Wednesday, March 17, 2010

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.



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.


  1. Great take, EB. If you are winding down the blog, you're clearly planning to go out in a blaze of glory!

  2. I am constantly amazed at the lack of understanding of even basic economic concepts that these people had.
    Live within your means. Cancel your cable, buy a cheaper car, for cash, take less expensive vacations, rent a place less expensive than you can actually afford.
    No one ever regretted living BELOW their means, but I have worked with hundreds of people who tried to live large, on credit cards and loans. Many of them ended up in bankruptcy or divorce court, still without a clue about how their choices led them to the inevitable conclusion

  3. First off, I agree with your takes completely El Bee.

    But this is all BS.

    People know/knew exactly what they were doing, as did the fuckheads in office.

    When we can get our heads out of our asses as a nation, and stop all this PC bullshit, and stop all the "blame America" blame game, maybe we can all revisit history, and remember that this is/was the greatest country on Earth for a reason, and remember what those reasons are.

    I'm so sick of people pointing a finger at this country, as though they are due some sort of handout, and then everyone else falling in line out of cowardice.

    For example, we hear the bs that "America is meddling in other countries affairs", as though everyone has a right to lash back at America, and America owes everyone something. Well where the fuck were these complaints when America was saving everyone's arse in WWII?!??!

    Fucking France of all countries, has the audacity to act like they have a beef with us, yet if it weren't for us they'd be part of Germany.

    Not to go on a tangent, but this is what is underlying and fueling all of these socialistic/liberal concoctions that are ruining our economy.

    When you make less than 50K, and are moving into a big house in a nice area, you know something is up. Don't give me this unwitting jive.

    Now what's been created, is the incentive for EVERYONE to be dishonest, and cheat the system. In the end, it's very unproductive for us as a whole.

  4. This is just what the banks do NOT want to happen, particularly in a no-recourse state. I have little sympathy for those that avoided doing basic math at the time of purchase or even asking the obvious question, "How can I pay for a $500k home on a $50k salary?" Seriously, if the three cases mentioned here are indicative, this country needs some (mandatory)economic education. WHO in their right mind signs for a 30 year mortgage or taps so much equity that close to retirement?
    "regulatory mismanagement" did NOT cause the price to fall. Mismanagement (yours and the bank's) is the cause of the insanely high price you paid and gambled away your retirement, Joseph.
    During the mania, I felt seriously out of touch with reality as I saw many, many people of modest means buying ever larger homes (and cars etc). Funny thing when reality catches up, eh? Like others, I am sick of the 'It's not my fault' lines. I have NO problem with those that make a business decision and walk. Just don't make it any more than that.
    Besides, FHA will finance you again in 3 years, so you won;t be out of the game long.

  5. It was easy to get caught up in the housing bubble- millions of people who should have known better got infected with the "housing never goes down in SoCal" bug and led them to do a lot of stupid, stupid things. The way our system is set up, let 'em default! They can always buy in again in 3 years, and save a lot more why they are doing it. The crazy thing is how the powers that be are trying to prop up housing values at all costs, when to my mind, it would be better for everyone if housing was affordable and in line with local incomes. Meanwhile we will have a lot of money wasted, people hocking themselves in debt because "everybody is doing it", and local and national recession of historic proportions because of it. And back in 2005 Ben Bernanke said housing was in line with fundamentals, what a bunch of idiots we have running things who couldn't buy a friggin' clue if their life dependended on it...

  6. QtR,

    Sure they can buy a clue...with our $$, but that would make the overlords unhappy.

    Politicians have proven consistently over the last 20 years (far longer in reality) that they will do what it takes to transfer public money to themselves and their benefactors (Wall St/Banks).
    Hate that I've become so cynical. You are right, QtR, propping up housing costs is not doing any good, but it is giving the powers that be time enough to generate phantom profits and collect large bonuses by not realizing their loses. more coffee for me!

  7. Great takes El Bee. I'm glad to see the times is on top of the issues of the day. This has only been going on for 2 1/2 years or so. In the inland markets and the central valley, there were a lot of new homes built and sold from 2003 to 2007 at $200-$300 per square foot. They are now trading for $60-$150 per square foot (near their long term average, assuming modest land costs).

    Just about everyone that bought in these markets is/was underwater, excluding the trade-up buyers that avoided helocs.

  8. You know, I do not blame people for strategic defaults. But when they start playing the victim...they are then FOS and I say #$@#'em.

    They COULD have done the bright thing. In 2000 I was 27 years old, starting in a new professional job, and happy about the prospects of promoting or moving else where and making more. I started an entry level degreed job at $34k a year. I saw that small condos were as low as $90-130k in nice areas and small houses in a place like Burbank were $225-275k. I lived super frugal, paid $400 a month on a guest house in a subpar blue collar area, and started saving and working my rear end off. Soon enough I started a new job in late 2001 making $52K a year. I was living the "American Dream" or so I thought. By this time, those homes were now mostly around $300K....out of my price range. So I saved and worked some more. I watched as others started getting "interest only" loans and laughed at them. Honestly I could not fathom doing such a thing. What if I lost my job? What if I had to take a lower paying job when that loan reset? The concept of only paying the interest was completely foreign to me.

    So I worked more and saved more. And made more. And I made more money. By 2004 I was making $65K a year. A very middle class income for a single male. But those houses in Burbank were no longer $300K, which would have been a stretch anyway. Now they were $400k. Worse yet, those tiny condos were now $250k and rising. FML. And at that point I gave up on owning a home. Renting was too cheap, and clearly a crash was coming soon. Or so I thought. But it didn't. Not for a good long while.

    But in the meantime, I avoided bad situations. I had a friend who wanted me to invest in houses with him. He wanted to use my credit to help him purchase a house(hell no! how would I ever buy a house if I did that?). Family pushing me to buy a house as its "the best investment you can make". People ranting about how I pay too much in taxes and need the writeoff(same people are dying on the vine right now).

    So we come to today. Things have taken a while and will take a while longer. I'm still single, have a lot of money, a gorgeous car that is paid off in full, a daily beater that I drive to work and costs only a few dollars a month in car payment, no debt, monster down payment/retirement fund, and an inexpensive rent. Last year I made the most I've ever made, $95K. Looking for the first time to move and rent in an upscale trendy area where small houses and nice apartments are dropping into the <$1500 a month range.

    And guess what? Housing is still over priced. Two places have come close so far...a fixer
    3bd/1ba pool home in North Hollywood. Not sure what happened there but it was initially listed at $319k with no activity, relisted, and finally some sort of estate sale at $332k....rough neighborhood surrounded by better neighborhood and $280-300k would have been more correct. The other place is a condo in a legitimately nice area in Sherman Oaks. 1500+ sq feet, 3 bed/3ba and upscale. HOA of $280/mo, small complex of 8 units. Listed at $334k and just totalling out the payment + HOA + property tax, its close but still on the high end. I'd jump right now at $300k.

    As to Long Beach....I've looked and everything in my price range is still in a sketch neighborhood. I've looked at Lakewood too, and $400-450k is just too much of a stretch for me. Plus I'm not sure I want to live in a sleepy neighborhood like that.

    The people playing the victim...they could have done what I did. They always had a choice. Instead they decided to follow a bunch of meaningless platitudes and jump on what they though was the "hot" game. To that, my response is "Oh well!".

    I think there is a very famous story about this sort of thing called "The Tortise and The Hare".