Strategic Defaults

[ziggy29]

I'm glad I had that high horse moral crap smacked out of my head at an early age. Makes it easier to swallow the bitter medicine surrounding us.

Agreed. This is why I'm rapidly embracing the idea of engineering an asset-rich/income-poor retirement -- at least as long as the trend is to base redistributive public policies on income. On one hand it feels like I'd be taking advantage of the system, but on the other hand, if I don't do it, I'd feel like the system was taking advantage of me.

 

[ziggy29]

I'm in the camp of people having a moral obligation to Pay what you owe and be responsible, but hard to condem personel Strategic Default, when big business is doing it with no regrets.

I think those who reasonably can pay back what they owe should morally do so. I'm debt-free so it wouldn't be an issue for me, but if things get really bad and you're way underwater on the loan, I would feel more of an obligation to my family than to the bank or their shareholders, and if defaulting and walking away is what is best for my family, so be it.

 

[FUEGO]

Agreed. This is why I'm rapidly embracing the idea of engineering an asset-rich/income-poor retirement -- at least as long as the trend is to base redistributive public policies on income. On one hand it feels like I'd be taking advantage of the system, but on the other hand, if I don't do it, I'd feel like the system was taking advantage of me.

That's been my plan all along. Hopefully they never get any bright ideas and start taxing wealth directly.

I think this approach may be particularly savvy if the proposed health insurance subsidies for premiums get put in place. The lower your income, the lower the percentage of your income you pay. It is a very progressive "tax" that will really ding the middle income earners, but for those ER's that can avoid needing lots of income, it may work out nicely vs. the status quo.

 

[clifp]

I'm sorry but you would have to be living in la-la land if you are unaware of the tax implications of doing a short sale. I don't own a house or even have a mortgage but I was aware of it.

That's interesting cause while I was aware of the Debt Relief act including its expiration in 13 days, I was unaware the income tax forgiveness only extended to the original value of the mortgage. This seems perfectly fair to me.

As a practical matter, I think this will force many/most of the people who used their house as an ATM and have"strategically" defaulted into bankruptcy.It is worth noting that even in non-recourse state like California, refinances are recourse loans. I hope (but doubt) that banks file claims in court to obtain additional judgments on those with the means to pay back their mortgages.

 

[Milton]

There is a related article in yesterday's Financial Times: Aline van Duyn, "A Business Decision". You can read the entire article here: US housing market hit by ‘walkaways’.

What a dysfunctional system.

 

[haha]

This person would be crazy not to default. California doesn't allow deficiency judgments, and there was a reason for that. To make it easier for buyers to pull the trigger on overpriced houses.

The lenders would sell your teeth for the gold, or your children into slavery. Just business.

It isn't your responsibility to be "nice" to them. Worldwide we are way past the handshake system.

Ha

 

[Milton]

Related article: Mort Zuckerman, "America must help its homeowners", March 5, 2010 Financial Times, p.11.

Roughly one in four mortgages today exceeds the house's value - approximately 10.7m homes. American Corelogic, the research provider, estimates an average deficiency per home of $70,700 or an aggregate of about $800bn. An additional 2.3m homes had less than 5 per cent equity. The remaining equity for many other homeowners is at historic lows. With declining prices beginning to hit the middle to higher ends of the housing market, we are looking at another foreclosure wave....

Sooner or later, the government may be forced to subsidise the mortgages of underwater homeowners. One solution might be to revive the Depression-era Home Owners' Loan Corporation. Such a body would buy mortgages that were close to or in default from banks and replace them with ones homeowners could afford. The banks would receive federal loans in exchange for shaky mortgages. This may be the only way to reduce mortgage principals to the value of the houses. It is estimated it would take more than $1,000bn to do this.

What a crazy system. If I were an American taxpayer with a paid-off mortgage (admittedly an oxymoron, but there must be one or two of them out there), I wouldn't be happy.

 

[MasterBlaster]

California doesn't allow deficiency judgments, and there was a reason for that. To make it easier for buyers to pull the trigger on overpriced houses.

That's only true for the initial trust-deed used to purchase a house. For many properties there have been a raft of secondary refinancings to take money out from the housing ATM. Therefore a raft of deficiency judgements will be forthcoming in California.

 

[haha]

That's only true for the initial trust-deed used to purchase a house. For many properties there have been a raft of secondary refinancings to take money out from the housing ATM. Therefore a raft of deficiency judgements will be forthcoming in California.

That is why I said buyers. If a person had attachable assets, and lots of non-puchase money liens he would need to take that into consideration. Perhaps he would decide differently.

 

[Milton]

California doesn't allow deficiency judgments, and there was a reason for that. To make it easier for buyers to pull the trigger on overpriced houses.

I would substitute: "To make it attractive for speculators to gamble on a real-estate bubble without incurring any personal risk". Heads they win, tails the bank loses.

 

[dixonge]

Here is the ugly truth: Wall Street pooled mortgages, sold them to investors, then purchased Credit Default Swaps on them as a form of insurance. In the end, they make a MULTIPLE of profit from a failing or downgraded pool than they ever would from the interest alone. To put it another way, they are insured against default, not against a modification. Having all the homeowners continue to make their payments and stay in a 'current' status is not what the Mortgage Backed Securities aggregators want.

Given what I am reading in the links I provide below, I have a hard time feeling any sort of animosity for homeowners who walk away.

"However, as Goldman Sachs began to aggressively short the various “assets” of the U.S. housing bubble, instead of having AIG write-up CDS contracts as protection, Goldman had its housing shorts duping AIG to enter into these CDS contracts – for the specific purpose of making huge, windfall profits when those CDS contracts “blew up”. "

My Take on the Goldman Sachs / AIG Saga -- Seeking Alpha

Credit Default Swaps Defined and Explained « Livinglies’s Weblog

Yield Spread – Kickbacks R Us | Home Solution Counselors

 

[Gone4Good]

Here is the ugly truth: Wall Street pooled mortgages, sold them to investors, then purchased Credit Default Swaps on them as a form of insurance. In the end, they make a MULTIPLE of profit from a failing or downgraded pool than they ever would from the interest alone.

Except for the fact that a large chuck of "Wall Street" had to be bailed out because of their massive, unhedged, exposure to mortgage backed securities. I don't think Citi shareholders ($4 down from ~$55), or Lehman shareholders ($0), or Bear Stearn's shareholders ($10 down from $172), etc, etc are doing a jig of happiness over how well "Wall Street" manipulated the mortgage market.

 

[dixonge]

Except for the fact that a large chuck of "Wall Street" had to be bailed out because of their massive, unhedged, exposure to mortgage backed securities. I don't think Citi shareholders ($4 down from ~$55), or Lehman shareholders ($0), or Bear Stearn's shareholders ($10 down from $172), etc, etc are doing a jig of happiness over how well "Wall Street" manipulated the mortgage market.

I won't pretend to understand all of this yet, but not all were 'unhedged'...

How Citi Blew Itself Up By Cleverly Avoiding AIG

Perhaps it would be more accurate to state that many large firms, *some* of which were major Wall Street players, stood to profit from defaulting pools of mortgages.