I thought it was an important story. The NY Times put the issue of Debt
Repudiation on the table. Exactly where it belongs. The author also
contributed a new adjective to describe many of America’s troubled
borrowers, “Ruthless Defaulters”. This definition comes to us from the
“lending” side of the equation. I think that is a misguided definition
by the industry. I don’t think they know what they are up against. Yet.
I disagreed with one premise of the article and wrote Mr. Streitfeld.
BK
"I
disagree with you that 'a small handful' are involved. I talk with
people who have debt trouble every day. More than half of them are
going to walk away from their debts. You say there is a downside to
this:"
"Ruthless defaulters
today face different perils. Delinquency destroys credit scores, can
prompt a lawsuit and guarantees a very large number of hostile calls
from collection agencies."
"People do not care about
credit scores any longer. What does that give you? Nothing. The lenders
are canceling lines left and right. Most people do not qualify for a
mortgage. Stores are no longer giving out their CCs. There is no more
credit available for those that are near the edge. There is no downside
to walking away any longer. Debt repudiation is the biggest systemic
risk we face. It is staring right at us."
DS:
"I
wondered if it might be more than a small handful, but I have to go
with the evidence I have -- no one publishes numbers on this. Where are
you talking with these people?"
I was going to respond to this
privately but thought it might be interesting to throw this out for
discussion. Neither Mr. Streitfeld nor I can say conclusively that the
number of Ruthless Defaulters is either, (a) A small handful or (b) A
significant number that is growing rapidly. In the blog world I can
throw out some data and some anecdotal information and draw a
conclusion of what it means to me. The readers will make up their own
minds. My response:
I follow default rates through Realtytrac.
(And others) The numbers for June were terrible. In the first six
months of this year there were an additional 1.5mm homes in default.
Not all of these borrowers are Ruthless Defaulters. A significant
majority were just fed up with the nightmare of home ownership.
The
personal bankruptcy rate is also soaring according to aacer (automatic
access to court electronic records). They described July 09 as, “The
hottest month for filings in three years”. From their report:
Consumer
bankruptcy filings also remain on the uptick, increasing by 48% last
month over the previous year, reported the American Bankruptcy
Institute. Using data from the National Consumer Bankruptcy Research
Center, the ABI said the 94,124 new consumer bankruptcy filings in July
also marked a nearly 14% increase from the 82,770 filings in June.
A
50% rise year over year has nothing to do with Ruthless Defaulters. For
$3,000 you can go chapter 7 and just say, “The hell with it all”. There
is no downside. They are not ruthless, they are just defaulters.
I
have lived in a small town for 30 years and know a diverse group of
people. I give free advice. Business has been booming for the past two
years. I spend, at most, one hour with and individual or a couple. By
the time they get to me there are typically only two possible outcomes:
-“Your
situation is perilous. It is not clear that you will be able to
forestall these debts. You can no longer re-fi them away. Your net
worth and cash flow are negative. You must renegotiate with all of your
creditors. If they do not listen to you, stop paying them. You have six
months before you are out of your home. You need to plan for that
possibility. You will meet with headaches at every step. Prepare for a
very difficult time ahead.”
-“Your
situation is hopeless. Do the right thing. Contact the lender and tell
them you are vacating the home. Send them the keys and don’t destroy
what is left. Sign papers for a “Deed in Lieu” transaction. As for the
CCs, you have to walk on those too. You have no assets or excess income
to pay those either. You are a cash payer and a renter for the next
five-years. Get a pre-paid cell phone and pre-paid credit card. You
will need them.”
Admittedly, my narrow exposure to this
is not indicative of anything on a broader scale. That said, the data
on foreclosure rates and bankruptcy filings coupled with my neighbor's
calls, tells me that the default rate on mortgages in excess of $500k
is going to explode this fall. That timing is driven by the end of the
‘selling season’. With that, the CC numbers would follow. Broad based
debt repudiation is a distinct possibility. It is the biggest systemic
risk that we face. There is no fix to this.
BBQ Talk:
Joe:
“I just settled with the bastards at Capital One. I owed $50k. Half of
that was % and fees. We settled at 50 cents on the dollar:
Lou:
“I had a First and Second mortgage with Morgan Stanley. I didn’t pay
them for nine months. Then I sent them the keys. They are going to take
a bath when they go to sell it. Now I am in a rental down the street at
half the monthly cost!”
Sally: “But doesn’t that hurt your credit rating?”
Lou:
“So what? The banks cut our lines to zero. There is no credit to get
anymore so who cares about FICO scores for the next five years?
Joe: “I never had any credit. I was a no doc. borrower. They deserve what they get.”
Sally: “So how do we get in on this?”
Joe/Lou: “It’s easy. Just stop paying for six months. The lenders will roll over.”
Chorus: “Yeah! Down with the banks. We are going to stop paying next month too!”
This is by no means a joke on my part. I was at the party.
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There is such a thing as a "deficiency judgement" where the bank can sue for the difference between what is owed and what the house sells for. It will be interesting to see if banks (or scumbag collection companies) begin going after defaulters in earnest. Most info on the net says "banks never pursue judgements" but that was usually because foreclosure was accompanied by bankruptcy and the borrower had nothing to go after. But people just walking away because they dont like paying the mortgage anymore and difficiencies in the six figures is a different story. Should be interesting.
On this subject... I am going to start a website and charge $10 for my service, walkawayfromyourdebt.com... I was in a business deal and racked up 100k in credit card debt back in 99 - 2003. I stopped paying and let the cards fall. the only one who collected on it was Discover. 8k. I say ph__k 'em. Anyone making minimum payments on a ccard is a fool.
Rack up the debt and flush... rinse and repeat just like they do in the dark pools.
I'm on the side of "more than we know." Just a hunch. I know a guy who recently walked from his house (neg. equity $250,000 because half his cul-de-sac was in forclosure), and he had very good credit before he walked. He just capitulated, got tired of the other houses with broken windows and weeds 5 feet high and he looked at the mess were in and figured it'll be 10 years before we make a turn out of the abyss. I also know three other people, good people who are business owners, who are in BK or foreclosure now. It came down to credit ratings or feeding the kids. What are most people going to do in that case?
It's sad that this has become the bbq conversation but I can't say I didn't expect it. The casual conversation brings what used to be a guarded and embarassing issue out in the open and serves to pave the way for rationalization / justification of the actions. What adds fuel to the fire is banks receiving TARP money or any other form of government support when a huge percentage of the population said no and representatives caved in. It's an indirect way of getting back at the banks that should never have gotten squat.
Folks may well lose the ability to "rationally default" if the wave gets too big and the Fed, banks & government gets scared with that look at reality. Few things would concern officals like a mass wave of self defaults. Especially since every effort is being made to keep folks locked into impossible situations and to reinflate whatever bubbles can be.
This, on top of the pending CMBS might just form a critical mass tipping point for the next leg down.
You cannot destroy the system by playing the system's game. Default is the fastest way to create equality between the people and the oligarchs. Default to bring the system down and create Jubilee.
The fullest expression of Sabbath logic is the Levitical "Jubilee": a comprehensive remission to take place every "Sabbath's Sabbath," or 49th-50th year (Leviticus 25). The Jubilee (named after the jovel, a ram's horn that sounded to herald the remission) aimed to dismantle structures of social-economic inequality by: releasing each community member from debt (Leviticus 25:35-42); returning encumbered or forfeited land to its original owners (25:13, 25-28); freeing slaves (25:47-55). The rationale for this unilateral restructuring of the community's assets was to remind Israel that the land belongs to God (25:23) and that they are an Exodus people who must never return to a system of slavery (25:42).
Interesting post Anon @ 13:30.
I'm left wondering how come we, as a nation founded on Judeo-Christian principles, (something far different than claiming "We are a Christian nation", which is false) have forgotten this concept of Jubilee. My take is that when Jesus chased the vendors out of the Temple, they came back as soon as He left. Since then, they got hired by financial institutions.
The rest is History, as they say.
This is what happens when the rule of law ends.
true story.
side note: this is one of the more interesting discussions I've seen on here lately.
the 20,000 ft issue in all this is that civil penalties only mean something to you if you have assets and/or money.
to illustrate, think of all of the states that mandate car insurance; every single one of them has droves of "uninsured motorists." personally, i wouldn't dream of not having auto insurance, but if I had no money and no assets, the civil fines and lawsuits to recoup damages are meaningless to me. sue me? sure. you win. who cares? i have no assets.
up to this point the fico score combined with easy lending was the carrot that gave people a tangible leg up, but now that credit is tight regardless, there is no incentive to play by the rules.
unfortunately, the housing crisis has made it much easier for people to make the rational decision to behave like uninsured motorists.
to be able to walk away from debt, sounds like a fairytale come true. however, as was said above there is a downside to this. debt never goes away. there are only two ways to realistically deal with it. either pay and/or settle it, or declare bankruptcy. these are the only two realistic options one has. so the downside could be severe. that depends on what state you live in. state law governs credit card debt.
i've worked my tail off to pay down $14K of $32K in credit card debt. i now have $18K blance left. when i started paying it down 2 years ago it seemed like it would be worth it to preserve my credit rather than file brankruptcy. now i'm not so sure. on the one hand, i'm almost halfway there, on the other hand, does it even make sense for me to pay off the rest? is a good FICO score going to have any meaning in 10 years?
Rational default makes a lot of sense for those who played that game. Since I have money still, I won't be doing it, but I know why people do.
True story: a friend was underwater on a house and renovations, multi-loan. He left the keys on the counter, called/emailed his bank informing them of intention to default and Deed in Lieu, and left the country for three months. When he got back, the keys were still sitting on the counter.
It's been a year. The house has still not been actively foreclosed. He could still be living there, if he hadn't moved to another state.
The house is in New Hampshire, near the Mass border. If anyone needs a place to squat, I think you could still live there for free for quite some time before the bank decides they can afford to show the loans/property as a loss on their balance sheet.
This must be right down the road from me - I'm on the Seacoast. Any idea who the bank is?
Don't forget that if your debt is not discharged in bankruptcy but simply written off, the IRS will consider it income to you and expect taxes to be paid.
I am the chump that paid all my bills on time, paid off my mortgage early, paid 100% all my damn taxes to the socialist crooks and unions that run the country. I am that idiot with the great credit score who never bought a damn thing on credit and has no particular need for credit.
When do the good and honest people of this country get a single fucking thing back from our gov't????????
Just another fucking tax bill is what we will get from Obama. Now I am paying for other people to buy cars? I am buying clunkers worth $100 for $4500 so I can help Obama's scumbag political contributors?
after I bailed out Fucking Goldman sack?
You and others who dutifully contribute their earnings to the state are being carefully & thoughtfully harvested. If you've ever gardened, there is a popular summer lettuce referred to as "cut & come again" that will grow back after every clipping.
A very important part of the government's calculus is that the ratio of welfare consumers (the administration's core constituency) remains in balance with taxpayers. If enough taxpayers "shrug", the respective states will collapse even faster than current forecasts.
"Harvested" is a good term. That is the name of the game.
All these loan mod programs are a joke, they are trying to convince people to irrationally support debt by providing a TEMPORARY interest rate reduction (e.g. most all mods have rates that step up over time), while providing ZERO debt reduction.
So they are counting on responsible borrowers to subsidize irresponsible borrowers who just stopped paying and are no doubt trading in their clunkers and getting a $4,500 rebate and plunking down the cash they saved by not paying their mortgage.
That is America today: the moral and responsible among us are being harvested to support the immoral and irresponsible.
respectfully, how is morality any more than a fairy tale? it doesn't apply to pols, beaurocrats or corporate entities. the only use i see for it is to control that portion of the herd being exploited or as you say harvested.
another fairy tale used to exploit the herd is the american dream. the fairy tales are being tested.
I agree, morality is used as a weakness, a wedge to convince people to do what is not in their best interest.
Is it moral to charge interest on money that banks create out of thin air?
When it comes to our money system, morality is indeed an elusive concept.
Lending at interest is perfectly moral, as long as you have the justification of lending at some deprivation of utility, or liquidity. Otherwise, it's quite true that you're charging for nothing at all.
It should be noted that sites such as Automatic Earth (possibly the most depressing, but intelligent site out there) states that as this continues, the only logical thing for the USA to do is to greatly limit or eliminate bankruptcy.
Perhaps one should do it while they still can.
Yes We Can! (woohoo!!)
No, the Centre for Research on Globalization is far more depressing.
Prepare for FICO Deflation.
I called Wells the otherday to find out if I can refi. They wanna do a new loan instead of a loan mod and they asked me to shell out2% closing costs.
I am alsoplanning to do the same - walk away from my mort. Its very stupidfor the banks notto refi as their costs of funding have come down drastically.
Again, who helps common man? Seriously, people need to do something!
excellent piece. i was reasonably confident that we would soon pull out of this downturn until i read this column and the comments.
the govt cant continue to finance this with just borrowing and deficits. when the inevitable tax increases come, that should put us on ice for a long time. and i dont think the irs will be as lenient as the banks. then there are the coming mandatory health care premiums.
i dont think i've ever known default to make more sense than it does right now.
don't give in to the dark side man. just hang in there and remember that repetition does not equal truth, no matter what orwell says. reality is the court of final appeal. (final not necessarily meaning "tomorrow.")
I have a friend who had a second home in the Phoenix area - his financial planner ADVISED him to walk away from his home because he was underwater. The rational: a foreclosure or short-sale only stays on your credit report for 7 years, while it will take at least that long for a house in that area to recover its value (in the meantime, he also would have had to continue paying $3,000/mo for his mortgage). "Rational Default" is a no-brainer for some.
I know for a fact that "ruthless default" is happening in large numbers. People who still have income, who could afford their payments, are just stopping payment because they are so far underwater it doesn't make sense to continue to pay.
Though I hate that term, I prefer the term "rational default". Because what they are doing is rational.
It is pretty clear to me what the govt/Fed is trying to do is reinflate asset prices so people don't feel they should walk away, that if they just wait long enough their house price will bounce back. The problem is, the level of inflation they need is astronomical. Like 10% a year over the next five years. God help us if they succeed in achieving that level of inflation.
Hmm you guys almost make me regret doing the smart thing and making it to my mid 20's without ever falling into the credit card trap.
there are researched facts on why people are defaulting that go beyond loss of income, it's cultural influence and negative equity
see facts in article in this link
http://www.smartprofitsreport.com/spr-market-pulse/strategic-default-hom...
Good link, the 1 in 4 defaults being voluntary seem about right. It will be interesting to see how that increases over time.
I also like the term "strategic default", or as I call it, "rational default".
I used to feel sorry for people who got screwed by credit card companies, banks, etc., but that just evaporated.
This country can't go Mad Max fast enough for my liking.
Good piece Bruce. Increasingly, FICO scores are seen as just another asset to be monetized, like early withdrawals from 401k's, or cancellation of life insurance policies...
This is the concept of "moral hazard" and the inevitable backlash of rewarding the failure of the too big to fail banks. Apparently, the government has decided that households are too little to not fail - because of this the system will most likely collapse under the weight of it all. A fire sale.
Everyone kept saying that "moral hazard" was a fools worry. Well, it's a good thing we're all smarter than that. I mean if we're going to have a complete societal implosion, then at least we didn't worry about it all this time.
Thanks for the post Mr. Krasting.
I have read some stories on several sites/threads where people talk about "ruthless defaulting" etc.
On a huffpost thread a guy from CA insisted that he and 3 of his buddies had not made a mortgage payment in 12 months and NONE of them had received a NOD yet.
This subject will not be discussed or commented on by the banks because it is beginning to happen and their biggest fear (rightly so from their point of view) is that the ruthless defaulting strategy will pick up speed and gain critical mass. As an example, I wonder how many CIT or Advanta borrowers hit their lines to the max when the news hit? Wonder how many of them will say "screw it"?
So here's my poorly researched theory on the banks not NOD'ing or foreclosing on people....because its more than just the straight house value once sold versus income they are getting or not getting...every house is capital on their balance sheet, capital allows leverage, leverage allows more lending, more lending allows earnings, at 10 or more times leverage, so is a fantasy 600k on the books with a little income worth more to them than say a 200k sale after foreclosure (counting losses and costs of foreclusure), this gives them 400k more assets on the books than they would have if foreclosed, it the capital from that fantasy house value worth the lost income/cold cash from selling hosue..how much is 400k of book capital worth to them in terms staying solvent or in terms of earning more from 400k leveraged out to loans of 4,000,000?
I have noticed that non-banks, securities holding houses are much more efficient at foreclosing.
Florida blog comments show people that have been in houses for two years without being kicked out, and that's with out legally fighting, and even when bank supposedly forecloses, they often don't finish it by seizing house.
My BofA Heloc sent me a letter saying I could pay interest only as long as I liked, even tho it was time to pay more.
We will end up with a defacto Year of Jubilee, push the reset button.
there are 5 main reasons the banks are slow on
nod
1. they want someone to occupy the place if for
no other reason than to keep rats away
2. they want to keep the inventory off the market to
prevent further detoriation in housing prices
3. they would eventually have to sell the property
and realize a loss
4. credit events would occur which would trigger
massive numbers of credit default swaps which
would literally nuke the financial industry
5. they are so far behind and buried in
foreclosures that many folks are simply waiting
for the legal staffs to process the paperwork
6. The banks do not want the liability of property taxes or securing the property from getting gutted.
Years ago, something like this would have been the last resort. A lot of folks out there may have stopped to think "What would the neighbors, our family, our friends think?"
Now it's obvious to a blind man that big business, the banks and the credit card companies have been raping us for decades. It's waaay past time they got some of their own back imho, ymmv.
While I have no plans to do this, bankruptcy offers powerful incentives to those who hated the concept of a "bail out" and in effect, "want a refund".
Only in the USA can Congress let the Fed give money to banks so they can loan it back to us at a high rate of interest.
Those who legally qualify discharge their debt, and can write off hundreds of thousands of dollars. Any income they earn, they keep, no longer having to pay credit cards, mortgages, etc.
A clever, calculating debtor can in effect, take back what Congress took from them.
I can't say I would blame them. Morally, is a different story.
Morals died long ago and it was finally put under when TARP was approved and used to pay out bonuses.
The society the banks wanted is the society they will now get. Greed, lies, deceit where everyone is only in it for his own benefit.
Good luck to us all.
Morals died long ago and it was finally put under when TARP was approved and used to pay out bonuses.
The society the banks want is the society they will get. Greed, lies, deceit where everyone is only in it for his own benefit.
Good luck to us all.
"Only in the USA can Congress let the Fed give money to banks so they can loan it back to us at a high rate of interest."
It's worse than that. The bank is charging you interest for money they create out of thin air, through the magic of fractional reserving:
they take in $10 of deposits. they lend out $100 in loans, and charge interest on all of it.
Literally a license to print money.
The Federal Reserve system is essentially a private banking cartel which was created in 1913. Unlike what Lincoln did with greenbacks, all new money is created with a debt attachment. A little math will show that results in there being more debt in the system than money. If we do not break that cartel, the cycle will only continue.
I thought it was $300 in loans? 30/1? 10/1 is so 20th Century
naw you're talking about iBanks where they don't even have to lend things, they just slice and dice stuff that other people lend, so that you can't tell if it's a bet on the winners or a bet against the losers. One is always slightly larger than the other, but either way, they only have to lose 3.5% in one quarter to blow all of their capital. You know. It's the new math.