Back on July 25th, 2009, I had this to say:
As I’ve said for some time now, we need what amounts to a bankruptcy reorganization of our national housing market. It will take some primo number crunchers to work it out, but mortgage amounts – by zip code – will have to be reduced to match current market values, and then the loans re-worked based upon the current value of the house. Its a lose/lose situation for everyone (for instance, I’d lose the approximately $130,000 I’ve paid for this house to date, the bank would lose a great deal of future interest as my mortgage amount would have to drop by 50% or so to bring it in line with current market values). Its lousy, but I can’t think of any way to really get us out of this mess – we have so many millions of houses “upside down” in relation of loan balance to house value that the temptation will become massive for people in that situation to just walk away…in which case, the banks would get even less than they’d get with a “cram down” on existing loans.
And now there’s this report:
…BofA’s credit loss mitigation executive, Jack Schakett, said the amount of strategic defaulters (those who can pay their loans but opt not to) are “more than we have ever experienced before.” He went on to say, “there is a huge incentive for customers to walk away because getting free rent and waiting out foreclosure can be very appealing to customers.”
Schakett says the foreclosure process is still taking 13 to 14 months (and by my estimates that’s an optimistic assessment), and so there’s over a year of free rent. While the banks are trying to improve the time, they’re just not there yet.
31 percent of foreclosures in March were deemed to be “strategic default” by researchers at University of Chicago and Northwestern University.
That’s up from 22 percent in March of 2009.
Business is business, folks. I know that some people are still following the bankster’s meme on this and calling such defaults “deadbeats”, but the fact of the matter is that a bank will default in a heartbeat if that is the most logical business decision to make. When you are in a financial jam, you add up the numbers, figure out what will hurt you least, and then do it.
There are also those who think that a person should still pay even on a massively “underwater” house because the price will eventually come back. Even supposing it will, I calculated that it would be approximately 2038 before my house came back to purchase price. Anyone with a calculator can do the same thing – and I’m sure a lot of people are. But, the prices won’t come back – not ever. There simply aren’t enough people in the rising generation to create the demand necessary for substantial price increases – unless we manage to get ourselves in to hyperinflation (which, of course, would only change the nominal rather than the real price of the house).
Cramming down people’s mortgage amounts will be a difficult business, but it still commends itself to me as the best means of curing the housing industry. Everyone would lose – but, also, everyone would gain. Houses would be priced to reality, they would be affordable and people would no longer view their houses as piggy banks from which to withdraw vacation cruises and other such nonsense.
Or, we can just continue on as we are and have massive increases in defaults which will cram down the prices the hard way. Its our choice.
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