Irvine Housing Blog

Yes, it’s finally hit people where they GET IT! Now, to find all the people responsible for lending the money out creating the real estate Ponzi scheme. The people losing their homes and down payments are losers as well as the american public as a whole. The winners are banksters, YOUR government, and financial investors from around the world. We lost, they won, without firing a shot.

The banksters were allowed carte blanche to de-fraud the american people, and not one is going to jail. Rememeber this when you argue petty politics, and remember, BOTH parties are bought and sold, that’s WHY we are here.

Walking away (default) is a lot more involved than most think, there are serious consequences with future and present Jobs and a host of other things, most underwater home owners will just ride it out if they can, 100K and under in SoCal, it’s most likely not a good Idea to walk away, 300K or more it gets easier to decide.
Unfortunately the mess we are in will take a lot of time and inflation, it’s going to be a long process, such is the nature of recessions caused by deleveraging,
Just ask the Japanese’s what happen when you refused to inflate.

There is a difference between corporate defaults and strategic defaults among individuals.

When a corporation defaults, it *cannot* service its debt.  It simply *does not* have the requisite cash flow to service the debt, so it defaults, debts are restructured (generally partially charged off), the company comes out of bankruptcy with a reduced debt load, the lender takes the hit, and life goes on.

When an individual “strategically defaults”, he does so because he *will not* service his debt even thought he has the capacity to do so.  That is, it’s a *choice* that he makes (hence, inclusion of the word “strategic”).  That’s an important distinction that is never noted when the corporate bankruptcy vs. individual strategic default meme is discussed.

Now, I agree with you that the folks that CANnot service their debt should be defaulting (much like a corporation).  But those who are capable of servicing their debt… just like a corporation that services its debt… should continue doing so and not “strategically default” simply to make their lives easier.

[It’s probably unnecessary to note, but just in case… that second paragraph above describes a Chapter 11 bankruptcy (restructuring), as opposed to a Chapter 7 bankruptcy (liquidation).  Obviously, in a Chapter 7 bankruptcy the company doesn’t emerge from bankruptcy… it’s gone.]

Who covers the $4 trillion shortfall.

I mean, I’m already in (to Countrywde, I mean B of A) for a cool five large.

The question is who “owns” the $4 trillion shortfall?  (That is, who’s going to take it in the shorts?)

The GSEs (that’s we Taxpayers, by the way) own 55% of it.  Foreigners own another 25%.  That leaves about 20% actually held on US bank balance sheets.  Now… where do you think the higher-quality mortgages ended up… sold to the GSEs and foreigners (via securitizations)... or held on US bank balance sheets?

The mortgages held on US bank balance sheets - while a bit shaky in aggregate - don’t compare to the underwater dreck held by the GSEs and inside the myriad securitization trusts.  So, who will be paying for the vast majority of this “strategic default” that you suggest?  Yup, we Taxpayers, and foreigners.  The banks will only see a fraction of it.  They may be dumb, but they were smart enough to unload the worst of the problem onto others’ shoulders.  Now, the lawsuits… that’s another issue entirely.

Agree with Who Flung Poo whole-heartedly.  Also, did we forget it was CREDIT crisis that started it all?  What would massive defaulting do now?  It’s not that simple folks, we don’t just default and everything ‘poof’ disappears.  I’ll need a lot more time to write to counterpoint everything Mr. Arends and IR supports here.  But basically, financial sector makes up 20% of the market.  Leave them with all that default burden and we’re in for a LONG day.  Combine that with the psychological impact of debt forgiveness culture,  and we’re just looking at the next ponzi scheme.  We’re not all of a sudden going to save more because our debt was forgiven.  Stimulating spending at all costs is not the answer folks, this solution will do that in the short term and then set us up for the greater fall.  Bad idea.

There are a lot of small investors who bought RMBS that they were assured was a safe investment in the 2002-2007 time period.  Most of them used their retirement funds.  The big guys, like pension funds, will likely prevail in lawsuits for fraud and misrepresentation, but what about smaller individual investors.

While I don’t disagree with the main premise of the article(debt is the problem), and certainly nothing the government is doing has or will fix much, I don’t see this as a solution.

Firstly, how do you promote a program that encourages homeowners to walk away from mortgages that are current, albiet burdensome. It’s just wrong.

Secondly, before they walk, they just stop paying
so it’s seems like you just add more non-performing mortgages into the pipeline.

Thirdly, all those who have stopped paying their
mortgage are actually spending “the mortgage money” somewhere else. I doubt they are saving it. So they are actually spending more money in the economy than the up-to-date mortgage holder.

Fourthly, there is moral hazard. The flippers and real estate investors will see this as a green light to over-bid on properties since there is no risk. Interest rates will jump, or banks will get out of the mortgage business. Investors in MBS paper will never want to touch the stuff again. Only the Government will be willing to stay in the Mortgage market. That’s what were are trying to get away from.
That’s the way I see it at least.

While I think that intentional default is in the direct interest of many debtors, I don’t think it is going to help the economy nearly so much as people might believe.  Continuing to pay the mortgage on a property from a position of negative equity is not wasting the value of that money, it simply transfers that value to the creditor, who generally has employees that get paid and equity holders that might get a dividend and their own creditors that would like to be paid back.  I’ll shed minimal tears for the predicament they find themselves in, but should the borrower’s cash flow and balance sheet be improved, another party’s is impaired.  “Justice” may be improved thereby, but the aggregate economy has been shifted very much.  Not that I was a frequent commenter here, but I stopped for a long time since the entertainment value of it diminished.  Those debtors that aren’t going to pay will stop paying and the others will continue and I’m willing to allow that every one of them has reasons that make sense to them for doing so.

Walking away from a house is not an easy moral decision but is certainly an easy financial decision. 

Just some anecdotal evidence, we stopped paying on our house (300k underwater) in August of 2008.  We were foreclosed on in June of 2009.  Our credit scores were in the 750 range when we defaulted and as of last month, our scores were both back in the 690 range.  We just bought a house ona 30-year fixed at 4.25%.  The house is in a great neighborhood and sold in 2006 for just over double what we paid for it.  It was a VA loan and ALL closing costs were paid for by the seller. 

Back in 2008 when we made the decision to get out, virtually all of our friends said it was foolish and that we would be screwed for years if we did it.  They were wrong and nearly all of them have defaulted in the past year or so. 

I don’t regret our decision to walk away, however we were very prudent since we made that decision and saved money religiously.  If we didn’t have the discipline to save after the default, I don’t know if I would be happy with out decision to walk away.

Who is the author of that piece talking to - kindergarteners?? It’s like he’s explaining that toys sometimes break to a 4-year-old. It’s very telling that the press has to talk down to debt-drowning adults about the realities of their bad financial decisions. I guess we can take some solace that they’re even acknowledging all the broken toys…

On the “It’s a business decision”, and “Businesses do it all the time”, issue.  All three of my daughters knew at a young age that the “But Sally did it” excuse was bereft of integrity and is dishonest.  It is amazing how few adults seem to understand that concept or think that it is more complicated just because they are stealing hundreds of thousands of dollars rather than a toy. 

My guess is they know how to tell their children it is wrong to back on your word or to steal.

bravo awgee. exactly.According to these people I should go buy a fancy car and drive it a few months and then just not feel like affording it anymore because it went down in value SO MUCH! why should I have to keep paying for it? It’s not worth the same amount. come take it. I enjoyed it while I wanted to. You can clean up the mess and pick up any costs I incurred. Oh, and I"m taking the awesome sound system with me!

p.s. I will keep the car and continue to pay if you decrease the principal I owe. fair deal?

Unfortunately, Arends the perpetual dunderhead doesn’t seem to understand why strategic default will fix the problem: Home prices still need to revert to reasonable levels.

An alternative perspective on deregulation-

http://www.youtube.com/watch?v=3AJDMuMOj2U

it was stated:  Keynesian’s try to avoid this necessary purging so nobody experiences any pain.

This not correct.  Keynes was a major advocate of writing off debt during the depression recognizing that it was needed to start over.

We should act morally and ethically - and hold other people, our politicians, corporations and other countries (namely China) accountable for acting morally as well.  We need to make it loud and clear to others, especially our representatives, that we expect ethical behavior.
When there are rich entities that can buy votes, our only counterweight is our numbers.

We have to be ethical and moral - and strong.

I agree in general that the housing bust needs to run its course.  Getting there won’t be easy, but it needs to be done.

I want to point out an area where I think you would benefit from a finer-grained analysis.  I wouldn’t go so far as to bash the “Keynesians”  The stimulus solution is a reaction to the failed “libertarian” policies of the previous administration and a way to deal with depression economics, where deflation and high unemployment are dragging things along.  As you say in your book, the banks, investment firms, low interest rates, are largely to blame.  We experienced near systemic failure of the financial system.  That’s not a healthy free market, especially in light of the trillions of emergency loans needed to keep things from imploding a few years ago. 

The point here is that you are perhaps taking slightly ideological stance that is unwarranted and somewhat contradictory to your overall message.

One way to look at this is to make an analogy to medicine.  Let’s say your friend likes cheese burgers and has high cholesterol.  Well his mistake is in eating too much fast food.  The fix is to change behavior and nutrition.  That’s true, and in our economic problems today we need to purge the system of the bad debt.

The problem is that your friend had a heart attack and is in the hospital.  So today is not the time to go on a crash diet.  You save his life first.  Get him back on his feet.  Then make the lifestyle changes.

I don’t agree with Krugman always.  But I think you’ve twisted his message to a large degree.  Stimulus is one way to shut down the depression economics we face now.  It’s a way to deal with the heart attack, so to speak.

Following your logic, let’s assume we do zero stimulus.  We let everyone default on their loans today.  The banking system would probably collapse, and that would wreak havoc on our economy.  There are only a handful of banks and investment firms that control much of the capital.  THis isn’t as if Yard House went out of business at the Spectrum.  The scale of the problem in relation to the size of the market is to the point where we have “too big to fail” issues.  In other words, we do not have a free market, because the axioms for a free market have not be satisfied.  We’ve nationalized much of the risk, so we can’t just use simple-minded, free market ideas to solve a more complex problem.

The other extreme is to do a 10 trillion dollar stimulus and go crazy with spending—well that would be awful.  So can’t do that.

The solutions are in the grey zone, somewhere in between.

Thanks for all your work, and I look forward to all your posts!

Cheers!
Stan

I beg to disagree,economy is currently facing bad right now.Maybe because of too much corruption in our country.