Until now, most people who have negative equity in their houses have paid their mortgage whenever possible, despite it being a terrible business decision. This irrational behavior has been chalked up to the impression that paying a mortgage is like keeping your word of honor.
Recently, as more people have witnessed how large corporations (and government in general) have defaulted on their contracts, suffering the penalties rather than continuing to pour money down a hole, all legally, these same people are realizing their mortgage is only a contract, with the terms of default spelled out clearly, and taking the default route is not only not “breaking a word of honor” but also not breaking the contract itself. Default is built into the system which is why homebuyers pay exhorbitant interest to the bank in the first place — the bank is taking a risk. From an excerpt in one of the articles below:
“Loeb said he thinks much of the criticism aimed at homeowners who default is based on a poor understanding of what a contract is.
A contract is nothing but a legally binding agreement between parties with competing interests that sets forth mutually acceptable terms for their interaction.
Loeb said every mortgage loan agreement includes default and home repossession as a possible outcome.
‘If you stop making payments, you’re not breaching the contract, because default and foreclosure are valid means of fulfilling the contract,’ he said.
White said it’s not uncommon for commercial-property owners or investors to default on loans that they no longer consider beneficial, and while it might affect their ability to obtain future loans, no one is calling them immoral.”
A year ago, one could barely see any articles, other than from fringe websites, pointing out it was hypocritcal for government officials to coerce people into continuing to pay nonsensical mortages while watching the banks default on their contracts and receive bailout money in the process. Now, however, that has changed and there is a flood of articles pointing this out. The proverbial straw that broke the camel’s back seems to be a recent event in which a bank that owned a housing complex with over 11,000 units decided to stop paying its mortgage, not because it ran out of money, but because it decided the property wasn’t worth the cost. Cases in point:
“NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. That’s good business. Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat.”
Well said, New York Times. It’s been years since I’ve read anything in your pages worthwhile.
Today’s article of doom: Aw, shucks, I wonder if some of that rally was overdone?
“When will the housing market stabilize?” everyone wonders. It’s very simple, actually. When the government forces holders of mortgages to reduce the principal owed. Let me explain.
First of all, at the end of 2008, 1 in 5 mortgages were “underwater,” meaning the cost to pay off the mortgage was more than the house was worth. Since this is March of 2009, the number is probably closer to 1 in 4. Being as it is cheaper to rent than own in all 50 states, even considering the interest tax deduction, this means the underwater homeowner has only two reasons to keep paying.
1) They don’t want to ruin their credit.
2) They feel the housing prices will rise in a short enough timeframe to justify paying all the interest in the meantime, and will rise steadily thereafter enough to (after factoring in inflation and the value of lost investment opportunities with the lost interest payments) eventually sell and make a profit.
There is no third reason, such as “they intend to pay off the mortgage in full in 30 years and don’t care about the current price.” The people who fall into that category are the ones who bought at a reasonable price and are satisfied with their purchase because they are not upside-down.
So, let’s look at the first reason. Nobody wants to ruin their credit — unless, well, it costs thousands of dollars a month in wasted money to maintain. Or perhaps unless credit no longer matters, since no one is lending anyway. Or if everyone around them has trashed credit, making trashed credit not a problem. Eventually, many people will find that the savings of not paying on a losing mortgage outweigh the credit loss.
The second reason is hinged upon a relatively quick economic recovery which no one anywhere can give any indication will happen. The vote of no confidence in this is shown by the fact that, at the end of 2008, 1 in 8 mortgages were behind on payments. Again, since this is March, that number is likely closer to 1 in 6.
So then, what could possibly motivate people to hang on and resume payment? Only one thing: a stake in the eventual profit. If all the upside down people were no longer upside down, and actually had some equity, or at least no negative equity, they would be motivated to keep paying (providing they had the means of course — some simply won’t be able to pay no matter what).
Therefore, the only solution is loan modifications that adjust the principal owed. This article explains the fact eruditely, speaking of the much-touted (and reviled) mortgage rescue:
The Obama administration’s failure to close the negative- equity gap means that its plan “will likely join the dud parade of federal rescues,” says John Kiff, an International Monetary Fund economist in Washington.
DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates “gridlock,” delaying bad-debt workouts and an eventual recovery.
That’s exactly right. The banks don’t want to reduce the principal, nor the interest rates, because then the cat is out of the bag and there is no more maneuverability: the mortages are not worth what they say they are. And since all the major banks are still on the edge, after all the baoilouts, acknowledging reality might be the same as acknowledging insolvency. So, of course, the inevitable outcome, like it or not, will be that the government does one of three things:
1) Force the banks to lower the principal, and bail them out or buy their preferred stock as much as necessary to keep them afloat
2) Force the courts to allow bankruptcy judges to force the banks to lower the principal, with the same effects
3) Nationalize the banks in one form or another and modify the mortgages themselves.
This is beyond the debate of right or wrong, smart or stupid. It’s going to happen. It is the only thing that will stop housing prices from continuing to fall, because as more mortgages fall underwater, and more people see no recovery is forthcoming, more will stop paying. And please don’t think anyone in charge cares enough to ask the question whether we should simply let housing prices fall back. They don’t care what you think.
These guys get it. They worked for the failing banks that are still pretending they are solvent and their mortages are worth the money they lent. They know it’s all fake. Now they’re buying mortgages the government was forced to own, through takeovers of failed banks, at pennies on the dollar, adjusting the principal for the homeowner, and pocketing the difference. This is the way of the future. The government (therefore taxpayer) loses, the bankers win, and we all live… whatever ever after.
Today’s article of doom: Think I’m negative? Check out this guy.
Hi everyone. First, I’d like to say I’m sorry I haven’t responded to those who have contacted me or left comments recently; I have been on an extended and much-needed vacation and haven’t been checking or updating recently. Thanks for your emails.
Usually my posts are filled with hyperlinked references, to give substance and credence to my opinions, so I don’t come off as someone who thinks he knows it all, and also to encourage independent research. Today, however, I am going to post my predictions for 2009 without any references whatsoever. This is 100% opinion, based upon what I’ve been reading and observing. 2009 will be the year of action and culmination.
1) Major inflation. Sticker shock on everything from food to gas will repeat last year’s spring and summer pattern. The new fad scare of deflation will drift away as the US can’t get anyone to continue financing its debt and the Fed finally resorts to massive inflation to close the massive budgetary gaps. China will slowly stop buying debt so the inflation will be steady rather than in spikes. The government statistics on inflation, like unemployment, will under-report it by two or three times. The price of oil, silver, and gold will shoot up as they did last year, and in approximately the same time frames.
2) Russia and Germany up. UK, US down. Though Russia is currently hurting from the low prices of oil, they still have a net surplus and savings; something the US hasn’t had for a long time (not to mention 1/8 of the world’s land mass and all the resources that go with it). Ukraine’s tiff with Russia over gas right now is likely to fracture Ukraine into two pieces, not harm Russia in the slightest. Russia might even gain territory. Germany is much more pragmatic and better-positioned to weather the storm, being one of the few rich nations that actually produces more than it consumes. Soon, Germany will de-facto control the EU and the euro like the US currently controls the UN. UK won’t shed the pound for the euro — not because the pound won’t fall, but because the rest of the EU won’t allow it. Riots and unrest in Germany and Russia won’t be nearly on the same scale as the US and the UK, as both are more homogenous societies and race relations will become a white-hot divisive issue during the new depression in multicultural societies. China will be a little bit of both. Riots by the have-nots, but no economic deterioration like the US and UK. China will mostly remain flat.
3) Israel regrets its Palestine invasion. Israel’s attack dog, the US, is very ill and won’t be able to cover for Israel quite as well as before. The Muslim world will converge on Israel politically and will be supported to an extent greater than ever before due to worldwide souring of opinion towards the policies of the nation of Israel. High risk of expanded war in the region, with players such as Syria, Lebanon, and even Pakistan. Israel will have minor losses comparatively but will lose public sympathy (its most valuable asset) forever. No nuclear weapons will come into play, however. Israel’s economic status sours considerably. Iran will not play a large part, counter to most peoples’ expectations.
4) Obama appears to be Bush with a different face. Same policies, same excuses, same results. Slight variation on the implementation. (Coke with the sweetness of Pepsi — it’s Coke II!) Different group of blind supporters, I suppose. Huge let-down for those with half a brain, no surprise for those with a complete brain. Expansion of military engagements in the Middle East, blind support of the Federal Reserve’s disastrous policies (rather, existence), more spying on citizens, increased police aggressiveness, bailouts, and spending money we don’t have. Big push to “regulate” and filter opinions on the internet based upon the excuses of fighting “hate speech and “extremism.” Congress will continue to be mostly ineffective except at endorsing the President’s policies.
5) Huge housing bailout. Likely to include a massive delay of foreclosures, mandatory interest rates, changes in bankruptcy laws, tax laws, etcetera. Probably won’t occur until around tax time. Will help keep people in their homes and prevent a larger wave of rioting but will not cause prices to suddenly start rising. Established homeowners’ complaints will fall on deaf ears. Credit card bailout also a strong possibility. Corporate bailouts of every imagined (and unimagined) stripe are also likely. Bailouts of cities and states will be frequent and certain.
6) Unrest followed by deployment of soldiers as “helping teams” (read police state) and all the bad press, riots, and anger that accompanies such. Increase in power of local gangs and hatred directed along racial lines. Economic division will not be seen along class lines as is more accurate, but along racial lines. 2009 will be the first year most people start to think about the US as several different regions, rather than a single nation. Possibility of bank “holidays,” government-assumed control of private retirement accounts, even a dollar default. Like the 30s, massive anger towards bankers, and wealthy people in general, and massive sympathy for any criminals who take on the establishment. Possible relaxation on the rules, or lax enforcement, of criminal marijuana laws. Marijuana becomes the new prohibition issue with its myriad motivations and repercussions. Huge increase on the regulation of firearms and acts of “terrorism.”
And there you have it. Stay tuned next time for my regularly-recurring article of doom.
Remember this quote from the 1976 movie Network?
“I don’t have to tell you things are bad. Everybody knows things are bad. It’s a depression. Everybody’s out of work or scared of losing their job. The dollar buys a nickel’s worth. Banks are going bust. Shopkeepers keep a gun under the counter. Punks are running wild in the street and there’s nobody anywhere who seems to know what to do about it and there’s no end to it! We know the air is unfit to breathe and our food is unfit to eat. We sit watching our TVs while some local newscaster tells us that today we had 15 homicides and 63 violent crimes as if that’s the way things are supposed to be! We know things are bad. Worse than bad. They’re crazy. It’s like everything everywhere is going crazy so we don’t go out anymore. We sit in the house and slowly the world we’re living in is getting smaller. And all we say is, “Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials and I won’t say anything. Just leave us alone.” Well, I’m not going to leave you alone. I want you to get mad! I don’t want you to protest, I don’t want you to riot, I don’t want you to write to your Congressman because I wouldn’t know what to tell you to write. I don’t know what to do about the depression and the inflation and the Russians and the crime in the street. All I know is that first, you’ve got to get mad! You’ve got to say, “I’m a human being, God damn it! My life has value!” So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now, and go to the window. Open it, and stick your head out and yell, “I’m as mad as hell, and I’m not going to take this anymore!”
Funny how the more things change, the more they stay the same. Reminds me of a certain candidate running on a campaign of empty “change” platitudes. Not that his competitor is any better. Here are some more fun quotes, this time from the Depression era (remember the date of the stock market crash was October 29, 1929 and the Depression lasted until 1939):
December 5, 1929
The Government’s business is in sound condition.”
Andrew W. Mellon, Secretary of the Treasury
December 28, 1929
Maintenance of a general high level of business in the United States during December was reviewed today by Robert T. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.”
Associated Press dispatch
January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.”
May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States that is, prosperity.”
June 29, 1930
“The worst is over without a doubt.”
James J. Davis, Secretary of Labor.
June 9, 1931
“The depression has ended.”
Dr. Julius Klein, Assistant Secretary of Commerce.
Today’s article of doom: What the housing bailout bill looks like from across the pond.
Well, this one’s even bigger than Bear Stearns. We’re going to bail out Fanny Mae and Freddie Mac, both technically insolvent (their liabilities are greater than their assets) and it’ll only be to the tune of TRILLIONS. “…a complete bailout of these huge mortgage finance players could double the fiscal deficit.” Double the national debt. Double. Words fail me. Most of the foreign owners of the 6 trillion dollars worth of owned or secured mortgage debt are China, Russia, and Saudi Arabia. However, from what we hear on the news, buying stock in the worthless companies with taxpayer money so the shareholders on Wall Street and the debt holders in foreign countries get bailed out is somehow good for the American homeowner. Go figure. The Federal Reserve says no more bailouts are expected. Right. I’m sure they’ll have to bail out a few of the 150 banks that are expected to soon go belly up.
In other news, not only are food prices going up, but I’ll bet few people notice the size of the food products are stealthily shrinking. Most people don’t know the weight of the food they buy, so it’s a great marketing trick. Oh, and here’s an ex-government employee in the UK affirming that the official inflation rate there (and here too) is rubbish. I mostly agree, but I think it’s more like 18%, not 10%, here in the US. I like this article too. “This recession could easily tip into a depression.” Hahaha, really? Another interesting read was this person’s take on why the bailouts must occur — to prevent lawsuits forcing the banks to buy back their fraudulent mortgages. I don’t know much about the legal world, but I wouldn’t be the least bit surprised.
You may have heard that the Federal Reserve, over the weekend, took over the second-biggest bankrupt bank since the FDIC came into play, IndyMac. You may have heard how many billions this would cost. What you probably didn’t hear about, however — and the lack of coverage was no coincidence — was that there was a run on the bank leading up to and culminating in its doors closing on Friday. Fear spreads fast, and the talking heads want it contained.
Today’s article of doom: might as well keep harping on the oil price. Up to $147 now.
I thought this was pretty funny. It’s taken from the official CIA government website. It’s a snapshot of each country’s current “account balance.” Of course, this is just one puzzle piece of the picture, but imagine each country as a person, and each person having a bank account. This is how much each country has in the bank. Anyone want to guess where the U.S. is on that list? Probably above Rwanda and Zimbabwe, but below Switzerland, right?
Wrong. We’re dead last with the largest negative balance. (“We may be losing money on our product, but we’ll make it up in volume.”) China is on top, of course. Now, how that account is divided up according to currencies, commodities, etc, makes a huge difference on its actual value, so this snapshot is just something funny to look at. Also, all the things not captured on this, such as natural resources, account balances of citizens, etc, paint a different picture. But, ultimately, it’s pretty hilarious.
In other news, there will likely end up being a housing bailout for homeowners here. As far as I’m concerned, the government shouldn’t be bailing anyone out, but if they’re going to do it for big business, the government might as well bail out individuals too.
Heck, they’ll have to, seeing as they’re taking the burden of the worthless mortgages Bear Stearns and other banks had as “assets,” and guaranteeing the banks full price for them. Pretty soon, the government will be holding millions of mortgages and doing whatever they can to prevent widespread default. Pretty slick how the big banks got to reap profits and then hand off the risk.
Today’s article of doom: Peaceful Tibetan Protesters Beat and Threatened with Death — In America