Dec232011
Strategic default is the banker’s stigma of convenience
Bankers foster the idea that strategic default on a primary residence is immoral. Bankers want borrowers to continue to repay loans even when it is not in the borrower’s best financial interest to do so. I and many others have argued borrowers have a greater moral duty to do what’s in the best financial interest of their family. Obviously, bankers disagree.
In reality, this isn’t a moral issue at all. It’s all about money. Bankers want to make money, and making moral arguments is a stigma of convenience. If they were on the other side of the transaction, they would make the opposite point. I know this because they were on the opposite side recently, and they did make the opposite choice. The mortgage banker’s association defaulted on the loan on their own headquarters! So much for the greater moral duty to keep their word and their written agreements.
Living By Default
We normally say that a company “went bankrupt,” implying that it had no choice. But when, recently, American Airlines filed for bankruptcy, it did so deliberately. The airline had four billion dollars in the bank and could have kept paying its bills. But it has been losing money for a while, and its board decided that it was foolish to keep throwing good money after bad. Declaring bankruptcy will trim American’s debt load and allow it to break its union contracts, so that it can slim down and cut costs.
American wasn’t stigmatized for the move. Instead, analysts hailed it as “very smart.” It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes. In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.
It is exactly the same as lighting money on fire. It’s gone. It isn’t coming back. For underwater borrowers who are paying more each month than a comparable rental, they are losing the difference each month from the family’s economic vitality. And for what?
These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.
Part of the answer is practical. Defaulting (even in so-called non-recourse states) is still a lot of trouble, and to most people it’s scary.
Most borrowers believe this, but the truth is Strategic default consequences are minor and likely to decrease.
In addition, homeowners are slow to recognize how much the value of their homes has dropped, and have inflated expectations of how much it will rise in the future.
Hope springs eternal. I suspect this is most people, particularly here in California. Houses have fallen in value much more than most homeowners realize or are willing to admit, and of the few who realize it, many of them also believe prices will come back quickly once the market bottoms. The market bottom is proving elusive, and appreciation will be much more tepid than loan owners expect once the bottom is in place.
The biggest hurdle, though, is social: while companies get called “very smart” for restructuring their contracts, there’s a real stigma attached to defaulting on your mortgage. According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”
Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense. Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.
This is more than just a public relations problem for bankers. This strikes to the heart of the lie they are perpetrating on the American people. When bankers say it is immoral to default, they don’t really believe it. Their actions speak much louder than their words ever will.
When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms. They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting). And there are plenty of useful ideas out there for how banks could do this without taxpayer subsidies and without rewarding the irresponsible. For instance, Eric Posner and Luigi Zingales, of the University of Chicago, suggest that, in exchange for writing down mortgages in hard-hit areas, lenders would take an ownership stake in a house, getting a percentage of the capital gain when it was eventually sold. Lenders, though, have avoided such schemes and haven’t done mortgage modifications on any meaningful scale. It’s their right to act in their own interest, but it makes it awfully hard to take seriously complaints about homeowners’ lack of social responsibility.
Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead.
Underwater borrowers who are paying more each month than a comparable rental have a choice to make. Either accept the arguments of bankers, keep paying the mortgage, and flush the money down the toilet; or they can do what’s best for their family and tell the bankers to shove that mortgage up their a$$.
Foreclosures May Delay Housing Rebound to 2013Q
By John Gittelsohn – Dec 22, 2011 7:36 AM PT
The two-bedroom Denver row house that Kyle and Jennifer Zinth bought in 2005 is a tight fit now that they have an 18-month-old son, Max, and a coonhound named Beauregard. They plan to put it up for sale next month, hoping to at least break even so they can buy a larger home.
“My understanding is it’s a better time to buy than sell,” Kyle Zinth, 34, a paralegal, said in a telephone interview. “If we can get out of this one without financial harm and get a good deal on the next place, then that’s ideal under present market realities.”
The Zinths are wading back into a U.S. housing market where prices may fall further under the weight of foreclosures and not rebound until 2013, even as the economy builds momentum and mortgage rates fall to record lows, according to a survey of 109 economists released this week by Zillow Inc. When values do rise, the gains probably won’t match those seen in the years prior to the bursting of the bubble in 2006.
Prices for resold homes are down 31 percent since the July 2006 peak, based on the S&P/Case-Shiller Index that tracks 20 major metropolitan areas. Values have increased 3.1 percent since bottoming out in March, though more than a quarter of homeowners with a mortgage are “underwater,” or owe more than their property is worth.
‘Dirt Cheap’
Prices may drop an additional 7 percent, according to Scott Simon, head of the mortgage- and asset-backed securities teams at Pacific Investment Management Co. in Newport Beach, California. Homes are more affordable now than at any time on record, setting the stage for a turnaround, he said in a telephone interview.
“The new normal is that, if you can get a mortgage, housing is dirt cheap,” Simon said, using the term popularized by his colleagues at the fund manager to describe the extended period of below-average economic growth they forecasted following the 2008 financial crisis. “You’re going to look at a graph someday, and it’s going to look like somewhere between Jan. 1, 2012, and June 30, 2013, housing bottomed.”
U.S. home values probably had their smallest decrease in four years in 2011, according to Zillow, whose survey found that prices may find their floor in late 2012 or early 2013 and will begin rising by 3 percent a year through 2016. That appreciation is modest compared with the last decade, when double-digit annual increases were common, the Seattle-based provider of real estate data said.
“Negative equity, unemployment and low consumer confidence remain the key factors delaying a true recovery,” Stan Humphries, Zillow’s chief economist, said in a statement.
Elusive Recovery
Prices will fall 1 percent in 2012 and rise 2 percent in 2013, Frank Nothaft, chief economist for mortgage-finance company Freddie Mac, said in a Dec. 14 report.
“A full-fledged recovery in the housing sector will likely elude the U.S. in 2012, but new construction and home sales are expected to be greater than in 2011,” Nothaft wrote.
Beating 2011 shouldn’t be hard.
Sales of new single-family homes this year are on pace to fall to 301,000 from 323,000 in 2010, which was the lowest in Commerce Department data going back to 1963. While housing starts hit a 19-month high in November, led by a surge in multifamily construction, the annual rate of 685,000 for the month compares with a January 2006 high of 2.27 million.
Revised Sales Data
Existing home sales rose to an annualized 4.42 million in November, the highest in 10 months after figures were revised, the National Association of Realtors said yesterday. The data showed that annual sales were an average of 14 percent lower than previously reported since 2007, magnifying the impact of the downturn.
“Even before the revisions things were bad,” Lawrence Yun, the group’s chief economist, said at a news conference yesterday. “Now they are even worse.”
As lenders tightened credit standards, 33 percent of Realtors reported sales being canceled last month because of problems such as mortgage denials or low appraisals, the Chicago-based group said yesterday. That’s up from 9 percent a year earlier.
Americans are taking advantage of low interest rates to refinance rather than buy, according to the Mortgage Bankers Association. Refinancing accounted for 80.7 percent of home-loan applications for the week ending Dec. 16, the most in 13 months, the Washington-based group reported yesterday.
New Low
The average rate for a 30-year fixed loan fell to 3.91 percent in the week ended today, the lowest in data dating to 1971, from 3.94 percent, Freddie Mac (FMCC) said in a statement. The average 15-year rate matched last week’s previous all-time low of 3.21 percent, according to the McLean, Virginia-based company.
Foreclosure filings, which slowed in 2011 as banks and loan servicers faced investigations over the use of improper documentation to seize homes from delinquent borrowers, are expected to be little changed in 2012, according to RealtyTrac Inc. A total of 224,394 properties received default, auction or repossession notices in November, down 14 percent from a year earlier, the Irvine, California-based real estate data service reported Dec. 15.
Shadow Inventory
Owners of more than 14 million homes are in foreclosure, are delinquent on their mortgages or owe more than their houses are worth, creating a shadow inventory that is holding down sales and prices, RealtyTrac Chief Executive Officer James Saccacio said.
Home prices fell 0.2 percent in October from the previous month, the Federal Housing Finance Agency said today. For the 12 months ending in October, home prices fell 2.8 percent.
Moody’s Analytics Inc. expects home prices to drop about 3 percent in 2012 as more foreclosed homes go on sale, Celia Chen, one of the firm’s housing analysts, said in an interview from West Chester, Pennsylvania. By midyear, the distressed share of the market — foreclosures and short sales, in which the lender agrees to a price below the mortgage balance — will begin to shrink and average prices will start to rebound, perhaps as much as 5 percent in 2013, she said.
“By the end of next year, prices will begin to appreciate,” Chen said. “The fundamental driver of normal home sales is going to improve because we expect the economy will start generating jobs by the end of next year.”
Squatters say foreclosed homes beat homeless shelters
They may lack heat and a consistent water supply, but the vacant dwellings aren’t as ‘depressing,’ as one New York mother puts it. Advocates say the number of squatters nationwide is rising.
By Tina Susman, Los Angeles Times
December 21, 2011, 4:09 p.m.
Reporting from New York—
Slips of paper are pasted to the broken door of the corner row house, violations for the garbage piled near the front steps. The stench of trash wafts up the dark interior stairway, where an ashtray filled with cigarette butts sits like an abandoned potted plant on the second-floor landing.
Nobody lives here, at least not officially.
But as you climb the narrow stairs to the top floor, a door opens into an airy apartment that is home to Tasha Glasgow, who is part of a largely invisible population of squatters occupying vacant homes across America. Given their clandestine lives, it’s impossible to say how many people are squatting in this country, but with more than 1.3 million homes in foreclosure and hundreds of thousands of people homeless, advocates say it’s safe to assume the number is growing.
“You have these abandoned dwellings that are sitting there vacant, sometimes for many months,” said Patrick Markee of the Coalition for the Homeless in New York, where shelters are reporting record numbers of residents. “It’s not an issue of whether squatting is right or wrong. The fact is that people are desperate for places to live, and they’re going to do what they need to do.”
New York would seem to offer an ideal setting for squatters, with its ubiquitous apartment blocs providing safe hiding for people who can’t afford the sky-high rents or stomach life in the shelters. The cutoff of funding this year for a program called Advantage, which helped needy renters pay for housing, has deepened the dilemma for people like Glasgow, 30, who has two children, one of them autistic.
Her 9-year-old girl and 5-year-old boy have been taught to adapt to the idiosyncrasies of life in a squat, which is a bit like life during wartime.
There is no heat. Empty jugs sit on the kitchen counter, waiting to be filled when the water comes on. Toilet-flushing and bathing are timed according to the faucets’ erratic flow. Bare bulbs jut from ceiling fixtures, the wood floors are bare of carpeting, and tattered drapes cover the windows. There are none of the signs of regular family life: no dishes in the sink from the last meal, no dining table, no mail to be opened.
Still, it’s better than a shelter. “I didn’t want to be in a shelter. It was depressing. I wasn’t getting support trying to find a place to live,” said Glasgow, who has occupied this apartment near the ocean, on the foggy tip of Queens, on and off since 2007.
Glasgow probably is not who most people have in mind when they envision squatters. With her shy smile, cropped curly hair, youthful face and earnest demeanor, she seems more like a grad student than a struggling mother.
At first, she was in this apartment legally, her rent covered mostly by the Advantage program. When the building’s owner stopped paying the mortgage a couple of years ago, she had to leave and ended up in a shelter with the children. Glasgow’s hopes of getting another apartment with city help faded after Advantage was canceled. She heard that her old apartment was empty, so she moved back in earlier this year.
If all goes well, Glasgow and the children soon will move to another, better squat — a vacant Brooklyn house. The children’s father, Alfredo Carrasquillo, entered it Dec. 6 as part of a nationwide effort by homeless advocates to highlight the housing crisis, which included public occupations of bank-owned properties. He won’t move the rest of the family in until he has made it more suitable for habitation.
“Honestly, we just thought it would be a great opportunity,” Carrasquillo said of taking over the vacant house in a public manner, which included a march through the neighborhood and a party on the quiet street, complete with balloons and housewarming gifts. “This is for everyone who doesn’t have a house right now — to show people they can fight back.”
There’s no guarantee Carrasquillo will be able to remain in the house long enough to fix it up for Glasgow and their kids. But if the cases of squatters elsewhere are any indication, it won’t be easy dislodging Glasgow or Carrasquillo now that advocacy groups — galvanized by the momentum created by Occupy Wall Street — have gained confidence in their battles with the banks.
“I wouldn’t say it’s the new normal yet, but I think it’s coming close to that,” activist Ryan Acuff said of people occupying vacant homes, or refusing eviction orders from their own homes. Acuff is a leader in Take Back the Land-Rochester, part of a nationwide network of activists. Its goal, Acuff said, is to publicize the housing crisis through confrontational tactics such as the occupation — or “liberation” — of foreclosed houses. He said officials have been reluctant to move against squatters when the spotlight is on them.
What the comment above failed to mention is that loanowners are legally allowed to squat until the sheriff comes, but ex-renters/squatters without a current rental agreement are trespassing, and can be arrested and jailed and ICEd at any time.
Pretty dicy for families to do that.
Looks like a beautiful house and great location … except for the “property needs work” and “portion of the backyard slid”. Spend $1.8 million plus another couple $100K to make it the perfection that $2 million demands, and live in fear of the next storm or earthquake leading to a value of $0 and condemned as uninhabitable? Perhaps not, as there are or will be alternatives. Looking for a FCB to solve the bank’s problem.