America's House Price Time Bomb - Upside-down homeowners walking away

[Dee Dee]

http://news.bbc.co.uk/2/hi/business/7529277.stm

Ms Trainer says she feels no moral obligation to go on paying a loan on a property that is going to go on losing her money. She says her friends support her decision.


"I think people are taking a more cold-hearted look at it," she says.
"Is the bank going to pay for my retirement because I was a good girl and paid my mortgage, even though legally I didn't have to?"

It is impossible to know for sure how many of the people who are now walking away from their homes could have gone on paying their mortgages.

But Professor Nouriel Roubini of New York University, one of the first economists to warn of the dangers of the American house price boom, believes the number of people positively choosing to walk away is growing rapidly.

"This is becoming a tsunami of voluntary defaults," Professor Roubini says.

"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.

"You could have most of the US banking system wiped out, so this is a total disaster."
Which is why it is not just US policymakers who are hoping America's new, multi-billion dollar initiative to stabilise the housing market will succeed in its aims and thus make walking away less attractive.

Bold is mine.

 

[Randolph Kinney]

Yes and the government is guaranteeing the losses and they own the printing press.

Expect to see the dollar continue to decline along with home prices.

 

[Metamorphic]

What I'm wondering, is how long the defaulter's will be unable to get a loan.

If the creditors put them on the side-line financially for a extended period of time (denying them access to home mortgage deductions, eventual real estate appreciation, investing with other people's money, etc) it would end up costing the defaulters more in the long run. Spending the next decade as a renter could be expensive. Of course if you take too many people out of the game, you decrease demand for things like houses and cars which makes it tough for the economy to recover. Seems like a lot depends on how quickly the financial institutions decide to forgive and forget.

 

[Couch Potato]

.... it would end up costing the defaulters more in the long run. Spending the next decade as a renter could be expensive. ...

In much of the country renting is cheaper than owning. (My rent is less than the property taxes paid by most in this area. Even a free house would not be a better deal. )

There are also those who purchase another house just prior to walking away from the first one. If you owe $500,000 on a house that is worth $300,000 and can do a 'deed in leu of foreclosure' you would be a fool not to do so.

 

[Terrel L. Shields]

is how long the defaulter's will be unable to get a loan.

does it matter? missing payments, etc. means their credit score is zip anyway. They are making the sensible decision to walk. This will bring down property values and increase inflation via lowering the value of investment from overseas thus weakening the dollar in world markets. Printing more money will only achieve that goal quicker. Less valuable dollars means the mortgage can eventually catch up with the actual "value" in greenbacks but never will catch the value of say gold. The two forces are going to achieive unity. Prices will fall as the dollar weakens until the two are at one with each other in terms of "Real" global value.

 

[Karl]

IF I were to just put the mortgage payment aside every month till they finally got me evicted. Do you think that anything that I wanted to buy with enough downpayment to get the deal done, do you think anyone involved in the new transaction would care about the history?? Unfortunately I can't bring myself to do this, although it is so easy to do. Guess that's why I get angry when I see this happening every day of the week.

Got a "Investor" here in town just walked away from 10 homes, Yet she's living good on the Golf Course doing volunteer work for just about everything here in town. & on a committee to better the town!! She sells a vitimin drink as a business tax writeoff. And she is on the Chamber Board, trying to improve business here!! Yep she's the one I'd get my business advice from. . HEY!! Country Wide she screwed you!!

 

[Dee Dee]

The point that the author drives home is that these homeowners are NOT in default and can afford their payments, but so upside-down that they've made a financial decision to trash their credit rather than give up money that they don't want to lose.

I seriously doubt that most housing market analysts are factoring this group into their future forecasts. It certainly seems that this is yet another contagion added to the housing market soup.

 

[timd354]

The point that the author drives home is that these homeowners are NOT in default and can afford their payments, but so upside-down that they've made a financial decision to trash their credit rather than give up money that they don't want to lose.

I seriously doubt that most housing market analysts are factoring this group into their future forecasts. It certainly seems that this is yet another contagion added to the housing market soup.

This has been going on for at least a year now and I would think that most forecasters are taking this into account.

 

[Restrain]

Saw it in the 80's. Just limited to Texas oil patch areas at the time. Now, it's nationwide.

Rep. Ron Paul was on the Glen Beck show tonight, warning of a possible complete financial meltdown. He was warning about all this stuff before and no one was listening. Maybe they'll listen now....nah.

 

[Terrel L. Shields]

Just limited to Texas oil patch areas

Read the book "Funny Money" about Penn Square bank. For Bill Patterson substitute your favorite (sic) Mortgage lender. For Beep Jennings substitute Mazilo or Perry...same old same.