspiciously like hope, which is known to be a crappy hedge.
KnotRP | 12.20.07 - 6:10 pm |
Masters of the Obvious like Kenneth Lewis may soon find themselves "surprised" when bailing out on your underwater house not only becomes more socially acceptable, but politically and legally acceptable as well.
HARM | Homepage | 12.20.07 - 5:18 pm | #
[DCR: Uh, it already is? It's not illegal to walk away...]
"I'm astonished that there is gambling going on here..."
....(attendant walks in) "Your winnings, sir"....
...Oh.....thank you, my good man.
(Everything you need to know about the world is contained in Blazing Saddles)
KnotRP | 12.20.07 - 4:41 pm | #
[DCR: better played in Casablanca:]
Rick: How can you close me up? On what grounds? Captain Renault: I'm shocked, shocked to find that gambling is going on in here! [a croupier hands Renault a pile of money] Croupier: Your winnings, sir. Captain Renault: [sotto voce] Oh, thank you very much. [aloud] Captain Renault: Everybody out at once!
I predict that there will be a race in no-recourse states between jingle mailers and legislatures changing the rules.
It can't be done retroactively, and the easy money is gone going forward, so this is moot really.
And what's with this "shame" business. A no-recourse loan is a contract saying that the borrower has the choice of repaying the loan or handing back the house. A borrower who walks is fulfilling his obligations just as much as one who repays the loan and keeps the house. Just like someone who pawns something and lets the shop keep it.
In 1992, everyone in the DC area who had bought a home in the past 2 years was 10-20% underwater. People didn't send back the keys. People live in houses, communities, kids go to schools--you don't just move.
That is, IF you are still working and can just make the payments [especially if you can refinance lower at some juncture.] That remains to be seen.
sdtfs- In 1999, I got a very attractive offer from a biotech company in San Diego. I turned it down, partly for family reasons, but also because cheaply built houses on postage stamp sized lots 10 miles inland were twice the price of my 1930s all-brick on 3/4 acres with 100 foot high trees in a really lovely well-established neighbourhood. And that was before the bubble. So, even when I am out shovelling a foot of snow after a Noreaster, I don't regret the decision for a second.
Of course I have read about flippers; I just have never met one, just as I have read about all kinds of curious phenomena that I have never experienced. I am going to hazard a guess that at least half the people who post here are from Cal. I think they are overestimating the number of real estate-obsessed people out there. I don't know any, though they obviously exist, so I may be underestimating the number. The truth probably lies somewhere in between.
"In 1992, everyone in the DC area who had bought a home in the past 2 years was 10-20% underwater. People didn't send back the keys. People live in houses, communities, kids go to schools--you don't just move."
1992 was different ....
When we sold our home in 1992, we had to buy another house or pay capital gains.... Not so now.... We sold our home in July of this year and don't have to buy another one, because the amount of our gain was within the limits of new capital gains tax laws.
Here in Oak Park I ran into a couple that must have been trying to flip their newly-bought condo. 2-bedroom, 4th floor, ok wooden floors, as generic as hell. They had already cut the price to $385K and we were all laughing at them.
(To give an idea of costs around here, the most expensive 2-bedroom in the building kitty-corner from them, built at the same time, was $320K. The only thing different was that parking, although allocated, wasn't immediately attached and had a small monthly charge. Heck of a difference to pay $65K for. )
Lot's of people pissed off about the thought of Jingle mail. They realize that will affect their own homes value. That is why they don't like it. Such is life. It is a contract. The homeowner promises to pay. If they don't pay, lender can take away home. OK, lender here it is. That's the way I'll play my contract. You (lender) weren't thinking of me when you explained all the benefits of the option arm without getting in to the details of negative amortization, prepayments so you can make more $ on yield spread premium, etc. Ok lender use the contract we signed to kick me out. In the meantime, I'll pocket the mortgage payments I was going to send to you, along with rents I collect and walk out on the other side better then ever. I'll work on my credit again and have it back within a few years. Oh, and I'll help property values come down too, so I can purchase it back cheaper in the future. Sounds like a plan. Look at my finger, Lenders!
Well, the criminals that made the loans, the criminals the jacked the prices deserve it. Indentured servitude is illegal. And don't tell me the buyers should have known better, the "industry" created this. I think they should go to jail. Realtors, lenders and Securitizers.
energyecon, that was f'in brilliant! Comment of the Day!
as for 'social attitudes towards default', that's pretty rich coming from the CEO of BofA. I am just old enough to remember a time when banks had a much different 'social attitude' than today. They used to pay interest on regular savings accounts. They used to be friendly. Now they rape you for bouncing a check (it happens to even fiscally competent people sometimes), they jigger the NSF process in order to maximize the amount of blood they can squeeze from the turnip, they institute credit card rape policies like 'universal default'...
I would say 'Fuck 'em', except for the fact that people are losing their homes and wrecking their credit history and suffering major disruption to their lives when they have to give up their home.
WTF did these bankers expect when they handed out mortgages to all comers? When you don't treat granting a mortgage with the seriousness that it deserves, you shouldn't expect the lendees to do so either.
CR said: "If people feel comfortable going to a party and saying to their friends - "I mailed in my keys. Ha ha ha." - then the lenders are in deep trouble."
How about "I went to see a bankruptcy lawyer and he recommended mailing in the keys." I've been doing a fair bit of that lately.
Instant Karma going to get you BOA!! Ha ha ha. But seriously folks, the banks are going to get their congressman, who they own, to pass a law making it impossible to do. So you better do it fast, before you can never escape debt owed to these blackguards.
My observation on todays posts: People who feel a strong connection to their community, who live around neighbors that they have long known and with whom they have relationships, feel that people need to be responsible, to live up to their contractual obligations. People who live in large coastal cities, with transient populations, who have seen their neighbors cash out and flee, feel little obligation to their communities and feel that the financial choice should trump the ethical choice. I have posted before that I feel that defaults in the US will be very high and that Japan should not be considered a good model because of their socialized sense of interdependence. The coming avalanche of foreclosures will demonstrate that community identity in our country has fractured and is in the first painful stages of the virtual revolution. Who said revolution would be painless? Viva la Virtual Revolution!
why is it OK for corporations to make cold, calculated business decisions regardless of any 'moral obligation' to their communities or country or workforce, but when individuals do that they should be condemned for making an 'unethical' choice?
If our community fabric is fracturing, it's only because people are following the cues from big business. Enron, WorldCom, and now this mess.
I guarantee you that if we went back to the old model of community-based banks granting mortgages to real homeowners rather than cultivating a culture of treating your home like a piggy bank or investment vehicle, we'd see a lot less of this 'fracturing' of which you speak.
like a virgin,
An interesting note on Japan: mortgage defaults were very low, but commercial loans were disastrous. So there are current, real world examples of how individual identity functions separately from corporate identity. I absolutely disagree with you that communities are fracturing because of the cues from big business. What's happening in business is a symptom of a far larger phenomenon. We are at the forefront of the transition from a physical conception of identity to a virtual one, and I think that this is a process with enough power to bulldoze any number of individuals who would prefer that things return to historical relationships. Our neurology will change, our culture will change, our values will change. I'm not making a value judgement. I'm making a prediction. The people with the strongest sense of physical identity will suffer the most. Protean folks will take it more in stride, but the difference between proteanism and schizoprrenia is a pretty fine line, which is why I've been practicing my tightrope walking.
George C wrote:
"Now, hire a lawyer to write letters to the state asserting that you are a victim of mortgage fraud. Lawyer letters should go to everybody. Your goal is to gum up the system so they can't foreclose easily. File a report with the local sherriff's office asserting mortgage fraud."
George C,
Interesting advice and a way to get ahead of what could be a nasty credit report.
What would you ask an attorney to write when asserting mortgage fraud on a negative amortized option payment loan? My loan was sold to Countrywide by the original loan holder so they aren't really the fraudulent ones, correct?
Just trying to figure out what an attorney or the local sheriff's office would have to say to be taken seriously.
BofA was astonished, ASTONISHED, that I wanted to pay off my credit cards and close all my accounts. Why wouldn't I want to keep that money in my savings account and accept 18% APR on a VERY flexible line of credit. They get what they deserve. A friend of mine just left there for Wachovia (probably not much better, but ...) because BofA sucked.
"Mr. Lewis says. "I'm astonished that people would walk away from their homes."
Well, I'm astonished at the stunts pulled on their customers and the general public by major investment banks. Turnabout...
Dashing through the bills, with a mortgage debt at bay,
Underwater we go, laughing all the way
Bells on defaults ring, making spirits light
What fun it is to walk away from a loan that just ain't right
Jingle mail, jingle mail, jingle all the way
Oh what fun it is to write off a mortgage debt away
Why not walk away if you didn't have to put any or very little skin in the game. Value is going to perceived based on how much effort was needed to obtain it. How much value does a house have when it was harder to rent than buy?
The smartest folks holding this toilet paper will be those that offer folks with good credit a prepayment discount for their heloc, and offer to drop the payment or the total owed to induce key retention.
Smart investment and banking folks, my mailbox awaits your intelligent response.
(This could take a year- they do seem pretty dense.)
I have time and keys.
Someday this war's gonna end...
Since these borrowers have little or no skin in the game, the biggest risk of walking away is their credit score, right?
Am I wrong or have the crisis moments in the 80 & 90ies been about smallchange only? Is it not that many "better" companies alone now have lost already more than what was considered dramatic for countries then?
And still there is little excitement outside small circles (like on this most interesting blog).
CR,
If you've crunched the numbers, then remind me:
If you subtract the total MEW for the last few years and you subtract say 800 billion in direct losses(rather than 1 trillion to be conservative), is there any estimate of what this number is and what it does for GDP assuming you spread the losses of several quarters?
(I have heard estimates that housing is only 5% of the economy and thus will only subtract maybe 1% from GDP, I never hear them add in the losses due to other factors such as the evaporation of MEW)
Here is a solution, make credit worth more to the individual. Thing like debtors prisions or a lifetime credit hit that means something.
"I'm astonished that there is gambling going on here..."
....(attendant walks in) "Your winnings, sir"....
...Oh.....thank you, my good man.
(Everything you need to know about the world is contained in Blazing Saddles)
(Everything you need to know about the world is contained in Blazing Saddles)
All we need now is a shitload of dimes.
AJ,
Those analyses are fundamentally flawed in that they ignore the leverage that mortgage securities have been used to support - this is the GS analysis of a $2 trillion crimp in lending even though the direct housing hit is $200 billion.
Does not Mr. Lewis realize that the reason that people's attitudes have changed is because the lenders themselves have decided that creditworthiness doesn't matter - that anyone can get a loan regardless of whether they have a track record of paying their debts or not? Why should creditworthiness be more important to the debtor than it is to the lender?
The truth of the matter is that if all buyers have been forced to put down more equity (the conforming 20% sounds about right), housing price inflation would have been much more muted. 3% down, 0% down, 110% mortgages were the rocket fuel for the housing bubble.
So, any so-called solution that does enforce a large downpayment on buyers leaves opens the possibility of a future bubble.
trail at 4:44pm,
Well put. Well put.
"Thing like debtors prisions or a lifetime credit hit that means something."
Trouble is the bleeding heart govt. would then tax the responsible citizens mercilessly to pay for care of the debtors, in or out of prison.
Now they think of this? Nothing like staring at the abyss to focus one's thinking. Something about reaping and sowing come to mind?
There's nothing special about mortgages. If people will walk away from their mortgages, they will walk away from their credit cards, car loans and student loans.
Those loans are always underwater -- i.e., you owe more on them than the collateral is worth. The credit card bomb is going to be enormous when it goes off. As lax as mortgage lending has been, at least there was SOME collateral. Credit cards were given out to almost anybody, especially the young, with no collateral.
"At least a few cash-strapped borrowers now believe bailing out on a house is one of the easier ways to get their finances back under control."
Presumably this is also a reflection of the comlpete disconnect between the cost of owning vs. renting. If you're having trouble paying the bills, and renting might save yo thousands of dollars a month, then it seems a strong incentive.
OT: OC treasurer tripled stake in SIVs. Experts question appropriateness.
O.C. treasurer Street tripled stake in controversial investments | county, sivs, street - Business - The Orange County Register
--
"Within the next couple of years, probably somewhere between 10 million and 20 million U.S. homeowners will owe more on their homes, than their homes are worth."
Looks like people are coming closer and closer to my forecast made 2-3 years ago. There has never been a more predictable outcome than what is and will happen to the US housing and how it will destroy the foundations of the system (rotten foundations, of course).
The price must be paid for harboring criminal financial gangs.
Jas
Lewis = maggot.
Back when Ben Stein was saying the subprime crisis was going to be insignificant in the scheme of things, I took a gander at the Federal Flow of Funds pdf to scope how big the debt overhang actually is.
Mortgage debt growth per year:
2001: $500B
2002: $700B
2003: $850B
2004: $950B
2005: $1T
2006: $1T
2007: $750B
If we are conservative and say 10% of these net new loans from 2003-2007 will prove to be a total loss, that's over $400B in lost money.
I consider that a lower bound, really. We could easily see a trillion dollars of borrowed wealth vanish.
Average Joe, when people say housing is only 5% of the economy, they are only talking about residential investment (RI). As a reminder, most of RI is new homes, home improvement and broker's commissions.
That 5% doesn't include less equity extraction (and the impact on consumer spending), and spillover effects (like fewer furniture purchases). And that 5% says nothing about losses from bad mortgages, and the resulting tighter lending standards.
We know there will be a significant impact on GDP, but it's hard to predict the size of the impact. It really depends on the psychology of consumers and homeowners. That is why this issue of "social acceptability of default" is critically important. If people feel comfortable going to a party and saying to their friends - "I mailed in my keys. Ha ha ha." - then the lenders are in deep trouble.
The same thing could happen to consumers. They could say - en masse - I'm getting my finances in order and cutting back on spending - and the economy will be in the tank.
Best Wishes.
Is everyone giving my tinfoil rantings about the new moral hazard a second look?
People with good credit were given a free lottery ticket. Is it any wonder that they throw it away when it becomes worthless? Whatcha gonna do? arrest them for littering?
Casey Serin remains free, that means no one is safe. That sounds like hyperbole but now I've got BACs CEO on my side as to the consequences. Let's be clear here Ken. It is your own damn fault. Millions of people have Googled Casey and know that you aren't going to do anything about lending fraud never mind lending mistakes. You destroyed the ethical considerations of the US financial system. Reap what you sow.
Anybody ready to reconsider my other wild idea induced default consequences of offering bailouts?
oh, and Congress passed this week the IRS change to not tax loan forgiveness, up to $1M.
The new breed of bankers are dumber than a bag of hammers.
Lending money to people with no down payment and no documentation. All on top of historically inflated assets. Get real.
This is what happens when banks can lend money that doesn't exist and then charge interest (and profit personally) on that non existent money.
It may not even be a question of stigma. If I can make everything BUT the mortgage and could make everything AND rent then I may very well walk away just to make ends meet.
RC has it right- time to offer discounts to keep most of the paper intact.
Whaddya want? Fifty cents or a quarter?
If you offer me 50 cents and I get to keep the house and the loan forgiveness tax free, well, I might just keep paying that mortgage.
Deal or no deal?
Banker, the clock is ticking!!!!
I like my new version- can we keep Howie to do the national version with mortgages?
Someday this war's gonna end...
Ah, good old debtor's prison. Take the person who owes you money, toss him in prison where he'll earn a pittance (doing unskilled labor instead of whatever it may be he's trained to do), and confiscate the entirety of that through fees to pay for the prison (to reduce those terrible taxes the bleeding hearts insist upon)... Forgiveness upon death, of course. No sense being unreasonable and carrying unto further generations...
If you can't tell, that's sarcasm. Unfortunately it's also the way the debtor's prisons of the past worked.
An idiot cant lose a trillion dollars, it takes a bunch of really smart people to do it.
I don't believe that attitudes will change.
I do believe that not all homeowners had the same 'going-in position' when they purchased their home.
Most bought homes for traditional reasons and will likely still regard a default as a calamity and will not resort to jingle mail.
Speculators bought homes to flip them and will treat them as a bad investment and cut their losses. I fail to see this as a change in attitude on their part.
All homeowners are not created or motivated to stick-it-out and live up to their end of the bargain equally.
Like everything else in this crisis, the pain will not be evenly spread. the bubble areas of Las Vegas, SoCal, Florida, etc... had a higher proportion of speculator/investor and will have a higher walk-away proportion as well.
I would venture that most posters are the responsible types.
This is what happens when banks can lend money that doesn't exist
I'm still trying to learn how much this loaning was fractional-reserve money-creation vs. being money-backed via MBS and CDOs.
Since these borrowers have little or no skin in the game, the biggest risk of walking away is their credit score, right?
Todd OBrien | 12.20.07 - 4:38 pm | #
For many with debt up to their eyeballs including the mortgage worrying about their credit rating is as sensible as hookers worrying about their reputation.
A lot of them are well beyond such concerns...
"The price must be paid for harboring criminal financial gangs."
Modern day pirates with treasure caves in the Caribbean and Swiss banks?
Do we all get a share of the booty, if found?
Isn't it interesting that these lenders facing jingle mail would be better off if homeowners declared bankruptcy?
They would get better than another hard-to-unload illiquid house. And the homeowners would--drumroll--no longer be underwater. Or able to just walk away.
So, clearly, they're going to oppose cramdowns with every fiber of their being.
I'm still trying to learn how much this loaning was fractional-reserve money-creation vs. being money-backed via MBS and CDOs.
That's a pretty easy one Troy - answer is in a fiat system with fully fungible money (and equivalents) its all backed by full faith and nothing more... read that as its all 'fractional reserve system' money. For good and bad it was designed to be that way.
Jas,
This is definitely going to result in a major crisis.
Don't forget, during a crisis, all sorts of government foolishness is foisted upon the American public in the "heat of the moment".
CR:"If people feel comfortable going to a party and saying to their friends - "I mailed in my keys. Ha ha ha." - then the lenders are in deep trouble."
At my mother-in-laws house over Halloween a new-ish (8-9 months) neighbor comes over with their kid for candy. New neighbor informs MIL that they "Got a bad loan" and are walking away from the house. This is the first (and presumably last) conversation MIL has had with this person.
Social acceptance pails in comparison to financial ruin. Why take the financial hit when its a non-recourse loan?
From the rest of the article: "Such behavior was highlighted in a page-one Journal article this week about the housing quagmire in Corona, Calif. One couple bought a home for $557,000 in 2004 and then refinanced it for increasing amounts as property prices soared, eventually ending up with an $835,000 mortgage -- and extra cash for personal expenses. The couple then bought a cheaper home in Texas and stopped making payments on the Corona home in June. As the countdown to foreclosure continues, it looks increasingly likely lenders will be stuck with that house."...
This sound like people are begining to exercise their PUT option (sell the house back to the lender).
taken from another another article: the THE OPTION-THEORETIC APPROACH TO MORTGAGE DEFAULT When the house value is lower than the mortgage balance (commonly termed negative equity), the borrower gains financially if he stops paying the mortgage, surrenders the house to the lender, and buys a similar house for less than the mortgage balance. This cor¬responds to selling the house to the lender for the mortgage balance, since the borrower essentially gains the dif-ference between the mortgage balance and the value of the house.
The CR team has written about it in the past. Thoughts?
In the last two months there has been an avalanche of mid- and high-range properties ($300k up to $1 million plus) onto the Yahoo Foreclosure lists for Chicago's northwest suburbs. The count just for Palatine and Arlington Heights stands at around 75. (Most of these are just at the "Lis Pendens" stage -- not finished foreclosures.)
During the summer months, it was rare to see anything with a value even as high as $200k in the listings for these communities. Many were under $100k.
Off topic, but nonetheless worthy of mention.
The Philadelphia Fed Index came in at -5.7 (consensus 6.2), a noteworthy and sudden drop, suggesting that the ISM manufacturing report will come in below 50 on January 2, signifying that the manufacturing sector is now declining.
Frankly, the Bloomberg economists blew this one.
Also, initial jobless claims came in at 346,000, very close to the 350,000 warning level. Continuing claims sustain the view that the labor market continues to soften.
Conjure Bag re-iterates his August forecast:
Recession Q1=08
Haha. Those with no scruples are going to have the game turned on them. Anybody know how much BofA makes on NSF shakedowns? It is a lot. It should be completely socially acceptable to say, "Hey, I screwed the bank on that deal," since the bank implicitly does the same thing on the other side of the trade. No hard feelings. It's not personal. It's just business, ya know?
The other factor that comes into play is the high turnover rate for neighborhoods in the bubble zone. Its just not as tight knit of community and so screwing your neighbor by going into foreclosure isnt as big of deal.
In Palatine and Arlington Heights you can now rent attractive 3- or 4-bedroom, 2-1/2 bath homes for around $2,000/mo. No problem finding a nice place to live after mailing the keys to the bank.
$1 trillion-what a joke!!!!!!!!!!!!!
There has been $6 Trillion dollars of mortgages written since 2005 through mid 2007 alone. How many of those mortgages do you think are underwater? Add in the home equity loans and were are now at about $7.5 trillion.
If just 20% of the above loans result in loss, we are at $1.5 trillion. What about the morgages and MEW originated between 2003 and 2005?
In addition, once we factor the slowdown in the economy arising from no more free money, get ready for the business losses and business value dimunation.
THE NUMBERS WILL LIKELY BE STAGGERING!!! And we are talking about losses with counter party obligations-that ain't not no dotcom crash.
Hey you think this oncoming disaster will teach America anything? Did Vietnam teach America anything? You get my drift, I hope.
By the way, President Bush today signed legislation into law that will
eliminate tax liability for mortgage debt forgivess. Debt forgivness is only frozen until 2009 I believe.
I can guarantee this will make jingle mail more "socially" and financially acceptable.
They want a controlled burn.
"That 5% doesn't include less equity extraction (and the impact on consumer spending), and spillover effects (like fewer furniture purchases). And that 5% says nothing about losses from bad mortgages, and the resulting tighter lending standards."
Thanks CR, I just wanted to make sure I had this right...
From one of your previous posts I eyeballed a guess as to the MEW since 2003 and it totals roughly 3 TRILLION dollars in MEW. (16 quarters averaging 187 billion per quarter)
In a world where people are mailing in the keys, this MEW is basically gone over the next 4 years.
This was tax free money directly injected into the economy in the form of a monetization of phantom equity.
I haven't heard anyone combine the pain caused by the obvious direct losses by walkaways, to the damage caused by the oportunity costs of the reduced spending power of the consumer.
It seems that losses due to jingle mail will only really impact the financial world. The actual homeowners will be better off as they rent for less and have more spending money due to less overall debt service.
The losses suffered by the consumer will be all those who try to deal with the resets, and every else who cannot or will not pull out tax free money from an asset that's rapidly losing value.
If MEW was say 500-700 billion over the last few years....that's 500-700 billion that won't be injected into the economy over the next several years...That's excluding any measurable losses due to default.
The people who don't jingle mail will in general have much less money to spend over the next few
Social acceptance pails in comparison to financial ruin. Why take the financial hit when its a non-recourse loan?
But second mortgages and HELOCs aren't non-recourse loans, so there's still a day of reckoning for those new-ish neighbors!
Wait, if you relax all the banking rules built up over generations things don't go well. I just find it laughable that a banking executive would be "astonished" about someone's decision to walk away from a home. I think the correct quote would be "I am astonished people would even sign up for these loans in the first place."
Perspective is a bitch.
I don't believe that attitudes will change.
They have changed. This isn't a symetrical progression. We cannot go back. Tanta didn't think attitudes are different. Ken didn't either. The ratio of NODs going to REO are 2x 3x historical norms. Yesterday's story was about the couple that bought a Lexus, a SUV and a house in Texas then walked from their California house. I was stupid. I sold a house and paid stupid taxes. I could have Heloc'd the piss out of it and jingle mailed the keys for a $100k difference net. Well guess what, no more. 2007: Do the right thing == get screwed and then get taxed extra to cover the criminal costs of others.
But the stock market is UP a bit today.
The Philadelphia Fed Index came in at -5.7 (consensus 6.2), a noteworthy and sudden drop, suggesting that the ISM manufacturing report will come in below 50 on January 2, signifying that the manufacturing sector is now declining.
I saw that mp - I work with two companies from that district (one is my largest client)... they are both busy. One is so busy they had meetings this week on how to allocate production resources until they can get an additional machine in place (cost many millions and takes time to get in & running).
Anecdotal is not data but I would like to see more raw data from the region before I ate cyanide. I don't operate a lot out there so don't really know what's up. I do know there is a lot of mil contracting in the Philly region & Mid-Atlantic and wonder if that's the driver (congressional tie up).
Personally I expect the Midwest to be down even more due to automotive slump continuing if not deteriorating. We'll see on that one.
I've been winning orders lately - more than in the last year... but I'm non-real estate and non-automotive... it hasn't hit here near as bad.
"Does not Mr. Lewis realize that the reason that people's attitudes have changed is because the lenders themselves have decided that creditworthiness doesn't matter - that anyone can get a loan regardless of whether they have a track record of paying their debts or not? Why should creditworthiness be more important to the debtor than it is to the lender?"
AND
"Social acceptance pales in comparison to financial ruin. Why take the financial hit when its a non-recourse loan?"
Amen. Point, set, match --game over.
I am astonished at how naive and stupid Keneth Lewis is. He has been promoted as one of the sharper minds in the banking business. So far he has called the bottom of the housing market last summer, and now is shocked that people with ZERO MONEY DOWN are walking away from homes they never owned in the first place? Why wouldn't they?
Mongo just a pawn in the game of life.
The fact that it is more 'socially acceptable' for homedebtors to leave the bank holding the bag is merely a reflection of the fact that many were in it for the financial gains they foresaw. They were in it to make a buck.....
dryfly -
Per our discussion yesterday, sounds like it's time for a government mortgage assistance program. Up to 50% of your mortgage depending on location for a low/no interest loan. You keep all the upside, of course.
There goes my personal bridge to nowhere, just when I was thinking I could request one over a trout stream.
The other factor that comes into play is the high turnover rate for neighborhoods in the bubble zone. Its just not as tight knit of community and so screwing your neighbor by going into foreclosure isnt as big of deal.
Cal | Homepage | 12.20.07 - 5:07 pm | #
Exactly. I've lived in my (non-bubble, non-suburban) neighborhood 20 plus years and half my neighbors were here before I was. Compare that with say - the Inland Empire?
Demographics matter as much as economics I'd say.
That 5% doesn't include less equity extraction (and the impact on consumer spending), and spillover effects (like fewer furniture purchases). And that 5% says nothing about losses from bad mortgages, and the resulting tighter lending standards.
It likely does not include downstream effects like the Georgia Pacific lumber mill just up the road from me. They have ceased all operations, and may shut the mill permanently. Reason given: no demand for lumber (which apparently was going into all those new construction projects). So now there are a few hundred employees drawing unemployment. When that runs out, those people will be in a world of hurt, as that mill was one of the stronger local employers.
Nobody likes my new version of deal or no deal?
I think I will try it on my real bankers shortly- I bet they bite.
Masters of the Obvious like Kenneth Lewis may soon find themselves "surprised" when bailing out on your underwater house not only becomes more socially acceptable, but politically and legally acceptable as well.
MAB they want a controlled burn
In fact a lot of the reforms put forth thus far are in the controlled burn territory. For example, tightening lending effectively pushes house prices down.
I frankly think making debt forgiveness non taxable is asinine. Opens the door to all sorts of manipulation. All they had to do was allow people to recognize capital losses on their residence, and there would have been no issue.
"Does not Mr. Lewis realize that the reason that people's attitudes have changed is because the lenders themselves have decided that creditworthiness doesn't matter - that anyone can get a loan regardless of whether they have a track record of paying their debts or not? Why should creditworthiness be more important to the debtor than it is to the lender?"
I'd love to hear the response to those questions..
Americans suck.
anyone know if this tax forgivness only applies to those that have some debt relieved and stay in their homes or does it also apply to those that just walk away and hand in the keys on a house that is worth less than the loan? if it is both then the govt is just encouraging more people to walk away.
Disregard my last:
Gary Shilling is explaining it all very well on bloomberg right now.
Folks...you should know that most folks who walk away from mortgages they can't afford, have walked before from other creditors and haven't the least compunction doing so.
The change in attitude is skewed by the addition of folks to the (temporary) home ownership ranks by lowering credit standards to let in the riff-raff.
This will all be history by Dec 20, 2009 when the sloshing of dollars, euros, yuans and pretty beads has created inflation to where a burger flipper can afford a McMansion to fit the uniform.
Long term debt holders are dead meat.
There goes my personal bridge to nowhere, just when I was thinking I could request one over a trout stream.
MLM | Homepage | 12.20.07 - 5:17 pm | #
MLM - I expect crazy proposals like the 50 down you suggest as this deepens... lots of them. I just hope they don't screw up my local streams in the process... trout fishing is an expensive hobby for most but not for me. My streams are within a 5 minute drive, on public land and I already own all the equipment I'll ever need (I even tie my own flies).
It could become the most enjoyable 'depression' anyone could imagine...
Negative equity is going to be the difference maker in this particuliar RE boom and bust cycle since it includes not only new home buyers but also established homeowners using refi credit products that pushs them into negative territory. It does not matter whether the mortgage holder lives in a bubble state or not the credit bubble was national so it impacts established neighborhoods in KS or new developments in Vegas all suffer the same fate-negative equity. What makes this a crisis today and going forward is the market continues to deflate, capturing more and more homeowners in the negative equity position.
Mr. Lewis needs to check out the rental markets. You can rent in southern CA for about 40% of the cost of home ownership (after the tax benefit). In other states the figure is higher but still represents a big savings.
Also, with lots of vacant homes on the markets, the supply of quality rental homes seems to be increasing, at least in San Diego where I live.
So why should "homeowners" pay double to stay in their homes when they can rent? And why should the government try to keep them there?
Dryfly,
Trade you some avocados, limes and olives for a couple brookies. We can ship them using all these forever stamps.
Welcome to the new economy. Illegal? I already said I don't care anymore. Get us for "tax evasion" when they let bank robbers get special tax treatment? 2nd amendment fair warning Mr. Revenuer. You can come for me if you have any prison space left after convicting the financial fraudsters.
Can someone explain the comment about recourse/non recourse? Does this mean that if a homeowner "mails in the keys" they can go after him/her, i.e., garnish wages, for the second mortgage but not the first? I know they do that for student loans (my son is paying his off that way, much to his dismay).
OT: OC treasurer tripled stake in SIVs. Experts question appropriateness.
That guy was sounding intelligent on a Bloomberg show this summer about avoiding the CDO sales pitches knowing they were stuffed with bad loans. But I guess he never thought to check the collateral of those high-yielding but safe SIVs. Ouch!
If the question is whether these upside down borrowers will bail out on their houses, my answer is yes. They will. I am observing this phenomena right now out here, and the pace is increasing. Bear in mind that it is not all subprime loans either. The most recent person who discussed their predicament with me was in a 5/1 "liars loan" that doesn't reset until 2010.
No maps for these waters.
Dude, where's my country?
Well, I probably won't do jingle mail myself, scruples yanno, but I encourage people to practice jingle mail. It ought to result in such tightness of money that I expect to be offered a buyout of my 15 yr 4.6x loan - half off anyone ?
Although its not like the old days is it ? Its not your local bank manager/thrift that's sweating. If my loan has gone into some MBS, into some CDO, into some CDO**2, tracking the owner of the loan is gonna get difficult. But for 1/2 off I'll do the work damnit..
-K
"I would venture that most posters are the responsible types."
It is economically reasonable to walk away from a house, if you are underwater and have no current hope that your financial situation will improve by staying there. Is it responsible to your family to act economical foolish if the only real consequence of walking away from your house is being in a better financial position? I'd rather walk from a house and learn from the experience.
"Am I wrong or have the crisis moments in the 80 & 90ies been about smallchange only? Is it not that many "better" companies alone now have lost already more than what was considered dramatic for countries then?"
First things first. I have a small position in BAC bonds (goes back 15 years - they were originally Nationsbank bonds). 7.75% noncallable 20 year bonds.
Can anyone point me to evidence that BAC was involved in sleazy lending? Seems like no one was an angel here - but BAC seems like one of the better guys on the block.
If not - then - as a bondholder - I expect them to foreclose when appropriate - and seek deficiency judgments against borrowers who decide to walk away from their contracts.
I really have zero sympathy for a lot of people who walk away from contracts. The simple fact of the matter is a lot are deadbeats - heads I win - tails you lose - kind of people. Reminds me of conversations I've had about what goes on in nursing homes here - where people give their money to their kids so they can qualify for medicaid - and then when mom needs a new set of teeth - the kids refuse to pay for them - gosh - we'd rather spend mom's money on a new Lexus (yes - this actually happens). Simply stated - people like this are ethical eunuchs.
FWIW - Florida is a rich deadbeat's haven due to our generous homestead and other debtor exemptions. I have seen instances where people who have moved here to seek financial asylum have been shunned (excluded from golf and tennis and other social activities). It's time that the majority of us - who are financially responsible - speak up and act up. Perhaps for those of us who live in HOA's and condos - it's time that we act more like coop's in NY - i.e., that we make sure that people will pay their bills before we allow them to be our neighbors.
I'm waiting for Wells Fargo to get in a cash crunch then I'll offer 48hrs 40¢ on the dollar terms for my own mortgage.
"Mr. Lewis needs to check out the rental markets. You can rent in southern CA for about 40% of the cost of home ownership (after the tax benefit). In other states the figure is higher but still represents a big savings."
Until the cost of buying comes down to 10-12 times annual cost of renting the same place, it's too high. A $500K home that rents for $2000/month has a sustainable price of at most $300K. And even then, renting's a bit cheaper all things considered.
Bush did this tax forgivness nonsense to gain votes next November. Compassionate irresponsibility!
Wait till Hillary comes out an tries to upstage Bush. She'll probably propose income tax credits to people who just went through forclosure. Why not throw in free health care too.
Woops....
"Am I wrong or have the crisis moments in the 80 & 90ies been about smallchange only? Is it not that many "better" companies alone now have lost already more than what was considered dramatic for countries then?"
The 80's were most certainly not small change.
The S&L mess was really big, and the 'LDC' debt problem BK'ed the money center banks, although they got a mulligan.
If I could figure out how to post tables from large pdf's, I'd cite some statistics.
Since these borrowers have little or no skin in the game, the biggest risk of walking away is their credit score, right?
That 'skin' is a sunk cost. If they're underwater and it makes more sense to walk from the house, it really shouldn't matter how much money they put down.
In California, there were 39,992 foreclosure filings in November, down 21 percent from the previous month but up 108 percent from a year earlier. RealtyTrac said California cities accounted for five of the nations top 10 metro foreclosure rates last month.
Broker Steve Clark said he hasnt seen any signs that the foreclosure scene is improving. A lot of people still come into his office hoping to list their houses in hopes of selling to avoid foreclosure, he said. Typically, though, they owe at least $100,000 more on the house than they could get for it, he said.
We cant list it, he said he tells them. Nobody will buy your home and help you out of this mess.
Foreclosure filings slow down | Recordnet.com
We are only two years into this, once we factor MEW, credit card debt, auto debt, student loan debt, and commercial and residential mortgages, we could be looking at $3 to $5 Trillion as defaults lead to further defaults creating a credit death spriral.
I could read the comments section from these stories all day long; informative and entertaining! In fact, sometimes I do read them all day long.
Moody's downgrades Bear Stearns long-term ratings to 'A2'
Moody's downgrades Bear Stearns long-term ratings to 'A2' - MarketWatch
Hi "kicking myself",
First mortgages are traditionally non-recourse loans. Since the second mortgage and HELOCs are the first to be wiped out during foreclosure, they are normally recourse loans.
I got the following from this link.:
Recourse loans are loans in which the lender can claim more than the collateral as repayment in the event that payments on the loan are stopped. Thus, a recourse loan places the borrower's personal assets at risk.
In essence, those new-ish couple, and the Oropezas who bought Lexus and dumped their Corona, CA property in favor of Houston, TX will be hounded for years to come! Bwahahahaha!
I get the financial argument for walking, but what about "universal default". I can't nelieve that these people have ONLY mortgage debt.
I think all of the dead beats should hire slip and fall lawyers and sue to receive pain and suffering judgements againt the lenders for the mental hardship and indignation of foreclosure.
The loan forgiveness proviso was essentially a no-brainer. You are simply not going to collect fictional 1099 earnings that a borrower who just lost his house never saw.
It would behoove some folks to remember we did not get into this mess through an excess of government regulation.
In normal times, or normal societies, people accept the necessity of government regulation, and either work or hope to make it sensible and useful rather than counterproductive and stupid.
Here, of course, we've been following a different and decidedly cultish path, which involved dancing gleefully around our golden Alan Greenspan idol and engaging in mystical divine congress with Milton Friedman.
The person who rented the median home in Ventura County is up $67,000 in the past 12 months compared to the person who bought. People can do the math. They won't wait until they are upside down. People with equity will start walking. Well actually, they'll consume any remaining equity and live as long as possible for free. The scuttlebutt is that Countrywide is offering people money to stay in FCd houses just to keep them from deteriorating. The 410 Avocado, Camarillo embarrassment probably left a scar on their corporate psyche.
Regarding defaults of credit cards and student loans, do most of the for profit schools like Apollo, Strayer, DeVry, etc. have students that pay tuition by way of student loans? Will this particular sector be in trouble or do most of the students pay by some other means? Just curious.
r0m30
Interesting point about universal default. Maybe this is why people are paying credit card debt over mortgage debt.
The invisible hand at work. People are not dumb. This is why down payments are necessary.
In essence, those new-ish couple, and the Oropezas who bought Lexus and dumped their Corona, CA property in favor of Houston, TX will be hounded for years to come! Bwahahahaha!
Like Casey Serin?
RIMM with blowout earnings today. Tech sector is holding up very well through this mess.
You can't walk from student loans via BK.
Thanks for the effort Zigurrat.
I am curious and found a link that defines s&l costs:
US Savings & Loan Crisis
"For some years the final bill for the S&L crisis remained uncertain. However, we know now that, setting aside ongoing legal action, the thrift crisis cost an extraordinary $153 billion - easily the most expensive financial sector crisis the world has ever seen. Of this, the US taxpayer paid out $124 billion while the thrift industry itself paid $29 billion." (1986-1995)
So a bit for the taxpayer and hardly a lot for the industry compared to todays players...
I would frankly be very surprised if too many people walk away from a mortgage they can comfortably afford and have a 30 yr fixed.
Say you have a 500,000 mortgage and houses like yours are selling for 400,000 or even 350,000, I think the vast majority would stay put. It's difficult to convince the wife to pick up and move to a rental that may change your school districts, or limit your ability to paint the kid's room bright pink. I think people overpay for assets all the time. Add in the unknowns as to what happens to your tax bill, how long it takes to recover your credit, and how long will the market stay low (especially with every optimist saying price rises are "just around the corner".)
I think for people to jingle mail will require a debt service they can't afford, or all the other typical reasons such as divorce, job loss, moving, etc.
My opinion only.
Like Casey Serin?
To tell you frankly, I'm not sure, since he filed for bankruptcy protection or something...
This might have already been mentioned, but I'm pretty sure student loans survive BK. At least, that is what I was always told.
Another significant and much overlooked side effect is inflation. Whereas home price appreciation translated into immediate liquidity through MEWs which caused inflation with a lag, the decline has a much slower opposing effect. There are only two ways out of this now. Lower rates back to irresponsible levels and bailout those in need, or take the pain free market style. Stagflation or severe recession, I'm not sure which one would be worse on the average American.
Someone should give Ken Lewis (who bought MBNA--iirc, after the bankruptcy bill passed)--a reminder of basic finance.
If I have $100 and three bills, one for $90, one for $50, and one for $30, all else equal, I don't pay the $90 bill.
I pay the $50 and the $30, and have $20 in my pocket. This is especially true if the interest rate and penalties on the $50 and $30 bills are higher.
When bankruptcy meant that mortgages can be maintained, but credit card debt was subject to cramdown, people paid the $90 bill, even though the interest rate was lower, because they might, just might, be able to keep their house at the end.
If nothing is going to be reduced, you pay the higher interest-rate bills, which means, post the Biden Bankruptcy Bill, treat the mortgage as pari passu, not Senior Debt to the Subordinate credit cards.
Ken Lewis may not realise that, but his borrowers appear to have.
My anectodal story on the SoCal rental market- I had my eye on two very nice places priced around $1m, both vacant (one held by an investor/realtor, the other by a family that already bought another). Both were on the market 9+ months with no real price movement. Both were pulled off the market and put up for rent at $3200 per month.
Even with 20% down, ownership would be about $6,000 a month. So why should I buy?????
Denzel...
DeVry and some of the schools are fine. However, the one's that advertise on daytime television (check out the ads on Tyra) for things like exciting jobs in fashion design, computer graphics, etc. is really horrible and borderline criminal, imo.
There is no question that, if there is any government bill to pay, it should be left on the table of those who profited from creating this mess.
The likelihood of that happening, of course, is best illustrated by what the rapid demise of the futile attempt to make hedges pay as high a tax rate as I do.
Robyn, regarding your "deadbeats"
Look at the loan contract. The contract specifies that borrowers can stop paying and the lenders can take the house. The lender's right of foreclosure is a negotiated term-- it is what the lenders wanted.
It has always been legally acceptable to walk away from a house. The lenders knew this. In fact, it boggles the mind that BAC was relying on a social norm to protect their interests.
The people who walk away aren't deadbeats. The lenders who made the loans-- knowing full well the terms of those loans-- are idiots.
CR or anyone: I would like to ask a naive question. Of all the people in my social circle, there is not one I can think of who bought a home other than as a place to live and a solid long-term (10 or 20 years) investment. I was never at any party where the topic of discussion was how we were all getting rich from our homes. Am I weird or is the behaviour you are discussing limited to a sub-set and highly concentrated in some areas?
Also, I thought in my mortgage it said if I defaulted and the home sold for less than I owed, they could come after me for the difference?
Here's my theory:
Joe Everyman has learned a thing or two from watching the Masters of the Universe (and the similarly inspiring Tom Vu). The simple message, leverage other people's money to get rich quick and make sure you're not left holding the bag if things go South. Catch is, everybody has been playing the same game, and now we don't actually know who's holding the bag. Jingle mail works at the grass roots, and it will be used like never before. Why not, that's how the rich guys play the game.
So, its not so much that 'we're all subprime now', its 'we're all Gordon Geko now'.
As it turns out, we CAN all screw each other.
or "We're all Donald Trump" as the case may be.
Say you have a 500,000 mortgage and houses like yours are selling for 400,000 or even 350,000, I think the vast majority would stay put. It's difficult to convince the wife to pick up and move to a rental that may change your school districts, or limit your ability to paint the kid's room bright pink.
I'll call BS on this one. In my area, median people get out of bed each morning, leave their family, commute to work, put up with their bosses, drive home, and collapse for a median wage of around 45 k$ per year before taxes.
If median people can save a year's wages by walking away, the weekend or two that it takes to pack and move are well worth it.
LTCM costs from the same website:
Long-Term Capital Management
"23 September 98: Goldman Sachs, AIG and Warren Buffett offer to buy out LTCM's partners for $250 million, to inject $4 billion into the ailing fund and run it as part of Goldman's proprietary trading operation. The offer is not accepted. That afternoon, the Federal Reserve Bank of New York, acting to prevent a potential systemic meltdown, organises a rescue package under which a consortium of leading investment and commercial banks, including LTCM's major creditors, inject $3.5-billion into the fund and take over its management, in exchange for 90% of LTCM's equity.
Fourth quarter 1998: The damage from LTCM's near-demise was widespread. Many banks take a substantial write-off as a result of losses on their investments. UBS takes a third-quarter charge of $700 million, Dresdner Bank AG a $145 million charge, and Credit Suisse $55 million. Additionally, UBS chairman Mathis Cabiallavetta and three top executives resign in the wake of the bank's losses (The Wall Street Journal Europe, 5 October 1998). Merrill Lynch's global head of risk and credit management likewise leaves the firm."
Hey that were peanuts !
"Americans suck."
No, Americans are pragmatic.
By the way. Robert Cote, I watched somebody make almost exactly that offer to their lender (Norwest Bank, part of the current Wells Fargo) back in the early 1980s... and they accepted the offer.
No the lying moron of a president is forgiving taxes on short sales.
Had enough of the lying republicans?
Zigurrat - Things have been pretty bad before. Only difference between now and then is the quantity and speed of information - and how fast people can act on it. In 1987 - not so long ago - when I wanted to redeem shares in mutual funds - I had to do it by mail. I remember the stagflation of the 70's - and the gas lines - and how little I was paid compared to rising prices (gas going from 20 cents a gallon to over a buck). During the Vietnam War - we gathered around a small TV set in the student lounge to see war footage that was 4 days old. Heck - when my parents were young adults - most people didn't even know FDR was crippled.
If you look at a really long term chart of the SP500 - you will see many times when things were looking pretty bad.
But you know - in the long run - at least from my perspective - since the Great Depression - things haven't been so bad for most people in the United States. We don't get shot for our political or religious beliefs. What passes for financial problems today (not being able to afford your McMansion - or luxury car - or your premium channels on cable) - would have been considered laughable 30 years ago. My husband shakes his head a lot. He grew up in a very typical middle middle class family in the 50's in Bergen County NJ. House was 1200 sf - 3 bedrooms - 1 bath. His father never earned more than $25,000/year. He worked summers at the Ford Motor Company on the line to put himself through college and law school. There are a lot of people like him. And when he sees people walking away from their obligations - whether they're financial or family obligations - he wants to give them a good kick in the a**.
Speaking of which - Kicking Myself - Apparently - from what some people here have said - if a lender forecloses on a mortgage in some states - it can't go after the homeowner for the deficiency. I don't know whether these statements are correct - but that is definitely not the case in Florida (where I live).
I've been predicting $2 trillion of hard losses for some time now, simply as a rough estimate based on outstanding home mortgages of about $10 trillon and consumer credit of $2 trillon plus. Add to that junk bonds, commercial mortgages, municipal bonds, miscellaneous lending, and it is pretty clear that $2 trillion of hard losses is really not stretching things. Also, $2 trillion is not a lot in comparison with GDP of roughly $14 trillon, especially if the losses are spread over 3 years (roughly $700 million of losses per year, or about 5% of GDP).
In addition to $2 trillion of hard losses, I'm also anticipating about $10 trillion of paper losses. $4 trillion would come from a 20% drop in nominal house prices, the rest would come from a drop in stock and other financial asset prices. Again, this isn't all that huge. These losses might be less in nominal terms if the government manages to cause enough inflation over the next few years.
The world has changed. In the past you were loyal to your employer, and in response they made some effort to keep you when times got tight. You paid the mortgage to your local bank, and if you got sick or lost your job, they worked with you to keep you in the house until you could get caught back up. Now it is all arms length. Companies will fire you at the slightest down turn, the mortgage holder is some group of distant bond holders that would toss you out at one missed payment. In this world, why this focus on the morals of paying your mortgage? There is no moral barrier to kicking out of a house those that lost a job or got sick, so why should there be a moral issue when we don't pay the bank? I do feel loyalty to my employer, and have always paid every bill, but it is a poor fit for today's world. I am opposed to a moral structure that only benefits the wealthy, eithter we all have obligations or none of us do and it is just "business".
Robert Cote @ 5:13
In HS, I went to the foreign language teacher to rant about a bunch of us got C's and D's on a nasty test while the daughters of the vice-principal and school district super collaborated their way to an A when he left us "on our honor".
"Well, at least you have the satisfaction of knowing that YOU did the right thing".
Another life lesson from the Bastard.
Dryfly @ 5:14
Welcome to middle PA, home of Jack Murtha.
If I understand this, there are some states where mortgage holders can go after you for more than the house ("recourse") and some where they can't. Any guesses on the fraction of underwater mortgages that are no-recourse?
I predict that there will be a race in no-recourse states between jingle mailers and legislatures changing the rules.
GET SET... GO!
A walk-awayer in his own words (sorry for the Caps)
WHY IS IT THAT THESE MORTGAGE COMAPNIES ARE NOT WILLING TO HELP SOLVE THIS HUGE PROBLEM BY REFINANCING THESE PEOPLES LOANS...THAT WOULD EASE UP ON THIS MORTGAGE CRISIS THAT IS WEIGHING HEAVY UPON THE UNITED STATES, THEY SEEM TO BE MORE INTERESTED IN TAKING A PEOPERTY BACK THAT DOES NOT HAVE THE SAME VALUE IT ONCE HAD..PEOPLE ARE FINDING IT EASIER TO WALK AWAY THAN DEAL WITH THESE COMPANIES.......I DECIDED TO WALK, BECAUSE THERE IS NO HELP...BUSHES POLICY HELPS NO ONE AND ONCE AGAIN THIS FOOL FOR A PRESIDENT IS MORE INTERESTED IN HIS IRAQ WAR, THAN WHAT IS GOING ON AT HOME. I AM WALKING AWAY....AND WITH 10 MONTHS WORTH OF SAVINGS, THIS WAS ADVICE THAT I GOT FROM MY MORTFAFE CO...THEY SAID YOU HAVE TYO BE 3-4 MONTHS BEHIND BEFORE THEY HELP YOU....I PUT THAT MONEY AWAY...AND SINCE TEN MONTHS AGO WHEN I ASKED THEM FOR HELP, THEY SAID NO...SO TAKE THE HOUSE..JUST RENTED ONE FOR 1000 A MONTH WHICH SAVES ME 4500 DOLLARS...YES BELIVE IT OR NOT MY PAYMENTS JUMPED TO 6000 A MONTH.
Posted 12/20/2007 8:31:56 AM
4Runner - What part of the country do you live in? California? Sounds like a low median wage for California - but I am not very familiar with California (except that I know that real estate prices are very high - we have a similar median wage but much lower real estate costs here in NE Florida).
BTW - what makes you think that working hard and getting tired is somehow a huge hardship. It's what people have done forever when they can. The first full-time job I had - 1971 - I worked maybe 60 hours a week - no OT - for $8,000/year. And my parents and grandparents - all of whom lived through the Depression - when there were no jobs - thought I had it pretty good.
Social norms sounds suspiciously like hope, which is known to be a crappy hedge.
S&L fiscal cost was 2.1% GDP (PDF file; table 6)
Mike....I like this for the big picture. Doesn't fit well with the end of the world.
It also doesn't include the LDC problem of the 80's. LDC= former third world, then Less Developed, now Emerging Nations.
People who are upside down on their mortgage already should consider not paying their mortgage. Not ethical, but appropiate to save your future. They can save lots of money by sending those mortgage payments to themselves (under someone else's name, of course). By the time they get foreclosed many would have more money than BEFORE they bought their house. Credit issues? Are you kidding? #1 they are having FINANCIAL issues now which is a lot worse. And within a few years, everybody will be forgiven for losing their home in the toughest real estate bubble, credit crunch in history. If they continue making payments they are just going further and further upside down as properties continue to depreciate over the next few years. It's great for the lenders and wall street (even for the economy). But where will those already in trouble be in 3 to 5 years? Financially, emotionally, etc. Compare the choice of continuing making ends meet to saving your money now and working on rebuilding your credit for the future. It's a no brainer and people will figure it out.
Oh, that's just great! Borrowers are discovering the wonder of limited liability in nonrecourse loans.
What happened to "stigma" when we need it most!
Robyn: I live in SD.
I never said that working hard was a hardship. I said that it was a heck of a lot easier to pack up and move than to work for a whole year. Even if you have to repaint the kid's room once or twice.
Like I said, it amazes me that "socially acceptable" even entered into BAC's calculus. My grandmother wouldn't dream of wearing white after labor day. BAC was incredibly lazy for loaning out real money relying on such nonsense.
Robyn:
If you panic and want to unload your bonds.... Just kidding.
But there is still a big disconnect between the end of the world zeitgeist on the comment sections here and the fact that we aren't even in a recession yet (unless or until figures are revised) and C hasn't cut its dividend.
As far as war stories from the not so distant past, like the 80's, people don't want to hear how bad it used to be. I don't even like to think of some of it. But if you didn't experience it, it is hard to explain in a way that doesn't make you sound like your own parents. Yikes.
ex-pat in UK | 12.20.07 - 6:06 pm
I am opposed to a moral structure that only benefits the wealthy, either we all have obligations or none of us do and it is just "business".
I was going to make this point but you said it better than I could. The social contract has been broken and actions have consequences. Look for more "screw the upper class" to come.
4runner: "I'll call BS on this one..... and collapse for a median wage of around 45 k$ per year before taxes.
If median people can save a year's wages by walking away, the weekend or two that it takes to pack and move are well worth it."
My turn to call BS 4runner. If your making 45k and your 500,000 mortgage goes to 350,000, you're gonna jingle mail because you CANT AFFORD the home even if you wanted to. Someone who can afford a 500,000 home makes $150,000 or so.
Secondly, people pay more than they have to all the time for stuff. Do you know how many 45k earners bought lexus's instead of camry's (essentially the same car) or bought name brand jeans for 140 bucks when you can get them at garage sales for 5 bucks. You overestimate the average person's financial intelligence.
And AheadOfTheCurve,
You missed those parties because you don't live in a bubble area.
(As I recall you can buy your own house for about what it costs to rent it)
Geographic distribution of bank and thrift failures by state, 1980-2000
Top 10 States (numbers in brackets represent market shares)
State Assets
$ billions Cost $ billions Number of Failures
1. Texas 196.9
(21.2%) 75.8 (40.2%) 850 (28.6%)
2. California 143.6
(15.5%) 21.3 (11.3%) 214 (7.2%)
From page 59.
On Page 67, cost in terms of percent of GDP, US S&L crisis, 2.1%.
There is even a section on US subprime from the 2000, when we had our first bank insolvencies from subprime.
The world has changed. The gap between the social classes is getting bigger & bigger, and the shark borrower can do something about it:
* Obscenely overpaid CEOs
* Grossly Incompetent CEOs getting parachutes when they are fired
* Billionaires with lower tax rates than their maids
* Government does not balance its books
* Government lies about its reasons for war
* Banks & Dealers lie about what is on their books
* Salaries don't keep up with inflation
* Inflation statistics don't jibe with reality
* Banks who you send your mortgage check to get bailed out by the Federal Reserve on a regular basis
What the current administration & business leaders don't realize is that the power of the contract depends on the evenhandedness of the two parties that agree to that contract. When your leaders act as ours do, you are begging Joe Sixpack to walk. I know I will if I have to.
Zigurrat
I am too young and in Europe anyway to really know something about the 80ies firsthand. Nevertheless the sums in play appear to have increased significantly and even in real terms.
I don't think the notional derivatives will be the big thing (like the 5 trillions between you and me, both of us can brush of the loss:) but the "small" amounts of tens of billions on each balancesheet. So I conclude that a significant potential for remarkable problems exist.
No the lying moron of a president is forgiving taxes on short sales.
Had enough of the lying republicans?
But, but... I thought Republicans liked tax cuts?! (ducks)
ex-pat in UK - Yes - as Paul Harvey would say - that is the other side of the story. My FIL sold fiber drums. He worked for one company - Continental Can - almost his entire working life. He had a good pension and generous health benefits. And sales in the 50's and 60's involved a lot of wining and dining customers - and playing golf with them.
Flash forward to my brother-in-law - also in sales - chemicals to auto companies in Michigan. Obviously a total disaster these days. In the beginning - the company tried to "adjust" things. Fire 1 out of 3 sales people - paying the remaining 2 a bit more. Then even that got unsustainable. There's a 401k instead of a guaranteed pension - certainly no post-retirement health plan to speak of. In fact - the company may well go bankrupt. At the age of almost 60 - my BIL is doing handy-man jobs to make ends meet (and if my SIL didn't have a steady job at UM - I think they'd be in big trouble).
On the third hand - my niece - their daughter - insists on trying to be an elementary school teacher in this depressed area. She has her whole life ahead of her - and this seems like a poor career choice to me. It is one thing to get stuck when you're in your 50's. Quite another not to explore one's options when you're in your 20's. Since you're in the UK - I will say that it reminds me of what I saw as a traveler in the UK in the 70's - when people up north were unwilling to explore more profitable opportunities down south just because they objected to "being uprooted".
BTW - I have had little contact with mortgage foreclosures here - but the lenders seem more forgiving than you indicate - more inclined to work with the borrowers.
As for the morality of some rich deadbeats - the Trumps of the world - it sucks. And it's galling to watch how they act. But we have to ask ourselves whether those of us in the majority would rather live in a decent civil neighborly law-abiding society - or one which mirrors that of these rich dead-beats. In the long run - I don't think our lives benefit from emulating them.
If your making 45k and your 500,000 mortgage goes to 350,000, you're gonna jingle mail because you CANT AFFORD the home even if you wanted to. Someone who can afford a 500,000 home makes $150,000 or so.
O.K.-- so the person who makes 150k$ only spends one year at work to make up the savings obtained by walking away, while the person who makes 45k$ spends three years at work to make up the same savings.
In either case, it is well worth the time and effort to pack up the boxes and move. Even if you have to repaint the kid's room.
As for people paying more than they have to for stuff, how often do they overpay on the order of a year's wage?
Robyn:
Another thing about the Texas meltdown. The depositors got repaid.
However the equity holders in the banks were wiped out, everyone that bought property using loans was wiped out.
Some people lived excessively, but there wasn't a lot of wealth that was both extracted and somehow buried in a tin can in the back yard. Everyone lost everything except people with brokered deposits who were made whole by the FDIC/FSLIC.
Most people who were reckless got punished. This story about stripping out all the equity and moving to TX -- true but it will be like welfare queens driving cadillacs.
They even nailed a few of the top executives. Milkin went to jail as well as Charles Keating. Not enough, but something.
"What the current administration & business leaders don't realize is that the power of the contract depends on the evenhandedness of the two parties that agree to that contract. When your leaders act as ours do, you are begging Joe Sixpack to walk. I know I will if I have to."
That's the fallacy of inside-the-beltway thinking. They -- politicians and the people they report to, which isn't us -- think that if they control legislation and the courts, they control everything. But once you breach the legitimacy of a way of doing business or an institution, it doesn't matter whether you rule it. People will walk away from it any way they can. They won't cooperate with it. They won't report to it. And it will cease to function.
Societies usually end up with the ethics they can economically afford.
So yeah, we're going to see a lot of "jingle mail", especially with all the new legislation making it harder to get out of credit card debt.
Banks get bitten? No--it's going to be the holders of the CDOs and SIVs that get whalloped.
Result of all of this: great suspicion of ratings agencies, great suspicion of any real estate debt. Probably legislation written to change real estate debt into recourse debt. Won't pick up this mess.
And yes, people will feel much less guilty about mailing the keys in. If they feel gypped at being sold something by a real estate broker who promised that real estate "could go nowhere but up", they're going to feel even less willing to hang around. "I trusted you and the bank and you got sold me stuff I really shouldn't have bought, stuck me in an ARM that's sucking up more than the money I make, took all your fat fees, and now that I'm in trouble you're unwilling to help me out, especially when I see the government bailing out all these banks? Go piss up a rope."
Well, if you start selling houses like they were used cars (and with the same ethics), at some point it's going to turn around and bite you in the bum.
Welcome to modern America
4runner,
My point is that even for a year's wage, they likely won't walk.
Firstly, they would have to be SURE it was a years wage. When you factor in the cost of the lost tax deduction, the cost of a realtor when you decide to buy again, the cost of the move, the cost of explaining to the family, the cost to rebuild your credit, the cost of future credit...etc, you would convince yourself you wouldn't save all that much afterall.
Besides, even if you save some money, you would still have "your" house which is worth something more than living in a rental. I'd pay more not to have a landlord.
Besides, walking away from your loan and renting doesn't mean that suddenly $150,000 appears in your bank account. Your savings would only come after years of renting for less. So it means that your monthly's may go down, but if you can afford the current mortgage then even a significant drop in monthly rent would not likely induce jingle mail.
Like I said, if they can afford it, the vast majority will continue to pay. (all bets are off in prices drop 70-80% of course)
BTW, has anyone seen the latest gem of wisdom from everyone's favorite real estate economist? Yun is now blaming everything on the media's reporting of the problem.
I swear, Enron Redux.
KansasCity.com | 404
A-Joe,
I've heard stories of people lying on their loan apps-- saying they have a renter for their current house, buying a house in the same development, and stopping payments on the first house. I can't verify if they are true, but such scenarios are a "sure thing."
It might not be money in the bank, but a chunk of change taken off your mortgage is pretty good. People drag their a__es to work for an entire year for the type of money that we are talking about. It is hard to imagine that any of the things that you are talking about come close.
CR's fascination with jingle mail becoming "socially acceptable"...fascinates me.
Social behavior can be described in many different ways: exemplary -> reprehensible...and our (not only mine, right?) job is to fit it in there somewhere.
Twas "socially respectable" to own a house, to be paying a mortgage and have left that slum of renting some abode...such is the pervasive clout of national advertising by Fannie and more. If you were not buying the Dream, you were suspect...not a loser exactly, just not in the trustworthy nest.
And the neighborhood can tolerate a few suspects, but there is a threshold at which their behavior becomes a viable alternative...makes you examine your own painful experience of paying mortgages on a depreciating property that could or could not continue.
And very likely the sheer numbers of suspects has more weight than any calculations you may wish to perform on future RE values and your capacity to pay mortgages.
It just takes me a little longer to see Cr's view sometimes.
the #1 reason why property values went up as they did, was not the rates, income levels, jobs, economy, etc. It was because ANYBODY could have bought a home. Bad credit (subprime), low income (stated), no job (no doc), no money (no asset and 100% financing). It artificially sent the balance of buyers to sellers out of whack. This is no longer the case. People must now qualify but prices are now way too high. So the supply to "qualified" ratio is now again out of whack but in the opposite direction. Only 3 things can save this market. 1: bring back all those crazy programs (that's never going to happen) 2: people's income must go enough to qualify for today's infaled prices (it will take many many years. 3: prices of homes must come down so people can qualify to buy them. Yep, that's it. That's the ticket. For those in trouble, you must weather this decline, wait for stabalization, and then wait on future appreciation all the way to today's values again. That's just for break even. Or you could walk away, save money, rebuild credit, and buy again when market has stabalized at a much lower price. Duh!!!
"Social behavior can be described in many different ways: exemplary -> reprehensible...and our (not only mine, right?) job is to fit it in there somewhere."
During Prohibition, it was socially acceptable to patronize a bootlegger or visit a speakeasy, even though illegal. Law enforcement often looked the other way.
To this day in certain parts of the country it's socially acceptable to smoke a joint in your own home, even put a grow light in the closet and grow your own. It's still illegal, but local government has "decriminalized" it.
When the law (or a type of contract, in this case) is at odds with the needs or desires of society, it will be flaunted. And the more out of whack that law or convention is, the more socially acceptable it will be to flaunt it.
In the face of a collapsing real estate market that they were assured they were making "a sure bet" on, I don't see why much of America -- not all of it, but certainly in pockets of the bubble states -- will nod and wink as their friends walk away from their homes.
CR,
What are the underlying numbers for your premise? I ran a similar analysis assuming a 1/3 loss per defaulted mortagage and came up with the same $2 trillion figure. I used $300,000 as the average house value, as opposed to the medium house value, which was closer to $200,000.
If you figure that foreclosures tend to occur in clusters and those properties tend to drop more than the overall market (plus transactions costs) your 50% figure could be more accurate. However, what is the basis for determining the average value of defaulting mortages is $200,000?
hopeinsd asked: "My anectodal story on the SoCal rental market- I had my eye on two very nice places priced around $1m, both vacant (one held by an investor/realtor, the other by a family that already bought another). Both were on the market 9+ months with no real price movement. Both were pulled off the market and put up for rent at $3200 per month.
Even with 20% down, ownership would be about $6,000 a month. So why should I buy?????"
Have you run the numbers to find out?
You can get 7.5% (or better) fixed-rate jumbo mortgages in CA. According to Case-Shiller, over the past two decades the CAGR for housing is 7.28% in LA, 7.01% in San Diego, and 7.44% in San Francisco.
What does this mean? You can borrow money at a slightly higher rate than the long-run expected return on the asset you're buying, and you get the utility of living in the house.
There are other costs/benefits, of course (taxes, insurance, maintenance, and the mortgage interest deduction) but not buying isn't nearly a slam-dunk decision as presented in your example.
Myself, I'd never be able to afford a $6,000 monthly mortgage, but affordability and investment return are separate issues. I couldn't afford to build an airplane factory, either, but that doesn't make it a bad investment for someone who could.
Sebastia
its just different when you are in ground zero...try chula vista, california.
i know at least 3 families who have told me the are "mailing in their keys".
No equity, can't make the payments, can't sell--mail in the keys.
Thats pretty much every 1st time buyer and every buyer who took out equity in a heloc or a resetting arm in SoCal, or all of Cali since 2005.
Howdy neighbors! No room for shame round here...
To buy a house for most average people meant you were getting ahead and building equity. Your house was your savings. This was the only form of real savings most thought they could access post dot-com bust. That was the implicit societal contract they thought that they were entering into. It did not matter what they signed. If the asset does not perform society broke the contract not them. This is the failure of Keysnian economics.
Average Joe said: "...Firstly, they would have to be SURE it was a years wage. When you factor in the cost of the lost tax deduction, the cost of a realtor when you decide to buy again, the cost of the move, the cost of explaining to the family, the cost to rebuild your credit, the cost of future credit...etc, you would convince yourself you wouldn't save all that much afterall...."
Holy smokes! Now there are two of us who live in the real world of, LOL!
S.
Yawn. Predicted this about 2+ years ago over on HBB.
Wait'll the next wave hits, when...
1) Seniors seeing their retirement funds (i.e., home equity) evaporating; and,
2) Better-heeled "investors" throw in the towel.
We ain't seen 'nuthin yet.
4Runner - Embarrasing confession. I like to travel. When the US dollar is weak - I travel in the US. I think I've been in about 46 states (and every county in Florida!) - but I have never ever been in SD. So you are definitely the expert in terms of talking about what is happening where you live compared to me. All I know is SD is very big - and has fewer people than Jacksonville FL (where I live). I like to hear about what's going on in other parts of the US though. Sometimes I think I hear much too much about really big states like California - and much too much about really small states like Iowa and New Hampshire (with regard to the primaries). But one rarely hears about SD.
in 2005-2006, it was crazy the people who were buying homes! Dental hygentists would brag about their million dollar home, their lexus, while the idiots who went to grad school defaulted on their student loans and lived in apartments...
4runner,
yes some people who can afford the mortgage will walk to buy cheaper...but my point is it won't be a large majority or even a large minority.
However, there will be enough people walking who CANT afford to stay to make sure all hell breaks loose anyway..
Robyn: no need to apologize. SD is beautiful- pretty dang close to perfect. You should make it a point to visit.
O-Joe: Only time will tell. For everyone's sake, I hope that you are correct and that Mr. Lewis is exaggerating. Suffice it to say that I'm not going to bet my money on these hopes.
Mr. Lewis says. "I'm astonished that people would walk away from their homes."
Mr. Lewis, I am astonished that banks would walk away from their obligations. Will B of A be repurchasing at face value all fraudulently originated mortgages which it sold? I thought not. On behalf of ShyCo investments let me introduce my associate Mr. "Fingers" McCrusher.
bigtrouble- Who is your dentist? My hygeinist certainly doesn't live in a million dollar home, and she drives a 5-year old Toyota.
What world do you folks live in? I don't know a single person who EVER flipped a home or walked out on a mortgage. Everyone I know (and I have ties in NY and Canada and my wife's family is in the midwest) buys a home to live in, pays the mortgage on time and stays in it for 10 or 20 years or more. It seems like you all live on some planet that doesn't resemble my world.
This post just got quoted in Krugman's blog. It's becoming a regular thing.
Avg Joe,
You could add to your list the possibility of a 1099R coming back in the mail from the bank. Unfortunately, I disagree with you though. I think many people will call it quits if they see others doing the same. I also think many will act irrationally to relieve short term pain. Same logic as credit cards.
These homesquatters should send in the keys and forget about the debt zombie plan paulsen is pimping to protect his rich folks.
The I can buy a house at 80% off sale.
quartz -- "just got quoted in Krugman's blog. It's becoming a regular thing."
Does he see the tip jar too?
Sebastian,
You are quoting a jumbo rate that is only available to the lowest LTV, lowest debt-to-income, highest FICO possible.
If you don't have those borrower characteristics, your jumbo rate is more like 2 full percentage points above conforming rates.
With investors on strike and banks short of capital to hold jumbos on their balance sheets, that spread is only going to get wider.
Where do people get the idea they can walk away from mortgages? I don't know, perhaps they watched Edward Lampert take enough value from former K-Mart stockholders to purchase Sears. Maybe they watched United's management transfer the value of the airline from the 'owners' to themselves. Maybe they had an employer go bankrupt and not pay out one cent of vacation pay. These are all considered the tactics of smart business people. Why is walking away from negative equity any different?
Can't anybody help me? I really want to meet a genuine house-flipping mortgage-skipping, equity-stripping dental hygienist in a million dollar house and I can't find them. All the million dollar homes in my neighbourhood have doctors and lawyers and GE vice-presidents. I feel my life is incomplete. Please help me locate one, please....
Average Joe:
I agree with you that for many people who own a home AND can afford the payments, the value of the home would not be enough to make them walk. They like their home, their location, their routine, and their neighbors. If they believe house values will come up long term, staying makes practical and emotional sense to them.
I have owned my house for many years and have significant equity. I could have moved up during the last few years and leveraged my money more, but I like my house and where I live. I plan to live here many years more so what it is worth now is basically irrelevant to me - it is my "home."
JR It's good to know that commone sense is still in style. I'm with you.
You can get 7.5% (or better) fixed-rate jumbo mortgages in CA. According to Case-Shiller, over the past two decades the CAGR for housing is 7.28% in LA, 7.01% in San Diego, and 7.44% in San Francisco.
What does this mean? You can borrow money at a slightly higher rate than the long-run expected return on the asset you're buying, and you get the utility of living in the house.
Nice choice of data points. The last two decades include two massive price-run-ups (the latest being by far the largest), and one, relatively modest, correction cycle.
Try it out to 3 decades, or 4 decades, or 115 years, like Shiller did, and you get a somewhat smaller number, closer to inflation. Not to mention that gains from the last 6-7 years are not going to last, and are not likely to be repeated anytime soon.
Alright, let me try this one. There are 30,000 Katrina evacuees still living in trailers. There was a riot in New Orleans today over plans to demolish public housing - NY Times
Why not offer foreclosed homes to these evacuees?
really want to meet a genuine house-flipping mortgage-skipping, equity-stripping dental hygienist in a million dollar house and I can't find them. All the million dollar homes in my neighbourhood have doctors and lawyers and GE vice-presidents. I feel my life is incomplete. Please help me locate one, please.
This is pretty close. Look for the subhead "Winning the real-estate game" and click on the link that says, "who's buying them?" on the following page from the Palm Beach Post, circa 2005:
West Palm Beach Business: News, stock quotes, financial, Real Money, health care, real estate | The Palm Beach Post
I plan to live here many years more so what it is worth now is basically irrelevant to me - it is my "home."
You freak!
Besides, walking away from your loan and renting doesn't mean that suddenly $150,000 appears in your bank account. Your savings would only come after years of renting for less. So it means that your monthly's may go down, but if you can afford the current mortgage then even a significant drop in monthly rent would not likely induce jingle mail.
Like I said, if they can afford it, the vast majority will continue to pay. (all bets are off in prices drop 70-80% of course)
The vast majority, or at least a large majority, aren't going to jingle mail their lenders.
The problem is going to be with what I call the "WMMP?" people. As in: "What's My Monthly Payment?"
Before the bubble these guys were eliminated through more stringent credit checks and having to have skin in the game, 20% down. They're used to walking out on other types of debt. There's no reason to think they won't do it for the mortgage. When they do the basic math that walking away from the mortgage and renting gives them more per month they'll do it.
Talking about fiscal time frames of more than a couple months is babble to them.
Average Joe
If they cannot afford the payments, it really does not matter, they cannot afford the payments so best mail in the keys. The sooner the better.
Too many economists assume folks have a choice. Plan A or Plan B.
In some cases, Plan B is the only one.
Holden- Thanks for the link. I don't doubt there are people like that out there. Jerry Springer manages to get guests for 5 shows a week, after all. The conceptual issue I have as I go about my life is that my friends, family and colleagues all buy homes to live in. Do they hope when the time comes to sell that it has appreciated? Of course. But mainly they live in them. And almost all my neighbours have lived here 20 years or more. Some are 2nd generation of their family in that house. So, while I don't doubt the existence of the phenomenon, I question how typical the jingle mail folks are.
Disgusted Paper Pusher
Once folks that could not may the payments were restricted from owning. This may be because of bad credit or low income.
Then the great financial revolution happened. And these folks got houses they cannot afford. Now the only question is jingle mail or foreclosure or short sale. Now jingle mail, for better or worst, is the easiest and cheapest option in the short run- no lawyers, not living in a home without making payments or crapping up a house before foreclosure or being hassled by credit folks or other bureaucratic folk with more education. For better or worst it is a solution and not the worst one.
If you cannot afford to feed the family and pay the mortgage payment and you got kids, it is a reasonable solution. Once maybe someone would kill themselves with multiple jobs to make it. Not now for any number of reasons.
Alright, let me try this one. There are 30,000 Katrina evacuees still living in trailers. There was a riot in New Orleans today over plans to demolish public housing - NY Times? hp
Why not offer foreclosed homes to these evacuees?
A: Because the government does not care what happens to poor Americans living in trailers. The mortgage industry/REIC does not care what happens to poor Americans living in trailers.
They do care about keeping house prices, profits, sales and --especially-- their own fees and commissions high. Your lousy "plan" to help out poor people by "just giving away" empty houses does not accomplish any of these goals.
Don't you know for whom "your" government is actually working?
Aheadofthecurve, you might check out this magazine from the library.
TIME Magazine Cover: Home $weet Home - June 13, 2005 - Real Estate - Housing - Money
or this one:
http://thumbsnap.com/v/KWn3Q3sx.jpg
This marked the peak in the housing bubble and was an excellent contrary signal. Lots of stories in there, probably what you're looking for.
Here is my advice for the upside down borrower. First, go rent an apartment whose monthly cost is 1/2 of what your teaser mortgage payment was. This will give you breathing room later. Keep current on the car and credit cards. Now, stop paying the mortgage. Keep current on the apartment. Now your cash flow will increase mightily.
You can keep living in your house, but in case your credit gets wiped out you'll have the apartment which is costing you half of what you were originally paying on the house. Now, hire a lawyer to write letters to the state asserting that you are a victim of mortgage fraud. Lawyer letters should go to everybody. Your goal is to gum up the system so they can't foreclose easily. File a report with the local sherriff's office asserting mortgage fraud. You may be able to stay in your home for years if you keep firing the legal paperwork out and tangling up the system. SAVE MONEY DURING THIS TIME. PAY OFF YOUR CARS AND CREDIT CARDS WITH THE EXTRA CASH FLOW. If you do get evicted, retreat to the apartment.
They used the system to screw you over, and now it's your turn!
Until the cost of buying comes down to 10-12 times annual cost of renting the same place, it's too high. A $500K home that rents for $2000/month has a sustainable price of at most $300K. And even then, renting's a bit cheaper all things considered.
Bob Dobbs
I rent my house for $2200 a month is SoCal. The one a few doors down sold in September 2006 for 850k with 0 down. They walked two months ago.
From my recent Strategy Report:
So what are the consequences of such a sharp decline in housing values. Well for starters, there are going to be lots of people who have negative equity in their houses. In other words they will owe more on their mortgages than their houses are worth. As Chart Two shows, about 4% of homeowners with mortgages were upside down at the end of 2006. That number has certainly increased since then. Now try sliding the line over to account for a 25% price decline. It is easy to see how one third of all mortgages in the country could have collateral that is worth less than the amount of the mortgage within a few years. Now ask yourself, if you were living in a house worth $300,000 and you had a $400,000 mortgage on it, would you continue to send in your check every month? Would your brother in law? Your next door neighbor? Now some people will decide to continue to pay. They like their neighborhood, their kids want to stay in the same school, and they feel a moral obligation to live up to the contract they signed. However, as more and more people mail in their keys, it will become much more socially acceptable to do so. Negative equity is a necessary, but not sufficient condition for jingle mail or foreclosures. After all if your house is worth more than you owe, refinancing or selling the house is always an option. There may be some cases where it is better for people with very small positive levels of equity to mail in the keys or be foreclosed upon. The figures in the chart do not include the selling costs for a home (i.e. realtor commissions) which typically run about 7% of the value of the house all included. Its probably not worth the hit to your credit rating if the difference is just a few thousand dollars, however, if it is $100,000, well thats a good reason to walk.
Report con't:
However, lets say that half of the people with negative equity mail in the keys or are foreclosed upon. That would translate to about a cumulative foreclosure rate of 16%. With just over 51 million houses with mortgages in the country, that means about eight million households losing their homes. The table below shows the Census estimates of the breakdown of owner occupied houses and the size and number of them that are mortgaged for 2006. I would note that the value of houses with mortgages tend to be much higher than those with out a mortgage. Non-mortgaged houses by and large are owned by little old ladies who have lived in the house forever. Among non mortgaged houses, 37% are very modest houses worth less than $100,000, while among houses with mortgages only 18% are worth less than $100,000. Conversely, at the high end, 15% of mortgaged houses are worth more than $500,000, while only about 10% of non-mortgaged houses are worth more than a half a million.
Still more:
A 25% decline in housing prices nationwide translates to about $5 Trillion in paper wealth that is lost. Now to a large extent, they will be just that, paper losses. The house is still there and still provides shelter. Those who dont have mortgages will be basically unaffected particularly if they have no plans to move. Even if they do, the cost of the house they are buying has probably also come down. That does not mean that there will be no effect. Generally when people feel wealthier, due to gains in the stock market or the housing market, the tend to spend more freely. Economists differ on the magnitude of the wealth effect and the extent it is different for real estate as opposed to equity gains, but 4% is a fairly conservative estimate (in other words if your wealth goes up by $100 due to the good performance of your portfolio, you tend to spend about $4 a year more). Well, 4% of $5 Trillion is $200 billion. To put that number in perspective, it is about 2% of disposable personal income, and 54% of the revenues of Wal-Mart.
could read the comments section from these stories all day long; informative and entertaining! In fact, sometimes I do read them all day long.
Denzel | 12.20.07 - 5:39 pm | #
It's an internet porn addiction for ubernerds
That was the implicit societal contract they thought that they were entering into. It did not matter what they signed. If the asset does not perform society broke the contract not them. This is the failure of Keysnian economics.
Tg | 12.20.07 - 7:22 pm | #
That is NOT Keynesian economice YOU NITWIT!
That is "I want mine, I'm gonna get mine and do it fast and easy and not have to work 'cause I'm entitled and anyone who doesn't jump in and be greedy, avaricious and play the game and be a winner and be the best is a loser " Republican economics.
Gotta wonder how many of these upside down McMansion owners voted in 2004?
could read the comments section from these stories all day long; informative and entertaining! In fact, sometimes I do read them all day long.
Denzel | 12.20.07 - 5:39 pm | #
I read them all night long.
Aheadofthecurve-Come to San Diego and I'll see if my 'hard money' lending friend can introduce you. The egregious flipping has to be done in a fast moving market, as San Diego county was. Apparently, your $1M houses are not moving, but did they make the move in $200,000 jumps every six months? Of course, these are still relatively rare stories. More normal is the 'average American' who bought a house because he/she could without thinking beyond the first months and then got that payment shock. Should they have foreseen it, of course,...did they? Nope. I don't see much evidence of a social order in San Diego that would be able to enforce a social code, other than the You-Tube generation. How deeply offended do you think they would be to know some one who walked away? How many unwed mothers are socially stigmatized? There was a time when it was actually un-thinkable, and now, no matter how you feel about it, it is in the range of normal.
I wonder if the social 'shock' is because of failing to meet contract obligations or just not wanting to rub elbows with a 'failure', or be taken advantage of by the same.
Best lines of the day...
I am opposed to a moral structure that only benefits the wealthy, eithter we all have obligations or none of us do and it is just "business".
ex-pat in UK | 12.20.07 - 6:06 pm | #
Social norms sounds suspiciously like hope, which is known to be a crappy hedge.
KnotRP | 12.20.07 - 6:10 pm |
Masters of the Obvious like Kenneth Lewis may soon find themselves "surprised" when bailing out on your underwater house not only becomes more socially acceptable, but politically and legally acceptable as well.
HARM | Homepage | 12.20.07 - 5:18 pm | #
[DCR: Uh, it already is? It's not illegal to walk away...]
"I'm astonished that there is gambling going on here..."
....(attendant walks in) "Your winnings, sir"....
...Oh.....thank you, my good man.
(Everything you need to know about the world is contained in Blazing Saddles)
KnotRP | 12.20.07 - 4:41 pm | #
[DCR: better played in Casablanca:]
Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.
[aloud]
Captain Renault: Everybody out at once!
Casablanca (1942) - Memorable quotes
I predict that there will be a race in no-recourse states between jingle mailers and legislatures changing the rules.
It can't be done retroactively, and the easy money is gone going forward, so this is moot really.
And what's with this "shame" business. A no-recourse loan is a contract saying that the borrower has the choice of repaying the loan or handing back the house. A borrower who walks is fulfilling his obligations just as much as one who repays the loan and keeps the house. Just like someone who pawns something and lets the shop keep it.
What a bunch of dumb bastards. These blokes wouldn't know if they shit their pants.
I don't agree with the tenor of these comments.
In 1992, everyone in the DC area who had bought a home in the past 2 years was 10-20% underwater. People didn't send back the keys. People live in houses, communities, kids go to schools--you don't just move.
That is, IF you are still working and can just make the payments [especially if you can refinance lower at some juncture.] That remains to be seen.
Employment is the key to housing.
sdtfs- In 1999, I got a very attractive offer from a biotech company in San Diego. I turned it down, partly for family reasons, but also because cheaply built houses on postage stamp sized lots 10 miles inland were twice the price of my 1930s all-brick on 3/4 acres with 100 foot high trees in a really lovely well-established neighbourhood. And that was before the bubble. So, even when I am out shovelling a foot of snow after a Noreaster, I don't regret the decision for a second.
Of course I have read about flippers; I just have never met one, just as I have read about all kinds of curious phenomena that I have never experienced. I am going to hazard a guess that at least half the people who post here are from Cal. I think they are overestimating the number of real estate-obsessed people out there. I don't know any, though they obviously exist, so I may be underestimating the number. The truth probably lies somewhere in between.
"Hey you think this oncoming disaster will teach America anything? Did Vietnam teach America anything? You get my drift, I hope.
James | 12.20.07 - 5:09 pm |"
Carpet bombing works?
"In 1992, everyone in the DC area who had bought a home in the past 2 years was 10-20% underwater. People didn't send back the keys. People live in houses, communities, kids go to schools--you don't just move."
1992 was different ....
When we sold our home in 1992, we had to buy another house or pay capital gains.... Not so now.... We sold our home in July of this year and don't have to buy another one, because the amount of our gain was within the limits of new capital gains tax laws.
Here in Oak Park I ran into a couple that must have been trying to flip their newly-bought condo. 2-bedroom, 4th floor, ok wooden floors, as generic as hell. They had already cut the price to $385K and we were all laughing at them.
(To give an idea of costs around here, the most expensive 2-bedroom in the building kitty-corner from them, built at the same time, was $320K. The only thing different was that parking, although allocated, wasn't immediately attached and had a small monthly charge. Heck of a difference to pay $65K for. )
Lot's of people pissed off about the thought of Jingle mail. They realize that will affect their own homes value. That is why they don't like it. Such is life. It is a contract. The homeowner promises to pay. If they don't pay, lender can take away home. OK, lender here it is. That's the way I'll play my contract. You (lender) weren't thinking of me when you explained all the benefits of the option arm without getting in to the details of negative amortization, prepayments so you can make more $ on yield spread premium, etc. Ok lender use the contract we signed to kick me out. In the meantime, I'll pocket the mortgage payments I was going to send to you, along with rents I collect and walk out on the other side better then ever. I'll work on my credit again and have it back within a few years. Oh, and I'll help property values come down too, so I can purchase it back cheaper in the future. Sounds like a plan. Look at my finger, Lenders!
Well, the criminals that made the loans, the criminals the jacked the prices deserve it. Indentured servitude is illegal. And don't tell me the buyers should have known better, the "industry" created this. I think they should go to jail. Realtors, lenders and Securitizers.
Off with their heads.
"At least a few cash-strapped borrowers now believe bailing out on a house is one of the easier ways to get their finances back under control."
This is because a few cash-strapped borrowers have managed to see clearly what is in their own economic self interest.
energyecon, that was f'in brilliant! Comment of the Day!
as for 'social attitudes towards default', that's pretty rich coming from the CEO of BofA. I am just old enough to remember a time when banks had a much different 'social attitude' than today. They used to pay interest on regular savings accounts. They used to be friendly. Now they rape you for bouncing a check (it happens to even fiscally competent people sometimes), they jigger the NSF process in order to maximize the amount of blood they can squeeze from the turnip, they institute credit card rape policies like 'universal default'...
I would say 'Fuck 'em', except for the fact that people are losing their homes and wrecking their credit history and suffering major disruption to their lives when they have to give up their home.
WTF did these bankers expect when they handed out mortgages to all comers? When you don't treat granting a mortgage with the seriousness that it deserves, you shouldn't expect the lendees to do so either.
CR said: "If people feel comfortable going to a party and saying to their friends - "I mailed in my keys. Ha ha ha." - then the lenders are in deep trouble."
How about "I went to see a bankruptcy lawyer and he recommended mailing in the keys." I've been doing a fair bit of that lately.
Instant Karma going to get you BOA!! Ha ha ha. But seriously folks, the banks are going to get their congressman, who they own, to pass a law making it impossible to do. So you better do it fast, before you can never escape debt owed to these blackguards.
My observation on todays posts: People who feel a strong connection to their community, who live around neighbors that they have long known and with whom they have relationships, feel that people need to be responsible, to live up to their contractual obligations. People who live in large coastal cities, with transient populations, who have seen their neighbors cash out and flee, feel little obligation to their communities and feel that the financial choice should trump the ethical choice. I have posted before that I feel that defaults in the US will be very high and that Japan should not be considered a good model because of their socialized sense of interdependence. The coming avalanche of foreclosures will demonstrate that community identity in our country has fractured and is in the first painful stages of the virtual revolution. Who said revolution would be painless? Viva la Virtual Revolution!
my observaton on your comment, jcsc:
why is it OK for corporations to make cold, calculated business decisions regardless of any 'moral obligation' to their communities or country or workforce, but when individuals do that they should be condemned for making an 'unethical' choice?
If our community fabric is fracturing, it's only because people are following the cues from big business. Enron, WorldCom, and now this mess.
I guarantee you that if we went back to the old model of community-based banks granting mortgages to real homeowners rather than cultivating a culture of treating your home like a piggy bank or investment vehicle, we'd see a lot less of this 'fracturing' of which you speak.
like a virgin,
An interesting note on Japan: mortgage defaults were very low, but commercial loans were disastrous. So there are current, real world examples of how individual identity functions separately from corporate identity. I absolutely disagree with you that communities are fracturing because of the cues from big business. What's happening in business is a symptom of a far larger phenomenon. We are at the forefront of the transition from a physical conception of identity to a virtual one, and I think that this is a process with enough power to bulldoze any number of individuals who would prefer that things return to historical relationships. Our neurology will change, our culture will change, our values will change. I'm not making a value judgement. I'm making a prediction. The people with the strongest sense of physical identity will suffer the most. Protean folks will take it more in stride, but the difference between proteanism and schizoprrenia is a pretty fine line, which is why I've been practicing my tightrope walking.
George C wrote:
"Now, hire a lawyer to write letters to the state asserting that you are a victim of mortgage fraud. Lawyer letters should go to everybody. Your goal is to gum up the system so they can't foreclose easily. File a report with the local sherriff's office asserting mortgage fraud."
George C,
Interesting advice and a way to get ahead of what could be a nasty credit report.
What would you ask an attorney to write when asserting mortgage fraud on a negative amortized option payment loan? My loan was sold to Countrywide by the original loan holder so they aren't really the fraudulent ones, correct?
Just trying to figure out what an attorney or the local sheriff's office would have to say to be taken seriously.
BofA was astonished, ASTONISHED, that I wanted to pay off my credit cards and close all my accounts. Why wouldn't I want to keep that money in my savings account and accept 18% APR on a VERY flexible line of credit. They get what they deserve. A friend of mine just left there for Wachovia (probably not much better, but ...) because BofA sucked.