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The Rise of the Mortgage 'Walkers'

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moh malekpour

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http://online.wsj.com/article/SB120243369715152501.html?mod=rss_opinion_main

Fitch Ratings, while telling investors last Friday to expect additional "widespread and significant downgrades" on $139 billion worth of subprime loans, has cited a new factor in their "worsening performance."

"The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.

Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren't so dumb. They're perfectly capable of acting rationally without political interference

Essentially, mortgage-bond investors, seemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. Moreover, prime borrowers in many markets face the same incentives.

Yes, this behavior is new -- but only when it comes to houses. Americans have long been able to cut their losses from bad investments and start over. It stands to reason that when the market made houses into yet another speculative investment, Americans would do the same.

Borrowers acted rationally in response to market forces and incentives during the bubble: Buy a house because prices always go up; you can't lose. Many are acting rationally now: Mail the keys back and un-borrow the money, because prices are sinking fast while the debt isn't. When the house was purchased not as a first home but as a rental investment, the decision is even easier.

Imagine: Politicians keep saying that Americans need protection from their big, bad lenders -- but that protection is already there.

Nobody is going to debtors' prison. Nobody is going to have to toil for 30 years and sacrifice their kids' future to pay off burdensome loans that they're stuck with forever because they overreached. (Even if banks and mortgage administrators pursue judgments for post-foreclosure loan balances, there's always bankruptcy as a last resort.)

As for Sen. Hillary Clinton and her proposed "moratorium on foreclosures": She may soon find that borrowers, not just lenders, are screaming to let them act within their contractual rights
 
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This is no surprise to me and, IMHO, what makes the most sense for any that are upside down. Shoot, even some that are not upside down can go rent the house next door for a lot less than their mortgage payments if they stay where they are. That's after they live in the house being foreclosed for many months prior to being forced to move out! They might even be able to negotiate with the lender to accept payment of much less than what their mortgage payment would/should be for a year or two before they walk away...
 

moh malekpour

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Who will pay the mortgage when the homeowner walks? You

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/08/EDL2UU85A.DTL&feed=rss.opinion

California's housing market may be entering a scarier phase: the point at which homeowners walk because the house isn't appreciating, not because they can't afford it. Banks are worried.

A Federal Reserve survey in January 2008 found that loan officers "are concerned with borrowers' reduced motivation to retain possession of their properties."

And Calculated Risk, a blog, posted a quote from Wachovia Bank's January 2008 conference call: "One of the challenges is... a lot of these current losses have been coming out of California... from people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties, and ... we're just going to have to see how the patterns unfold here."

Bank of America CEO Kenneth Lewis said, "There's been a change in social attitudes toward default ... We're seeing people who are current on their credit cards but are defaulting on their mortgages ... I'm astonished that people would walk away from their homes."

If income indicates ability to pay, down payment is an incentive to pay - skin in the game.

In California, lenders are generally barred from getting money from a defaulting borrower. The lender gets the house and that's it, even if the borrower has $1 million in the bank. Only judicial foreclosure allows the lender to get the borrower's other assets, but it's slow, expensive and encourages a defense of loan origination fraud. Buying a house with little down is like having your cake and eating it, too. If the house appreciates, you keep the riches; if it doesn't, you walk and lose only what you put down, often nothing. It's wrong to insure such losses with taxpayer money.
 

Tom Woolford

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This is no surprise to me and, IMHO, what makes the most sense for any that are upside down. Shoot, even some that are not upside down can go rent the house next door for a lot less than their mortgage payments if they stay where they are. That's after they live in the house being foreclosed for many months prior to being forced to move out! They might even be able to negotiate with the lender to accept payment of much less than what their mortgage payment would/should be for a year or two before they walk away...


You hit that one right dead center. I currently do not own a home, and am damn glad I don't. If I had not sold my home, I would be upside down in the mortgage, taxes would be killing me, and my insurance carrier would have canceled me, and I'd be stuck with Citizens. Right now, I'm a renter and thankful for it. That said, I'm starting to look for bargains............:new_multi:
 

Terrel L. Shields

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They're perfectly capable of acting rationally without political interference
The borrowers are rational. The banks were not. This is entirely the fault of the lending community no matter how many "skippies" are out there.

The late Dr. Graaskamp recognized the problem in the 1980's when he wrote that RE had become the perfect hedge or straddle investment, where the borrower bet the market would go up, borrowed 100% then artibraged the value gained if the market went up, or let the bank have it if the market went down. The hedge cost very little, a few months house payments at most. The lender took the risk because the borrower invested no down payment and thus had no equity in the property.
 

Joyce Potts

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Congrats to all the skippies who was never handed an appraisal order form with a pre-determined target they couldn't meet!!

Good job!
 

Terrel L. Shields

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who was never handed an appraisal order form with a pre-determined target they couldn't meet
You know I think that it wouldn't have mattered. The mortgage banks would have one way or another made those loans in fear of losing market share and would be more than happy to put people in houses they cannot afford. So far the biggest problem is that the payment is simply larger than these folks can pay.
 

DeanHarris

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I know several people who are simply not paying their mortgage for as long as they can get away with it as a strategy.

If one's credit is already mediocre and the house went from $400k to $250k and going down...not much incentive to struggle and pay the house, taxes, hoa, property ins, interest on the loan, cdd, and so on.

I believe the scenario above is fairly wide spread.
 
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Milton Friedman

We can go back to Milton Friedman for the explanation of the current state of the housing market and the downturn in consumer spending. He also provides some insight into the reasons the stimulus will not have any but a short term effect.

Simply put, Friedman hypothesized that consumer spending was driven by long term income expectations whether that be wealth created by education, ownership of stocks/bonds or more importantly to the current situation, the value of property. Consumers, will spend not on the basis of their short term income receipts but on the basis of what he described as "real wealth." See below for the general description of the Permanent Income Hypothesis (PIH)

This explains why credit card debt rose to higher and higher levels with consumers buying food and paying every day expenses instead of using credit card debt to make purchases for furniture or appliances. Since home values were rising so steeply and increasing their "real wealth." consumers spent beyond their immediate receipts.

Now "real wealth" is receding in value. Consumers look to the home the same way they look at a bad stock or a junk bond gone bad. The mortgage stands in the way of selling and recouping some of the value of a stock that has tanked; so they walk.

No matter what the situation of the average consumer, the hypothesis is bound to work both ways. If "real wealth" recedes, consumers will spend less. The reason the economy is about to fall over the edge is not just due to less refinance equity money being spent in the economy, it has more to do with the reduction in the "real wealth." in the hands of consumers. The "real wealth" of Friedman's hypothesis is turning out to be not so permanent.



The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman. In its simplest form, PIH states that the choices made by consumers regarding their consumption patterns are determined not by current income but by their longer-term income expectations.

Measured income and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall gain/unexpected) element. Friedman concluded that the individual will consume a constant proportion of his/her permanent income; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to consume.

In Friedman's permanent income hypothesis model, the key determinant of consumption is an individual's real wealth, not his current real disposable income. Permanent income is determined by a consumer's assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumer's ability to earn income. The consumer can then make an estimation of anticipated lifetime income.

The theory suggests that consumers try to smooth out consumer spending based on their estimates of permanent income. Only if there has been a change in permanent income will there be a change in consumption.

The key conclusion of this theory is that transitory changes in income do not affect long run consumer spending behavior.

Suppose a government cuts taxes prior to a general election. If consumers perceive this to be only a temporary reduction in their tax burden to increase the government's popularity, then consumption will remain unchanged. If the tax cut is seen as permanent then this may cause increased spending.
 

Couch Potato

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In a society where people change houses on a regular basis, why in the world would anyone be surprised by the willingness of people to walk away. It's just a place to live, not their home.
 
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