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Thursday, June 3, 2010

Deadbeat Nation or PO'd Nation?

Items of Interest:

There are strong feelings on both sides of the issue of "walking away" from your home mortgage. If companies like Morgan Stanley and Blackrock can walk away from their commercial mortgages in "strategic defaults", why shouldn't people?


NY Times:
Owners Stop Paying Mortgages, and Stop Fretting -- For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”...

Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”...
discussion:
Tim Knight / Slope of Hope:
Deadbeat Nation -- Not to put too fine a point on it, these people make me sick. My wife and I bought our house with a down payment earned with hard work. We filled out all the paperwork honestly and with complete documentation. We haven't missed a single payment, or even been a day late, not even once. Never in a million years would I consider flipping off the bank and just hanging out in this house for free until I was thrown out onto the street...

Luigi Zingales  / City Journal:
The Menace of Strategic Default -- Homeowners who walk away from their mortgages undermine our financial system...

Felix Salmon / Reuters:
Continuing risks in the housing market -- As for borrowing the money, I think the folks who did so did absolutely the right thing. When someone offers you a government-subsidized non-recourse loan on an appreciating asset, they’re giving you a put option. The more you borrow and the less you put down, the more that option is worth. These borrowers maximized their leverage. The market turned, and they exercised their put options. They are not the dumb ones, they are the smart ones. The dumb ones are the ones who gave away the farm lending this money...

Lita Epstein / Housing Watch:
Walk Away From Your Mortgage: A Good New Beginning?
-- Frustrated by job losses, underwater homes, and unwieldy mortgage modification programs, more and more homeowners are crafting their own mortgage modification programs. These programs, which do not have the approval of lenders, involve paying nothing more and using the time till they get evicted by the bank to create a Plan B...

Diana Olick / CNBC Realty Check blog:
BofA: Mortgage Walkaways Have Huge Incentive -- Why are they (Bank of America) getting more aggressive on modifications?

Because more borrowers are walking away. Yes, I know we've talked about this forever on this blog and on CNBC, and the New York Times did a piece yesterday on it, and 60 Minutes did a piece on it a few weeks ago. The fact of the matter is it's getting worse, and B of A execs are acknowledging that openly...

31 percent of foreclosures in March were deemed to be "strategic default" by researchers at University of Chicago and Northwestern University.

That's up from 22 percent in March of 2009...
----
related:
Robert Lowenstein / NY Times:
Walk Away From Your Mortgage! - No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth....

John Robb:
The double standard on debt defaults. The aggressive behavior of corporations and high net worth individuals relative to debt and contracts will be copied by the rest of society. Get over it, game theory dictates this. The result a legalism so intense (since basic norms of behavior can't be assumed, they must be spelled out with excruciating detail and enforced through lengthy and exhaustive monitoring) that the overhead expenses of running our economic system become unsustainable. Why? This behavioral roll-out converts the economic returns on societal complexity already in place (systems we built to solve past problems) from marginally positive returns (I'm being generous) into deeply negative drags on all economic and social activity.

Diana Olick / CNBC Realty Check blog:
Walkaways, Pay Option ARMS Hit Banks Bad

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