Strategic Default

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Feb 18, 2010 10:18 am

What is everyone's take on strategic foreclosures? I am seeing it mentioned more and more on the news and new websites popping up all the time telling people how to do it. Plus all the recent NY Times articles about why people should be doing it.

Without the "people should pay their obligations" discussion, does anyone think this will pick up steam and destroy the banks?

The baby boomers make me a bit nervous on this one. They are the ultimate herd. Once one does it, everyone does it. I saw a local news story last night talking about how baby boomers are walking away more and more and renting in retirement communities instead since they figure they will never break even on the house by the time they die.




Feb 18, 2010 10:39 am

I don't think it will become as widespread as it appears.  Yes, there will be a natural uptick.  Not just because fo the economy, but because boomers (in general) have less pride than their parents (the "Greatest Generation").  I can't imagine my grandfather ever having walked away from an obligation. 

It also stems back to longevity and loyalty in the workplace (everyone is essentially a free-agent these days), and the overarching distrust of big banks and corporate America.  People now see that banks don't give a fukc about them, so why should they care about walking away?  30, 50 years ago, you got your mortgage from your bank downtown.  You paid the mortgage on your 1100 sq.ft. ranch for 30 years, and then you retired.  You had a party when you made the last payment.
I think I've already had 5 mortgages in my lifetime, and moved at least 10 times (some rentals).
On top of that, 50 years ago, you paid a mortgage for 30 years, then you retired and soon died.  Today, you retire, consult, move around, live for 25 years after "retiring", etc.
It's just a different world we live in now.
Feb 18, 2010 10:42 am

Very true. I have had three clients ask me about and two that did it. Both clients had enough money to flat out buy their house. Both basically said if the big banks can walk away from their obligations why can't I.

Very different thinking then my grandparents.

Feb 18, 2010 11:05 am

I think there should be a national deadbeat list where we would place the name and picture of those who walked away from their obligations... 

Feb 18, 2010 11:16 am
shantom1:

I think there should be a national deadbeat list where we would place the name and picture of those who walked away from their obligations... 

 
Then we also need a deadbeat list of banks and companies that screww their customers and layoff their employees.  I think it's now become a tit-for-tat mentality with consumers.  Personally, I would never walk away from my obligations (assuming I was solvent) because of personal pride.  But I can't say I have one single ounce of loyalty to any financial services firm that now exists.
Feb 18, 2010 11:46 am

Personally, on a micro level I don't "get" the stigma of walking away from a house or strategic default.  As long as I'm solvent, I personally wouldn't do it.  Not because its an obligation but because of the negative effects it would have on me and my family (credit).

 
However, business is business.  The bank loaned the person the money for the house with interest.  This isn't not a guaranteed investment for the bank.  They made the loan accepting that risk is involved, and they receive (or hope to) a premium for the risk taken.  Strategic default is a risk.  Accept it.
Feb 18, 2010 11:51 am

I think it depends on the numbers. Both of my clients had houses worth over 2 million that are now worth 1.25 or less. The banks wouldn't modify their loans since they had so much money in their accounts. So my clients said FU to the bank.

I jog by one of the houses. It is listed by the bank at 650,000 at auction. PLUS in my area they have to pay the back real estate taxes due (including the whopping 10% interest penalty per month)


Feb 18, 2010 12:11 pm
CALI123:

I think it depends on the numbers. Both of my clients had houses worth over 2 million that are now worth 1.25 or less. The banks wouldn't modify their loans since they had so much money in their accounts. So my clients said FU to the bank.

I jog by one of the houses. It is listed by the bank at 650,000 at auction. PLUS in my area they have to pay the back real estate taxes due (including the whopping 10% interest penalty per month)


I know that different states have different laws, but in my neck of the woods, your customers borrowed money to buy an asset and pledged said asset as security for the loan.  If they walked away from the loan, the bank experienced a loss, and the bank was aware that they had other assets (other than shielded retirement assets), they are going to get a court summons sometime soon.  I swear, many grown adults today think like children.  The stench of entitlement reeks to high heaven.
Feb 18, 2010 12:18 pm

good point - I'm in a non-recourse area where the banks have no power (anymore  - they gave up the right a few years ago to be allowed to foreclose on a house without going to court). I bet they are kicking themselves now.

I find all this interesting as some states the banks didn't lobby very well to make sure they were protected better.

Personally I wouldn't want the credit hit - but if you have alot of cash in the bank...

(disclaimer - I don't have alot of cash in the bank - I am married)

Feb 18, 2010 12:27 pm
CALI123:

good point - I'm in a non-recourse area where the banks have no power (anymore  - they gave up the right a few years ago to be allowed to foreclose on a house without going to court). I bet they are kicking themselves now.

I find all this interesting as some states the banks didn't lobby very well to make sure they were protected better.

Personally I wouldn't want the credit hit - but if you have alot of cash in the bank...

(disclaimer - I don't have alot of cash in the bank - I am married)

Wow.  The California Bank lobby must be a bunch of pikers.  My state allows for non-judicial foreclosures AND deficiency judgements.
Feb 18, 2010 1:30 pm

Credit Scores are meaningless unless you want to finance something..

Feb 18, 2010 1:35 pm
chief123:

Credit Scores are meaningless unless you want to finance something..



This is not quite true.  If you are attempting to get into government contracting, they take a look at that.

If you are in the military, you can lose your security clearance if you default on a mortgage or credit card.


Feb 18, 2010 1:50 pm

Life insurance underwriting allows credit checks as well.  Apparently, people with bad credit are also bad insurance risks.

Feb 18, 2010 2:31 pm

P&C insurance rates increase with bad credit as well.

Feb 18, 2010 2:45 pm
chief123:

Credit Scores are meaningless unless you want to finance something..

 
Chief, your argument is crumbling around you faster than Obama's re-election chances!
Feb 18, 2010 5:34 pm

http://www.nytimes.com/2010/02/03/business/03walk.html



This is a great article - says 10% of homes in the US have a value which is less than 75% of their mortgage.



I predict a tipping point where everyone walks away.

That's when I'll buy my new house!!!