Strategic Defaults

[beowulf]

Just read this article - American Dream 2: Default, Then Rent - in the WSJ - here is the link - American Dream 2: Default, Then Rent - WSJ.com

Looks like those who LBYM, saved, struggled in the past to meet their payments and eliminate debt were really the suckers. The number of people deciding to walk away from underwater properties when they could afford ro pay, but choose not to, is accelerating. This lowers the values of property for everyone else and raises borrowing costs. The comments at the end of article are priceless.

Really makes me wonder why bother to do things the moral, ethical way when more and more people could care less.

 

[Fireup2020]

Absolutely pathetic! I have nothing nice to say about this.

 

[TomCat]

My understanding is that a "bank" can sue to get payment from the home owner for any unpaid mortgage debt Is it just that there are too many to actually go after? Or is ther an assumption that the home owner does not have the money to collect from?

Tom Cat

 

[Bikerchick]

How can someone capitalize on this trend? As an investment, I could pay cash for a "short sale" house and rent it to someone - collect the rent, or resell it. Not quite like flipping - what if someone would like to stay in their home and is contemplating default? I could buy it with cash from the bank, rent to the former owners and even set up a lease-to-buy contract, where I hold title until they pay enough "rent" to buy the house - they'd never even have to move.

I've done rental as a side business for years, with a pal who does the management. Has anyone done rentals before, or worked in real estate, who has an opinion on this as an opportunity?

 

[youbet]

My understanding is that a "bank" can sue to get payment from the home owner for any unpaid mortgage debt Is it just that there are too many to actually go after? Or is ther an assumption that the home owner does not have the money to collect from?

Tom Cat

In earlier threads on this subject, others(more expert than I) explained that it is a state by state issue. In some states, the lender can go after your other assets if you default, in others they can't.

From the article quoted by OP above:

California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default.

 

[Bestwifeever]

Great, now our infamous "keep or pay off the mortgage?" debate can have a third point of view: "keep or pay off or walk away from the mortgage?"

 

[DangerMouse]

Not much one can say about the ethics of these people. I wouldn't be bragging about defaulting on my mortgage when I am paying $700 a month for my BMW. They really should change the laws so people who default lose everything. What surprises me is how willing these types are to brag about what they have done, they have no shame at all.

 

[W2R]

I wonder how long it will take for their FICO score to recover. Having a low FICO could really limit one's rental choices. At least, I am thinking that probably one could not rent an apartment from one of the large property managers after having defaulted on a mortgage.

 

[FIREd]

I find this absolutely disgusting. But, as I am often reminded when I voice that opinion, if it's legal to walk away from your home and stiff the bank (non-recourse mortgage), then they have done nothing wrong. They are merely using the law to protect themselves from evil banks... At least that's how many seem to justify their decision.

 

[W2R]

I find this absolutely disgusting. But, as I am often reminded when I voice that opinion, if it's legal to walk away from your home and stiff the bank (non-recourse mortgage), then they have done nothing wrong. They are merely using the law to protect themselves from evil banks... At least that's how many seem to justify their decision.

But do we define right and wrong by our legal structure? I think that is a pitiful situation, if true. Sure, the law reflects the cultural environment in which it was/is built. But when it comes right down to it, I don't think that if something is legal it is necessarily something I would be proud to do or something that is not wrong. Many, and I hope most of us demand far more of ourselves than the law demands of us.

 

[Texas Proud]

I find this absolutely disgusting. But, as I am often reminded when I voice that opinion, if it's legal to walk away from your home and stiff the bank (non-recourse mortgage), then they have done nothing wrong. They are merely using the law to protect themselves from evil banks... At least that's how many seem to justify their decision.

I am kind of in both camps.... not looking kindly at people who walk away from their debts... but also in the camp that this is a business decision... and the law allows this to happen...

If you were running a business and you had an asset that was not 'productive' for the costs.... and you could get a similar asset for a lot less... and your debt was non-recourse.... you would be a fool not to get the cheaper asset...


I also think that the banks should stop lending in the states that do not allow recourse... or the banks should require a larger down payment... or get the law changed... I bet if there was no one that would lend you money to buy a house, you would be complaining to the gvmt about it...

 

[FIREd]

But do we define right and wrong by our legal structure? I think that is a pitiful situation, if true. Sure, the law reflects the cultural environment in which it was/is built. But when it comes right down to it, I don't think that if something is legal it is necessarily something I would be proud to do or something that is not wrong. Many, and I hope most of us demand far more of ourselves than the law demands of us.

The problem is we all have different standards of morality. For some, staying on the right side of the law is good enough.

 

[youbet]

I wonder how long it will take for their FICO score to recover. Having a low FICO could really limit one's rental choices. At least, I am thinking that probably one could not rent an apartment from one of the large property managers after having defaulted on a mortgage.

In another thread it was pointed out (magazine article) that the max hit for a mortgage default was 160 pts. So if you have good credit, say a score of 800, you're still at 640 after default. That's not good, but I think you'd be able to find a rental in today's market if you otherwise have good references. Plus, if you save $200k by defaulting, you could pay rent a year in advance if the landlord is worried!

Long ago, when we were discussing mortgage bailouts in general in various threads, I started to wonder when this would happen. I'm not really surprised. For a few thousand bux, no real reason to take the credit hit. But for big bux, hey, why not? Only morals, a conscience, and personal pride would cause someone to stick it out.

 

[youbet]

I also think that the banks should stop lending in the states that do not allow recourse... or the banks should require a larger down payment... or get the law changed...

I sure agree with that. It seems like there is a Catch 22 going on today. The gov't is very mad at lenders who made loans to folks unlikely to be able to pay. So, the lenders tightened standards. Now the gov't is very mad at lenders for not lending enough.

Folks like us were just old conservative patsies when we put 20% on our houses and had to show some evidence of income........

 

[FUEGO]

Long ago, when we were discussing mortgage bailouts in general in various threads, I started to wonder when this would happen. I'm not really surprised. For a few thousand bux, no real reason to take the credit hit. But for big bux, hey, why not? Only morals, a conscience, and personal pride would cause someone to stick it out.

I think my morals, conscience, and personal pride is worth approximately $200,000. Unfortunately my mortgage balance was never anywhere near that much, nor is the value of my house.

I seriously don't hold these intentional defaulters in contempt. The lenders made a bet on the creditworthiness of the borrowers and they got it wrong in some cases. It sucks for me as one who owns these banks that are losing money. But it was a business transaction.

 

[youbet]

I seriously don't hold these intentional defaulters in contempt. The lenders made a bet on the creditworthiness of the borrowers and they got it wrong in some cases.

Not exactly. The WSJ acticle is talking about folks who are credit worthy and are defaulting despite the fact they could pay. What the banks got wrong was the value of the home they loaned the money against. They went with appraisals during the bubble and now the bubble popped. The still credit worthy borrowers are walking because the consequences of doing so are relatively minor in relation to the sometimes huge amounts of money involved.

 

[FUEGO]

Not exactly. The WSJ acticle is talking about folks who are credit worthy and are defaulting despite the fact they could pay. What the banks got wrong was the value of the home they loaned the money against. They went with appraisals during the bubble and now the bubble popped. The still credit worthy borrowers are walking because the consequences of doing so are relatively minor in relation to the sometimes huge amounts of money involved.

I would look at defaulting borrowers and say they are not creditworthy (in hindsight of course). Whatever reason for the default, it is a default. But yes, I understand the distinction you are making between those who simply don't have the cash flow available to service the mortgage versus these "strategic defaulters" that are making a financial decision to not pay the mortgage in spite of their ability to pay it.

 

[FIREd]

I mean, this whole thing is like gambling with borrowed money. If you win you get to keep the winnings and if you lose you get to let somebody else pick up the tab. In that respect, people are just doing what too-big-to-fail institutions have done all along, export the risk and rip the rewards. Real estate gamblers export the risk to the banks, the banks export the risk to the taxpayers and round and round it goes. As a taxpayer, there is no way I can condone any of it. I am tired of paying the gamblers' debt.

Thinking of it, the taxpayer is already exporting the risk to China, we just have to do a strategic default and stick'em with the bill...

 

[Bikerchick]

I wonder how long it will take for their FICO score to recover. Having a low FICO could really limit one's rental choices. At least, I am thinking that probably one could not rent an apartment from one of the large property managers after having defaulted on a mortgage.

But one could rent from a small-time investor with enough cash upfront.

In the old 'hood we had a guy who regularly showed up at open houses with a briefcase full of money to back up his written offer. He wrote a check for more than the down payment and got money back from the check, then rented the house to the city as a half-way house, 2 ex-cons to a room. After awhile, the bank (now out of bankruptcy) would repossesse the house, a friend of his would buy it as a short sale, and the whole thing began all over again. It was unbelievable how much property he was controlling this way - everyone knew what he was doing but even the authorities couldn't follow the money trail well enough to prove anything. We called him the Godfather when he wasn't around to hear it

I didn't make this mess and don't walk away from commitments, but this could be opportunity knocking. Ultimately these houses will be sold by the bank to people willing to buy at the lower price. If one has the cash this can be a great opportunity for at minimum a nicer residence than what I'd previously contemplated, and perhaps a second rental after I retire.

 

[Bikerchick]

I am tired of paying the gamblers' debt.

You betcha!

 

[brewer12345]

Hmmm...

Help me out here: when a company finds that it has a lot more debt than assets, it declares bankruptcy and (at the very least) takes a piece out of the lenders' interest to make up the difference. We all understand this and don't find anything especially immoral about it. Yet when an individual does the same with an upside down house he has committed some major sin in some people's eyes. Does this assymetry of stands bother anyone else?

 

[FIREd]

Hmmm...

Help me out here: when a company finds that it has a lot more debt than assets, it declares bankruptcy and (at the very least) takes a piece out of the lenders' interest to make up the difference. We all understand this and don't find anything especially immoral about it. Yet when an individual does the same with an upside down house he has committed some major sin in some people's eyes. Does this assymetry of stands bother anyone else?

I see a big difference. When you are bankrupt, you cannot repay your debt. You either ask the judge to restructure the debt or discharge it. You really have to be deep in the hole to come out debt free. Here people have the money to repay the debt, they just can't be bothered. They made a bad investment, the investment lost value and they don't want to be the ones holding the bag.

 

[brewer12345]

Dreamer, your problem is with people who made an investment that had a lot of leverage and walked away when it did not work out. Do you only buy the stocks of companies that are debt free? Planning on chipping in your share of the company's debt when a levered investment you make goes bad? Its no different.

 

[Gumby]

Brewer makes a very good point. It is a simple business decision. When you give a mortgage to a lender, in part you are paying for the option to simply give them the house instead of the rest of the payments. That is what the banks bargained for and that is what they are getting. In an ideal world, mortgage loans in non-recourse states should bear higher interest rates due to this enhanced ability to walk away.

 

[FIREd]

Dreamer, your problem is with people who made an investment that had a lot of leverage and walked away when it did not work out. Do you only buy the stocks of companies that are debt free? Planning on chipping in your share of the company's debt when a levered investment you make goes bad? Its no different.

I invest in REITs that are very much leveraged. When I lose money I take the loss. I don't expect anyone else to hold the bag for my bad decision.