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Strategic Default
When the housing market burst, thousands of homeowners found themselves underwater with their mortgages, and stood by as they watched their homes devalue to far less than the amount of their loans. A 2009 study (pdf) found that 26 percent of foreclosures were strategic defaults, meaning that homeowners chose to walk away from mortgages they could still afford to pay to get out of a bad investment.
Inside the lending industry, strategic default goes by another name, too: ruthless default. Some bankers consider the act to be immoral or at least, unscrupulous, citing that foreclosure not only affects the homeowner. Neighboring houses of those that foreclosed take a hit on their value, too, because when foreclosed homes sell at discounted prices, it affects what buyers are willing to pay. Foreclosure also contributes to urban blight.
Individuals also grapple with the ethics and logistics of walking away from the mortgage they agreed to pay. Companies have emerged that walk homeowners through the legal landmines of strategic default. This one claims that when you accept a loan, defaulting is always on the table.
Are you a homeowner underwater? Have you tried to get a loan modification or considered foreclosure? What do you want to know about your options?
GUESTS:
- Sarina Labrum: Homeowner with an underwater mortgage who is considering strategic default
- Mike Dupras: Homeowner in the process of a strategic default and a client of You Walk Away
- Luigi Zingales: Professor of entrepreneurship and finance at University of Chicago Booth School of Business
- Jon Maddux: CEO of You Walk Away
- Joe Ohayon: Senior Vice President of mortgage servicing at Wells Fargo
Tagged as: foreclosure · mortgage
Photo credit: taberandrew / Creative Commons
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banks forced to make loans to those who were not capbale of repayment caused this whole mess >. just another unforeseen consequence of pandering democrat legislation
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Jacob hang in there! I enjoy your writing, I have a response that builds on your premise but frankly with the hostility and lack of intellect on display I find to be far to juvenile and poisonous to bother with this forum any longer. See ya on the radio.
lolo as you were advised “Seek Help”! -
so, you agree that bakers are and should be the despots? -- Iolo — Wed March 9th 4:24p.m.
NO!!! I don't wanna be a despot! But I really like baking! The scent of fresh bread, the taste of warm chocolate chip cookies -- it's all so irresistible! I wanna bake, but I don't want to be a despot!
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Jacob, please carefully examine your suppositions. You are saying that some should never have been approved in the first place. Your allegation seems to imply you believe that the mortgagors somehow were aiming to get something they weren't entitled to. Noting of course that this sort of victim blaming is sort of out of date as it is exactly what the banks/mortgage "bucket shops" did to deflect scrutiny away from their own illegal practices currently being investigated though sadly not prosecuted. As an example, I have a good friend who quit the mortgage business when she found she was being expected to falsify not only loan applications after the applicant had signed and submitted them (to get the loans approved and her company get its fees) but was also expected to falsify the loan documents from the underwriter to hide the real terms from the mortgagor. There is so much allowed to go on in the largely heretofore poorly regulated mortgage brokerage business that it is not surprising to me in the least that these practices were rampant. In point of fact, look at the legislative history in Washington state regarding "bucket shops" and compare and contrast what is going on in Oregon with what is NO LONGER encouraged to happen in Washington. And Washington made its changes in the late 80's with the "savings and loan crisis" for those of you old enough to remember that particular meltdown.
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jacob
"Credit and Trust makes the Economy Work."
Actually credit is what hurt the economy and we should not have trusted the bankers.
So your argument is self invalidating.
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I AGREE WITH LOLO>>>LETS DISCUSS THE TOPIC AT HAND, MY PROPERTY VALUE WENT DOWN 30 % BUT MY PROPERTY TAXES WENT UP. AND LOLO I READ EVERY WORD OF YOUR POSTS AND FOUND YOU WERE OFF TOPIC 97.34 % OF THE TIME.
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are you on the verge of default, dfund? really sorry for anyone who might be in that pinch -do you still trust your banker?
why? or why not?
did you 'calculate' what percentage off-topic any others were, as well - i would expect you to have some interest in that too- if only to show you were unbiased -but never mind - that would be asking too much
How is it the dem's pandered to the bankers? and the repub's resisted giving away the bank to the bankers, tooth and nail? was it a savage fight for them? were any repub's wounded in their valiant defense of the common man (and woman) you made the claim above - can you expand on it and justify this claim?
i sympathize with this situation, if it is indeed what you suffer - not much solace that everyone seems to be in this same situation, yet why don't you all at least write to elected officials and just outline your situations, as you see it - then our rep's would have evidence to take the bankers and hold their feet to the fire - so to speak - we wouldn't really want roasted banker - pluughh! too fatty
which party offers you a remedy? or are you willing to trust the bankers again? Have you tried to write a statement regarding your situation to your congresspersons and state representatives? and what kind of response have you gotten, if any? do you care to share any of the relevant information here, in the hope it may help others?
P.S.- YOU WENT BACK TO SHOUTING - IMAGINE IF EVERYONE DID THAT!
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no i am not on the verge of default
lolo excuse me me for pointing out that you were off topic>. i only pointed it out beause of your criticism of others
if you recall> garney frank and chuck dodd were in charge of oversight oversight, this whole mess was caused by democrat community housing act which forced banks to give loans to people with little ability to pay them back
THE BEST GOVERNMENT IS THE LEAST GOVERNMENT
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DFund, the caps button is a toggle, please do consider using it. That having been said here's an interesting factoid about property taxes that the realtors should feel pretty shamed over: homes being short-saled or foreclosure re-saled haven't had their property tax assessment revised and the reason is that the realtors themselves are generally refusing to budge on what they "believe" (despite no current market support) the house was "valued" at at the biggest bulge of the bubble. Example: In 2010 I looked at buying a foreclosure resale where the monthly amortized real estate taxes exceeded the mortgage payment (with strong assurances of absolutely no changing by county tax assessors on the assessed value of the residence, thanks to greedy realtors' freely offered baseless "opinions" based on wishes not reality). And yet those selfsame realtors still whine about not being able to sell homes!
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DFUND,
Regarding your comments about the "community housing act," I suggest you research the Gramm-Leach-Bliley Act of 1999, which obliterated the Glass-Steagall Act of 1933, which had served as effective regulation of the finance industry for 66 years, following the Great Depression.
The "community housing act," or Community Reinvestment Act, occurred in 1977. While it certainly belongs in the discussion, the 30 year old CRA alone did not cause this. Poor people weren't the only ones caught up in this. (I would think that would be obvious by now) It does make for a good right-wing talking point, however.
Point is, there's plenty of blame to go around. Note that in both 1999 and in 2008 (TARP), the President and Congress that wrote the bills were of opposite parties. And neither President vetoed either bill...
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Our small, 2 bedroom, 2 bath house in Boulder City in a seniors only estate was appraised in 1998 at $150,000. It was sold in 2007 for $300,000. That was right before the bottom began falling out of the housing market. We were very, very fortunate. But I know other people living in that development are presently 'upside down' in their mortgages. As these folks are mostly all retired, I don't know how they will manage with this situation. Thankfully most are comfortably well off and being elderly maybe the situation of falling house values won't affect them as it might their heirs. Also perhaps their mortgages, as was ours, are paid off.
It is the younger people still in the workforce where the problem is indeed a grim one. Given the fact that the LV area, that includes Boulder City -some 20 miles distant- has an unemployment rate of about 15 to 18% all the evils created by so many jobless people are finding their way to BC.
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Folks,
I've just deleted over twenty comments from this thread that were personal attacks. Some of the comments were from a few days ago; sorry it took so long.
As many people have noticed, the level of discussions in these threads has taken a real dive over the last few months. We don't want to alienate more people like Desolation, who wrote, above, "with the hostility and lack of intellect on display I find to be far too juvenile and poisonous to bother with this forum any longer."
We'll do our part to monitor the threads more carefully, and to enforce our commenting guidelines more assiduously. I hope that all of you will stick around to keep these threads what they've been for so long: models of frank, feisty, and respectful dialogue.
Dave
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Thank you, Dave. I wrote to the general TOL Staff email address (thinkoutloud@opb.org) over the weekend to let you guys know about the proliferation of ad hominem attacks. I usually enjoy coming to the blog and reading, and contributing to a lively, thoughtful exchange of ideas, but the spate of personal attacks made me begin to think about leaving and not coming back. I would not have liked to do that.
I, for one, try to make thoughtful comments that add to the discussion, even if they are occassionally slightly tangentially off-topic. Sometimes my comments are a bit tongue-in-cheek (like the "Voldemort" comment in the International Students thread), but I try to keep them respectful and well-thought out. When I am responding to another poster's comment directly, I usually quote and give credit for the comment I am responding to. I hope that TOL has a long and thought-provoking life on OPB.
Courteously,
Penelope McKibben
(AKA Penny_From_Eugene)
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Thank you, Dave. I agree with Penny_From_Eugene. I read some of the blog comments this morning and thought this is a waste of time; the online contribution has deteriorated too much over the last several months.
But I want to stick around because I appreciate and respect what you and the TOL crew do. TOL exposes me to possibilities outside my wheel house. I gained much needed rumination from reading The Other Wes Moore. I look forward to reading more TOL book recommendations. I'm also encouraged that TOL provides access and insight into the nebulous world of regional government.
I view the current deterioration of the TOL blog as an opportunity to practice compassion and non judgement. Some days are better than others though.
Thank you for illuminating many paths to better ways of being.
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I gave my house in Arizona back to the bank a little over a year ago after finding myself at least $200,000 under water on the mortage. My financial advisor felt that if I kept the house, it would never return to anything like my remaining mortgage balance in the foreseeable future. I was nearing retirement and knew that I could only continue to make the payments if I continued to work well into my 70s. As soon as I had to stop working, making the payments would be out of the question. My bank and I each took risks on the mortgage and we had a business deal: they agreed to loan me a given amount of money. In return, I promised to either (a) pay according to the schedule or (b) give them the house and lose what I'd paid to date. I chose Door #2. This was a wrenching experience for all kinds of reasons but I don't think it was an issue of morality or honesty, as some people suggest. It was a business deal that went wrong for everybody involved.
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I find your situation interesting because you state ...."I was nearing retirement and knew that I could only continue to make the payments if I continued to work well into my 70s." So, if the market handn't turned down, you would not have had to work into your 70's? I'm missing something here. Is it possible that your real intent was to sell the house before retirement to get out from under the payments? It seems that your circumstances were all too common around 2006-2007. I'm not saying that you were thinking this, but I think many folks thought that the housing market would rise infinitely and that real estate was not so much a financial risk as it was a sure bet, and a retirement nest egg as well. I'm sorry that you lost your house and I'm sure that it was difficult. Nonetheless, the only time I think that returning a home to a bank should be in a situation of extreme financial distress such as a death, an illness that prevents the breadwinner from working or in the case of job loss with subsequent bankruptcy. There has to be a severe penalty for "strategic default" or people will continue to do this nary a concern.
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seems to me that the heart of the problem is treating everything in our lives as an investment. why should a house be an investment and not simply a place to live? if folks bought houses to live in instead of to unload for a profit somewhere down the line, changes in price up or down wouldn't be such a big deal. quality of design and construction would improve. neighborhoods would be more stable. housing bubbles wouldn't be such a problem. the pop-up suburbs that have proliferated in times of economic growth would be replaced by more thoughtful solutions.
I believe that this simple change in attitudes would have many benefits for the strength of our communities, for our economy, and for our environment. the idea of strategic default would cease to be an issue.
which isn't to say that the bankers, mortgage lenders, developers, and derivative pushers should be let off the hook for their part in all this. they absolutely should not. but the folks who took the loans also share some responsibility for trying to cash in on the American Dream© without considering the damage it has done and continues to do.
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How did big banks end up with huge portfolios of bad loans? Was it the goal of big banks to acquire massive amounts of real estate because they knew many of their customers couldn't afford to repay their mortgages given the softness of the economy? Cynically, the housing bubble looks like the biggest transfer of wealth from the poor to the rich in recent times.
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Read up on "securitization" and see how this was done. The banks got their money. They still have it. They are still sitting on their bags of gold.
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"How did big banks end up with huge portfolios of bad loans?"
They didn't, they ended up with the "fees" from selling those loans.
And investors who bought the securitized mortgages ended up with the bad loans. And the consequent losses.
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Very timely topic. I hope that you cover with the principals of You Walk Away what types of services they charge for, how much they charge, what relationship they have to other service providers licensed in Oregon, what additional charges there are for those other service providers, and finally, ask them if You Walk Away is licensed as a debt management company operating in Oregon, in accordance with recently enacted House Bill 2191, which generally requires any companies that engage in assisting consumers with debt problems to be registered with the Oregon Department of Consumer and Business Services, and provides for specific disclosures as well as limitations on what is charged.
David
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Sought to buy a house in the early 1990s. I didn't like the conditions: interest rate on mortgage too high, not sure my job was secure. I didn't buy the house because I didn't want to risk being foreclosed if something went wrong. I had never considered walking away from a contract I signed. Does integrity still have meaning? Just because fat cats walk away from busted deals doesn't mean I should. I would prefer to avoid sinking to their level.
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It would potentially make sense to be morally against strategic defaults if the consumers were entirely to blame for the defaults, or if it was a one-off event. These defaults are occurring because all sides took on unnecessary risk. The financial institutions created the riskiest of products that allowed, or provided, a defective and unsustainable architecture. This bad engineering allowed the markets to collapse; and, following suit the housing values further collapsed. You might say that consumers are indeed, morally responsible for their actions, because we are all (generally) morally responsible for our actions, but the players of the financial institutions are also morally responsible for their actions. Consumers don’t have much of a choice, it may be a hard choice, with no great outcome---but at this point, it is a utilitarian choice, that is attempting to judge the path that causes the least harm. If the bank played no role in the market collapse, the consumer might have different moral obligations, but they are both guilty. Nothing will negate the moral responsibility, but there are definitely viable excuses for strategic defaults, that allow the consumer to weigh one action over another to seek the lesser of two evils.
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"Some bankers consider the act to be immoral or at least, unscrupulous,"
That's hilariously ironic!
I have had long and heated discussions with Conservative Republicans who insist that "there are no morals in business".
Bankers created this crisis with their "Derivative" financial scheming and they complain about normal peoples "morality"?
Doesn't it look more like bankers are pathologically greedy? That bankers are sociopaths, dangerous to society?
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What does Mr. Dupras plan on doing once his credit is completely trashed? Someone please address the consequences of walking away from a financial agreement like a mortgage. Is default better than filing for bankruptcy?
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There is a critical double standard in play here. Individuals are typically held to a moral standard that demands that they complete a mortgage contract, regardless of changing economic conditions. If I default on a mortgage for $200,000 for a house that de-values to $125,000, I am expected to "suck it up" and live with the cosnsequences of a business decision that did not work out. The shame of the community labels those individuals who default as morally corrupt.
On the other hand, if I am a large business, these decisions are made solely on the potential return to their business interest. A beautiful case in point is Paul Allen (Vulcan Enterprises, Portland Trailblazers) who signed a "no-early payoff" mortgage with TIAA-CREF (representing the New York Teachers Pension Fund) to build the $250 million plus Rose Garden. When cheaper money became available, Paul Allen defaulted on the loan, sticking the pension fund with the consequences. After running the facility for two years, TIAA-CREF sold the property back to Paul Allen at terms that were far more favorable to him.
The test for the Rose Garden default decision was not a moral compass, but how to maximize financial return to the borrower. Paul Allen is seen as a brilliant business man. The borrower who makes the same decision on a home is considered a slacker!
Thunderbeast
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"There is a critical double standard in play here"
You are exactly right!
Er, the double standard is exactly wrong.
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David and all, this is why owning a home shouldn't be the goal for EVERYONE. I understand strategic default, but I don't understand the attitude of "it's the bankers fault"; no bubble is sustainable.
We got lucky by selling our house before the bubble burst; we've been happy re-renters since then.
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I'd like to know of one instance where a bank has done the right thing when it's not in their financial interest.
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They can't.
Legally, their fiduciary responsibility is to their shareholders and not to their customers, so it would be illegal for a bank to "do the right thing".
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Schools should educate kids to treat a house like a business, an investment, and do house-business like an actual businessman, ruthlessly and without any consideration for the banker. If the housebuyer takes a risk and loses, he should default or go bankrupt like any businessman would and unload the loss on others.
So I wonder if the housebuyer should create his own "house-limited-corporation" to limit his potential losses in the first place. A corporation is legally designed to privatize the business profits to the shareholders and socialize the losses onto the public, and if businesses can do that, why can't housebuyers do that too?
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I don’t believe your guest understands the nuance of morals. Strategic default-ers are still morally responsible, but they potentially have an excuse to take another action. It is similar to part of what goes on in a Sophie's choice. Weighing the equation to decide whether to default does not get rid of the moral responsibility, nothing will, but it might provide them with a justification to act differently.
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Considering the bankers' collective guilt in the financial meltdown of the last four years, IMO they have a collective obligation to renegotiate the loans. Unfortunately their dirty tricks are at work even where their feet are held to the fire via federal mandate and they are "forced" to renegotiate; those dirty tricks have been well documented in investigative journalism both print and broadcast and include but are not limited to the final injurious retribution against the homeowner: following re-negotiation even to the level of agreed turnover, turning the homeowner into the IRS claiming that the homeowner "financially benefited" from the process. Yes. They do that. They file forms with the taxing authority claiming the homeowner had "income" from the difference between the negotiated amount and the full amount due under the mortgage. There IS no such thing as true cooperation and good faith efforts on the part of bankers in these situations. There just is NO SUCH THING. If they can't have all their money, they will have their vengeance. Homeownership is not the American dream it is in fact the American Nightmare. Financial experts were noting this as far back as five years ago. Crunching the numbers equals the true meaning of the word "mortgage" = "death pledge."
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There was predatory lending. There truly are people that need help but I am continually disgusted by people who treated their homes like a piggy bank. I personally know people who have defaulted not because they couldn't pay but because they want a better deal and see it happening all around them.
I too am underwater and challenged by a large cut in income in my household but I'm not walking away from my house. Sure, I could save tons of money but my house is a HOME. It is a long term investment.
Read contracts. Understand what you are getting yourself in to before you sign. Know your risks. If you don't understand get an attorney. There is just as much blame to go to homeowners who had no business buying the properties they did. Does anyone really think they can afford a $300k home with only a $50k/yr salary?
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Venessa, there is plenty of evidence now that "reading before signing" didn't do a whole lotta good and that is because things were changed in the documents after the person signed. Where attorneys were involved it maybe happened less but it still happened.
Maybe one in a hundred prospective homeowners tried to get loans they "didn't deserve." Many more were deliberately duped by unscrupulous lenders and brokers.
"Getting an attorney" is not the answer to life's problems. I should know. I have been a paralegal for 40 years and pretty much seen it ALL.
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A mortgage is not the same thing as a home loan. "Mortgage" means the security interest in the collateral (the home) held by the lender. So, when you're paying your house payment each month, you're paying down the home loan. You don't extinguish the mortgage until you have paid the loan down to zero.
It's too bad so many folks use the terms interchangeably--yet another small part of the misunderstandings that surround this housing-bubble/bust situation.
A very good book to understand the recent market fiasco, and all market downturns in general, is How Markets Fail, by John Cassidy. Readers might also enjoy the book called The Quants (I forget the author's name), which is about the financial industry and its zany ways of making huge sums of money by, in part, using huge amounts of leverage--borrowed money--in risky ways.
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Also: "Inside Job." Plus the series NPR did on how the meltdown happened; it was shockingly sickening to hear the taped interviews of twenty-something mortgage brokers who freely admitted they committed financial shenanigans to earn high fees - fees so high that they bragged of astonishingly, obscenely large incomes - one interviewee copped to an income of $120,000 per MONTH. You heard me. And the one who was earning that whined because he was always "broke at the end of the month." If you want a one-word diagnosis of the mortgage/home lending meltdown that word would be "greed."
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No businesswoman would stay in a business in which she would lose money for twenty years, she would cut her losses and go try something else.
And housebuyers should do the same.
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So the rest of us should pay for someone else's poor decisions? Should we do the same when someone loses money in the stock market?
A home is not a business.
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You're thinking like a decent person but businesspeople don't think like you do and I think that you ought to mentally arm yourself to act like a businessperson when you deal with them.
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Bankers are in business to help themselves, not to help you, and you really need to know that when you do business with them. They are in "competition" with you for your money, they are not "cooperating" with you for you to keep your money.
Now a Credit Union is a different thing and I highly recommend them, they are the opposite of a banker.
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Bankers do not think morally when they sell the loan, but they try to morally guilt trip the buyer when the borrower gets into trouble.
The housebuyer should "do unto the banker as the banker did unto the buyer".
That's the "Golden Rule"!
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I enjoyed David Miller and his guest’s discussion. Although the conversation was probably purposely narrow to facilitate programmatic goals, at times listening I would have liked the balance of an historical perspective. Certainly personal responsibility is a central issue relating to our recent financial crisis. However, a comprehensive discussion which talks of ‘moral considerations’, is difficult without describing the larger events which caused the situation of upside-down mortgages. The way I understand it, large banks (many still holding the mortgages discussed in today’s program), rating agencies, and government regulators conspired to create a mortgage market and securities based (dishonestly) upon that market, thereby creating huge profits for many Wall Street winners. Among the many losers middle class home owners, businesses, and workers predominate. For most of these, foreclosure, bankruptcy, and other legal remedies are the norm. For those who played a role in the institutional malfeasance that caused of the crisis, legal consequences have been few and far between.
Today’s Think Out Loud was an interesting look at a small slice of this larger cultural event. -
Very well said JRD.
Unfortunately, pursuing legal remedies is unaffordable for most people particularly those hardest hit by the Second Great Depression. Consider this: the mid-range American homeowner still employed averages approximately $21 per hour take home pay. Mid-range large city lawyers charge ten times that and more per hour together with a five-figure retainer up front to cover "costs" such as investigations, depositions, expert witness fees, and the high cost of going to trial. IF they will even take these cases; there are some who have been considering taking them on class-action basis and to my knowledge there have been no "class certifications" as yet. (And keep in mind no one except the lawyers "win" in class action litigation, witness the Johns-Manville asbestos litigation debacle or the Exxon Valdez litigation where judgments remain unpaid more than two decades later.) The harsh reality is this: remedies legal or otherwise may exist in law or on paper. They simply do not exist in the real world, except perhaps for the already very wealthy who don't need them anyway.
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"The harsh reality is this: remedies legal or otherwise may exist in law or on paper. They simply do not exist in the real world, except perhaps for the already very wealthy who don't need them anyway."
True.
And that is worth a TOL show.
Corporations as a normal business strategy use the technique of wearing a plainant down with legal fees so that she quits long before she even gets to court.
"All the justice you can afford", is a time-dishonored business strategy.
Or maybe "All the justice you can buy" is a better way of saying it.
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I chose the path of strategic default back in Feb 2009.
We bought our home in April 2007, and recognized by early 2008 that the market had topped and we were about to go underwater. I spent two months trying to get my lending bank (local CU) to at least work out a lower payment, to no avail. We then put it on the market to see if what kind offers would come in. Over the next 10 months we got 5 offers within $20,000 below the payoff amount, I even made a good faith offer to take on the deficiency at whatever rate they would offer. Nothing. Every one of these offers were sat upon for 5-10 weeks by the bank before being declined.
I stopped making the payments in order to get the banks attention, plain and simple. The next offer came in almost six months later, during which time we received a few threatening letters, but no notice of foreclosure. The offer was almost $40,000 below the payoff yet, inexpicably, it was accepted. We moved into a rental during the wait and maintained the property for showings etc.
So, was I justified, was it "moral"?
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Depends. Did you need to move? Were you able to make the payments? Or were you simply making a financial decision? Real Estate prices are a collection of impressions of the buying community, thus underwater is a mass delusion. Another question to ask is why your local Community Credit Union should have taken a write down on the loan? Did they deserve to take a loss while you did not?
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"Some bankers consider the act to be immoral or at least, unscrupulous," ... well, they should know, being experts in both.
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I've come full circle on the strategic default issue. I am now in the camp that has no problem with someone who wants to default on purpose because of one fact, but with one caveat. In a "normal" market (like the one before this latest boom that was created by insane lending standards - the caveat), the lender/bank was willing to make the loan and accept the home as collateral for a default (the fact). So, by all means, there is consideration for breaking the contract.
What I DO have a problem with is people defaulting and then living in the home for free! Move out! Fannie/Freddie (me, the taxpayer) has backed that loan, and now you get to live there for FREE?? Meanwhile the Fed keeps interest rates so low that houses haven't depreciated enough to reflect their true value, and keeping me out of the market!
I also find it laughable that people who can afford their mortgage were just fine paying it while it was appreciating in value, but not now. (those who could never afford it are a different story)
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Fannie and Freddie were sold off in the Johnson administration to hide the cost of the Vietnam war. We didn't own Fannie and Freddie again until the bailouts, and they made a few people very very rich.
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I agree with Mr. Zingales and I applaud Lucia. She has spoken the definitive truth here. She walks the walk and is honoring her obligations and living within her means. I have little patience for those who don't stand behind their word and signature. I also find it disingenous to blame the banks and mortgage companies for purchasing a home that they could not afford. Let's face it... some made bad decisions and bought houses that they couldn't afford. But, all of us own houses that have decreased in value over the last few years. However, most of us are hanging in there, paying our mortgage and honoring our obligation. I find little honor in the work of Jon Maddux. What was not revealed was how he is making money on the bad decisions of those who walk away. He is a parasite reaping reward on the poor behaviors of his clients.
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TelemarkTumalo,
For you to claim that people who walk away are making bad decisions presumes that you intimitely know their situation and have experienced what they are going through. If not, then it makes you sound judgmental and slightly ignorant, no offence intended. I have spoken to some of our thousands of clients and heard their stories. I have to say that if I were to take sides, then I side with the underwater homeowner who has to do what is best for their family. I agree with you in that many homeowners took on too much risk and made a mistake when purchasing the home, thinking the value would continue to rise. We have to be honest however and look at all the facts. The former Chief Economist and Senior VP of the National Association of Realtors wrote a book titled, "Why the Real Estate Boom Will Not Bust – And How You Can Profit from It". The last two presidents had huge pushes to increase home ownership in America. If chief economists and leaders in the highest positions of government and finance couldn't see or stop this crisis from coming, how on earth can we reasonably expect a homeowner who was pursuing their American dream to not get caught up in buying a home or using it as an investment?
In 2000, because of a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.
Tom Lund, the head of Fannie Mae single-family mortgage business, publicly stated in 2005, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure?"
We can all agree that the underwater homeowner going through foreclosure didn't create this housing bubble or that low interest rates and reckless lending practices created a huge demand for housing. Supply and demand is what creates bubbles. I appreciate that you are honoring your obligations, we all should do this. However sometimes things don't work out as planned and we have to take a step back to ask ourselves if we are hurting our family and financial future so that we can feel like we honored a promise to pay a corporation who also took a risk, charged fees and interest rates to cover their risk, and collateralized the loan on a home they appraised, and felt the value was enough to cover the debt if they needed to take the home back. I really enjoy discussing this topic and if anyone would like to do so with me, please don't hesitate to email me at jon@youwalkaway.com
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Has anyone considered all the home owners that work, or did work, in residential construction? Not only are they underwater but they're also out of work...
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When you look at a 30 year fixed rate loan from the point of view of the lender it makes very little sense for them. The likelihood for early repayment is very high (lost interest) and interest rates have historically been fairly reasonable. Fannie Mae and Freddie Mac were created to be the incentive banks needed to make the more affordable loans, and so the American Dream was born (pre-depression home buying involved 50% down payments and huge interest rates). Now, some home buyers (there is a distinction between a home buyer and an investor that strategic defaulters should pay more attention to) are backing out of the contract, and as we provide less and less assurance for the banks that they'll be repaid their bet, they will become less likely to offer those 30y fixed loans, and we'll all lose. Almost no decisions are purely financial. In a state like Oregon, where many contemplate the impact of purchasing asparagus or a t-shirt, I'm surprised we would even consider making strategic default a more common choice. We bought our home in 2008 and have no idea how much it's worth now. It doesn't matter. We're not going anywhere.
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Homes have been purchased for investment for decades. Home ownership was one of the only ways that the middle class could grow their nest egg, mostly free of risk. This ended when the bank lobbyists pushed through deregulation of their industry. Once they accomplished THAT, they were free to lend to those who otherwise wouldn't qualify. Everbody was making money from the "free market" housing bubble. Banks were NOT worried about these loans going sour by default because they packaged and sold them as AAA investments to others so quickly the ink on the conrtracts were barely dry. Toxic loans bundled together with other "good" loans sold to investors who thought they were secure and safe because the credit rating agencies gave them a triple A grade...with some nudging from the banks involved. I think we all know the rest of the story when the domino's began to fall, billions of our tax dollars were used to bail them out but the people who had mortgages were left with NO lifeline. Home values plunged, the economy stalled and average American's were sent into the unemployment lines. Wall Street and the banks began handing out big bonuses again and the stock market was soon back over 11,000. The avg taxpayers home is now worth 20-30% LESS than it was before this fiasco. Unemployment checks don't cover the mortgage payment. For every 1 job there are 6 other applicants. 14 million people are either out of work or under-employed. Soup kitchens and food stamps are at their highest levels in decades and 20% of children live below the poverty line. Let's stop talking about the small percentage of folks who "strategically default" and listening to the bankers who NOW want to talk about morality and start focusing on those who did nothing wrong, followed the rules and lived within their means BUT STILL face the reality of a drained savings account and moving their family out of their home. After the brutality of greed that has been rained down upon us I find it hard to sympathize with financial institutions who caused this mess and are now whining about me not being able to pay them...more money! Maybe if they would work harder on modifications or principle buy-downs folks would be able to weather this storm. Instead, you get the run around on phone calls, missing paperwork for modifications, hours on hold from one dept. to another then you get disconnected. Foreclosure? Giving back a home that will probably NEVER gain back the $50k that it's currently under the loan amount makes perfect sense to me. Mybe I'll finally be able to sleep at night. It's their house anyway. I can't afford it anymore. I'm sure they'll still manage to get their bonus next quarter. I'm sure they're incredibly proud of how rich they still are.
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"Home ownership was one of the only ways that the middle class could grow their nest egg..."
Yes, that's true. But the way they did it was to pay it off over 30 years (or trade up along the way), thereby having no housing costs (except for taxes/insurance) in their later years.
The past decade this attitude has been turned around such that people think the act of buying (at any price) alone is enough to make them rich. All they have to do is wait 2 years then sell. How many people have you heard in that time who say they were always told that housing is the best investment? A lot. Problem is, they never stopped to think just why that...WAS. All they knew was that they just HAD to "get in."
In reality they were just renting...from the bank.
You also seem to think those 20-30% losses happened in a vacuum. I don't discount what you say about lenders. But the only reason prices went as high as they did was precisely BECAUSE of the lenders and their insane lending standards. The loss of prices isn't a crisis at all. It's the cure.
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PortlandDave: Your point about growing your housing nest egg through appreciation over the life of the mortgage (or trading up) is well taken. Paying off their mortgage will net them whatever the value is at the time. If they entered into a 30 year, $250k mortgage @ 5% and have matured the life of the loan, they will have paid $261K in interest ALONE into the bank coffers, as well as paying off their principle. That's the deal they both agreed to and I fully understand that. Unfortunately after the Wall Street bubble, their home isn't even worth the initial purchase price anymore, or should I say, their nest egg shrank considerably. That's an unfortunate reality these days but they are not the people I'm talking about. If someone is not in financial distress than it really doesn't matter how much their house is appraised at unless they sell at that time, it's simply a figure on paper. It doesn't make them richer or poorer.
I'm referencing those who entered into a mortgage with every intention of paying for it for the next 30 years, or trading up after an increase in value but have lost a job, or their spouse has lost their job as a direct result of the banking industry playing fast and loose with mortgages and pensions and investment monies without the oversight of regulation.
Many folks did hear that housing is the best investment. Why? Because it was, for decades, until bankers saw a way to exploit it and make millions while building their bubble. Your average 9-5'er needed a place to live and saw stability and growing value, not to mention the news media, mortgage brokers, financial analysts and money guru's touting the safety and value of the housing market. Shame on the avg guy for being a victim right? Shame on them because they just HAD to "get in", lol.
Reality IS, it's just a contract held by collateral. The bank lends money for a home and uses the home as security. You don't pay, they take BACK their home. Nothing personal, it's just business. As a partner in said business, I also have the right to allow them to take back their home if I can no longer pay. The recent slew of unemployment really doesn't leave to many choices. Pay or EAT...I would choose to EAT. Businerss is business. No hard feelings.
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...you also stated that "The loss of prices (value) isn't a crisis at all. It's the cure." Well I would go one step further and say that the cure for this would be to perp walk a couple dozen Wall Street execs, freeze their assetts, confiscate ANY illegally gotten gains, turn their world upside down with each one getting their own personal IRS agent, umm, make that 3 agents for each so it's thorough, and scrutinize their family investments while parading them through the media for months until they finally end up in a cell with Bubba. No, not a white collar crime spa facility but a hard core, "don't drop the soap pretty boy", bunk bed sharing, gang infested PRISON! Let em spend a few years in there so they can go back and tell their corporate thugs all about.
There's your CURE.
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"Shame on the avg guy for being a victim right? Shame on them because they just HAD to "get in", lol."
I must not have communicated that well. The "average guy" thought he was guaranteed appreciation without putting much, if any, skin in the game. That was the difference. For decades people bought a house to live in, and it paid off for them, because they paid it off. Their strategy wasn't (necessarily) to make money off the house. Enter the late 90s - 2000s, and everyone assumed appreciation was a birth right. There isn't an acquaintance I have that didn't tell me how much they were "making" on their house.
I couldn't agree more with you on the perp walks for bankers...but just about every loan-owner I know was playing the game too...
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"Shame on the avg guy for being a victim right? Shame on them because they just HAD to "get in", lol."
I must not have communicated that well. The "average guy" stopped being the norm is my point. Enter the late 90s - 2000s, and everyone assumed appreciation was a birth right, especially those that bought near the top.
There isn't an acquaintance I have that didn't tell me how much they were "making" on their house and that now was a great time to buy. (I had to find an online blog of people like me to check my sanity) Very few of them had a strategy that kept them in that house for more than 5 years. If the average Joe assumed he would make money just by signing a piece of paper, then yes, shame on him. I couldn't agree more with you on the perp walks for bankers...but just about every loan-owner I know was playing the game too...
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"Shame on the avg guy for being a victim right? Shame on them because they just HAD to "get in", lol."
I must not have communicated that well. The "average guy" stopped being the norm is my point. Enter the late 90s - 2000s, and everyone assumed appreciation was a birth right, especially those that bought near the top.
There isn't an acquaintance I have that didn't tell me how much they were "making" on their house and that now was a great time to buy. (I had to find an online blog of people like me to check my sanity) Very few of them had a strategy that kept them in that house for more than 5 years. If the average Joe assumed he would make money just by signing a piece of paper, then yes, shame on him. I couldn't agree more with you on the perp walks for bankers...but just about every loan-owner I know was playing the game too...
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Comments are now closed.
Is it better to have loved and lost, than to have never loved?
Many of those experiencing foreclosures obtained their mortagages in a too liberal, underscrutinized lending climate. And because they probably should never have been approved for an unaffordable mortagage in the first place, they are now in jeopardy of losing their home.
Is it better that these homeowners should have never been deluded into the homeownership dream and just been consigned to being lifelong renters? At least the dream was real for a brief moment, but for many the premise was false and the foundation shaky. Being a renter will be more common for many Americans.
Short term defaulting leads to bump up in one's income and stiffing and unruffling the stuck-up bankers. But your credit rating may suffer for up to a Decade or Two. Credit events like Bankruptcy and Foreclosures will go on to haunt a credit score for the rest of your life--look at your comprehensive credit report, it is astonishingly detailed to the last bad check from college days. There is NO Giant Red Reset Button like your xBox. Imagine not being able to secure a loan for a college loan, car, a boat or a house for 20 years--the bank may get the last laugh. And you better carry a fat wallet with a lot of cash because credit cards were a past convenience.
Credit and Trust makes the Economy Work.
The Golden Rule: He who has the Gold, makes the Rules.
And those who do not play by the rules, do not get to play.