Jun032010

Strategic Default: The $10,000,000,000 Monthly Economic Stimulus

The HELOC abusers stimulated the economy when they borrowed all that money and spent it. Now that these same people are walking away from their mortgages, they no longer have housing payments, and their spending amounts to about $10,000,000,000 each month. Perhaps we should thank them for all their spending? I think not.get_used_to_it

As long as lenders allow this to go on, and as long as the US taxpayer is paying the bills, these squatters are stealing from each of us. Lenders need to process their foreclosures, and borrowers need to experience the consequences of their actions.

Owners Stop Paying Mortgages, and Stop Fretting

Published: May 31, 2010

ST. PETERSBURG, Fla. — 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. …

 

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said 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.”

This is what I was writing about in The Latest Lie about Strategic Default: Borrowers Are Emotional Fools. People get pissed off at lenders and stop paying the mortgages. The couple above are the poster children for this effect.

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

The same LPS report shows more than a third of all delinquent borrowers have been delinquent more than one year. The squatting time is getting steadily worse.

 

While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

 

Once we finally push these squatters out, in two years, they will be back at it again.

… Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

That is the cold, hard truth of the matter; people strategically default for many reasons, but preservation of their lifestyles is chief among them. Everyone tries to delay The Unceremonious Fall from Entitlement.

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

So how big is this economic stimulus?

$10 Billion a Month Freed up Each Month from People not paying their Mortgage. $1.9 Billion of That is in California so People can continue Leasing their SUV Mercedes and Getting Tans. Thanks Bailouts!

The latest data tells us that over 14 percent of all U.S. mortgages are either 30+ days late or in some stage of foreclosure.  In other words, 7.2 million people are not paying their mortgages.  Yet banks are turning out record profits even though they are bleeding in their real estate cash-flow.  Now let us run a hypothetical here.  The median mortgage payment of those 51 million mortgages is $1,514.  This is actual stimulus for people if you don’t pay that each month.  If you aren’t paying your mortgage you just relieved yourself of your biggest monthly commitment.  So let us run a rough number:

$1,514 x 7.2 million         =             $ 10,931,916,697

So this frees up some $10 billion each month (this is a rough number).

How much of this economic graft is benefiting California?

So today you have roughly 798,000 California mortgage holders not paying their mortgage for a variety of reasons.  Clearly the main reason is the economy is horrible.  But a large number are taking advantage of the situation.  The median home payment in the state is $2,384.  Let us do the math:

$2,384 x 798,832               =             $1,904,414,716

So of the $10 billion in non-payer stimulus, California receives roughly 20 percent of the cut.

Well I’m glad some people have their priorities straight.  The fact of the matter is the bulk of Americans, the middle class, are being screwed by the banks, Wall Street, and also the current bailout structure.  The median home price in the U.S. hovers around $170,000.  Why not cap any bailout help to mortgages at that level or less?  Do you feel good that the folks I talked about (who make over $100,000 a year by the way) in California who have a Mercedes and BMW and continue to live in a nice home rent free are able to do so because of your taxpayer money?  This is exactly what is happening.  No wonder why many Americans must feel like fools.

The name of the game is simple.  Get into massive debt, so much so that when you fail, you will then be able to negotiate lower terms because the government enjoys rewarding horrible behavior.  Things like this won’t last long because eventually, the public that is being ramrod into bailouts wakes up and revolts.  Yet this could be a few years or much longer before any of it happens.

In case you had any doubt, The California Economy Is Dependent Upon Ponzi Borrowers. What is going to happen when these people have a house payment again?

Back to Owners Stop Paying Mortgages, and Stop Fretting:

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

These borrowers are really planning to cram down their lender. After a year or more of squatting, they will tell the bank to reduce their principal in half or take the house back. That takes a lot of courage.

The lenders I have spoken with are unified in their policies; they would rather lose more money with a foreclosure than accept cram downs from existing borrowers. They are willing to pay that price to prevent moral hazard from encouraging all their borrowers to cram them down, which they would if given the chance.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future. …

“I need another year,” he said, “and I’m going to be pretty comfortable.”

Look at the impact squatting has already had on borrowers. These people think they can cram down their lenders or squat their way through the recession. I don’t care how much economic stimulus this creates or whether or not this keeps our banks solvent; this is wrong. If lenders don’t want to see a  a great deal more strategic default, they shouldn’t make it so rewarding. Or is it that our government shouldn’t let them because the US taxpayer is paying all the bills.

Strategic default is a lesser evil for the borrower than continuing with a lifetime of debt servitude, but borrowers who do this are supposed to have consequences. Foreclosure is a superior form of principal reduction because it has consequences for the borrower. So far, the consequences of strategic default have been more positive than negative, so we will continue to see more strategic default and the squatting the goes along with it. Until lenders foreclose and push these people out, strategic default will become an even greater problem. In fact, if anything can bring down the banking cartel withholding our inventory it is strategic default. If everyone does it, banks will have to foreclose or give away millions of houses.