The Latest Lie about Strategic Default: Borrowers Are Emotional Fools

Lenders are trying to label strategic defaulters as hysterical fools in order to keep the hopeless paying a little bit longer.

Irvine Home Address … 13711 SOLITAIRE Way Irvine, CA 92620

Resale Home Price …… $675,000


And So Sally can wait, she knows it's too late and she's walking on by

My soul slides away, but don't look back in anger, don't look back in anger

I heard you say

At least not today.

Oasis — Don't Look Back In Anger

Home debtors can wait, many know it's not too late and they're walking away. The ones that stay watch their souls slide away one payment at a time. Paying on a hopeless mortgage checking Zillow Zestimates and NAr press releases for good news about their home's value. Those are the debtors who will look back in anger — anger at the lies they were fed, the manipulations from realtors, lenders, and now our own government. How would you feel after a decade of being underwater?

Lenders are frightened about strategic default because it threatens to wipe out the remaining illusions about the value of the worthless loans on their balance sheets. If every underwater homeowner did what was in their best financial interest, our banks would be undeniably insolvent; therefore, lenders are coordinating a public relations campaign to appeal to false morality and now lenders are trying to stereotype strategic defaulters as hysterical fools.

There is so much about the manipulation of borrowers by lenders I find offensive. This one I find particularly offensive because lenders are trying to make the correct and rational decision of hopeless debtors look like the incorrect and irrational decision of overemotional lunatics.

If lenders were merely trying to bluff debtors with bullshit or foster fantasies of appreciation, their behavior would be consistent with the clueless shills of the National Association of realtors who lie by ignorance — however, lenders know strategic default benefits many borrowers, and they are intentionally perpetrating a lie for their own advantage. Unintentional lies of bullshit are not as offensive as intentional deception for personal gain, which is what lenders are doing now.

Anger at the root of mortgage default problem, study finds

Saturday, May 22, 2010

Memo to the bank: Take this money-sucking, underwater house and shove it! Go ahead and wreck my credit for years to come. I'm walking away, no matter what.


That's the question posed by Brent T. White, a University of Arizona law professor whose academic paper last year on the fast-spreading "strategic default" phenomenon drew sharp criticism from lenders and Wall Street, who viewed him as the Pied Piper of the walk-away movement.

Now White has published a paper based on the personal accounts of 356 strategic defaulters and homeowners on the verge of doing the same. His finding: People who intentionally default on their loans are not as economically rational or calculating in their decision-making as widely thought.

The reporter is setting readers up with a false premise hidden in the language: rational and calculated decision making does not support strategic default. Unfortunately for lenders, the ability to do math clearly demonstrates that strategic default is wiser for those who are deeply underwater and paying far more in interest than they would in rent. It is a wise and rational decision for borrowers in that circumstance. Whether or not people get emotional about that fact is beside the point; strategic default is the best course of action for many home debtors.

In fact, he said, their decisions to pull the plug "may not turn out to be economically rational."

Here is where the lenders plant their insidious lie: it may not turn out in your favor. Fear of the bogeyman is all they have left. Deeply underwater homeowners who continue to pay bloated mortgages will consider their odds and chose the path with a much higher probability of a successful outcome: strategic default. What lenders fear most is that strategic default may turn out to be very economically rational. In fact, it will.

Perhaps if this bear rally goes on a bit longer lenders can appeal to residual kool aid intoxication as well — "Don't default now, prices are coming back!" Yeah, right.

But they walk anyway, in large part because they are at the end of their emotional rope.

Sure, once people are pissed off enough, they get angry and make a decision. Anger is a wonderful motivator for change. Everyone who strategically defaults makes a very difficult decision, and either choice they make is fraught with difficulties.

They have transitioned from feelings of anxiety and hopelessness to outright anger at their lenders, the government and a financial system they consider unfair.

That's because borrowers have been screwed by lenders, the government and our financial system — with a little help from their own greed. It is human nature for people to blame every responsible party other than themselves. Borrowers who strategically default are pissed at the perpetrators just as any victim would be. There might even be a few with the smallest modicum of introspection who realized they participated as well. Not many, but a few….

White published his latest paper in Arizona Legal Studies, the university law school's journal. After a study he did last year, which argued that far larger numbers of underwater borrowers should stick it to their lenders, White says he was inundated with e-mails and calls from homeowners saddled with negative equity. Many provided him with extensive details of their financial situations and difficulties dealing with their lenders.

According to CoreLogic, a real estate analytics firm, negative equity continues to be a massive and corrosive problem. During the first quarter, 11.2 million homeowners across the country owed more on their mortgages than the market value of their properties.

In Las Vegas, 75 percent of mortgaged homes and condos are underwater. In Phoenix, 550,000 homeowners have negative equity — 58 percent of houses with loans. Florida's rate of negative equity is 48 percent, followed by Michigan at 39 percent and California at 34 percent. Nationwide, nearly one out of four mortgaged houses is in a negative equity position, according to CoreLogic.

There are a lot of borrowers who are underwater. Many of them would benefit from strategic default.

White and other academic researchers say that severe negative equity is the essential spark that prompts owners to consider walking away — even those who think it's morally wrong to default.

We have about six more months of mileage out of the morality play. By the end of this year, many people will know someone they know and respect who strategically defaulted. Once that happens, it's over. When the hundreds of thousands of people who are deeply underwater see the benefits others gain by defaulting, they will all do it.

Based on the personal accounts shared by strategic defaulters, White said, they often have high credit scores, sterling payment histories and solid incomes. As one underwater homeowner said in an e-mail to White, "There isn't a lender out there who wouldn't give us a loan," based on credit performance.

Didn't this author argue earlier that these people were irrational and poor decision makers? Aren't people with high credit scores more savvy about debt?

But staring at hundreds of thousands of dollars of negative equity, owners become anxious, then pessimistic, about their financial futures. Older owners with severe negative equity worry about their ability to stay afloat in their retirement years if they keep paying their mortgage.

Why someone late in their career would take on a huge mortgage is beyond me. Other than the desire for a property they could not afford, senior borrowing is purely for the anticipated mortgage equity withdrawal to fuel their retirement spending. Seniors in particular should consider strategic default. What do they have to lose? If seniors get cut off from credit cancer it is the best thing that could happen to them.

Lenders and loan servicers often play crucial — if inadvertent — roles in motivating owners to walk away, White said. Of the 356 homeowners' situations he analyzed, 100 percent reported contacting their lenders to work out a solution before they defaulted.

Many say they were rebuffed by servicers who refused to discuss modifications with anyone current on loan payments. White quoted one deeply underwater homeowner: "So many times I have called my mortgage company to say that I have been a good-paying customer, who despite the difficult economic times, [has] continued to pay on time. I am told over and over again that they cannot do anything for me."

What is the bank's incentive? If people who are deeply underwater keep paying, the bank has no incentive to stop that. Only if borrowers actually default does a lender have any incentive to do anything. Nothing is going to change that.

Other owners told White that they tried to qualify for one of the Obama administration's foreclosure-prevention programs but either got snagged by rigid income-to-payment rules or non-responsive servicers, or were told they were too deeply underwater to obtain assistance of any sort.

Any borrower so far underwater as to fail to qualify for a government program should default. What are they waiting for? The government basically told them to.

In the end, anger pushes even the most reluctant defaulters over the line.

Some of the anger is directed at the federal government. One couple told White: "Frankly we are tired of getting the short end of the stick, while the government seems to rescue everyone but us."

That's because the government is bailing out the banks while letting borrowers flounder. Did borrowers really think it would turn out the other way?

White says there can be no effective answer to the walk-away trend as long as lenders and the government fail to intervene early and address underwater borrowers' needs and emotions.

Do borrowers need therapy to be convinced to keep paying when it is not in their best interest? I suggest a mass hypnosis. Maybe if debtors are hypnotized, they will suddenly believe paying the supersized mortgage is in their best interest.

One possibility: much deeper principal-reduction efforts for owners who have severe negative equity and see no way out. Another option offered by White: Create a "rent-based loan program" that would allow underwater owners the option of refinancing their balances to an interest rate that would bring their monthly payments in line with the rental cost for a comparable house.

Foreclosure is a superior form of principal reduction. If the government and lenders want to reduce balances, foreclose on people and reduce balances that way. I like the idea of rent-based payment cram downs. Underwater loan owners are renting from the bank anyway. If lenders believed their loans could get crammed down to rental equivalence levels, perhaps they wouldn't make so many stupid loans.

Bought at bottom, milked it, and squatted

  • Today's featured property was purchased for $372,000 on 11/6/1998. The owner used a $297,600 first mortgage and a $74,400 down payment.
  • On 11/22/1000 he opened a $50,000 stand-alone second.
  • On 8/22/2001 he opened a $100,000 HELOC.
  • On 7/29/2004 he opened a $150,000 HELOC.
  • On 4/13/2005 he refinanced with a $600,000 Option ARM with a 1% teaser rate and obtained a $120,000 stand-alone second.
  • Total property debt is $720,000.
  • Total mortgage equity withdrawal is $422,400
  • Total squatting is at least 20 months.

Foreclosure Record

Recording Date: 06/04/2009

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/23/2009

Document Type: Notice of Default

Uncomfortably numb

After writing about this for over three years, when I see someone who stole $422,400 and squatted for almost 2 years, I am rather numb to it all.

If someone robs a bank and gets $20,000, it makes headlines and someone goes to jail, but when someone steals nearly half a million dollars through a mortgage, nobody notices.

If someone breaks into a vacant house and squats for a couple days, the police are called out to remove them. If someone quits paying their mortgage and squats for a couple years, nobody notices.

If someone had told me these would be commonly accepted actions a few years ago, I wouldn't have thought it possible. Yet here we are. I am uncomfortably numb.

Irvine Home Address … 13711 SOLITAIRE Way Irvine, CA 92620

Resale Home Price … $675,000

Home Purchase Price … $372,000

Home Purchase Date …. 11/6/1998

Net Gain (Loss) ………. $262,500

Percent Change ………. 81.5%

Annual Appreciation … 5.1%

Cost of Ownership


$675,000 ………. Asking Price

$135,000 ………. 20% Down Conventional

4.87% …………… Mortgage Interest Rate

$540,000 ………. 30-Year Mortgage

$137,704 ………. Income Requirement

$2,856 ………. Monthly Mortgage Payment

$585 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$56 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees


$3,497 ………. Monthly Cash Outlays

-$694 ………. Tax Savings (% of Interest and Property Tax)

-$665 ………. Equity Hidden in Payment

$253 ………. Lost Income to Down Payment (net of taxes)

$84 ………. Maintenance and Replacement Reserves


$2,476 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$6,750 ………. Furnishing and Move In @1%

$6,750 ………. Closing Costs @1%

$5,400 ………… Interest Points @1% of Loan

$135,000 ………. Down Payment


$153,900 ………. Total Cash Costs

$37,900 ………… Emergency Cash Reserves


$191,800 ………. Total Savings Needed

Property Details for 13711 SOLITAIRE Way Irvine, CA 92620


Beds: 5

Baths: 3 full 1 part baths

Home size: 2,590 sq ft

($261 / sq ft)

Lot Size: 5,500 sq ft

Year Built: 1970

Days on Market: 173

Listing Updated: 40297

MLS Number: S598459

Property Type: Single Family, Residential

Community: Northwood

Tract: Rc


According to the listing agent, this listing may be a pre-foreclosure or short sale.

This large home has 5 bedrooms and 3.5 baths. Two of the bedrooms have private baths with showers and tubs. Both of these bedrooms also boast cathedral ceilings. As you enter this home you walk into a large livingroom diningroom combination. Off to the left you have a cozy familyroom with a brick fireplace. As you move to the right of the home you have a comfortable kitchen with a breakfast nook and breakfast counter. All three of these rooms have sliding glass doors that lead to a fantastic backyard that is complete with a pool. This home is very open, making it perfect for entertaining.

Sub 5% interest rates are stabilizing prices

The markets are signaling continued deflation and a double-dip recession. As a result, money is flowing into government backed home mortgages. The historic spreads between the 10-year Treasury and a GSE MBS are now meaningless because a mortgage-backed security from a GSE is now backed by the full faith and credit of the US Government — it is a government security. Between the flight to quality and the government guarantee, interest rates are very low.

As a result of very low interest rates, payment affordability is very high. Today's featured property would likely save an owner money versus a comparable rental, and that is what is driving our market. Of course, the actual price paid is still very high, and the stability of record low interest rates is suspect to say the least, but the affordability of monthly payments is undeniable. If lenders were smart, they would be selling more of their REO into this temporary affordability.

61 thoughts on “The Latest Lie about Strategic Default: Borrowers Are Emotional Fools

  1. IrvineRenter

    Owners Stop Paying Mortgages, and Stop Fretting

    ST. PETERSBURG, Fla. — For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

    Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

    “Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

    A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

    This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

    “I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

    Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

    The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

    While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

    There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

    More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

    1. winstongator

      But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

      “I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

      Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.

      WTF was this guy doing buying rental properties? Any large down-payments & 2nd home riders for his mortgages? In FL, where this story is bylined, speculative home purchases where the buyer had no intention of living there and/or the rent income didn’t cover the cost were completely out of control Any of that in Irvine/SoCal?

      It took me a while, but I agree that foreclosure is the best way to achieve principal reduction.

      1. IrvineRenter

        Land barons are common here. Many loans in default were “investments” that only cashflowed with Option ARM teaser rates. If fact, the primary thing that convinced me there was a residential real estate bubble was the huge negative cashflows on individual properties being financed by borrowed equity.

    2. se

      In reading your recent posts it appears that the best alternative if you are deeply underwater is to default on your loan.

      It seems like a good time to bring back you post on understanding how and when banks can come after you for the balance (recourse vs non loans).

      1. IrvineRenter

        Yes, the people who default with recourse loans will also need to declare bankruptcy when the debt collectors come calling. So far, collections have not begun and many debtors believe the collections will never happen.

        1. Alan

          They may even be right – it doesn’t cost anything additional to gamble. After all, the income tax due on defaulted debt is being waived. If debt collectors are coming after 10 or 20 million defaulters, there may well be enough political weight to legislate the problem away. Debt collectors don’t have the best PR, and cases excessive efforts against some sad story will come along soon. Or perhaps bankruptcy laws will be changed in the defaulters’ favor so that they can hang on to their toys and income, while wiping away that pesky debt.

        2. CA

          Since CA is one-action and non-judicial is the predominant route, collections on recourse loans won’t happen in this state…except maybe on 2nd mortgages who haven’t taken their “one action” yet?

    3. Anonymous

      “They’re all crooks.”
      Nice statement from someone defaulting, thereby stealing tax money from fellow citizens and children (aka future wage earners to pay of the debt) to pay for the bank bailout …

      1. Swiller

        You sir, are in idiot. People losing their homes aren’t stealing your money. That’s the politicians YOU voted for who are giving YOUR money to the banksters, but you are too ignorant to actually think and see for yourself. YOU are one of the many reasons this country sucks.

        1. Schizlor

          People who can pay, but choose not to, and then default, causing the banks ask the government to pay them instead of the borrower who stiffed them, by way of a taxpayer bailout, and get that bailout by way of MY tax money…are absolutely stealing my money.

          If you found out that in the past 3 years, people had been raping women and getting away with it scott-free…would you turn around at participate? This kind of “everybody’s doing it so why can’t I” mentality is sickening to watch unfold in this country. I truly am ashamed to be an American right now.

  2. cynic

    But this is inevitable in a society that is conditioned to ‘always have it all’. How many times have we seen lottery winners and NBA superstars end up broke after a few years?

    A consumption based economy must inevitably reach where we are now.

    Perhaps if we truly start referring to HELOC abusers as thieves – we may see some change.

    But I am not hopeful.

    1. AZDavidPhx

      The banks are too fat and happy now. How do you seriously go back to sound lending practices after all the bailouts and shell games?

      The system is dependent on getting everybody mortgaged up by the time puberty arrives.

      I am looking for the 40 year mortgage next after they finish clawing back all the boomer housing bubble wealth. It’s the next logical step to engineer lower monthly payments for a new generation of monthly payment buyers.

  3. Stock Investor

    IrvineRenter: “the ability to do math clearly demonstrates that strategic default is wiser”

    It goes well beyond math.

    For example: imagine that strategic defaulter is in court, and I am on jury duty. IMHO, justice without morality is wrong, and it is moral to protect society from thieves. Sorry, but, please, do not expect any slightest sympathy from me.

    1. IrvineRenter

      This issue becomes very muddy when it comes to these borrowers. I agree strategic default is theft, and these borrowers should experience consequences. However, a good defense attorney would point out that many borrowers were entrapped by lenders eager to give out free money.

      Do you remember the Delorean case? John Delorean needed money to save his car company, and the government set him up and caught him on tape taking a bribe. He was acquitted because of the entrapment defense.

      1. es

        That may be the only time the entrapment defense has ever worked. He was dealing cocaine, and the defense was that “he would not have done what he did *but for* the involvement of the police.” Law enforcement has to all but physically coerce you into doing something before that defense will even get off the ground. Otherwise, all those “to catch a predator” guys would all be going free (and some actually are).

        This would be a purely civil trial for breach of contract, and as you have argued many times the consequences for breach are clearly spelled out within the contract itself.

        1. Stock Investor

          “the consequences for breach are clearly spelled out within the contract itself”

          No, not really.

          There are infinite possibilities. For example, sometimes foreclosure may lead to very devastating divorce, because one spouse blames the other. No written warning.

          1. newbie2008

            Maybe divorce could be avoided by strategic default that would allow the couple to save some money than trying to hold back an unstoppable sea of house debt. Heavy debt is like a millstone around one’s neck. Even if you’re not underwater, it has a choke hold on the debtors.

            Say Couple A: Pays mortgages at 60% DTI, house under water by 50%. Wife and husband fighting over how to spend the remaining 2% of disposible income. Saving being drained. Fights for 3 years with no end in sight. Gets FC in 5 years.

            Say Couple B: Strategic defaults and lives rent free for 2+ years. Saves 50% of the 2+ years of mortgage payments for future rent, uses the 50% of mortgae payments for disposible income. Gets FC on 2.5 years, but has rent money and a place to rent. Has been saving for 5 years.

            Which couple is more likely to get divorced?

          2. Schizlor

            What happens to couple B when they go to rent a new place to live and the only one willing to rent them a room is Willy in the broken-down RV under the bridge by the river, because they both have 524 credit scores and a history of chronic non-payment for mortgage debts?

            Not paying when you can be proven beyond a shadow of a doubt to have the means to pay is VERY dangerous to your future prospects in obtaining ANY kind of credit. It may “feel” good now to know you are getting the same free ride as your neighbors, but just like people in a riot, when the smoke clears and the consequences of your actions are held to account, you will be mortified and deeply ashamed that your morals were so easily cast-aside and you were so easily corrupted by that infantile desire to participate in whatever the crowd is doing, right or wrong.

            Beware the dangers of conformity.

            Didn’t we learn to avoid that trap in elementary school? Apparently not.

      2. Stock Investor

        “… good defense attorney would point out that many borrowers were entrapped by lenders …”

        I see predatory lending as organized crime. Strategic defaulter was not entrapped. He signed deal with organized crime to extort money from taxpayers. Strategic defaulter spent stolen money (which makes him different from John DeLorean, who lended money to drug smuggler and FBI informant).

        May somebody buy McMansion because of poor math skills or hard childhood? Sorry, I do not believe this excuse. IMHO, most of strategic defaulters must plead guilty or insane.

        1. AZDavidPhx

          Agree with Stock Investor. These profiled strategic defaulters are low class; just as low as the lenders whom they villify. They remind me of the folks who slip on the sidewalk and then sue the city for 10 million dollars due to not enough signs, sirens, warning systems, smoke signals, etc not being in place to protect them. Notice how proud Mr. Pemberton is of himself for gaming the system? His foreclosure is his blessing as now he just uses his mortgage payment for steaks at the Outback. As someone who has paid his rent on time every month for the past 5 years – I would love to be on his jury and send him to debtor’s prison for the rest of his life.

          1. tonye

            Things are not so black and white.

            In this case, the people getting screwed are renters like you and long term homeowners like me. None of us are getting any of the “financial love” from the Gov. Meaning we are paying for the banksters and the defaulters.

            The base issue here was the greed of the banksters and the homeowners. Allowing 0% down mortgages was a pure option call by the borrowers. The lenders bought some insurance on their collateral.

            So now, the Feds is making the lenders whole and removing the responsibility from the borrowers (ergo no IRS liability).

            In one way, I can see that strategic defaults by the borrower are not complete theft. I mean, they return the collateral they had offered, and in which they had absolutely no financial stake.

            I would agree that the best way to handle this would be to go into foreclosure with no Government intervention. Let the banks foreclose, the homes go on the market and the borrowers all hit the bankruptcy button.

            Morally, what’s happening all around us sucks for those of us who were financially responsible. I thought very hard of selling two years ago. Maybe now that my son is heading to college and my daughter soon to be in the 11th grade I might just blow the house into this artificially high market (LOOK, no short sale….), put the money into mexican pesos and rent for a while until I move to my La Ponderosa in Virginia City.

      3. Schizlor

        Borrowers were no more entraped by lenders than the meth addict was entrapped by the dealer. Yes, the dealer shouldn’t peddle that crap…but does that mean the buyer is not at ALL responsible for consuming the substance?

        Blaming the bank for “trapping” you into taking a loan is like blaming McDonald’s for making you fat, or RJ Reynolds for giving you cancer. The cold hard fact is that you HAD a CHOICE…and you made the wrong one. Just because the guy who sold it to you is a crook doesn’t absolve you from being an absolute moron for taking it in the first place.

        I worked in the mortgage industry from 2004 to 2009, and believe me, people couldn’t wait to get the signing over with. They’d ask “how long is this going to take?” Not, “Can I have some extra time to read this over with my lawyer?” All they cared about was “Can I waive the 3 day recission period and get the check today?” People ATE UP these crap loans because they were promised huge sums of money, and most Americans are self-serving idiots who care more about how much their car is worth than about thinking long and hard about how the most massive financial purchase of their lives will affect them and their family down the road. Spend now, ask questions never.

  4. ElvisInMiami

    One question I would pose to strategic defaults is where are you going to live when you are evicted out of your house? Maybe landlords and property management companies do a background and credit check.

    As a landlord now, if you are not paying in cash up front for the lease and your credit and background is shoddy, I tack on 20% to the total price (really I give a discount to others, but hey)

    Personally I don’t like the strategic default option, but there is a lot of positive that would come from it (if the government doesn’t interfere so much and banks really do evict trespassers/squatters).

    For example, I look at Zillow and in Florida 1.9% of all homes sold are priced at 900K+. That is logical as in the top 2% of household incomes (250K+, according to government) could realistically afford a 900K+ home. Now look at what is for sale, 5.1% of homes for sale are listed over 900K. Assuming you can negotiate 10% off a 1M home and buy for 900K, you still have 4.5% of the homes listed at 1M+.

    Do this exercise in just about any state and you will see that what somebody can afford lines up with what sells, but not what is listed. Most listings are listed high because of the debt that is owed on the property. So how do we reduce the listing prices to come within 10% of realistic purchase prices(this would take a 20-50% reduction in list price depending on the price range)? Answer could be strategic defaults, or just letting the market slowly drop for another 5 or 6 years.

    1. IrvineRenter

      The observation you make about what is for sale and what can be afforded is something I discussed in A Theory of House Prices and Housing Markets. I totally agree with your assessment. What is worse is that the over $729,750 market has no government support. I think the illusion of a high end is due for a catastrophic collapse… either that or a great deal of squatting.

      1. John


        “I think the illusion of a high end is due for a catastrophic collapse… either that or a great deal of squatting. ”

        I totally agree with you. However, what I see keeps defying logic. Houses in TRidge & TRock are still selling like hot cakes… well, not quite but fast enough with still not any significant discount from 2006.

        Also, we discussed this issue about nonperforming loans one time. You said with short sale and people not paying their mortgages while waiting for short sale or foreclosures with sqatting:

        the banks borrow money to pay the CDO investors.


        Who lend these banks (the Fed?)

        How long can they keep borrowing?

  5. Swiller

    More power to the “homeowners”. The banksters set all this up just as nice as pie, expecting the ethics and morals of the american people to keep them paying simply because it’s the “right” thing to do.

    The american people will only play the fool for so long. The common man knows the whole system is run by fraud and the corrupt are getting rewarded. The homeowners defaulting are well aware of the hyprocritical stance of the wealthy and those whom bought before the fraud. The ones with massive “equity” are only scared that their INVESTMENT will drop to mere pennnies and will try anything in order to get people to support the housing Ponzi scheme.

    I hope home prices drop another 50%, and the average american family can once again, afford to buy a home, rather than just DINK’s (dual income no kids), baby boomers who got lucky and bought before fraud, and the rich whom just pass a $100,000-200,000 down payment to their kids.

    The government (or those behind it, the globalists) want out private property, and they want our guns. So far with Obama in office, things are going according to plan.

    1. lowrydr310

      I hope home prices drop another 50%, and the average american family can once again, afford to buy a home, rather than just DINK’s (dual income no kids), baby boomers who got lucky and bought before fraud, and the rich whom just pass a $100,000-200,000 down payment to their kids.

      I hope so too – that’s the only thing that will truly straighten out the mess in the housing market. Cheaper homes mean there’s more money left to spend on other things, which would kick start our consumer-spending-driven economy back to life.

      In the mean time I’m perfectly comfortable renting. I’m not getting any pressure to buy a house from my wife. Maybe it’s the fact that when she grew up she lived in and owned house and a rented house and realizes there’s practically no difference.

      1. Planet Reality

        What country do you guys live in? Homes are affordable in 95% of US markets. If you can’t afford a home for your family you are looking in neighborhoods that require a higher income or bigger homes that require higher income.

        1. lowrydr310

          Just because a bank tells me a home is ‘affordable’ based on my income doesn’t mean it’s my best option.

          I’m currently renting a 2BR apartment. A friend of mine recently bought a townhouse in the area that’s similar in size but in a location that isn’t as good. His principal/interest/taxes/insurance is 2x my rent.

          Oh I forgot, I don’t get the interest deduction that he gets, so I must be losing out.

          1. Planet Reality

            It sounds like you live in one of the 5% of areas, Manhattan Beach I’m guessing? If you can’t find an affordable place to buy it’s your own fault or you need to make more

    2. Schizlor

      “Got lucky and bought before fruad”

      You mean anyone who bought a home between 1945 and 2002?

  6. nefron

    “After writing about this for over three years, when I see someone who stole $422,400 and squatted for almost 2 years, I am rather numb to it all.

    If someone robs a bank and gets $20,000, it makes headlines and someone goes to jail, but when someone steals nearly half a million dollars through a mortgage, nobody notices.

    If someone breaks into a vacant house and squats for a couple days, the police are called out to remove them. If someone quits paying their mortgage and squats for a couple years, nobody notices.

    If someone had told me these would be commonly accepted actions a few years ago, I wouldn’t have thought it possible. Yet here we are. I am uncomfortably numb.”

    So why are you so goddamn sympathetic to the same person who is now underwater? You are talking out of both sides of your mouth.

    1. IrvineRenter

      I am sympathetic to the situation the families are placed in. The course of action I recommend for them is painful, but not as painful as trying to sustain the status quo.

      It greatly annoys me that these people spent almost half a million dollars, but a bank was stupid enough to give them the money. The borrowers should have consequences, and the banks should have consequences. The banks consequences should be proportionally larger because they enabled this mess.

      These borrowers did what they did. Nothing is going to change that. I have argued that foreclosure is a superior form of principal reduction because borrowers still have consequences. I am not proposing they be given a pass like those who endorse widespread principal reduction.

      Strategic default is not being given a free pass. Borrowers pay a price as they should. Many, if not most, will also need to endure bankruptcy. That course of action is still better than paying on an underwater mortgage for a decade or more, particularly when they could rent a comparable property for much less.

      What we are talking about is what underwater borrowers should do going forward. Many of them should walk and take their medicine because the cure is less painful than the disease.

      1. Swiller

        Thanks IR. I am one of those families placed into a very bad situation. I can tell by posts like those from Nefron, that they are enraged our tax dollars are being used to buy out mortgages and to seemingly reward those whom are not paying their mortgage. Let me tell you first hand, the banksters are not doing this to HELP anyone but themselves. The homeowners involved…namely ME in this situation, do not want out tax dollars to go to the very corrupt institution that created this fraudulant scenario.

        That would be YOUR elected officials. I don’t vote for republicrats any longer.

        I hear so much bullsh1t on this site…stuff about debtor’s prisons and such. Stop already, I think some uber wealthy bankster just jizzed himself thinking about the possible ramification of that. Default on a loan, go to prison, where the crony capitalists can then get FREE slave labor (better than sitting in the crappy little cell all day isn’t it!). The whole sh1t storm makes me sick. I honestly think about leaving this country for good when I retire…which isn’t really that far off. I’m thinking a country with more FREEDOM would suit me better. Ya ya, get off the nuts of the politicians and propaganda, this is *not* the most “free” country any longer.

  7. thrifty

    Any word on the status of Cal senate bill 1178 sponsored by Corbett that would remove the personal liability when re-financing a purchase money mortgage? It would not apply if additional money was taken out and would not apply to heloc or second mortgage refinancing. It would limit the lender’s recourse to taking back the property in a default as does an original purchase money mortgage now.

  8. Planet Reality

    Under $2500 a month for 2500 sq. ft. and 5500 sq. ft. Lot?

    Dare I say below rental parity in Irvine?

    1. AZDavidPhx

      Why should it fetch a penny over the 1998 comp? The economy was booming in 98. Have incomes doubled since then?

      1. Planet Reality

        It should sell at a monthly rate that is 30% of what it can rent for?

        How many can I buy?

      2. IR_Fan

        A couple of reasons it would fetch more.

        1) Incomes are measured in real dollars and the prices are nominal. Even if you assume inflation averaged only 2% a year, this house would should be worth 471k. If it were 3%, then house is worth 530k.

        2) Interest rates on 10 year treasury back in 98 was 4.75%. Today, it is 3.31%. The present value of that any income stream using those relative discount rates yields a 36% higher price in present value dollars.

        So even if inflation were only 2% a year and nothing else changed other than the discount rate (IE interest rate), then this house should be worth 641K.

        1. AZDavidPhx

          So even if inflation were only 2% a year and nothing else changed other than the discount rate (IE interest rate), then this house should be worth 641K

          Wrong. Incomes would have to have gone up 2% per year as well.

          1. Planet Reality

            For the people who buy in premium areas incomes have obviously doubled, tripled, or more. David if you are the middle guy then your income may be the same as 1990s.

          2. AZDavidPhx

            I’m not convinced of that. I suspect that these people buying in “premium” areas are using money that was not saved the hard way (job income).

          3. IR_Fan

            I don’t think you read what I wrote carefully. I said incomes are normally stated in real terms.

            If you use nominal terms like you would have with house prices, incomes have gone up faster than 2% a year from 1998.

            In 1998, average California per capita income is 28k. In 2009, it was 42k. In nominal terms, that is a 50% increase or 3.75% annual growth.

            If you were to use that number, than just based on incomes alone, this house should be worth 580K. Then you layer in the significantly lower interest rates, and the house is more affordable in terms of what the payments represent as a % of average income then it would have in 1998.

            Obviously, IR’s point is valid that if rates go up, then prices have to come down, but as of right now, there is every reason why it should be priced “one penny” higher than in 1998 comps. In fact, it should be a lot of pennies higher.

  9. loss to lender

    IR wrote: “After writing about this for over three years, when I see someone who stole $422,400 and squatted for almost 2 years, I am rather numb to it all.”

    Apart from free squating, the loss to the bank will be a lot less than $422,400 if the house sells for $675,000. Also, why use the word “stole” in this case?

    1. IrvineRenter

      At some point, these borrowers knew they were never going to pay back the money unless their house sold for a higher price. Once they went Ponzi and stopped paying down their debts, they were stealing. I suppose we could call it “contingent borrowing” with the contingency being someone else will pay it off.

      Not all of the borrowed money will be lost to the bank. With 5% interest rates, someone will step up and pay off the majority of the previous owner’s borrowing.

  10. newbie2008

    The Delorean case was totally different. The defense was that an agent of the US govt. threaten Delorean with death and the death of his family if he did not smuggle the cocaine and that there was bad faith prosecution (misconduct) in claiming the govt did not have those death threat audio recording.

    The squatters do not have a right to squat for years of taxpayer funder rent. The years of squatting is a post-contract benefit given by the bank. The banks can FC after 90 days in CA for the NOD followed with a TS sale or use a judical FC. The years of squatting is a benefit or more of a CO-CONSPIRACY to keep up the high house prices and to transfer upon a regular sale/mortgage to liability from the banks to the taxpayers. The non-paying borrower is benefiting with free rent and taxes, the banks are benefiting from recognizing the loss on the house. Banksters (the leaders) and sqatters (the followers) are co-conspirators. The taxpayers will get hosed again (post election).

    The wild cards are retroactive changing of the law by the legistrators or by local judges in making formerly non-recourse loans into recourse loans or removing the single action clauses. Even if the ruling are won of appeals, it the indivdual case is not appealed on time, then tough luck for the debtor.

    Either way, my predictions are at least 5 huge hosing for the taxpayers. Bush’s 1.5 trillion was the first, Obama’s 3 trillion was the second, commerical RE will be the third, European & CA sovereign debts will be the forth, roosting of the new home loans will be the fifth.

    You’re in grave error on the Democrats vs. Republicans. There both with the banksters. Read on what FDR did for large business vs. what Teddy Roosevelt did. Then looks at what both parties did post WWII. JFK might be the most economically conservative president in the 20th century.

    1. Swiller

      I’m sorry if I gave the impression I’m blaming one political party, because that has never been my stance on this blog…ever. They are both to blame, hence the reason of my being registered as a Non-Partisan voter…I can choose whoever I think is best.

      JFK was killed because he tried to make money backed by U.S. Treasury. The globalists didn’t like such patriotism and he was soon killed after. Remember the old saying….follow the money.

  11. EconRules

    All this talk about how horrible these borrowers are make me sick. Of course they made a stupid decision, haven’t we all? I am sure they are not proud of what they did and are constantly surrounded by guilt, shame, and hopelessness. So is it good to kick a dog while he’s down? These people need help, no matter what they did in the past. This is the perfect opportunity for people to show compassion; instead of complaining about the situation, help someone organize their finances, instead of spewing hatred, try to realize you might be in their shoes one day (bad business deal, health issues, being sued, etc.), instead of being condemning, realize these people are human beings and deserve a chance to redeem themselves. Or you could just continue to boast in your superior intelligence and financial know-how while you mock all those who are not like you. If you are the latter, you will be forgotten before your funeral is over.

    1. newbie2008

      Read my comment on holding-on vs. stragetic default and divorce. A stragetic defaults can be much better than holding-on on many levels (financially, emotionally, and for family stability). The banksters are the ones who fueled the problem. I just don’t like adding fuel to the fire by bailing the banksters out. The whole idea stinks of theft. Robin Hood: Govt taxed the people to proverty to benefit the few. Robin Hood stole from the govt and few (not the rich per say) to give back to the people.

    2. RIP Honesty

      oh please. Many people I know bought around 2000. They took every penny out of their houses and went on the most expensive vacations imaginable ie… Disney Cruise, Spain, Europe. They bought expensive clothes. They paid extortion prices for dance classes for little Rebecca and bought 500.00 baseball bats for little Tommy. They bought designer dogs and designer groceries. They plumped, pulled and inflated themselves to extreme. They also bought giant gas guzzlers. In the mean time prices for everything were pushed through the roof because nobody worked for their money anymore they just charged it to their homes. Now after the party stops and they owe twice as much on their house than what they paid, I’m suppose to feel sorry for them? I don’t think so. I have paid my rent on time every month for the past seven years and not once was I rewarded with any of the above or an awesome vacation. Yes, I call them thieves.

      1. RIP Honesty

        and one more thing… This financial know how you speak of is called basic math. If you make 4000.00 a month your mortgage can’t be 5000.00.

        1. suck born every minute

          RIP Honesty,
          Everybody knows that math is just for geeks and those foreigners. You only need your MBA and wish thinking to make $4000 a month to pay for a $5000 mortgage. Just keep borrowing from them Chinese and force them to stop manipulating the currency and interest rates.

  12. darms

    You started this post w/a pet peeve of mine –
    “many know it’s not too late and their walking away”

    Don’t you mean “they’re” instead? You talk about wanting to improve your writing but you’re having problems w/this & w/spelling? (Last post had an “and” when you meant “an”) Yeah it’s a nitpick but every time I see a “their/there/they’re” or similar oops it makes it tough to resume reading…

  13. theyenguy

    You write: “I like the idea of rent-based payment cram downs. Underwater loan owners are renting from the bank anyway. If lenders believed their loans could get crammed down to rental equivalence levels.” … Yes, I like them too, but I don’t think that is what is going to happen. I think a black-swan event is coming soon, like out of the blue, and then a liquidity evaportation. Over at, the ten year US Note ETF, IEF, was barely up on a down stock market day; its chart pattern looks weak; so I look for a number of failed Treasury Auction failures; and an economic breakdown; and then, the banks, I think, will force the squatters out and lease the properties.

    A rent-based payment cram-down would cause an immediate reduction of book value on the bank’s balance sheet; where as on a lease program, perhaps the bank can keep the property inflated at the current mark to fantasy allowed under FASB 157.

    You have mentioned in previous articles that you favor debt elimination/debt liquidation. I’ve been following the Greek Debt Crisis quite a bit, and believe Global Governance is coming to Europe, and yes soon to the US as well.

    I have reference by link the article entitled Greece Reschedules Hospital Debt by Alex Korbel; it relates that Greece as a nation is simply going to write off, eliminate and liquidate billions it owes to pharmaceutical companies. I wonder how the companies and share holders feel about that.

    You write: “If someone had told me these would be commonly accepted actions a few years ago, I wouldn’t have thought it possible. Yet here we are. I am uncomfortably numb” … When I first read about the interpretation and application of FASB 157, I was shocked, I was stunned. It took me several weeks to come to accept the truth and its implications. Now, I think to my self at times, I wish, I could have been so shrew as to act on the FASB 157 entitlement. But then again, I am thankful for the little place I rent, and the privacy and simple comforts I have, and I know this world is soon passing away and I will be departing for a better age.

Comments are closed.