Purging debt through default and foreclosure is the key to an economic recovery. This uncomfortable truth is leaking out to the general public.
Irvine Home Address … 226 ORANGE BLOSSOM Irvine, CA 92618
Resale Home Price …… $159,900
One step forward
never seems to get you nowhere
Sinking faster
In you go
You want to save they day
so you grab on the reins and run in circles
You're going to crash and drag the world down with you
Only one thing remains
Default — Only One Thing Remains
The economy is being dragged down by massive debts taken on by insolvent households. We have tried loan modifications, and they failed. Voluntary principal forgiveness is not forthcoming, so that leaves only one alternative to purging the excess debt: massive strategic default.
Massive default is best way to fix the economy
Commentary: Clearing away the debt is the only way forward
Brett Arends — Sept. 12, 2011, 12:00 a.m. EDT
NEW YORK (MarketWatch) — You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy?
There’s a way to do it. Fast. And relatively simple.
But you’re not going to like it. You’re not going to like it at all.
Default. A national Chapter 11 bankruptcy.
The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy.
I told you that you wouldn’t like it.
The apologetic tone of this article reflects the cluelessness of the masses. The ideas he puts forward are the same I have been stating for the last several years without the apologies or the sugar coating. Perhaps it takes this tone to break the bad news to the masses who still believe we can amend, forgive, or earn our way to prosperity.
I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back.
Yes, the quality of life HELOC abusers got to enjoy while others were prudently living within their means is irritating. However, I think most people are over that. The unceremonious fall from entitlement is poetic justice.
But you know what? The time to stop that was five or 10 years ago, when the money was being lent.
It’s gone.
And mass Chapter 11 is, by far, the least obnoxious solution to our problems.
The only solutions to bubbles and Ponzi schemes is not to inflate them in the first place. After the hard lessons of the Great Depression, society put safeguards in place to prevent recurrence of the nasty financial viruses. Unfortunately, we dismantled many of those safeguards in the name of deregulation, and in short order we unleashed a monster.
That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.
It’s the debt, stupid.
I pointed that simple fact out in 2009: It's NOT the economy, stupid. “The problems with the economy of the early 90s were rooted in a loss of disposable income because homeowners were overextended on their mortgages, and the money they should have been spending in the local economy was instead going to debt service somewhere else. It is a problem we will face going forward as well–unless the foreclosures wipe out the debts of most homeowners.”
We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. And for all the yakking about how people are “repairing their balance sheets,” they’re not. From the peak, four years ago, they’ve cut their debts by a grand total of 4%.
And a lot of that was in write-offs.
More than a quarter of American mortgages are underwater. Many are deeply underwater. In states like Nevada and Florida the figures are astronomical.
The key thing to understand is that most of that money has gone to what a fund manager friend of mine calls “money heaven.” Most of these debts will never, ever be repaid in real money. Not gonna happen.
The reality of “money heaven” is not being reflected on lender's balance sheets. With the suspension of mark-to-market accounting rules, banks are pretending they are going to be repaid money they will never see.
Think how corporations handle this kind of situation.
It happens all the time. Banks and bondholders find they have lent, say, $1 billion to a company whose assets and earning capacity will only repay, say, $300 million. What happens? Does the company soldier on with $1 billion in debt it can never repay? Do the stockholders send back their dividend checks? Do they sell their homes to pay off the bonds?
Not a chance. The company goes through Chapter 11. The creditors ‘fess up to their blunder, they face up to their losses, and they fix it. They write down the loans and take the equity instead. The balance sheet is cleaned up, and the company starts again.
Why not homeowners?
Most of the objections to this idea are well-meant, but misinformed.
A fund manager I asked raised the issue of “moral hazard.” Why should anyone pay their mortgage if some people were getting a pass, he asked?
The answer: For the same reason GE and Verizon kept paying the coupon on their bonds while Lehman Brothers defaulted. You want to keep your credit standing. And you want to keep your equity.
The better question is “why would anyone who is underwater and paying more than a comparable rental keep paying their mortgage?” And the simple answer is “they shouldn't.” Many will be cajoled by the nonsense lenders put out about moral obligation, but by and large, unless a loan owner has equity or is saving money versus renting, they should quit paying. Many will.
If a company defaults, the stockholders get wiped out. If a homeowner defaults, the bank takes the home. I like keeping my home, as well as my savings, and my credit rating. Most people are the same.
The reality is most people don't have any equity or any savings, and their credit score is not worth the hundreds of thousands of dollars they are underwater.
Some will say the financial impact would be terrible. But the banks would just be facing up to reality. And a lot of these mortgages are already trading at distressed levels.
I like that part. Banks should be forced to accept the consequences of their mistakes. The idiots who caused this mess should lose their jobs and their huge bonuses. Unfortunately, that isn't what happened.
Some will say, “why should people get away with borrowing imprudently?” The response: Why should the banks get away with lending imprudently?
Yes, imprudent lending is the larger problem, and Strategic default is moral imperative to prevent future housing bubbles.
There’s no point telling people not to borrow money. They always will. I have yet to see a Wall Street executive turn down free money. I have yet to see a company in an IPO say, “Don’t give us so much money!” People like money. They will take as much as they are offered.
In a free economy, the people who are supposed to ration the loans are the lenders. Banks are supposed to lend carefully and responsibly.
I pointed out this fact in Lenders Are More Culpable than Borrowers.
What else are they paid for? Accepting deposits? You could hire people on minimum wage to do that.
Some will say, “it’s immoral” for borrowers to default. Alas, most of these people are being inconsistent. They are usually the first ones to defend a company when it closes down a factory and ships the jobs to China, or pays the CEO $50 million for doing a bad job, on the grounds that “this ain’t morality, pal, this is business!”
But when Main Street wants to do the same thing, they start screaming “Morality! Morality!”
We don’t live in an economy based on morals and fairness.
T Mobile doesn’t charge me what’s “fair” each month. They charge me what’s on the contract. Your employer doesn’t pay you more if you need more. He pays you your economic value. Did Dick Grasso give back his bonus? Bob Nardelli? Dick Fuld? We operate in an economy based very firmly on contracts, and nothing else. Companies, and the wealthy, live by the letter of the law.
American mortgage contracts allow for default. Half of the states in this country are “non-recourse,” which broadly speaking means you can send in the keys and walk away from a bad loan. The other half are sort of “semi-recourse.” The bank can come after you for any shortfall, but only in a limited way. Broadly speaking they can’t touch retirement accounts and basic assets. You can typically keep your car, personal effects, often things like life insurance.
Strategic Default Is Merely Collecting On Home Price Protection Insurance Sold By Lenders. 
Most of the people who are deeply underwater don’t have that much anyway.
And the banks knew this. When they were lending $500,000 to a bus driver with $1,000 in his checking account, they knew that their loan was only guaranteed by the value of the home.
If they didn’t know it, they should have. Their incompetence is not our problem.
It’s tempting to say, “if someone borrows money, they should repay it.” Generally speaking, I agree. I pay all my debts. But while that makes sense when applied to any individual, it doesn’t work so well when it’s applied to everyone.
We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That’s the reason people aren’t coming into your restaurant. It’s the reason people aren’t taking your yoga class. It’s the reason they haven’t hired you to redo the kitchen.
Note the after-crash disposable income slice on the far right. That's why the excess debt of the housing bubble is so economically debilitating.
And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That’s the reason we have a shortage of demand. That’s the reason no one is hiring.
Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.
You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.
Hallelujah! Foreclosures are essential to the economic recovery.
What are the alternatives?
Government cutbacks, higher taxes, and a balanced budget? In a normal economy, fine. But in this situation, when the private sector is also slashing its spending, that could lead to absolute catastrophe. That’s what happened in the Great Depression. And our debt levels are worse than in the Great Depression.
Government borrowing? That’s the Keynesian solution. “The consumer can no longer borrow like a crazy person,” says the Keynesian, “so Uncle Sam has to do so instead.” It’s just transferring private madness to public madness.
If you talk to a Keynesian like Paul Krugman, no amount of government spending is too large if it boosts the economy. Perhaps, just perhaps, the economy should experience a slowdown. The dumb ideas that survived in good times get purged in recessions. That's one of the reasons we have them. Unsustainable business plans which consume resources but provide little or no value get wiped out. The capital tied up in losing ventures is released to find a better home. Keynesian's try to avoid this necessary purging so nobody experiences any pain. It doesn't work. It only builds into larger problems in the future.
Inflation? That’s probably the least bad alternative. But it’s just default by another name. And instead of taking money from the imprudent banks that caused the problem, it robs grandma’s savings.
Once the deflationary headwinds subside, the federal reserve will most likely continue stimulatory policies for too long, and we will experience a bought of inflation. We won't hear any credible inflation talk until the economy picks up, but once it does, we will likely inflate away much of the excess debt by currency devaluation.
Twice before, advanced economies have gone through what we are going through now — namely a massive hangover after a massive debt binge.
The first was the U.S. in the 1930s, the second was Japan in the 1990s.
The U.S. didn’t get out of it until the 1940s unleashed inflation and reduced the debt’s value in real terms.
Japan still hasn’t gotten out of it. They have deflation, while government debt has skyrocketed.
The correct moral hazard is to punish the banks who lent imprudently by making them eat their own losses.
I told you that you wouldn’t like it. I don’t either. But the alternatives are worse.
He obviously didn't write this article for my consumption. I love the idea. No need to apologize to me.
$1,350 in; $132,000 out
The owner of today's featured property bought at the bottom of the last real estate recession. On 8/29/1997 she paid $72,000 for this property. She borrowed $70,650 which means she put a whopping $1,350 down.
She refinanced with a $72,000 first mortgage on 3/29/2001, and she obtained a $35,000 stand alone second on 12/20/2004 (Merry Christmas). She capped it off with a $132,000 HELOC on 11/2/2006. If she used the HELOC, this property is deeply underwater. Since it is advertized as a short sale, we can assume she at least took part of it.
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 226 ORANGE BLOSSOM Irvine, CA 92618
Resale House Price …… $159,900
Beds: 1
Baths: 1
Sq. Ft.: 662
$242/SF
Property Type: Residential, Condominium
Style: One Level, Contemporary
View: Pond
Year Built: 1976
Community: Orangetree
County: Orange
MLS#: S672729
Source: SoCalMLS
On Redfin: 1 day
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Nice ground floor single level property. Very clean! Large livingroom opens to patio along the stream. Great for BBQs or simple entertaining. Kitchen has breakfast counter and indoor laundry hook-ups. lots of association ammenites. Short distance to Irvine Valley College and Irvine Spectrum.
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Proprietary IHB commentary and analysis 
ammenites?
Resale Home Price …… $159,900
House Purchase Price … $72,500
House Purchase Date …. 8/29/1997
Net Gain (Loss) ………. $77,806
Percent Change ………. 107.3%
Annual Appreciation … 5.6%
Cost of Home Ownership
————————————————-
$159,900 ………. Asking Price
$5,597 ………. 3.5% Down FHA Financing
4.20% …………… Mortgage Interest Rate
$154,304 ………. 30-Year Mortgage
$52,410 ………. Income Requirement
$0,755 ………. Monthly Mortgage Payment
$139 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$33 ………. Homeowners Insurance (@ 0.25%)
$177 ………. Private Mortgage Insurance
$250 ………. Homeowners Association Fees
============================================
$1,354 ………. Monthly Cash Outlays
-$68 ………. Tax Savings (% of Interest and Property Tax)
-$215 ………. Equity Hidden in Payment (Amortization)
$8 ………. Lost Income to Down Payment (net of taxes)
$40 ………. Maintenance and Replacement Reserves
============================================
$1,120 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$1,599 ………. Furnishing and Move In @1%
$1,599 ………. Closing Costs @1%
$1,543 ………… Interest Points @1% of Loan
$5,597 ………. Down Payment
============================================
$10,338 ………. Total Cash Costs
$17,100 ………… Emergency Cash Reserves
============================================
$27,438 ………. Total Savings Needed
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Yes, it’s finally hit people where they GET IT! Now, to find all the people responsible for lending the money out creating the real estate Ponzi scheme. The people losing their homes and down payments are losers as well as the american public as a whole. The winners are banksters, YOUR government, and financial investors from around the world. We lost, they won, without firing a shot.
The banksters were allowed carte blanche to de-fraud the american people, and not one is going to jail. Rememeber this when you argue petty politics, and remember, BOTH parties are bought and sold, that’s WHY we are here.
and you have no responsibility for signing on the dotted line?
i second that. predatory borrowers. when dumb people lend money to dumb people, both need to lose.
Yes, everyone, that is everyone who bought into the bubble is stupid, we know this, all the business’s, all the investment firms, all the home buyers, stupid, we know that now, that includes ME.
You know why I was stupid? I put down 20% cash rather than leverage the piss out of my wealth, like most people did, and most business’s do. If I would have had the forethought to actually use the Ponzi system, I would have walked with a few hundred thousand in my bank account because I have a non-recourse loan.
Then I could have purchased a house CASH, come post here, and listen to you sing the praises of someone who owns their home free and clear. What a hero, what an upstanding citizen.
Damn, I am stupid, stupid me for having good intentions of home ownership. I should have screwed the system for all it was worth…..
Is that the attitude you would like me to have from your constructive posts?
It is not so obvious how OUR government is a big winner in this – where is the profit for them? Likewise, there are many more financial investors from around the world who have lost money – and big money at that – in this than have profited.
If you are looking for where the money has gone, one of those places is the people who are losing their homes and down payments. As IR keeps pointing out, they took plenty out of those houses. It was not only the bankers.
Walking away (default) is a lot more involved than most think, there are serious consequences with future and present Jobs and a host of other things, most underwater home owners will just ride it out if they can, 100K and under in SoCal, it’s most likely not a good Idea to walk away, 300K or more it gets easier to decide.
Unfortunately the mess we are in will take a lot of time and inflation, it’s going to be a long process, such is the nature of recessions caused by deleveraging,
Just ask the Japanese’s what happen when you refused to inflate.
The smart people used straw buyers for their gambling.
I agree that it’s more complicated than usually presented, but for most underwater homeowners, I’m sure I’d recommend strategic default after reviewing their financials.
Is a $150K underwater position unbearable if that household’s income is $150K+? It’s all relative.
My thoughts exactly. Not that I am happy about it.
There is a difference between corporate defaults and strategic defaults among individuals.
When a corporation defaults, it *cannot* service its debt. It simply *does not* have the requisite cash flow to service the debt, so it defaults, debts are restructured (generally partially charged off), the company comes out of bankruptcy with a reduced debt load, the lender takes the hit, and life goes on.
When an individual “strategically defaults”, he does so because he *will not* service his debt even thought he has the capacity to do so. That is, it’s a *choice* that he makes (hence, inclusion of the word “strategic”). That’s an important distinction that is never noted when the corporate bankruptcy vs. individual strategic default meme is discussed.
Now, I agree with you that the folks that CANnot service their debt should be defaulting (much like a corporation). But those who are capable of servicing their debt… just like a corporation that services its debt… should continue doing so and not “strategically default” simply to make their lives easier.
The distinction you are making is not that black or white. Who determines if a borrower has capability of repayment? Whether it be a corporation or an individual, there is a certain level of austerity and cost cutting that is reasonable and some that is not. Most strategic defaulters are in financial distress due to excessive debt. The gray area is the DTI of the borrower. A lender might believe they can afford a 60% DTI, but in reality they can’t. If a borrower only has a 30% DTI, then their strategic default doesn’t simulate consumer spending or benefit anyone other than themselves. However, low DTIs are the exception rather than the rule.
The same is true of corporations or even governments. The borrower always has a different opinion of what it takes to keep them solvent than a lender does. Many cram downs occur when a borrower does have capacity to pay but the managers or politicians have decided it is not in their best interest to do so.
It may be a bit gray, but that does not change the morality of going back on your word, and the grayness is a strawman argument. The defaulters know whether or not they can still pay. They know whether or not they are scumbags.
the morality of going back on your word
The above quote is beyond laughably ridiculous. This is a mirage perpetuated by lenders in the same way that “non-financial compensation” is used by companies to pay employees less than they are worth and trick the employees into believing that they have been fairly compensated.
Default/foreclosure is not an immoral choice. It is exercising a perfectly valid option in a FINANCIAL (NOT moral) agreement. Not paying the mortgage and then expecting to be able to keep the collateral (the house) would be “going back on your word”. Not paying and returning the collateral is KEEPING one’s word.
-Darth
Are you sure about that? I am not a lawyer or even versed in legal matters, but it seems to me that when you borrow money for a home with collateral, you promise to make the payments. I understand that the house is collateral that the lender will TAKE if you do not make the payments, but I do not remember the language of the contract reading, “If you change your mind and decide not to make the payments, you agree to GIVE the house back.” I don’t think the mortgage contract gives the borrower a choice. I think it just says that the borrower agrees to pay and lays out the consequences for non-payment.
For me, a financial agreement where I make promises is also a moral agreement. Is my position laughingly ridiculous? Probably, but I prefer laughingly ridiculous to the alternatives.
You’re right. Mortgage notes hold borrowers personally responsible for the debts. State laws limit if and how the debt may be collected upon default, but this shouldn’t be confused with the contract not holding the borrower personally responsible for the debt.
Mortgages might also contain pre-payment penalty language. Is breaking a mortgage to refinance immoral? It is a significant risk to the mortgage holder. Before the great housing bubble the main risk to holders of mortgage backed securities was prepayment risk. You could shave thousands of dollars off your payment. That’s thousands that you won’t be paying the bank. Is that wrong?
This is not true. Corporations default on properties outside of bankruptcy all the time:
http://www.hpe.com/view/full_story/10586133/article-DEFAULT–Merchandise-Mart-Properties-in-receivership
This is why corporations are formed – to shield the individuals making up the corp from individual liability for the actions of the corporation.
Other defaults by the parent company:
http://online.wsj.com/article/SB10001424052748703565804575238650253124526.html
More:
http://online.wsj.com/article/SB10001424052748703447004575449803607666216.html?mod=WSJ_hps_LEFTWhatsNews
“Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts.”
Strategic default is a way borrowers put pressure on lenders to restructure debts. To say that companies only do that when they ‘cannot’ service its debt is ignorant.
[It’s probably unnecessary to note, but just in case… that second paragraph above describes a Chapter 11 bankruptcy (restructuring), as opposed to a Chapter 7 bankruptcy (liquidation). Obviously, in a Chapter 7 bankruptcy the company doesn’t emerge from bankruptcy… it’s gone.]
Who covers the $4 trillion shortfall.
I mean, I’m already in (to Countrywde, I mean B of A) for a cool five large.
The question is who “owns” the $4 trillion shortfall? (That is, who’s going to take it in the shorts?)
The GSEs (that’s we Taxpayers, by the way) own 55% of it. Foreigners own another 25%. That leaves about 20% actually held on US bank balance sheets. Now… where do you think the higher-quality mortgages ended up… sold to the GSEs and foreigners (via securitizations)… or held on US bank balance sheets?
The mortgages held on US bank balance sheets – while a bit shaky in aggregate – don’t compare to the underwater dreck held by the GSEs and inside the myriad securitization trusts. So, who will be paying for the vast majority of this “strategic default” that you suggest? Yup, we Taxpayers, and foreigners. The banks will only see a fraction of it. They may be dumb, but they were smart enough to unload the worst of the problem onto others’ shoulders. Now, the lawsuits… that’s another issue entirely.
The taxpayers will end up paying most of the cost. I think most people accepted that reality years ago when we took over the GSEs. Just because we don’t like it doesn’t mean it won’t happen. The debtors we are looking to repay this debt either can’t or won’t. For us to believe they will is just denial.
Agree with Who Flung Poo whole-heartedly. Also, did we forget it was CREDIT crisis that started it all? What would massive defaulting do now? It’s not that simple folks, we don’t just default and everything ‘poof’ disappears. I’ll need a lot more time to write to counterpoint everything Mr. Arends and IR supports here. But basically, financial sector makes up 20% of the market. Leave them with all that default burden and we’re in for a LONG day. Combine that with the psychological impact of debt forgiveness culture, and we’re just looking at the next ponzi scheme. We’re not all of a sudden going to save more because our debt was forgiven. Stimulating spending at all costs is not the answer folks, this solution will do that in the short term and then set us up for the greater fall. Bad idea.
correction- that AT BEST would stimulate spending in the short term.
There are a lot of small investors who bought RMBS that they were assured was a safe investment in the 2002-2007 time period. Most of them used their retirement funds. The big guys, like pension funds, will likely prevail in lawsuits for fraud and misrepresentation, but what about smaller individual investors.
they get smoked for lacking the common sense needed in investing.
While I don’t disagree with the main premise of the article(debt is the problem), and certainly nothing the government is doing has or will fix much, I don’t see this as a solution.
Firstly, how do you promote a program that encourages homeowners to walk away from mortgages that are current, albiet burdensome. It’s just wrong.
Secondly, before they walk, they just stop paying
so it’s seems like you just add more non-performing mortgages into the pipeline.
Thirdly, all those who have stopped paying their
mortgage are actually spending “the mortgage money” somewhere else. I doubt they are saving it. So they are actually spending more money in the economy than the up-to-date mortgage holder.
Fourthly, there is moral hazard. The flippers and real estate investors will see this as a green light to over-bid on properties since there is no risk. Interest rates will jump, or banks will get out of the mortgage business. Investors in MBS paper will never want to touch the stuff again. Only the Government will be willing to stay in the Mortgage market. That’s what were are trying to get away from.
That’s the way I see it at least.
Fourthly, there is moral hazard. The flippers and real estate investors will see this as a green light to over-bid on properties since there is no risk.
This is incorrect. Flippers and investors need good credit, because most of their buys are at least partially leveraged. If they are buying with all-cash, then there is no such thing as strategic default, because the money that they will be losing is their own. They don’t have a mortgage to default on if they are an all-cash buyer. Only highly-leveraged buyers have strategic default as an options, and their options (for a tragically-short period of time) become limited after they default.
This isn’t a penalty for their “immoral” choice, but rather a penalty for their failure to deliver the desired profit to their lender.
-Darth
Darth I commend your attempt to educate the people in regards to what constitutes a moral or ethical breach, but just face it, it IS a moral hazard because they say it is. And as awgee so proudly states “They know whether or not they are scumbags.” and if they don’t, I’m sure awgee and like minded compassionate loving people will tell them.
While I think that intentional default is in the direct interest of many debtors, I don’t think it is going to help the economy nearly so much as people might believe. Continuing to pay the mortgage on a property from a position of negative equity is not wasting the value of that money, it simply transfers that value to the creditor, who generally has employees that get paid and equity holders that might get a dividend and their own creditors that would like to be paid back. I’ll shed minimal tears for the predicament they find themselves in, but should the borrower’s cash flow and balance sheet be improved, another party’s is impaired. “Justice” may be improved thereby, but the aggregate economy has been shifted very much. Not that I was a frequent commenter here, but I stopped for a long time since the entertainment value of it diminished. Those debtors that aren’t going to pay will stop paying and the others will continue and I’m willing to allow that every one of them has reasons that make sense to them for doing so.
Sorry, meant”… the aggregate economy has not been shifted very much”.
Walking away from a house is not an easy moral decision but is certainly an easy financial decision.
Just some anecdotal evidence, we stopped paying on our house (300k underwater) in August of 2008. We were foreclosed on in June of 2009. Our credit scores were in the 750 range when we defaulted and as of last month, our scores were both back in the 690 range. We just bought a house ona 30-year fixed at 4.25%. The house is in a great neighborhood and sold in 2006 for just over double what we paid for it. It was a VA loan and ALL closing costs were paid for by the seller.
Back in 2008 when we made the decision to get out, virtually all of our friends said it was foolish and that we would be screwed for years if we did it. They were wrong and nearly all of them have defaulted in the past year or so.
I don’t regret our decision to walk away, however we were very prudent since we made that decision and saved money religiously. If we didn’t have the discipline to save after the default, I don’t know if I would be happy with out decision to walk away.
Who is the author of that piece talking to – kindergarteners?? It’s like he’s explaining that toys sometimes break to a 4-year-old. It’s very telling that the press has to talk down to debt-drowning adults about the realities of their bad financial decisions. I guess we can take some solace that they’re even acknowledging all the broken toys…
I noticed that too. Probably, if you’re dumb enough to get yourself into this mess, then you’re incapable of understanding adult-level writing style.
On the “It’s a business decision”, and “Businesses do it all the time”, issue. All three of my daughters knew at a young age that the “But Sally did it” excuse was bereft of integrity and is dishonest. It is amazing how few adults seem to understand that concept or think that it is more complicated just because they are stealing hundreds of thousands of dollars rather than a toy.
My guess is they know how to tell their children it is wrong to back on your word or to steal.
@awgee: I know what you are saying but hear me out.
I am raising my kids with the exact same philosophy but when I look at the larger world, I have to wonder if the system is so damn corrupt that those try to live by things like ethics are fools.
I have had so many friends and family use their houses like ATM and then walked away that it is ridiculous. In my circle, me and and another friend are the only one that stayed away from the ponzi scheme that was the housing bubble. We stayed put in smaller dwellings, saved money and lived below our means.
The rest of the crowd simple walked away from their houses after extracting handsome amounts from their ATM. The early wave has managed to salvage their credit and are now looking @ buying again because “NOW IS THE TIME!!!”.
When I look at the balance sheet, I have a nagging feeling that they came out ahead than me and my family. All I can show is “ethical” behavior on my part while they have almost a decade of good living, nice toys and some change leftover.
As I scramble to keep my healthcare costs low (son has a medical condition) and hang on to my job, while the rich get richer and jobs get shipped overseas, I don’t know what to believe in. I look at my kids and wonder if it would not have been better if I had just thrown my “ethics” and jumped in the party.
I do know that when my son gets in high school I will talk to him about this episode and tell him to make his own mind: in the land of the free/home of the b rave, being ethical and doing the right thing means getting screwed over while the crooks legally walk away with your money.
Alix – Of course those who live by an ethical standard are fools.
So?
Would you rather be a fool than a liar, cheat, thief, etc. Would you rather your children hear you called a fool or a liar, cheat, thief, etc.
Honesty can also sometimes be expensive. So? Maybe that’s kinda the point.
Alix – A few folks here know my situation, but I will tell you.
We sold our home in the summer of 2005. Do you know what we were called? “Fool” would have been rather one of the nicer words.
I think maybe not living by the world’s standards allows one to see things in a different light. It was clear to me in 2005 what was about to happen. But then, I am possibly a fool and my moral position is laughingly ridiculous.
We just closed on a home. We bought it with cash. The “smart” folks who know how best to fulfill a mortgage contract will undoubtably find our cash purchase foolish or laughingly ridiculous, but …
I’m a bit confused here, I’m not sure how selling near peak would be considered “foolish”.
Maybe buying a home now with all-cash is… because you said you were able to get 200% returns on your 2005 sale proceeds so I would think you would leverage the low interest rates and continue to let your money work for you rather than have it sit in a still depreciating asset.
“…leverage the low interest rates and continue to let your money work for you…”
That is classic realtard/mortgage broker dribble!
Why is that dribble?
awgee said he’s made 200% since he sold his home… you don’t have to be a realtor or broker to understand that making 200% on $500k (I have no idea how much awgee’s house was) is better than putting $500k into a home that could lose 10%.
In fact, I think that’s opposite of what a realtor/broker would say… isn’t their tagline “invest in a home instead of the stock market”?
You are confused for the same reason you are thinking that leveraging oneself with low interest rates when purchasing a home is a wise financial decision.
ONLY IN HINDSIGHT, can you see that we sold at the peak. At the time we were selling, we looked like we were throwing money away. And now, buying with borrowed money with low interest rates is for suckers. If you are buying with cash, you probably do not care if re prices decrease or increase. If you are buying with cash, you probably understand that buying a house is an expense, not an investment. If you are borrowing, by necessity not objectivity prices must increase and your house is an investment. If you are buying with borrowed money when interest rates are low, it is a poor investment and the level of debt will affect every other investment decision you make, and not in a positive manner.
ONLY IN HINDSIGHT will you see that buying with borrowed money when interest rates are low is a poor investment decision. Buying with cash is not an investment decision. It is an affordable lifestyle decision.
Our home can not “lose” 10%. Unless an earthquake or a fire or something else destroys it. It’s “value”, “price”, or worth to others is irrelevant. We will live in it. And it will cost us money to do so; taxes, HOA, maintenance, etc.
I said it’s realtard/mortgage broker dribble because this is the line they used for years to get you to finance as much as humanly possible and cash-out equity.
“Why leave all that equity sitting there doing nothing for you when you can cash it out and put a downpayment on an “investment” property (or stock market, insurance product, etc.).”
I disagree… anyone who saw housing prices jump from late 90s to mid 2000s knew it was peaking, you don’t need hindsight to know you’re selling near peak, you just need to know you’re selling for much more than you were in for.
As for leveraging low interest rates as a wise financial decision, it is for those who don’t have all cash like you and it’s better than paying higher interest rates or rents that are above ownership costs, even IR has said that. But that wasn’t the point, the point was that you said you maximized returns on your cash so why not continue to do that and increase your family’s wealth since your returns are higher than current interest rates? Those 200% returns would pay for HOA, maintenance, tax etc.
@Perspective:
I understand now what you were saying. I’m just not a big believer in putting 100% cash into a home, even if it was an appreciating asset. I would rather have my money working for me elsewhere… especially at a 200% return rate.
ethics and integrity are the key to long term success in business, finance, and life.
there are times where it seems opposite, but that is life’s way of testing you.
awgee, i would have pegged you as one to finance 50% of the home purchase and leave the rest in physical PMs. what made you choose to go all cash?
Lifestyle, peace of mind, taking care of my wife and children, etc. I find it impossible to take the emotions out of investing if I am in any way leveraged or in debt. I can make more money with less capital through judiciousness. Leverage and debt introduces high levels of greed and fear.
bravo awgee. exactly.According to these people I should go buy a fancy car and drive it a few months and then just not feel like affording it anymore because it went down in value SO MUCH! why should I have to keep paying for it? It’s not worth the same amount. come take it. I enjoyed it while I wanted to. You can clean up the mess and pick up any costs I incurred. Oh, and I”m taking the awesome sound system with me!
I think more people should do just that. If they did, loans on cars would require hefty down payments, and the terms would never exceed the useful life. Every buyer-borrower would always have equity in the car because lenders would be forced to write loan terms that never left the borrower under water. That would make for less car debt and lower car payments.
p.s. I will keep the car and continue to pay if you decrease the principal I owe. fair deal?
Unfortunately, Arends the perpetual dunderhead doesn’t seem to understand why strategic default will fix the problem: Home prices still need to revert to reasonable levels.
An alternative perspective on deregulation-
https://www.youtube.com/watch?v=3AJDMuMOj2U
it was stated: Keynesian’s try to avoid this necessary purging so nobody experiences any pain.
This not correct. Keynes was a major advocate of writing off debt during the depression recognizing that it was needed to start over.
We should act morally and ethically – and hold other people, our politicians, corporations and other countries (namely China) accountable for acting morally as well. We need to make it loud and clear to others, especially our representatives, that we expect ethical behavior.
When there are rich entities that can buy votes, our only counterweight is our numbers.
We have to be ethical and moral – and strong.
I agree in general that the housing bust needs to run its course. Getting there won’t be easy, but it needs to be done.
I want to point out an area where I think you would benefit from a finer-grained analysis. I wouldn’t go so far as to bash the “Keynesians” The stimulus solution is a reaction to the failed “libertarian” policies of the previous administration and a way to deal with depression economics, where deflation and high unemployment are dragging things along. As you say in your book, the banks, investment firms, low interest rates, are largely to blame. We experienced near systemic failure of the financial system. That’s not a healthy free market, especially in light of the trillions of emergency loans needed to keep things from imploding a few years ago.
The point here is that you are perhaps taking slightly ideological stance that is unwarranted and somewhat contradictory to your overall message.
One way to look at this is to make an analogy to medicine. Let’s say your friend likes cheese burgers and has high cholesterol. Well his mistake is in eating too much fast food. The fix is to change behavior and nutrition. That’s true, and in our economic problems today we need to purge the system of the bad debt.
The problem is that your friend had a heart attack and is in the hospital. So today is not the time to go on a crash diet. You save his life first. Get him back on his feet. Then make the lifestyle changes.
I don’t agree with Krugman always. But I think you’ve twisted his message to a large degree. Stimulus is one way to shut down the depression economics we face now. It’s a way to deal with the heart attack, so to speak.
Following your logic, let’s assume we do zero stimulus. We let everyone default on their loans today. The banking system would probably collapse, and that would wreak havoc on our economy. There are only a handful of banks and investment firms that control much of the capital. THis isn’t as if Yard House went out of business at the Spectrum. The scale of the problem in relation to the size of the market is to the point where we have “too big to fail” issues. In other words, we do not have a free market, because the axioms for a free market have not be satisfied. We’ve nationalized much of the risk, so we can’t just use simple-minded, free market ideas to solve a more complex problem.
The other extreme is to do a 10 trillion dollar stimulus and go crazy with spending — well that would be awful. So can’t do that.
The solutions are in the grey zone, somewhere in between.
Thanks for all your work, and I look forward to all your posts!
Cheers!
Stan
I beg to disagree,economy is currently facing bad right now.Maybe because of too much corruption in our country.