Strategic Default Gaining in Popularity
MAYBE IT’S TIME TO WALK AWAY AND STICK IT TO THE BANKS
It’s 2011. You’re laid off, your job was out-sourced or eliminated, furloughed, foreclosed on, or you know someone who is. You wonder where you’ll fit into the grim new economy colloquially known as “this mess.”
With nearly a quarter of all Americans are currently underwater in their mortgage because of that steadfast honor.
You’re astonished and possibly ashamed that mutant financial instruments dreamed up in your great country have spawned worldwide misery. You can’t comprehend, much less trim, the amount of bailout money parachuting into the laps of incompetents, hoarders, and miscreants.
The basic story line so far is that we are all to blame, including homeowners who bit off more than they could chew, Lenders became predatory and wrote absurd adjustable-rate mortgages, backed by Pooling & Service Agreements from greedy investment bankers.
Credit derivatives also figure heavily in the plot. Apologists say that these became so complicated that even Wall Street couldn’t understand them and that they created “an unacceptable level of risk.” Then these blowhards tell us that the bailout will pump hundreds of billions of dollars into the credit arteries and save the patient, which is the world’s financial system. It will take time-maybe a year or so-but if everyone hangs in there, we’ll be all right. No structural damage has been done, and all’s well that ends well
The dire straits of the middle class of America have made it near impossible for our politicians to keep up the pretense that our current government truly works for the “people.” Between the multiple overt and secretive bailouts, the massive bonuses, “robo-signing”, mortgage fraud and the circular use of our tax money to lobby for these continued handouts, you can no longer hide from the evidence
If you are one of them, chances are you didn’t do anything wrong. Almost all of you were not subprime borrowers or speculators, but merely people buying a house that they thought they could afford at the time. You were just unlucky in that you bought a house during a time when an outdated Wall Street and their complicit politicians decided to use housing to regain the income they lost due to the internet age.
You didn’t cause this mess. They did.
Now you are struggling to make the same payments on this mortgage on your now overpriced home even in light of a crashing economy and massive deflation, all while the government does everything in its power to help Wall St. keep the bonuses coming.
It probably doesn’t feel right to you. (click this link for peace of mind)
That is because you probably are a good person. But your mortgage is a business deal, and it is not immoral to walk away from a business deal unless you went in to the deal with the intention of defaulting. If the proper disclosures were not made or explained to you, then you are a victim and not a defendant.
As part of the deal for your house, your mortgage holder gets interest payments from you and they also use the note to your house for their capital reserves. In return, they take the risk of a foreclosure. In many states, you paid extra to have a non-recourse loan where the lender just gets the house back if you stop paying — your interest rate would’ve been much lower if you were held personally liable like a student loan. But if you still feel bad, then donate the money saved to charity instead of to their bonuses. And when someone tries telling you why it is so wrong, here are some answers:
Yes, it might seem selfish, but you are actually going to help fix our country the right way, through the use of pure capitalism. There are 3 parties involved in your mortgage — the mortgage holders, the servicing bank and you. You probably want to stay in your house. Most of the people who actually own your mortgage also want you to stay in your house, preferring a mortgage reduction that you keep paying instead of the total loss of a foreclosure. But the major banks (BofA, Wells Fargo, JP Morgan, Citi, etc.) that underwrite and service the loans don’t care about either of you. They (with the aid of their government) just care about hiding their true financial condition for long as possible so they can continue to bonus themselves outrageously. The credible threat of you walking away from your mortgage “en masse” is the only market-based solution that will force these banks to work with the mortgage holders on your behalf.
Yes, it might hurt your credit. But with time, people bounce back from having foreclosures on their record. Search online and then talk to a lawyer about the repercussions, which vary by state.
- No, the banks won’t necessarily pass the losses on to customers. They already make a lot of money. If costs are passed on to every consumer without banks competing on price, that’s a sign of illegal collusion or a monopoly. Let’s fix that instead of just letting banks ruin our lives. They might, however, not all make $145 billion in bonuses next year doing something fundamentally so easy.
The growing popularity of strategic default can’t be denied. Forty-eight percent of homeowners surveyed say they would consider a strategic default — also known as walking away — if their home were underwater, in the latest research done for RealtyTrac. That’s up from 41 percent in May. Yet the banks still seem to be in denial that a strategic default wave may be building.
Strategic default is when a borrower makes the strategic decision to stop paying his mortgage. Since it takes 1½ to 2 years to foreclose on a home in judicial foreclosure states, the borrowers then use the cash that would have gone toward paying their mortgage to pay off other debts and improve their own financial position.
RealtyTrac, says there’s $300 billion worth of adjustable mortgages expected to reset in the next 12 to 15 months. That will increase monthly mortgage payments by $1,000 on homes already underwater by 30 percent to 50 percent. He thinks its “tough to make an economic decision to stay in that situation.”
Some families, who like their neighborhood and their kids are in a stable school environment, will likely stay in their homes, even if the mortgage payment goes up, if they can afford it. There’s another group of people, mostly young couples, who don’t have an emotional attachment to the location. For them it’s more an investment decision about keeping a roof over their heads. They will ask themselves whether they can live more cheaply in a rental, since they don’t expect their home to regain enough in value in the next 10 to 20 years.
We’re a more mobile society, now more than ever. People just don’t have the same emotional ties to their home as in the past. He also thinks there is a “visceral anger toward lending institutions,” which is driving some of this movement toward strategic default. People watched as the banks got their bailouts, but they’re not willing to share in the losses of the general public by offering principal reduction. Interestingly, men (57 percent) are more likely than women (40 percent) to consider strategic default as an option for dealing with negative equity, the survey found.
The banks must face the “harsh reality that there is about $1 trillion sitting on their books” in property that has lost value. That $1 trillion number comes from an executive of JP Morgan Chase who testified before Congress that it would cost the banks between $900 billion and $1 trillion to “right size” the market values of the mortgages on the books.
If the banks decide to do nothing they do it at their own peril, by their doing nothing it is a proactive decision to enable strategic default. A lack of connection and communication between the servicer and the borrower widens the gap and chances of your success.
Will banks begin to consider principal reduction for underwater borrowers to stem the tide of strategic default? No one knows that answer for sure, but there are good solutions for the banks to consider and companies out there ready to help them. Yet while the administration supports principal reduction as an option for struggling borrowers, the regulator for Fannie Mae and Freddie Mac does not, according to recent reports.
Well, it is becoming time to take matters into your own hands… I suggest that you call your lender and tell them if they don’t lower you mortgage by at least 20%, or adjust the mortgage balance to reflect true current market value of the property, or you are walking away. And if they don’t agree, you need to consider walking away. Don’t fall for the “modification run around ( see video Foreclosure Help Runaround of an actual loan modification call at http://www.foreclosureself-defense.com/the-library/videos/ )
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