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.
there was a good article about why people default when they could pay mortgage, turns out its cultural, or said another way, contagious, once you think everyone is doing it, you are more likely to do it...