by jonmaddux
The Tip of the Foreclosure Iceberg
January 12, 2010 in 2010 Predictions, Best Of The Storm, Everything About Foreclosures, Fresh Perspectives, Home Economics, Social Mood Swings
Default… The Domino Effect
Defaults are like dominoes. As more people default, it becomes more socially acceptable. The Wall Street Journal recently reported that:
“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”
Just like anything that spreads that once was socially or “morally” questionable, such as drinking, smoking, spending more than you make via credit cards, strategic default has become a new social trend. Joe Borrower decides he’s going to strategically default. Joe feels passionately about his decision and shares it with his friends. His friends start contemplating and weighing the option as well…
Until home values strongly recover, this trend will (and has) continue to spread like a wild brush fire.
UPI.com reported:
“Nearly one out of ten homeowners, 9.2 percent or 7.4 million homeowners, say they would likely walk away from their homes, default on their mortgages and suffer the consequences to their credit if they felt financially vulnerable and owed more on their homes than they are worth, according to a new national survey released today by Reecon Advisors, publisher of Real Estate Economy Watch.”
The last Mortgage Bankers Association report estimates that the total number of loans in some sort of delinquency, default, or foreclosure status to be about 8.2 million, or 14.41% of all loans. There was around 3.9 million foreclosure notices given in 2009, but if the total number of loans that are in some sort of delinquency, default or foreclosure presently is 8.2 million, it’s obvious that we have a bigger problem beneath the surface. You can try to hide 8.2 million people in default, but at some point, you gotta know that you are only looking at the tip of the iceberg.
More foreclosures
Please consider CNN Money article: Jan 1, 2010
For Gus Faucher, the director of macroeconomics for Moody’s Economy.com, the huge number of foreclosures that remain in the pipeline is the big problem.
Moody’s upped its estimate of defaults recently because of shortcomings of the government-led mortgage modification programs. Trial workouts are not being made permanent and completed modifications are redefaulting at high rates.
“There are going to be fewer [successful] modifications than we thought,” said Faucher.
Even so, he added, much of the price decline has already occurred and Moody’s forecast is for only another 8% drop. The worst-hit markets will be the ones suffering the most foreclosures, places like Arizona, California, Florida and Nevada.
Resetting option ARMs (adjustable rate mortgages) will also aggravate the foreclosure problem. These mortgages allow borrowers to pick their own payments, which can be so low they don’t even cover the interest. Balances swell.
For many of the more than 350,000 option-ARM borrowers, it’s time to pay the piper. Their loans will change into fully amortizing mortgages that will carry much higher monthly payments. A very large percentage of these homeowners will default, according to Shari Olefson, author of “Foreclosure Nation: Mortgaging the American Dream.”
“We’ve still only seen the tip of the foreclosure iceberg,” she said.
The ice cold truth about our economy is that it is in a much worse state than people realize. According to figures released by the Department of Labor, the real marker of American unemployment stands at 17.5 percent — a figure which takes into account under-employed workers and those who have not sought work in the last four weeks, according to a published report.
Debt Club
I want the economy to recover just as bad as the next person, I just don’t see how it can just yet with people out of work and with millions of homeowners worse off than renters. We’ve been told that debt is bad, so why does the economy need so many people in debt for it to thrive? Spend spend spend. We need to spend more of our paycheck or max out our credit card, so that the local store won’t go out of business.
Here’s a good quote from Fight Club.
“…an entire generation pumping gas, waiting tables; slaves with white collars. Advertising has us chasing cars and clothes, working jobs we hate so we can buy s**t we don’t need.”
Most of us are guilty of it. A mortgage is meant to be paid off eventually, right? So why did the lenders invent interest only loans and negative amortization loans? Clearly to take advantage of buy low and sell high. Short term homeownership similar to the arbitrage that stock traders get rich off of. Who benefits from the crashing real estate market? The people who are buying the homes on the foreclosure auction block? How is it possible that a home can become like a stock that goes up and down in value so much that it can destroy peoples lives. If that is what homeownership has become, should we be looking at it more like a stock trader? Buy low… sell high.
I hear people complaining about strategic defaulters, but what about the real people who created the bubble and the crash, the ones who drove the ship into the iceberg. Why get mad at the ones who are scrambling to occupy a seat on a life boat as the Titanic is sinking…
To big to fail?
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- A Few Different Ways to Avoid Foreclosure With the way the housing market and economy are right now, it looks like it is going to be...
Thanks Housing Storm!
The author is an apologist for speculative house buyers, effectively giving them a free pass and acting like assigning blame is an all-or-nothing dilemma.
Strategic defaulters irritate me because it exposes their true intention for purchasing real-estatem speculation and the prospect of making some money.
People who buy with the intention of actually retiring the debt and paying off the asset in full do not strategically default because they do not overstretch their finances to buy when their own money is on the line.
I see strategic defaulters as the lemmings who drank the Kool-Aid being served up by the REIC hustlers and decided to join the party only to stiff the bar when the party ended and the bill showed up.
So then people like this author say ‘Why be mad at them?’ – here is why. These irresponsible people cheated the responsible. The savers who were outbid by these donkeys using easy credit who threw all caution to the wind. The money they borrowed into existence diluted the money supply and essentially stole the buying power away feom the disciplined savers.
Granted, there is a special place in hell for the money hustlers who threw the party, but nobody forced anyone to attend. These strategic defaulters attended the real-estate Kool-Aid party on the own free will. For them to default in the face of having to repay that which they spent, pointing fingers at banks, etc is not acceptable.
If they want to mail the keys back and get out of Dodge, fine, whatever. But to stop payment and squat in the house in order to strongarm a modification of your contract by subjecting the other party to duress is ridiculous.
I see poor conduct on the part of everybody involved. It’s not a matter of just picking the worst of the worst like some sporting event and engaging in cheap populism.
Not everyone wants to walk away from their houses you know. It involves a lot of researching,talking to professionals and some even spent money to hire a lawyer to help them work with their lender just to be denied and told there is nothing they can do .Maybe you have not experience staying up late every night for last 2 years trying to figure out how you can keep your house and protect your families future at the same time. Maybe you live in LALA land that everything is perfect and houses around you are not in foreclosure. Some people did not use their houses like ATM machines, instead they spent a big chunk of their savings upgrading/fixing up the home they love.
You can say what ever you want about strategic defaulters but at the end of the day, this people lost their houses and banks are happy to take them away. I hope you will not encounter any hardship down the road, or you might find yourself in the same boat (unless of course you are rich and have unlimited supply of resources). Maybe you’ll understand what other people are going through.
AzDave is more right than not….. I’m privy to the data. I know how many of these people cashed out 100’s of thousands shortly after buying them with no money down. speculators turned lemons into lemonade. Yes the banks made the loans, but they where way to naive to know that the ‘Average Joe’ would take full advantage of their game. Basically … ‘Right Back At Em’. Banks thought they had the public up against a wall, but the public screwed them right back.
When it’s all said and done….. the saver was the bag holder. Earned no income and lost value on his cash savings.
The lenders / banks agreed under contract that the house was adequate collateral for the debt. The recourse agreed to by them is to take back the house. The homeowner is still following the contract by giving back the house. They lost their down payment, their credit score and some of their pride. What really does the lender lose? The lenders write it off and get bailout money.
Not condoning strategic defaulters and not all of these people entered into their mortgages with this intent.
Bad things happen to good people and that is certainly the case with some of these homeowners.
When you loose your job, can’t afford the payments and have lost so much of your equity this is clearly an option.
In reality, if enough people did this the banks would have to take notice and maybe they could start acting more responsibly in the loan modification or short sale arenas.
The reason they tell us to spend is not so that the local business won’t close. We have a fractional reserve lending system that drives the monetary supply in our economy. Google “Money As Debt”. Until you understand monetary policy, you will have no clue about the real relationship between debt, calls for consumers to spend, and the housing crisis / recession.
Jenny,
I’ve seen the video “Money as Debt” I recommend it. It’s very eye opening. I was simply quoting the media that says we need to get people spending again to get our economy going again… thanks for your comment.
I’m encouraged all the time to strategicly default, and believe me, it’s very tempting. We never anticipated that our house would become nearly worthless due to massive speculation and fraud by others. We bought in Modesto in 2002, just as prices started to rise and before new construction and housing speculation became ridiculous, propped up by fraud and toxic loans. And our mortgage is a 30-year fixed and affordable as owner-occupied. We never anticipated leaving because that’s where I grew up. BUT, we moved in 2005 for job reasons, listed our house in 2006 after we felt confident our new jobs were working out, got a sales contract in 2007 for $300K+, and then everything fell through. We owe nearly $200K and shortsales/REOs in our neigbhorhood are currently listed below $100K. We’ve got good tenants now, but it doesn’t even come close to our mortgage payment. Our first tenants had to move back with their parents due to job loss, and it took several months to find our current tenants. There’s tons of rental inventory in Modesto, but not many attractive tenants (i.e. verifiable & stable income, good credit, no pitbulls). To add insult to injury, we’re renting a house in the bay area but now our landlord is strategically defaulting. The rental market is pretty tight out here because the banks are taking so long to deal with the problems. So we’re getting it on both side.
making a monthly mortgage payment, insurance payments, taxes, and up keep? are you REALLY a “homeowner”? id call it establishing yourself as “on the hook”. buy an old car and live in it , if you really want status in amerika.
How much is the Title of “homeowner” worth? Your neighbors aren’t that nice anyways! hehe.
Seriously though. If you owe more that your house is worth, then you are worse off than a renter and you don’t really own your home… The lender does.
I used to own 40,000 shares of Intel stock that was purchased at various prices points between $50 and $75 per share. Since it may never see that price again, did I have an option to “sell short”? No.
The difference is leverage. In other words, someone else is bearing the risk in a mortgage. My stock situation is a “short pay” where I get to eat the loss. Banks are eating the losses now. But that was how they played their cards.
As long as someone else will bear the risk for a reasonable cost, people will jump at it. And why not? Who’s the sucker?