LA Times: More homeowners are opting for 'strategic defaults'

By way of Calculated Risk:

Underwater on their mortgages and angry at banks, more borrowers are choosing to hand over the keys, even if they can afford the payments.

By Alana Semuels, March 17, 2010

Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert home, even though she could afford the payments.

Bloch paid $385,000 for the two-bedroom in 2006, when prices were still surging. Comparable homes are now selling in the low-$200,000s. At 66, the retired psychologist doubted she'd see her investment rebound in her lifetime. Plus, she said she was duped into an expensive loan [EB: "DUPED"? RIGHT. HEY, WHATEVER IT TAKES TO JUSTIFY YOUR ACTIONS IN YOUR OWN MIND].

The way she sees it, big banks that helped fuel the mess all got bailouts while small fry like her are left holding the bag. No more.

"There was not a chance that house was ever going to be worth anywhere near what my mortgage was," said Bloch, who is now renting a few miles away after defaulting on the $310,000 loan. "I haven't cheated or stolen." [EB: UH, EXCEPT FROM TAXPAYERS WHO HAVE TO COVER THE BANK'S LOSSES ON YOUR FORECLOSURE]

...

Stuck with properties whose negative equity won't recover for years, and feeling betrayed by financial institutions that bankrolled the frenzy, some homeowners are concluding it's smarter to walk away than to stick it out [EB: DUH].

"There is a growing sense of anger, a growing recognition that there is a double standard if it's OK for financial institutions to look after themselves but not OK for homeowners," said Brent T. White, a law professor at the University of Arizona who wrote a paper on the subject.

Just how many are walking away isn't clear. But some researchers are convinced that the numbers are growing. So-called strategic defaults accounted for about 35% of defaults by U.S. homeowners in December 2009, up from 23% in March of 2009, according to Luigi Zingales, a professor at the University of Chicago's Booth School of Business.

He and colleagues at Northwestern University's Kellogg School of Management reached that conclusion by surveying homeowners about their attitudes and experiences with loan defaults.

They found that borrowers were more willing to walk away if someone they knew had done it, and that the greater a homeowner's negative equity the more likely he or she was to default, even if the monthly payment was affordable.

...

"The fact that people are strategically defaulting -- there is no question," Zingales said. "The risk that the number of people doing this might explode is significant."

A flood of walkaways could damage the nation's fledgling housing recovery by swamping the market with foreclosed properties [EB: ONLY IF BANKS ARE FORCED TO FORECLOSE AND PUT THEM ON THE MARKET. THAT HASN'T HAPPENED AND I DON'T SEE ANY POLITICAL WILL TO MAKE IT EVER HAPPEN]. Still, some experts are dubious that millions of underwater homeowners will pull the plug as Bloch did. Homeownership remains the cornerstone of the American dream [EB: NO, LIVING BEYOND YOUR MEANS AND GETTING RICH WITHOUT WORKING FOR IT IS THE AMERICAN DREAM. WALKING AWAY AND BUYING A BIGGER HOUSE WITH A CHEAPER PAYMENT FITS THAT DREAM PERFECTLY]. Moving is a hassle. And the stigma associated with a foreclosure is likely to keep many hanging on for a recovery [EB: I THINK IN THE COMING YEARS WALKING AWAY WILL ACTUALLY BE A POPULIST BADGE OF HONOR AND SEEN AS A SAVVY FINANCIAL MOVE. "YEAH, I REALLY STUCK IT TO THE BANK. THEN I BOUGHT A BIGGER HOUSE IN A NICER NEIGHBORHOOD WITH A LOWER MONTHLY NUT. WE JUST BOUGHT NEW WATCHES AND BENZES WITH THE EXTRA MONEY!" YOU THINK THAT GUY WOULD BE "STIGMATIZED"? REALLY?].

The biggest surprise is that so many underwater homeowners continue to pay, said White, the Arizona law professor. He's convinced that personal shame, as well as moral suasion by the government and financial institutions, has kept many homeowners from walking away, even when they'd be better off financially by dumping their homes.

But real estate veterans said old taboos were eroding fast.

...

"Now, it's more of a business decision -- it's people who could afford their house but it's an inconvenience," Maddux said. [EB: I THINK WHAT WE'RE SEEING HERE IS WHEN A HOUSE IS PURCHASED AS A SPECULATIVE BET--WHICH MOST WERE DURING THE BUBBLE--THEN IT IS MUCH EASIER TO CUT YOUR LOSSES AND WALK AWAY FROM. SOMETHING PURCHASED AS A "HOME," HOWEVER, IS MUCH MORE DIFFICULT TO TREAT AS A PURE BUSINESS DECISION]

He and other experts said average Americans are fed up with hearing how they're supposed to honor their debts while businesses operate by another set of rules.

Case in point: Maguire Properties Inc., one of the largest commercial landlords in California, walked away from seven prime office buildings in Los Angeles and Orange counties last year, defaulting on loans worth more than $1 billion [EB: DO AS WE SAY, NOT AS WE DO].

...

Some purchased their homes at the peak of the market only to see the value drop precipitously when the bubble burst. Others bought low but couldn't resist borrowing against their rising equity to make home improvements and pay off other bills [EB: BUT NOW THESE IRRESPONSIBLE HOME ATM-ABUSERS WANT YOU TO VIEW THEM AS "VICTIMS"]. When home values fell, they too found themselves underwater.

Ken Henrich purchased his Marysville, Calif., home for $187,000 in 2004. He and his wife later refinanced the property, tapping their increased equity to pay off credit cards. They now owe around $300,000 on a place that's worth about $132,000. They let the four-bedroom residence slip into foreclosure and are waiting for it to be sold at auction. They're planning on renting for a few years until they can perhaps buy again [EB: IRRESPONSIBLE SHITHEADS TRYING TO LIVE THE GOOD LIFE, WHOLLY INCAPABLE OF MANAGING THEIR FINANCES, NOW WANT YOUR PITY].

"We can more than make the payment," the 54-year-old sales rep said. "The way we look at it, our credit would still be perfect years from now but we'd still owe tons more than it's worth."

There are consequences to walking away. A default will knock down a credit score by at least 100 points, said Craig Watts, a spokesman for FICO, the company that developed credit scores. That could make it tough to borrow money, rent an apartment or get a job because many employers now routinely check the credit histories of potential hires [EB: BULLSHIT SCARE TACTICS. NOW THAT THE WHOLE "MORAL OBLIGATION" RUSE HAS BEEN PROVEN TO BE A COMPLETE CROCK THANKS TO BIG BANKS MOONWALKING AWAY FROM COMMERCIAL PROPERTIES, THEY'RE GOING TO TURN UP THE HEAT ON THIS OLD LIE. WHILE PEOPLE WITH BAD CREDIT WILL HAVE DIFFICULTIES, IF APARTMENT MANAGERS INSISTED ON RENTING ONLY TO THOSE WITH PRISTINE CREDIT, THEY'D HAVE EMPTY UNITS FOR YEARS].

To some homeowners those consequences are a small price to pay to gain a measure of revenge against the financial institutions whose loose money helped fuel the crisis [EB: IT'S THE "REVENGE" ANGLE THAT IS REALLY FRIGHTENING TO BANKS. GIVEN ALL THE POPULIST ANGER OUT THERE, I SUSPECT THIS IS EVEN MORE DANGEROUS THAN PEOPLE MOTIVATED BY FINANCIAL COMMON SENSE].

Joseph Shull, a 68-year-old marketing professor, said he's planning to walk away from the town house he bought in Moorpark in June 2006.

"I'm angry, and there are a lot of people like me who are angry," he said.

He purchased the home for $410,000 and spent $30,000 renovating. Now the house is worth around $225,000.

Shull admits he overpaid for his property. But he said it fell in value in part because of "regulatory mismanagement."

"The bank stabbed me, but at least I got in a pinprick back," he said. "This is the new economy. The old rules don't apply any more." [EB: AND WITH THAT, ALL OF THE BIG BANKERS PUT ON THEIR BROWN PANTS AND COWERED UNDER THEIR DESKS. HOW LONG BEFORE BANKS START LOBBYING FOR RETROACTIVE RECOURSE LOANS IN CALIFORNIA?]

The whole article is worth a read.