Strategic Default: The $10,000,000,000 Monthly Economic Stimulus

Strategic default provides a major stimulus to the California economy. Nearly $2,000,000,000 per month flows into the local economy that used to flow out to debt holders in other places.

Irvine Home Address … 31 TRAILING VINE Irvine, CA 92602

Resale Home Price …… $499,900


let the stories be told

let them say what they want

let the photos be BOLD

let them show what they want

let them leave you up in the air

let them brush your rock and roll hair

let the good times roll

The Cars — Let the Good Times Roll

The HELOC abusers stimulated the economy when they borrowed all that money and spent it. Now that these same people are walking away from their mortgages, they no longer have housing payments, and their spending amounts to about $10,000,000,000 each month. Perhaps we should thank them for all their spending? I think not.

As long as lenders allow this to go on, and as long as the US taxpayer is paying the bills, these squatters are stealing from each of us. Lenders need to process their foreclosures, and borrowers need to experience the consequences of their actions.

Owners Stop Paying Mortgages, and Stop Fretting

Published: May 31, 2010

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. …

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.”

This is what I was writing about in The Latest Lie about Strategic Default: Borrowers Are Emotional Fools. People get pissed off at lenders and stop paying the mortgages. The couple above are the poster children for this effect.

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.

The same LPS report shows more than a third of all delinquent borrowers have been delinquent more than one year. The squatting time is getting steadily worse.

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.

Once we finally push these squatters out, in two years, they will be back at it again.

… Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

That is the cold, hard truth of the matter; people strategically default for many reasons, but preservation of their lifestyles is chief among them. Everyone tries to delay The Unceremonious Fall from Entitlement.

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

So how big is this economic stimulus?

$10 Billion a Month Freed up Each Month from People not paying their Mortgage. $1.9 Billion of That is in California so People can continue Leasing their SUV Mercedes and Getting Tans. Thanks Bailouts!

The latest data tells us that over 14 percent of all U.S. mortgages are either 30+ days late or in some stage of foreclosure. In other words, 7.2 million people are not paying their mortgages. Yet banks are turning out record profits even though they are bleeding in their real estate cash-flow. Now let us run a hypothetical here. The median mortgage payment of those 51 million mortgages is $1,514. This is actual stimulus for people if you don’t pay that each month. If you aren’t paying your mortgage you just relieved yourself of your biggest monthly commitment. So let us run a rough number:

$1,514 x 7.2 million = $ 10,931,916,697

So this frees up some $10 billion each month (this is a rough number).

How much of this economic graft is benefiting California?

So today you have roughly 798,000 California mortgage holders not paying their mortgage for a variety of reasons. Clearly the main reason is the economy is horrible. But a large number are taking advantage of the situation. The median home payment in the state is $2,384. Let us do the math:

$2,384 x 798,832 = $1,904,414,716

So of the $10 billion in non-payer stimulus, California receives roughly 20 percent of the cut.

Well I’m glad some people have their priorities straight. The fact of the matter is the bulk of Americans, the middle class, are being screwed by the banks, Wall Street, and also the current bailout structure. The median home price in the U.S. hovers around $170,000. Why not cap any bailout help to mortgages at that level or less? Do you feel good that the folks I talked about (who make over $100,000 a year by the way) in California who have a Mercedes and BMW and continue to live in a nice home rent free are able to do so because of your taxpayer money? This is exactly what is happening. No wonder why many Americans must feel like fools.

The name of the game is simple. Get into massive debt, so much so that when you fail, you will then be able to negotiate lower terms because the government enjoys rewarding horrible behavior. Things like this won’t last long because eventually, the public that is being ramrod into bailouts wakes up and revolts. Yet this could be a few years or much longer before any of it happens.

In case you had any doubt, The California Economy Is Dependent Upon Ponzi Borrowers. What is going to happen when these people have a house payment again?

Back to Owners Stop Paying Mortgages, and Stop Fretting:

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

These borrowers are really planning to cram down their lender. After a year or more of squatting, they will tell the bank to reduce their principal in half or take the house back. That takes a lot of courage.

The lenders I have spoken with are unified in their policies; they would rather lose more money with a foreclosure than accept cram downs from existing borrowers. They are willing to pay that price to prevent moral hazard from encouraging all their borrowers to cram them down, which they would if given the chance.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

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

“I need another year,” he said, “and I’m going to be pretty comfortable.”

Look at the impact squatting has already had on borrowers. These people think they can cram down their lenders or squat their way through the recession. I don't care how much economic stimulus this creates or whether or not this keeps our banks solvent; this is wrong. If lenders don't want to see a a great deal more strategic default, they shouldn't make it so rewarding. Or is it that our government shouldn't let them because the US taxpayer is paying all the bills.

Strategic default is a lesser evil for the borrower than continuing with a lifetime of debt servitude, but borrowers who do this are supposed to have consequences. Foreclosure is a superior form of principal reduction because it has consequences for the borrower. So far, the consequences of strategic default have been more positive than negative, so we will continue to see more strategic default and the squatting the goes along with it. Until lenders foreclose and push these people out, strategic default will become an even greater problem. In fact, if anything can bring down the banking cartel withholding our inventory it is strategic default. If everyone does it, banks will have to foreclose or give away millions of houses.

Another Trustee sale flip

Lenders are clearly releasing inventory at an intentionally slow pace to shore up pricing. When they do let one go, it provides opportunities like today's. I doubt this flipper will get the full markup they seek, but it will still be a profitable trade.

Irvine Home Address … 31 TRAILING VINE Irvine, CA 92602

Resale Home Price … $499,900

Home Purchase Price … $385,000

Home Purchase Date …. 3/17/2010

Net Gain (Loss) ………. $84,906

Percent Change ………. 29.8%

Annual Appreciation … 109.1%

Cost of Ownership


$499,900 ………. Asking Price

$17,497 ………. 3.5% Down FHA Financing

4.87% …………… Mortgage Interest Rate

$482,404 ………. 30-Year Mortgage

$101,983 ………. Income Requirement

$2,551 ………. Monthly Mortgage Payment

$433 ………. Property Tax

$133 ………. Special Taxes and Levies (Mello Roos)

$42 ………. Homeowners Insurance

$262 ………. Homeowners Association Fees


$3,422 ………. Monthly Cash Outlays

-$418 ………. Tax Savings (% of Interest and Property Tax)

-$594 ………. Equity Hidden in Payment

$33 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves


$2,505 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,999 ………. Furnishing and Move In @1%

$4,999 ………. Closing Costs @1%

$4,824 ………… Interest Points @1% of Loan

$17,497 ………. Down Payment


$32,319 ………. Total Cash Costs

$38,300 ………… Emergency Cash Reserves


$70,619 ………. Total Savings Needed

Property Details for 31 TRAILING VINE Irvine, CA 92602


Beds: 3

Baths: 2 full 1 part baths

Home size: 1,500 sq ft

($333 / sq ft)

Lot Size: n/a

Year Built: 2005

Days on Market: 64

Listing Updated: 40323

MLS Number: S610662

Property Type: Condominium, Residential

Community: Northwood

Tract: Tamr



59 thoughts on “Strategic Default: The $10,000,000,000 Monthly Economic Stimulus

  1. Planet Reality

    Do you really think this will be purchased with a 3.5% FHA loan? I doubt it, it will be 20% down payment. Do you have information that shows $500K 3BR in Irvine are being purchased with 3.5% FHA loans? I doubt this is normal.

        1. Planet Reality

          I would be very surprised if this was an FHA loan. In Irvine there are multiple offers and the 20% down payments are accepted. There used to be someone here who would post the down payment data. Average in Irvine was around 28% down. I would love to see the current data.

    1. Soylent Green Is People

      I can assure you that a vast majority of purchases below $600k are financed with FHA insured loans today. Conventional 10% down loans are pretty hard to get due to the PMI companies restricting investor concentration in attached properties to 30% or lower! FHA is 51%ish, depending on circumstance.

      Should prices collapse further, that 3.5% down is going to get eaten up pretty quickly. As a side note, with a 2.25% FHA Up Front Mortgage Insurance Premium being finanaced more often than not, the true post close equity in these FHA purchases is to use a lender term: Squa-douche.

      My .02c

      Soylent Green Is People.

  2. Enm

    After all this, what fool would lend $500K at 5% for 30 years with only 3.5% down to these idiots? Oh yeah, the American taxpayer would.

    With strategic defaults commonplace, market-based mortgage rates with 3.5% down should be more like 15% to reflect the risk. Mis-pricing assures that the crises will continue.

    1. Geotpf

      You are assuming prices will continue to drop. Provided prices either drop by less than 3.5%, or are stable, or increase, there’s no risk-if the homeowner stops paying, the bank will merely take the property back and sell it at a profit (well, there are costs involved-so maybe prices need to be stable or grow for there to be no risk). Only if prices drop by more than the downpayment is there a significant risk of loss to the lender. This is unlikely, IMHO. The bottom has passed and prices will increase from now on, espeically on the medium-to-high-end (every house in Irvine is by definition at least a “medium end” property-no $80k houses in Irvine).

      Now, the low end (<$175k or so) might take a short-to-medium-term hit due to the expiration of the tax credit. But for $485k house, $8k (and/or $10k) was peanuts and most buyers of such probably didn't qualify anyways. The only real danger (on the medium-to-high-end) is if the flood of REOs that is supposed to be here any day now actually shows up. I'll believe that when I see it. It might go from a drip to a trickle, but I really doubt a flood is coming.

      1. flyovercountry

        You are underestimating the costs and risks of a forclosure for a bank. If it takes a year to get someone out of the house after they stop paying, that is 4.5 – 5% lost interest earnings there. Then there is 6% in real estate commissions, another percent or so for closing costs. And that assumes that the house is in good enough shape to be sold as is without any paint, carpeting, cleaning, or repair bills.

        We are selling a house right now and someone asked about seller financing… in theory I would be willing to carry the financing on the house, but I sure wouldn’t do it for less 10% down, probably not for less than 20% down. And if someone has a 20% downpayment, they probably don’t need seller financing, so it is a bit of a moot point.

        1. Geotpf

          But the banks can borrow from the Fed at basically 0%. With interest and inflation rates so low, there’s no rush to foreclose in any case. Plus, there’s PMI payouts (or the equilvalent).

      2. Chuck Ponzi

        I’d be willing to bet you that housing prices are bottomed out.

        In some areas, and in some pricing strata, yes.

        For the vast majority of Orange County, and especially houses valued at >500K, I’m willing to make a bet that the bottom is still in the future a year or 2 away at least.

        There isn’t enough volume to constitute a bottom. We need to go back to historical volume levels and pass the distressed inventory through before we have a stable base to build off. Otherwise, it’s still catching a falling knife. You’ve got more people exiting the homeowning business than entering.


    2. Planet Reality

      You are right the risk premium for a 3.5% down payment loan should be higher than a 20% down payment loan. Not 15%, but definitely 200 to 300 basis points higher.

      You are also right about the reason the rates are close to the same. The tax payer is backing the loans. Anyone investing in Fannie or Freddie debt can’t lose because the tax payer will eat any loss.

        1. Planet Reality

          Yes but only if they were required to pay cash for this. As SGIP points out this can be rolled into the loan which is backed by tax payers.

  3. Planet Reality

    The median income of this zip code is $112K.

    This is probably pretty close to the median home in Irvine. It sold for $485K.

    Looks like the median home is affordable to the median income.

    This would put the price to income ratio for this area at 4.3.

    This is very close to the price to income ratio of the 1990s bottom and interest rates are far less.

    In 2009 this ratio was around 4.0, with 4.X% interest rates.

    1. no worries

      So the median “home” is a 1500 square foot condo? How much better than the Irvine median do I have to be doing to stop sharing walls with neighbors? Get a backyard?

      $260 in HOA + Mello Roos, too?


      1. Planet Reality

        I believe the median home in Irvine would be 3 beds, 2 baths, and 1200 sq. ft.

        You have to take into account that 40% of housing in Irvine is 2 BR / 800 sq. ft. or less apartments / condos.

      2. Geotpf

        You wanna live in Irvine, you have to pay the toll. If you want to live in 95% of the rest of the country, you could get a real house with a yard for a fifth of the price. In 95% of the country, $100k will buy you a real house.

      3. Alfred Nonymous

        That’s the Irvine Premium, brah! If you can’t afford it, then Corona or Riverside is the place for you. You don’t belong in Irvine if you can’t afford it.

        Total Savings Needed: $70,619

        For a moment, let’s forget about the emergency cash reserves. You still need to bring ~$30K to the table. Do you think a family earning the ‘average’ Irvine income and looking to buy this ‘average’ Irvine home has the savings needed?

        My guess is that they also have the lease payment on their ‘average’ BMW or Mercedes, and ‘average’ consumer credit card debt, in which case it probably makes more financial sense to rent a comparable place for a while, unless you believe that we’ve hit bottom and we’re going to look at another decade of stellar real estate performance.

    2. Marc

      Seems like some idiot forked over a ~$100k profit to a flipper (who held it for 2 months?). I hope this is not setting an example, since otherwise we will see everyone and their grand mother buying real estate again which would bring us the next bubble (although I also think that we still haven’t see the bottom of the current bubble).

      1. IrvineRenter

        The flipper bought this for $100K under market at trustee sale. Deals like this are common for those who have cash to play in that market.

        It’s when people can make money flipping from buying and selling at full retail price that the insanity really begins. That won’t happen for quite a while.

  4. theyenguy

    The photo you provide says: “We bought so much stuff … had cosmetic surgery … thank you Fannie Mae”.

    Mortgage Equity Withdrawl has led to a surrel lifestyle.

    Real Self Breat Implants reports that the average cost of for Orange County, CA (with 4 reviews provided) comes in at the national average of $6,600.

    Dermatologists often refuse to accepts low end insurance policies and clients because they are all doing Botox and cosmetic surgery paid for by the FASB 157 Squatting Entitlement and abundant use of mortgage equity withdraw.

  5. pasadenabee

    Here’s another kind of stimulus.

    My landlord bought the condo I lease from him last year. He gets about $2,000 from me every month. He pretends to live in the unit so he can send his child to the local school since it is a good school district. Surprise, he stopped paying his mortgage…I’m guessing he is looking for a loan mod.

    So, he’s getting $2,000 a month and paying nothing. He got the $8,000 tax credit. He doesn’t have to pay for private school. When will the media profile these types of scumbags? Instead, the media will always profile the cancer survivor and small business owner who is not paying his mortgage.

    Why doesn’t the media profile someone like me? I make almost twice the median income in my town. I have $150,000 in savings for a downpayment on a house. I cannot afford a starter home in my town. My tax money goes to help my sociopathic landlords steal. If I stop paying the rent, I get evicted and my credit gets trashed even though my landlord is not paying on his obligation. WTF?

    By the way, thanks for this blog IR. You are awesome.

    1. If it quacks like a duck

      SIMHO, smells like mortgage fraud to me if an owner occupied loan was obtained without being owner occupied. Also some school disticts have been asking/demanding payment for student not living in the district who attend school in the district. Some area have recource provisions on non-occupancy properties, but I’m not a lawyer to address these issues.

      Banksters and govt will likely turn a blind eye for they want a “sucessful” stimulus outcome — unless you get on the wrong side.

    2. Geotpf

      You could always snitch on him to the school district. Such a complaint could be made anonymously-pick up a payphone and call the district.

    3. cara

      If he gets foreclosed on within 3 years, it won’t even matter whether he was living in it or not, he’ll have to pay the $8k back.

  6. tenmagnet

    This flip worked out flawlessly.
    Bought on 3/17 for $385K, Sold 5/28/10 for $485K
    $100K in 70days is a very nice return on your money.

        1. lowrydr310

          How exactly did this place sell for $40K? Was that a normal sale? That’s a pretty steep discount from its Jul 2005 sale price of $285,000. Heck, even the flipped $100K sale price is a bargain.

          I think you’ve just proven the point that outside of Irvine (and other ‘premium’ areas – face it, though not in the same category as Newport, Beverly Hills, or Santa Monica, Irvine is currently ‘premium’ whether you like it or not), affordable homes do exist.

          I actually like the look of that house. No McMansions for me, thank you very much. I wonder if the neighborhood is safe to walk around in at night, or if the public schools are any good. Heck, I could pay that mortgage off in 5 years and by the time my kid’s ready to start school I could send her to a top notch private school!

          1. Geotpf

            Open market REO sale. And the bank had a horrible time selling it. They reduced the price TWELVE TIMES, and still had to accept 20% off their final price.

            Really, look at this:

            Date Event Price Appreciation Source
            Aug 27, 2009 Sold (Public Records) $100,000 >1,000%/yr Public Records
            Aug 27, 2009 Sold (MLS) $100,000 — Inactive MRMLS #I09082684
            Aug 05, 2009 Delisted — — Inactive MRMLS #I09082684
            Jul 30, 2009 Listed $99,950 — Inactive MRMLS #I09082684
            Apr 30, 2009 Sold (Public Records) $40,000 -40.4%/yr Public Records
            Apr 30, 2009 Sold (MLS) $40,000 — Inactive MRMLS #I08133833
            Apr 03, 2009 Delisted — — Inactive MRMLS #I08133833
            Mar 06, 2009 Price Changed $49,900 — Inactive MRMLS #I08133833
            Feb 21, 2009 Price Changed $73,900 — Inactive MRMLS #I08133833
            Feb 09, 2009 Price Changed $76,900 — Inactive MRMLS #I08133833
            Jan 30, 2009 Price Changed $77,900 — Inactive MRMLS #I08133833
            Jan 16, 2009 Price Changed $79,900 — Inactive MRMLS #I08133833
            Jan 07, 2009 Price Changed $81,900 — Inactive MRMLS #I08133833
            Dec 23, 2008 Price Changed $85,900 — Inactive MRMLS #I08133833
            Dec 11, 2008 Price Changed $87,900 — Inactive MRMLS #I08133833
            Dec 01, 2008 Price Changed $89,900 — Inactive MRMLS #I08133833
            Nov 18, 2008 Price Changed $92,900 — Inactive MRMLS #I08133833
            Nov 07, 2008 Price Changed $94,900 — Inactive MRMLS #I08133833
            Oct 28, 2008 Price Changed $99,900 — Inactive MRMLS #I08133833
            Oct 24, 2008 Relisted — — Inactive MRMLS #I08133833
            Oct 23, 2008 Delisted — — Inactive MRMLS #I08133833
            Sep 17, 2008 Listed $104,900 — Inactive MRMLS #I08133833
            Jul 15, 2005 Sold (Public Records) $285,000 35.6%/yr Public Records
            Oct 31, 2002 Sold (Public Records) $125,000 — Public Records

            It’s in a bad neighborhood and is small and old. I was tracking it for shits and giggles due to the twelve price reductions, and I was completely flabbergastered that somebody managed to flip it the way they did for such a huge profit. If there was a house in Riverside I expected to get torn down, or at least stay vacant forever until a bum burned it down, it was this house.

  7. BD

    The data suggests the second wave is coming. Rents in OC continue to decline. Lower home prices are on the way, and a 50/50 chance of double dip recession. Eurozone in trouble, China slowing, and more Gov. layoffs in CA.

    Just my .o2, but we could be entering a long period of deflation i.e., Japan.

    1. HydroCabron

      “…we could be entering a long period of deflation i.e., Japan.”

      Nope. Not gonna happen. Real estate only goes up from here, at least in Irvine.

      Once you hit the first level or flat spot in the home pricing graph, or the slightest uptick, then that’s the bottom for the next 15 years, or so goes the reasoning in some of these comments.

      Real estate never wiggles on the way down: no bear rallies, only continuous up or down movements over several years.

      Sure, the downmarket areas, where all the losers and stupid people live, could drop some more, even though they have already been hammered. But Irvine is about spirituality and a higher state of being which transcends economic forces. Even though it has only seen a much milder drop than the trashy cities elsewhere, this is the lowest it’s going to get.

        1. Planet Reality

          LOL – now is the time to buy your 270K lake forest condo. IR, it’s a damn shame that you disable comments for that listing. The comments would be LOL after LOL after LOL.

          1. irvine_home_owner

            There is probably a snarky profile of it over at

            To be fair (and you must take your bumps as well as you dish them)… 8 pictures… all of them of the outside of the home? C’mon!

          2. Plane Reality

            LOL – not to mention there are pending sales 20% below their *exclusive* listing price LOL

          3. Planet Reality

            Puhleaze, that was gentle. Facts are facts and you have made the same accurate comments on listings that weren’t yours. The other comments would have been way worse.

          4. irvine_home_owner


            My comment was because I really wanted to see what the home looked like on the inside.

            One of my big pet peeves is when they don’t have pictures of the kitchen or the master bathroom.

            Not allowing comments is unfair. You need to be able to take criticism as well as you serve it. And people could have useful comments for you too.

  8. newbie2008

    Justice delayed is justice denied.

    Continued govt sponsored theft by the banksters using the home squatters as cover.

    The squatters benefits are massive vote purchases at $100 billion per years until the election is over. The bankster bailout is at $3 trillion for 3 years, about 10 time more per year with no end in sight. Time for those not receiving squatters benefit to rise up and vote all the Washington DC hacks out of office, but who to put into office that are not on WS payroll? The CA RepublicRat primaries are examples of the choice between a liberal RINO and a more liberal WS RINO. don’t get me started on the DemoRat primaries. Same old, same old with different names but the same end policies.

  9. Interview with Robert Shiller

    Interview with Robert Shiller….

    Do the expanded roles of Fannie Mae and Freddie Mac in the mortgage market obscure the true state of the housing market?

    The government has always used Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) to subsidize housing. They buy and guarantee mortgages, which keeps rates low; and they have come to represent the enduring American value of home ownership.

    Their increasingly large role in the mortgage market isn’t just making people wonder how much a mortgage should cost. People are increasingly asking why we subsidize home ownership anyway. What’s so good about owning a home that the government provides this function? Plus the limits on what are considered “conforming mortgages” have been raised so high that we’re subsidizing $900,000 McMansions. Why would we do that, and why would we want to teach people to expect extravagances to be subsidized?

    It seems like after the past few years of bailouts, everyone wants the government to make life just like it was in 2006.

    Perhaps, but this makes me worry about the way that people think about debt. There was a recent research paper that showed the moral obligation that people feel to pay their debts still exists, but that it’s weakening at the margins. Free markets and entrepreneurship depend on basic moral values like repayment, so this could be a problem that people are in conflict about this.

    It seems to a person on the street that big bankers didn’t have to repay their debts because they were able to bribe the government to bail them out. This is making people very angry and could diminish that sense of moral responsibility that is so important for the success of the country. It also undermines the sense that in our society a rising tide should lift all boats.

    When the poor are this unhappy it makes it politically impossible to support pro-growth policies because the voting population will not support any policy that threatens to leave some people behind and make others rich

  10. no worries

    Thanks for running these numbers IR. Believe it or not I was just thinking about this yesterday. How much of our “recovery”, specifically as consumers, has been subsidized by people no longer making loan payments (house or CC)?

    Your $2B/mo in CA is a great estimate.

    Problem is, I have no idea how much that is. Or what it relates to. I’m going to assume that very little of that “free money” is going to savings or investment. So is there some sort of monthly total for consumer spending, or some equivalent, to scale this $2B to?

    1. freedomCM

      I think CA is spending about that much for unemployment benefits to suport ~4M people, if that gives you perspective

  11. S.O.S.

    I’ve never heard of this guy, but the tabloids are reporting on yet another celebrity who is choosing strategic default. The average Joe will undoubtedly become desensitized to the idea as this becomes more commonplace.


  12. Mark

    400 days without paying your mortgage. Must be sweet. I would rent 2 Harleys and head for the mountains with my girl. But wait. Somebody (banks?) is keeping a tab on the amounts not being paid, right?

    Does anyone else find it humorous that as a renter one would probably never cross the threshold of 60 days refusing to pay monthly rent(let alone 400 plus days) without getting drop-kicked Ray Guy style into the street by the loving landlord?

    Say…why can’t banks show the same tolerance as landlords? Oh that’s right. Bankers are supposed to be making loans and hitting the driving range by 3pm.

    1. Cook County Renter

      I would have taken that mortgage money and rented a cheap apartment in Jackson Hole Wyoming and skied every single day.

      Wait, this isn’t, or is it?

      1. newbie2008

        One guy took the HEW and gave it to his wife.
        She turned around and purchase the house on a short sale. Your tax dollars at work.

        I would much rather have the money go to the truely needed for basic living expense — min. accomodations and food expense. One thing I done agree with BHO is that obessity is the leading preventable cause of illness in America.

        1. Geotpf

          There are rules against short saleing properties to related parties. They committed fraud againt the bank.

          1. Newbie2008

            The guy was bragging about it. I though that there should be laws against that, but the bank that approved the HEW/refinancing approved of the short sale. Guess no skin off their backs (got house for only $50,000 net, banksters got their fees and bonus’ — Let the shareholders and taxpayers eat …..

  13. newbie2008

    I don’t feel that bad about the squatters on the low end of the spectrum with a $50,000 mortgage. It’s the multi-million squatters that bugs me. There’s not much that can be done about the NPB with $3 million of HEW using a refinanced first, cause of the one action rule and membership in the club. It’s likely that the multiple million HEW is being done on multiple properties by the club members.

    Never miss an opportunity to reward the guilty of the club.

    IrvineRenter, You talk of moral hazzard with the borrowers and banks. Morals. It like talking about the hygiene of a wild boar.
    Let’s see a graphes of
    1. the time for FC sale (free ren) and principle $ and
    2. free rent time and % equility.

    Like that the lower loan values will be FC quicker (4 months to NOD and 2 month for TS) and the muliple million club members will be over 2 years of free rent.

  14. cracked lid

    If I were a banker I would make it a point to foreclose as quickly as possible on at least a few mortgages and just let some of the older ones drag on longer. When a family is looking at strategic default there is a large difference between getting to squat for free for 18months or rolling the dice on 33 months vs getting booted in the 3 month minimum. The average is the same in both cases, but I’m guessing people would hesitate more in the second case. Kicking a few people out as fast as possible would likely do a lot to convince people to keep paying if the money is there.

  15. JK

    If one was to buy right now would you go with an FHA 3.5% down even with the 2.25% premium (which in some instances is financed too), or would it be better to put 20% down?
    The low down payment seems to be a way of hedging your bet in case prices tank. If they did one could walk..err..I mean squat for a year or so and not lose much at all.
    That’s not my intention but all these people working the system has got me thinking even though I could easily afford the 20% down on a good property.
    Any thoughts?

  16. matt138

    That is a fair assessment. Wait til rates start climbing. All these bulls’ grandiose re visions will be squashed. Arguing and swimming against the free market is a fool’s game – both for bloggers and govts alike.

    1. irvine_home_owner

      What is going to happen exactly when rates start climbing?

      Do you think prices will drop in exact proportion to them? I don’t… especially in “premium” areas because home owners there would rather hold than make less (and can because they are not as underwater as in other areas).

      No one is going to price their house based on different in interest rates… if a home in their area sold for $900k 6 months ago when interest rates were 5%, they are going to try to sell it for $900k now even if rates are 6%. They would have to list it for $806k (assuming an 80% loan).

      Rising rates is a boogeyman that isn’t as scary when you do the math.


    My hat is off to the STRATERGIST! I can only hope more will become informed, and begin this process. Banks produce NOTHING! Now it’s their turn to get the shaft. This “holier than” BS, targeted toward the homeowner regarding morality! Now if that isn’t the pot calling the kettle. Don’t forget what caused the current crisis; banks, and insurance companies. The banks caused the meteoric streak in home prices. They were perfectly content collecting the interest that those hot air ballooned loans generated; now because of their greed, housing prices collapsed, yet they still feel justified in collecting interest payments based on bubble values? Well the “Strategic Defaulters” have called them – Thank You!

  18. NOTaREALmerican

    So true. The guy I sit next to – who is delinquent on all debts – just bought a new iPhone. Gotta have it, he said.

    Life is about running scams. America is a nation of scammers.

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