by Jon Maddux
Strategic Foreclosure And The Last Man On The Boat
October 13, 2009 in Banking and Finance, Best Of The Storm, Everything About Foreclosures, Featured, Fresh Perspectives, Short Sales, Social Mood Swings by Jon Maddux
Strategic Foreclosure
I think it’s time to talk about foreclosure in a raw, brutally honest way. Yes there are many people who are devastated by foreclosure and losing their home. That was mostly last year. This year it seems that more and more people are walking away that could otherwise pay. What is happening? The phrase comes to mind “Strategic Foreclosure”. I have been hearing more and more about “Strategic foreclosure” lately and to some people it means buy a new home, then bail on the old one. The lenders have caught on to this and have changed some of their guidelines to help stave off this problem. I think of strategic foreclosure as someone who choses to foreclose on their home, because it seems like the best option. Why would someone do this you ask? Well there are many reasons. One being it is severely over leveraged or “underwater” and doesn’t look like it will come back for many years. One tool you may want to use is here. This can help you decide if you are losing thousands of dollars by “owning”. The reason I put the word owning in ” ” is because if you have no equity it’s more like leasing for a real long time. Another reason is that you could be clearly putting good money toward bad. First thing that comes to mind is giving a homeless person cash when they have a bottle of jack in their hands. Another reason is that the house has no equity and is unsell-able. It’s been on the market and no one has made an offer. You’ve lowered the price over and over and still… no buyer. Another reason is that you simply cannot afford it. Your income is not high enough to support the payments and your lifestyle. Let’s face it, you signed a contract, but the contract has a loophole or an “out”.
I have an iPhone. I used to be with Verizon wireless and had a 2 year contract with them. When the iPhone came out, I chose to break my contract so that I could get an iPhone. I payed a penalty when I did so, because that is what the contract said. Did I feel bad for breaking the contract? No. I didn’t think twice, other than I didn’t like what it did to my bank account. I used to have a membership at LA Fitness. I realized after several months of non-use, that I was wasting my money every month and that I could save money by working out at home. The truth is, people break contracts every day, and when they do so, there is something in that contract that says what the penalty will be. The same goes for foreclosure. It may just come down to simply assessing your finances, talking it over with a trusted person that knows about the law and your rights and deciding if it makes business sense. You may be the type of person who says… “I won’t walk away from my house because I am a man/woman of principle and would NEVER do that. If that’s the case, then that’s great, but then don’t complain about your decision. Stand by it and suffer the consequences as well. If you bought a home for say $300,000 and it’s now worth $80,000. If just about everyone on your street has either done a short sale or walked away. If you are one of the last on the street and you’re trying to hold it together because of your decision not to move, then you better be prepared and willing to have your new neighbors be:
1. A family that makes significantly less income than you do.
2. Someone who is paying a mortgage that is less than half of what you are paying.
3. Someone who is excited about getting a house so cheap. Now yours is cheap too but not to you.
4. Renters and people who don’t have roots or a desire to set down roots in the community.
5. A real estate investor that is taking advantage of the low price to buy, flip it and make a big profit.
If you are this person, and if things persist by getting worse, you may be the last man on the boat.
The Last Man On The Boat
When I started www.YouWalkAway.com almost 2 years ago, I didn’t think that it could get as bad as an entire neighborhood in new communities would be abandoned and have just a few people living there. Now in cities like Riverside and Miami there are entire buildings and entire communities with preposterous occupancy rates. I mean, one family living in a condo tower in Ft. Meyers, FL? come on.
I recently received a call from a man who because of principle was the last person to go after his entire new community one by one either foreclosed or sold short. He noticed that there began to be crime in his neighborhood and didn’t feel his kids were safe anymore. After listing his home for months without success, he finally made the decision to strategically foreclose and let his house go.
I understand if you feel like you made a promise to pay that mortgage and you are going to stand by that promise. That is admirable and noble. But do you think it’s smart? Do you think it’s responsible? Don’t cut your nose off to spite your face. Here’s some info thanks to Wikipedia
Ironically, the phrase ” Cut your nose off to spite your face” as understood today does not really apply to Saint Aebbe, since she did not cut off her nose in an effort literally to “spite her face”. The expression has since become a blanket term for (often stupid) self-destructive actions motivated purely by anger or desire for revenge. For example, if a man was angered by his wife, he might burn down their house to punish her; however, burning down her house would also mean burning down his, along with all their combustible personal possessions.
In this case it’s obviously not out of revenge, but it’s out of principle. But it’s like saying I am not going to break a rental agreement on an apartment when you got a better job in another town because you signed something. That is ridiculous. In the contract it clearly states your penalty and guess what….so does your mortgage note.
If you want to stay, stay. If you need to, have to or want to go, then go. Don’t let a contract that clearly has an out stand in your way. Of course, make sure you check and clearly understand what your implications legally and tax wise could potentially be.
If you have watched your neighbors jump out of the sinking boat and jump on to life rafts and it seems like your the last man on the boat. Unless you put a big down payment down, have a 15 year mortgage on the house or a ridiculously low rate / payment, could it be time to join them.
Please understand that this is only my opinion and is in no way legal advice or foreclosure advice.
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I think it’s pretty obvious that for some people it makes sense to walk away and foreclose in a “strategic” way. I think it’s better to correct the path that you are on before you end in financial disaster. Don’t just do nothing, because that is the worst thing you can do. Right?
Well said. Thank you for your insight!
In my area it will take 20 years for my home value to recover and I wanted to move in the next couple of years. I thought it was smart to buy but it turned out be a nightmare. If you don’t plan on living in your home forever (throwing your money away) getting out while you can is the only thing that makes financial and logical sense. All morals aside, this is a decision for me, my family and future.
“Morals aside” is the interesting part and that’s where the debate really is.
When times get tough…and everyone has tough times…the decision to stay or walk has to be a business decision. Just like you said: financial and logical.
Good luck!
Morals are key to your future. Why did you buy a home if you planned to move so quickly? Knowing your attitude towards morals I certainly would not do business with you. I think you will find your integrity is far more important to your future than you think and you are being shortsighted.
This is correct thinking, Steve. Too many people enter into agreements assuming the skies will be clear for the next 30 years. They only want what benefits them and are not concerned about harming others.
Being practical might seem like you are doing the right thing, but if it results in harming someone else, it is definitely not the right thing, no matter what someone else believes.
Where were the lending institutions’ morals when they dangled
the dream of homeownership and qualified people who had no business buying homes?? All this led to the housing bubble which now bears their own fruit.
Morals are important, I believe in following the golden rule and being the best neighbor I can be. That said, paying a mortgage is not a moral issue. A mortgage is a business deal between the owner and the bank, the banks stands to make an enormous amount of profit over the life of the loan from the interest they charge. The owner gets a place to live and potentially a investment.
Choosing to strategically foreclose is about doing what is best for the owner and their family. In my book taking care of your family is the higher moral ground than throwing money in a hole. But this is business and you know the saying don’t take it personal, its only business.
Steve: FYI the average home is held for 7 years!
PS: Get a life. This is not a moral decision it’s a business decision. End of story!
Only SUCKERS let morals guide their business decisions. Steve, please stick to your morals because I would LOVE LOVE LOVE for you to be the last man on the boat. LOL.
“Strategic Defaults” will become more ever present as home values continue to drop. Discerning homeowners are beginning to see that their credit scores will repair much quicker, even with a foreclosure on their records, then the time it will take to regain lost equity.
Based on FHA guidelines, anyone who has not been a homeowner for at least 36 months will qualify again as a “first time” homeowner. FHA loans are approved based on income documentation and a minimum credit score of 620.
Through the foreclosure process, most homeowners will be able to use the money that they would normally send to the lender to pay down / payoff consumer debt. This action, by itself, will have a significant positive effect on credit scores. If the homeowner continues to be responsible by paying all bills timely and further educates themselves as to credit score management, then at the end of 36 months, their scores will be back to mid-600’s easily enough to qualify for a FHA loan.
As noted above, homeowners have some control over the rebuild of credit scores. However, homeowners do not have any control when it comes to the loss of equity in the home. In most cases, if the equity loss is 50% or greater, the homeowner may have to wait 8 to 10 years before they break-even. Essentially, these homeowners are renting a home and paying 50% more then other comparable home rentals.
As more and more homeowners face the reality of their less-than- desirable homeownership position, choices that they may never have considered before will become much more evident in the days to come.
Kudos Jon!
Jon,
People need to keep in mind that depending on their contractual obligations and where they live it may not be as simple as just walking away. You may still owe the difference in your mortgage amount and what the creditor ultimately sells the home for to the creditor. The creditor may seek recourse against other assets. Also even if this is forgiven, there can be tax implications of this “gift” from the creditor. All in all, I think people should attempt to live up to their side of the agreement unless they are actually unable to (loss of job etc.). I’ve seen too many walk away because their mortgage became an inconvenience and their get rich quick dreams turned into bad investments. My idiot brother in law is currently walking on home #2 that “he won” the right to buy in a lottery (according to him) because he doesn’t feel like paying anymore. He was supposed to get rich without doing any work and you know the rest. He is quite capable of paying. Whole neighborhoods have been destroyed by his type of behavior, people do not take their obligations seriously. Someone always pays for bad investments. If you walk you are pawning off your responsibility on the taxpayers. Hopefully, lenders will learn not to do business with people who do not feel that contracts are binding in the future. I doubt this will happen as the government bailout let the lenders get away without consequence as well. The taxpayers get the shaft because of the greed, deception, and ignorance of some of the lenders and buyers. The whole thing stinks.
“Strategic foreclosure” is just a nice name for a bad practice to make people feel better about not fulfilling their obligations. Its one thing to not be able to fulfill your obligation because of loss of job, health, etc. Its another to do it because of convenience. I suspect may feel guilty about what they are doing and like your wording because it lets them rationalize their behavior. Integrity is important and people need to learn to live with their mistakes. Strategic foreclosures are exacerbating the problem and intensifying the real estate losses. It should be made harder to walk not easier. This goes for the lenders as well.
Hello Steve,
Do you own a home? If so, how much equity do you have in it? Do you have a low fixed interest rate?
I own several. I own two outright and have a 30 year fixed on the third. All have dropped in value, but it is a risk I took. The equity in the third home (a recent acquisition) is approximately 33%. The home loan is a fixed 30 yr loan at current prevailing rates. I plan to sell one of the other homes at a loss in the near future. I have always bought far below my means and made payment of mortgages my first priority. One home came in my marriage to a wife who followed a similar conservative approach to home buying. These homes are not extravagent, but are what we could afford (well below). The only reason for carrying home #2 at the current time is upkeep costs are very low and I maybe wrongly expect prices in this vicinity to improve in the next several years. If not I will take a further loss and move on. There is noone to blame but myself. While my wife and I scrimped and saved to pay our debts my fore mentioned brother in law spent like a drunken sailor on new cars (with exotic rims), gadgets, jewelry, expensive and constant vacations predominately on credit. I do not feel sorry for him in the least. He pre-spent his lifetime’s earnings and is now trying to extricate himself from the consequences. To make matters worse he whines as though he is the victim of his sometimes fraudulent behavior. Anyone ever extending a dime of credit to him or those like him deserve to lose said dime. Hopefully, the government will not compel the banks to loan to these types of individuals in the future (those that lived like the rich without making the money first). I feel sorry for those with my brother in law as a neighbor as his reckless actions are driving their home prices down (all of ours really) and probably increasing our future tax burdens. His pampered spoiled antics and integrity challenged attitude hurt a lot of people. Also, there are apparently a lot of my brother-in-laws around. These remarks are not meant to disparage those who cannot meet their mortgage payments due to legitimate disabilities or long term loss of employment. This economy is extremely challenging, but in my mind is made worse by the “integrity challenged”.
I’ve been in real estate 30 years and a homeowner for 40. I have to say I’m torn in my opinion of “strategic foreclosure”. I know a fellow that lost his job at the beginning of this snafu and has done everything to hang on to his home. He will most likely loose it. Also, a newly single Mom saddled with a huge mortgage that would sap off all of her income and savings eventually and she’s decided to walk away. I agree with both of their actions; an illustration of me being torn. Today, people seem to give up too easily on everything and want instant fixes to problems. As a result we see knee jerk reations that later cause more problems than if they had just taken a deep breath and let the dust settle before they made major decisions. I know a couple that ran into problems in their marriage and jumped into a divorce. They upset their entire life (including the lives of their 3 young children) only to decide to remarry 2 years later. They suffered extreme set backs as a result of their actions and continue to pay the price today. I think some of the “strategic defaulters” may have similar experiences; and yet, it’s the right thing for others. Still torn……
I agree with Steve and find the practice extremely damaging to the system and our financial future.
Once again, those who made bad decisions in life are “victims” and it is OK to shrug their personal responsibilities, leaving the rest of us to clean up their mess.
Yes, it’s a shame the value of a home is dropping. They do that. No one ever guaranteed anyone their home values would increase forever. But these people bought big homes with big mortgages and knew they really couldn’t afford it. Now they have been caught in their deception and want to just walk away and forget it.
I am tired of being the guy that always has to pay for my own way through life and for those who take chances on my dime.
I am not forgiving the banks either, here. They lent money to folks that they didn’t even take the time to look at W-2’s for. But in their case, there was a certain amount of Gov’t pressure put on them to do those loans.
And, yes, I have had a mortgage, I own my own home, I have refinanced from time to time. I did liquidate an account recently to pay off my mortgage (recently)so at the moment I am clear. I say this only to provide proof of participation in the game.
Obviously I agree with you. We seem to be fostering a no consequences culture where get rich schemes and new bubbles may propagate and deflate with even greater negative results. Moral Hazard seems to be totally forgotten.
Steve, the moral hazard runs both ways.
There are two parties to the contract: the borrower and the lender. Both parties were irresponsible and reckless with other-people’s money.
Borrowers who default face consequences: they can’t borrow money again at attractive rates for a long time.
Banks get billions of taxpayer-dollars handed to them by our Government.
If we are going to be upset about ignoring moral hazard, let’s focus our anger towards the banks. The borrowers get punished enough.
I am upset with the banks as I stated. I will focus on both parties thank you. Many of the borrowers don’t seem to be punished at all. Not being able to borrow more money you won’t repay isn’t really losing something. Also, real estate agents the country over are already looking for ways to get the “strategic foreclosers” into new homes and loans as we speak. It may be cynical, but I think some are encouraging this behavior to increase housing transactions. There are many attempts already underway to lower lending standards because the banks won’t lend to people right now. They have good reason not to – the people cannot repay. It will be interesting to see how this all turns out.
Agreed…it will be interesting.
Certainly agents, mortgage brokers, homebuilders, and all of their associations will be in favor of anything to boost transactions, regardless of whether or not the idea is economically or morally sound. (tax credits anyone?)
“…money you won’t repay” is a bit harsh.
I doubt that a pool of these borrowers would be more likely to default on a new loan than the rest of the public. Especially FHA borrowers.
The real issue isn’t whether they should be punished: they should. The question is how. Blacklisting? Charge them higher rates? Throw rocks at them?
If we had a functioning market, some lender would step in and find ways to work with the “better” defaulters. Because we only have one lender – Uncle Sam – they make all the rules.
I think the tone of the article is misleading. If you are exercising a clause in the contract by walking away and turning in your keys, you are not breaking anything. You are taking a legal path that neither you nor the lender intended, but did consent to, as part of the contract.
Also, it’s not as if the lender is giving your money back. He has both your money and the house now. If he didn’t insist on a large enough down payment to cover the loss in value, then he made a poor business decision and has to live with it.
A lot of life is making your best guess and living with the results.
What clause are you referring to? Foreclosures do not usually absolve you of paying the difference in the eventual sales price and what you owe. I admit my experience with the contracts is shallow, but I’m not sure walking away is as easy as some people seem to think. I know Congress has made some concessions on taxing loan forgiveness, but even that is forfeit if subsequent HELOCs were taken and not spent 100% on the home. I foresee some bad tax problems coming for the “walk-awayers”.
Why isn’t giving up your home and damaging your credit punishment enough? And why are we so concerned with punishing borrowers? Obviously, no one bought their home with the intention of foreclosing. Equity was rising and people were making money off their property. Everyone was telling us to buy homes. “It’s a tax write off. Don’t waste money renting when you can gain equity!” The propaganda was everywhere. The banks were the ones trying to get rich. Oh wait they did! And the CEO’s continue to take millions of dollars in bailout money for their expenses and salaries. All the while, we simply made made a business deal that we are following through with. We cant pay, the bank takes the house back. Simple as that. No one ever asked what would happen if we exercised our rights??? Don’t be angry at your neighbor for foreclosing. The poop hit the fan and it won’t get better until it makes sense for people to keep their homes. No one wants to be the last man on the boat…or block.
I am never surprised by the comments to my blog. It is obvious that this topic draws out strong opinions on each side. I enjoy reading them and I am glad people are responding. I like Jeff’s comment and I agree with him completely. It’s true that each one of our choices affect one another in one way or another. I guess even when people eat at McDonalds, it could end up affecting me in some way because fast food is unhealthy and could lead to more expensive medical costs which will be passed on to everyone that uses the hospital. Just food for thought.
The only contract I have is with God, everything else is subject to interpretation.
“Sixteen tons, and whaddya get, another day older and deeper in debt. Saint Peter dontcha call me because I can’t go, I owe my soul to the company store”–Tennessee Ernie Ford
I tried to negociate a new loan starting in Feb. 09. All I wanted to do was go from interest only to straight 30 year fixed. Colonial savings has been screwing me over ever since. Said they would do itthen appraisal came back $80,000 short! Asked for short sale and they kept jacking me around. Finally told them to take the house in Oct. and stopped payments. Had a 740 FICO and today it has dropped to 630!! hehehe. They really do have us by the balls. As a long time American Express user I called to tell them ahead of time what I was doing. They said my history with them doesn’t matter a bit! FICO is all they care about!!
Check this out….
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467
Good luck all.
I think people are bundling a lot of emotion into what should properly be nothing but a business decision. Mom, apple pie and Chevrolet, 4th of July, presents under the tree; that kind of baggage. What they seem to be doing is blurring the boundaries between personal commitment to one another with commercial commitments to a bank that is every bit if not more responsible for the plight we are in. They are seeing a strategic default as a failure when the REAL failure is to pay and pay and pay for a dwelling that will do nothing but depreciate over the years, because it is a fact that many houses will never ever be worth what was paid for them in real dollar terms.
These people either must become familiar with a basic rule of finance called the sunk cost, or they will truly fail where it matters, by being bled white and saddled with a house that was and will always be worth less than what was paid. In continuing to pay with hopes of recouping lost equity all you do is rob yourself and your family of the money that could otherwise go to buy a better life, that is, will your kids go to community college and a second rate state university rather than a first rate education because you had to sacrifice their future to keep paying for a house that is not ever going to be anything but an albatross around your neck? Good luck because you are now gambling that the worst is over when in fact the worst is yet to come, in my opinion, and those kids might not get to go to college at all.
Even if like me you do not have kids, what about the pure lowering of the stress level in your life? That is a real quality of life issue. Longevity depends upon it.
Sunk costs are unrecoverable past expenditures. These should not normally be taken into account when determining whether to continue a project or abandon it, because they cannot be recovered either way. It is a common instinct to count them, however.
Most people will say to themselves that with luck they will see price appreciate to the value they paid within ten or so years thus making their investment good, but for most who bought in the top of the bubble their houses will never appreciate to that level in their lifetime. And when you make a $2,300 a month payment or whatever it is, while your new neighbors pay 500, which is happening in my neighborhood today, you also have to count the opportunity cost of the difference and multiply by a time and interest factor which is what we call compounding. Time value of money is so poorly understood in America today it is no wonder some people simply dispose of all income the moment they get it.
I am paying $1,000 per month to live in a house that is identical to the one next door, the lady that bought that place got it for $40,000 less and 2 points lower in interest, she bought only 7 months after I did. Her payments are half mine, and I know people who bought here in 2006 paying well over two grand a month. That particular family has two little girls and their college fund has now been spent and the family is still going to lose the house in foreclosure, if you ask me that is the immoral position to take, to rob those kids of their future in order to grease the palms of some greedy bankers who depend on your gullibility.
My decision as of June is to walk away, I have a degree in finance (retired now) and so it is hard for me to admit that I made a mistake, I thought I was buying at the right time, that prices once halved could go little or no lower, I was wrong. At least my decision making process is based in thought and knowledge, not emotion and fear, if I can be wrong then anyone can be and so you should let it go and not be so hard on yourself, regrets are counter productive in this discussion, they prevent you from facing the real decisions. But this is way too important to leave to financially illiterate guesswork and plain old luck because housing is a huge expense.
For the foreseeable future housing is not a way to “make money,” or even a way to save, but more like a gigantic tax, you pay it voluntarily or you walk away and try again later when the markets stabilize at a much lower price level.
How much lower? Nobody knows for sure, but I had waited many years to buy in part because given an average household income in the USA of about $43,000 per year, even if you almost double that for a couple with two such incomes, this means the average house payment should be around $1,200. At 5% for 30 years we are talking about at most a $140,000 house, yet America in most major metro areas had gotten to the point where people with that kind of income were spending between half a million and a million bucks for their houses, and that all has to be unwound, it will take a long time. I waited because either incomes had to radically go up to justify such prices, or prices had to radically drop. There was no in between. Still is not.
Completely torn on the subject. I’ve read all the comments and must say that each of you have a extremely valid points. After losing my job, being out of work for several months I finally found employment….The downside is that I’m dramatically underemployed, making about 60% less than my last job. I’m not complaining though, because of the grace of God, I’m still able to pay for my home each month and my wife works as well. But I would be completely dishonest if I didn’t say that I have been combing the internet for the last few weeks looking at options. I love my home. I love the stability it creates for my family, especially for my kids. But is it worth the anxiety and stress? I’m torn…
The note is a contract. It says borrower will pay back lender and if borrower doesn’t then lender will take property. It’s simple, it’s business. Some want to make borrowers feel MORALLY obligated to pay – that’s wrong. It’s a simple business contract. Guess what, companies do it all the time. Trump does it regularly but there it’s called RESTRUCTURING DEBT or transfering debt. Make the common sense economic decision that is best for you. Leave the morals out of it.
Steve,
Both my husband are I are currently serving in the military. We have engraved the word “integrity” in our hearts and believe deeply in doing the right thing when no one is looking. Here is our situation. We became proud home owners in 2005; little did we know what kind of mess we had gotten ourselves into. Signing over an adjustable-interest-only loan we turned the key to our new home. Since then, our mortgage has adjusted substantially, and the value of our home has depreciated. Currently, we are in the hole over 200 K. My husband and I have made several attempts to improve the financial burden of our home to include: asking the bank to refinance our jumbo loan into a 30 year fixed – paying principle towards our home, attempting the loan modification process, and lastly we requested a short refinance only to be told “NO” every single time because according to the bank we make too much money (the bank has received every payment on time). In these several attempts we have spent over 5,000 dollars for hired help, to no avail. The bank simply does not want to work with us, and we refuse to be “the last man on the boat.” Keeping our home because of PRIDE is simply selfish to our marriage and our child. To stay in our home is essentially throwing away our hard earned money on a house that we’ll never own. At this point a strategic foreclosure seems like the only logical option.
If the bank refuses to work with you, then walking away is definitely something to consider. For the bank, this is all business, and you should treat your decision the same way.
Check out this video: http://immoralhazard.housingstorm.com/2010/02/08/more-reasons-to-walk-away-indymacs-slap-in-our-face/
I learned the hard way about how banks do business last year. My wife and I have great credit, actually we just bought a home it was a foreclosure and provided us with a tremendous opportunity.
When I purchased my truck a few years ago I financed through the dealership. I then recieved an offer from one of my credit cards, for 2.99% for the life of the loan. I thought that was a great opportunity to save some money and still pay off the debt. What I did not realize is that the credit card companies are virtually free to change terms on you at their whim. I mistakenly thought that as long as I paid on time every month I would be okay. Wrong. The credit card company CHASE, decided they did not like me having such low interest anymore so instead they more than doubled my minimum payement from 2% to 5% (went from $280 a month to $700). Although I had been paying more than the minimum, I could not afford the new minimum. When I called the company they told me the only options I had was to pay off the 12K left, or to agree to new terms. Since I could not pay it off, I was basically forced to a new rate of 8.5%. So much for the morals of banks…
I had to relocate about a year ago for work. We tried to sell our home but did not even have anyone look at it. We have it rented but are losing about $800 a month. I am going to try one more time to sell it this spring. If that fails I have no qualms about walking away. In this situation you have to think about yourself and your family and what is the best decision for you. It is a business deal, and I learned the hard way that banks don’t care their contracts, if they can break their deals they can and do. If this was about morals, then the banks would have to have morals too. They don’t.
My fellow Americans: With all due respect and with no interntion to offend anyone, I have to say that this (latest) trick (bursting bubble of credit on steroids, built over the years by Mr. Geenspan’s Fed printing $$$ with no regard to macroeconomic basics, keeping interest rates INFLATIONARY & intentionally at historic lows and for historically long time) fits a predictable pattern: Suck as many into the trap as much as possible, then switch the scenario and suck $$$ from them while also getting rich by buying abandoned stuff (stock or houses) at rock bottom prices. Blaming (most) of those who got mortgages on houses which – thanks to UNSUSTAINIBILITY of housing prices via interest rates which needed to be increased as Chinese + others realized that buyng US T bills + bonds, Fannie Mae etc stock became less attractive (riskier) – subsequently dropped in value thus getting them “under the water” that they were irresponsible is completely missing the point, conveniently (in the ruling class interest)blaming the little man (woman), while the big thieves are getting no punishment (but taxpayers paid bailouts and bonuses instead). …. Big thieves and those who have job description to know (Fed, Congress, SEC, bank chieftains, Wall Street, etc.) NEVER have problems with moral dilemas (and markets + their bosses do not pay them or keep them for doing so). Yet the propaganda and tales abound for holding the little man, victims of grand schemes of ripoffs, hostages by playing on their gulibility and sensitivity to moral appeal. Walk away. It is just like any other contract. With specific penalties involved. Cost versus benefits. Throwing (still relatively) good $$$ into a sinkhole is not smart, loving behavior. Prospect for any overall increase of US housing stock are close to zero as 1) interst rates are at historic lows already and for quite a long time 2) employment picture will not improve any time soon and – more importantly – not enough to drive housing prices up. 3) US trade and budget deficits will INCREASE pressures on flight from dollar and as dollar will continue to weaken, imports (starting with gasoline) will increase in price – therefore also FORGET about any price appreciation in far away suburbs and developments: people will not be able to afford such daily commute even when they will hold a job and have Prius or other high mpg car. … Personally: We filed for Chapter 7 bankruptcy in summer of 2004 clearing $145K, mostly credit cards debts, everything except $10K in SallieMae loans. VERY, very glad we have done so, as new bankruptcy law was just about to come (greatly favoring banks). We – FORTUNATELY – didn’t want (or could get if we have wanted) mortgage, thus saving many tens of thousands on mortgage interest + real estate taxes + commission payments (on a top of tens of thousands saved on pseudoheroic effort to pay of those credit card loans). BTW: Those credit card debts were there as one of us was to finish physician’s residency, expecting $200K+ annual income, therefore that debt. We feel VERY GOOD about our Chapter 7 and if we would have gotten stuck in this credit on steroid/financial engineering/default swap/irresponsible Fed policies mess we would do what makes BUSINESS sense when one gets really deep under the water with a mortgaged house: give the keys back to the bank. They too bet that it is a GOOD collateral and they are professionals.
Great discussion.
Wall Street banks from Goldman Sachs to the one down the street were bailed out by the U.S. taxpayer when they made bad bets. And guess what? They made record profits with our money, borrowed money. Any of you see any of that back yet? Nope. Just the opposite…you’re going to see your taxes go up while the bankers pay out bonuses more than our mortgages.
For those of you ‘noble’ folks on here, can you tell me what the difference between them walking away from their contractual obligations (AIG for example) and putting it on the government (us) and a homeowner walking away from their obligation and putting it back on the bank?
There is no difference. Actually there is one. We actually feel a tinge of remorse…banks on the other hand jump at the chance to dump their bad decisions on others.
I work in the financial sector and know this first hand and that’s why I will walk away from my home next month. It was a bad trade. They can have the keys back, I’ve paid rent for the past 4 years.
I warned anyone who would listen that bailing out the financial sector would create a “moral hazard” but the government did it anyway. There’s a famous saying on Wall Street that says “capitalism without bankruptcy is like Christianity without hell.” The government has made the decision that certain institutions are too big too fail.
Well guess what? I’ve made the decision that my family is too big to fail and I’m not going to throw my money out the window when I could deploy that capital elsewhere.
You people need to start thinking like a bank and shareholders and not like people. It’ll make your life a lot easier, along with many of your financial decisions.
Cheers,
Whiz
I forgot to add another bailout that we (us) did in 2001.
I worked for an airline…my first (and last) day at work at American Airlines was 9/11.
After those devastating attacks, the airlines pleaded for help. But people forget that the internet bubble had popped and business travel had dried up. The airlines were in bad financial shape before the attacks and it was getting worse.
The attacks were a perfect excuse for them to plead for a bailout.
I knew that my job depended on this, but I was adamantly opposed to bailing out the airlines. Why should we the people pay for the bad business practices of the airlines? We bailed them out anyway…and look where it got them. They’re still losing money.
What about the automakers? Bloated union contracts and poor products that couldn’t compete in the market. Let them fail? Nope, US to the rescue.
But God forbid you make a mistake or fall on bad times. They’ll come down on you like a ton of bricks. Time for us to do simply what’s been done to us forever.