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A New Wave of Defaults?
I have been working with a young couple for a year now. They have been
up against it. They look pretty typical. They bought an apartment with a
first mortgage and low down payment. Then they made improvements with a
HELOC. He lost his good job and now works for less. She works long
hours and they have a kid.
They are underwater on the 1st mortgage so the HELOC is worthless. Their
monthly cash flow including debt service has been negative for a long
time. They have been paying the mortgage(s) by drawing down more on the
HELOC.
I advised them a year ago to stop the madness. They tried to contact
their lenders for assistance but were told they did not qualify for a
re-financing, as they were current on their mortgage.
I told them to stop paying. But they would have none of that. They had
built up a credit rating that they were both very proud of. They did not
want to lose that. But more importantly they felt that walking on IOUs
was something that morally they could not do. I told them they were
nuts but that I was proud to know them.
I sent them a link to last week’s Barney Frank letter to the big banks
telling them to write down non performing second mortgages. I sent them
the link for the BoA story and their program to write down principal for
delinquent mortgage debt.
They called just now. They made up their minds. They will not pay either
the 1st or the 2nd this month. The “entrance fee” to getting the debt
relief they need is to not pay any longer. The cost will be a tarnished
credit. They no longer care.
Does this story mean anything in the Macro Big Picture of defaults? I am
certain that it does. A rising trend is about to become a rogue wave.
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"I don't understand the need for the TBTF middle men."
So sorry, but they're the only indirect, less than totally blatant way of obtaining quasi-legal bribes... I mean, campaign donations and perks.
How about a 3 year moratorium on interest. All mortgage payments go directly to principal. Fuck the securitization....
this idea makes too much sense for it to ever become reality.
Zero Interst Rate Policy for the masses? Sir, be careful! What you speak of is powerfully effective stuff, and reserved only for the select and priveledged few that have been sacredly prepared through Ivy League educations to handle that which may only be dispensed via the discount window.
Now there's a common sense solution. Investors get their money back, just without yield. Offer this to anyone with 20% or less equity.
but I'll take it further. Those who qualify for HELOC (20%+ equity), also have the same deal. 3 years interest free. Imagine what that would do to the economy. Remember it's the compounding interest that kills us.
“The most powerful force in the universe is compound interest". Albert Einstein....actually, i don't really know if he ever said that.“The most powerful force in the universe is compound interest". Albert Einstein....actually, i don't really know if he ever said that.
ROFLMAO! thank you...it was looking to be a very grumpy morning.
I understand being morally responsible- I admire that couple for wanting to do the right thing. But why should they? Most of Congress is so damned crooked they'll have to stick a steel pipe thru their ears and screw them in the ground when they die. The TBTF banks have been rewarded for their bad behavior. In the meantime, the most responsible taxpayers and hardest working people will be penalized with higher taxes and an eroding currency. I say do what you have to do. It's business. Do what's best for your family and your finances and tell the bank to shove it up their ass. If you have to- walk away- guess what? Life won't come to an end. The biggest thing you will probably feel, is relief.
"Most of Congress is so damned crooked they'll have to stick a steel pipe thru their ears and screw them in the ground when they die."
Har! I like that. However, I would think they'd want to stick that pipe elsewhere so as to straighten them along their longitudinal axis in order to allow the use of conventional burial accessories.
I think morality dictates that you do not feed the criminals. I think morality dictates that you stop paying your mortgage and spend more money stimulating the local economy or saving it in a local credit union that actually loans to small business instead of gambles it on wall street. The highest moral ground is doing what is best for all not your individual pride.
high moral ground= whats best for all sounds good , but got a lot of people killed too.
Are you back from the trip? How is it MH?
+1 LOL
Just extend that logic to every crime there is and you have the definition of hell.
Extend and Pretend is only rational when
you believe things will turn around.
Slowly more people are beginning to take
the red pill. They accept that either a
tipping point has been reached or that
a sea change has occured. The old rules
are a legacy that no longer matter. An
entirely new regime of rules now hold
sway.
Once people reach this point, yes they
will be in a funk for awhile, but they
will start to come out of that and
prepare. They will find others that
are further down this road than they
are - maybe they will listen.
The more people that stop trying to
maintain legacy positions and are
prepared or partially prepared for
what is coming the better. Sites like
zerohedge are important because people
that are "almost" ready to throw in
the towel will find help for their
thinking.
ROTFLMFAO! What a bunch of idiots/losers/sheeple.
Show some sympathy GG. Yes, we at ZH know a credit rating is bullshit. However, the sheep have had their brains washed and rinsed and have been taught that a credit score is something to be proud of.
It takes time to unwind this brain conditioning. These people saw the light, even though it took a while, good for them.
Time and time again, Wall Street exploits the stupid, this is just another case of the same thing. Instead of saving their cash and getting rid of the house, their idea that they need to "do the right thing" has ruined them financially.
They kept themselves enslaved by the ridiculous sense of morality that paying your mortgage actually reflects on who you are. They forgot that the banks were taking advantage and exploiting this nonsense, which is why everyone was rating subprimes at AAA, because "people would spend less money on food than stop paying their mortgage".
I don't feel sorry for them, because they were stupid. We need to train our kids that there is no such thing as "morality" when it comes to financial matters. Do what makes the most financial sense. This is what Wall Street does, and so should we. Fight fire with fire.
"Do what makes the most financial sense. This is what Wall Street does, and so should we. Fight fire with fire."
Unfortunately, the game is massively rigged. Heads they win, tails you lose.
Well I sure as hell knew we were in a bubble and sold my house in Arizona at the top. It wasn't rocket science. I saw all of those neg-am IO no money down schemes going on all around me and knew the end was coming. Why was everyone else so unaware? Sheep/herd mentality, that's why.
Housing going up and up was like the Nasdaq in 1999. Many people wanted a piece of the home ownership profit potential--the homeowner ATM as I like to call it. And now I am also subsidizing people that had 30 year mortgages from 1990 and refi'ed their way into scuba gear as well. I'm sorry but it is a bit irritating. Those who put 20% down and are underwater are no different than the housing crash in NY from Oct 1987 to late 1991. I knew many folks in LA underwater for 10 years during the same period. Furthermore, a friend of mine bought a building in NY in 1984 and wasn't above water until 2000. We lived through that period without bailouts but this time is different because everyone plowed into the housing casino at once and the TBTF's almost failed.
I know that a lot of people thought they would be able to handle these ridiculous ARMS and IO's but it was all based on the premise that housing would never go down. Surely not ALL people are that ignorant.
So sure, don't pay. Stay in your houses. Wait for your loan to get reworked into something sensible like a 30 year mortgage. Most of those toxic neg-am IO pieces of shit should have been illegal in the first place. Option ARMS too. I'm all for that.
But in the meantime, I want my money back on the shoes I bought last week because they have been discontinued and were marked down 50% and for my neighbor to pay for it because I was an idiot not to see that they were "going out of style". My friend at Intel wants her $2 million back from when INTC topped at $72 in 2000 because a bunch of idiots ran up the stock and she forgot to sell it. And Phil Helmeuth wants his money back from Phil Ivey not only because he thinks he is a better poker player than Ivey, but because he is a big baby.
I'm sick of putting off the inevitable. Let it go down and let the debt get wrung out of the system. The longer we wait, the worse it is going to get. And in reality--this is just another bank bailout in disguise.
I might have woken up on the wrong side of the bed this morning...sorry for that, but what the hell is the difference between principal reduction and Santa Claus when most people didn't have much skin in the game in the first place? I lost money on a house in 1998--I took my lumps and it sucks. But any asset purchase is always a risk. And I have never owned a home as an investor--just a place to live.
Whatever. I appreciate your work Bruce. I just think it all delays the inevitable total deleveraging.
Exactly. By making new rules to reward bad decisions, the government and now the banks is creating a new bubble. Why are 'risk assets' like equities going up? There's no risk! Uncle Sam will take care of you! Buy a condo with an FHA loan in Florida where the seller makes the down payment (sure, no scam there). No risk, right? The bottom is in.
No new rules, no exceptions. Bad banks should fail. Individuals who (unfortunately) made bad investments should declare bankruptcy. Time to clean house before the madness sets the world on fire.
Sorry, I can't agree with that. If you take on debt, you should do your damndest to pay it off. It is a contract. The other side may be immoral. Everyone might be doing it. But you don't walk away unless you have no option.
If you cannot pay, then getting a write-down makes sense. But that doesn't mean you should take advantage of others. That's what Donald Trump does. It may work, but it is immoral. Legal, but immoral. If you are going to take that approach, then quit whining about Goldman Sachs, et al. If it is survival of the fittest, you should look up to them, not berate them.
It may hurt me financially, but at least I keep my integrity.
If everyone did this, we wouldn't be in the trouble we're in now. It was the lies, the someone will bail me out attitude, the everyone does it mentality, the greed of Wall Street, the greed of politicians, and the greed of speculators that caused the mess.
Best answer of all is not to take on debt, or at least more debt than you can manage even in a crisis.
That, my friend is Christian ethics. If it makes me a fool, so be it. I don't steal just because everyone else does it.
You cannot serve God & mammon
+ 56,216
OK, I understand that a lot of relatively innocent people are getting reamed nowadays. And it is not JUST their fault. Plenty of blame to go around.
But, you take on a debt, you better be real serious about paying it off IMO. People should pay their just debts.
I am not a sleazy mortgage broker or a sleazy Wall Street bank.
I am an Asian Rolling Bearing.
"Best answer of all is not to take on debt, or at least more debt than you can manage even in a crisis."
http://www.usdebtclock.org/
as KD would say, "yeah right."
It's not my debt. And if all goes well, I won't be here when it comes due. I didn't ask for it, I didn't vote for the people responsible, and I don't intend to pay it.
Then you must not vote. You will pay it, or you will go to jail for income tax evasion.
The ethical bonds have been broken (by government, corporations and banksters). There are no "rules" anymore, and I am not going to be played for chump anymore. I will fight these criminals by any means available. Thanks to zerohedge for all the great suggestions.
I mean I'm getting out of here. At least, I'm trying to. It ain't easy
"you will go to jail for income tax evasion."
not if you have very little income, as defined by the tax code.
nothing illegal about being poor...yet.
You are right and over 50% of Americans don't pay income taxes anymore. I think last year the balance tipped in favor of the non payers.
In the current climate you need to be really rich or marginally poor. It's the poor chumps in between that are carrying the painful burden of socialism's costs. Granted it looks like Barry is going to make a half hearted attempt to burden the "rich" a little more, but it will be the $50K-$250K income that will feel the socialist reforms most. They will continue to feed on the middle income wage earners.
Walking away when you can't bear the obligation isn't stealing, provided you leave the copper in the walls and the appliances. The bank gets "their" house back. Need I remind you, even though the proverb admonishes us to neither a lender nor a borrower be, the concept of Jubilee is also part of the Mosaic tradition.
Exactly...compare apples to apples here mouse.
I agree, if you cannot pay, there is nothing wrong with walking away. That is the contract the bank signed. That is the risk they took on and was embedded in the interest rate, and so was paid for.
I'm saying the problem is when you can pay but choose not to do so to get out of a loss position. That's when it would be wrong.
If people who can pay walk away, then everyone will suffer as the interest goes up for everyone.
I know it is going on, and I know that is what our moronic (at best) government is incentivizing. They are creating moral hazard, but that doesn't mean it is right.
I think we might be in violent agreement
personally i'm with you mouse. but you know what if that's the behavior they wish to reward, fuck it, give them exactly what they're asking for. i know that little mouse keeps whispering that this may play right into their game, but even if it is, again fuck it, we're just one step closer to the endgame then. and in the endgame, the FICA will mean FUCAll.
what if the loss position you find yourself in was brought about, through fraud and manipulation? should you still feel obligated to fulfill a rigged agreement?
Well, there's fraud and there's fraud.
Do you mean the "fraud" of so-called predatory lending? Yes you should pay. There's no such thing.
Do you mean a seller note from a now-bankrupt developer that did not complete the project? Legally, you might be obligated to pay, but I don't think you would be morally obligated. Did he fail because he was crooked or was it due to economy? That is, did you knowingly take on the risk of his failure?
Were you manipulated into buying an option-ARM? Sounds like a personal problem
I can't think of many people who were tricked into buying. Loan disclosures are pretty straight-forward.
No simple answers. Depends on the situation.
Just my opinion.
There's another kind of fraud. The fraud of entering into a contract where you understood the terms but didn't know that the terms could be manipulated against you, with the specific aim of seizing property. I am of course talking about the fraud of central banking / fractional reserve banking, where a central monetary authority can expand and contract the business cycle at will in order to create conditions most favorable to its client, the big international banks.
This is criminal activity by any definition; will we tolerate it? Should we?
It is critical that the rule of law be upheld, and be seen to be so. Recent actions by the government and the money-center banks seem to be aimed rather at proving what they can get away with. This is shockingly dangerous behaviour and must be reversed. Denninger, for all of his faults, rails often and harshly against the subversion of the rule of law. An informal but widespread recognition by the masses that the rule of law has been suspended is all that stands between us and reverting to a Lockean state of nature, with its attendant state of war:
§ 16. The state of war is a state of enmity and destruction; and therefore declaring by word or action, not a passionate and hasty, but sedate, settled design upon another man's life puts him in a state of war with him against whom he has declared such an intention, and so has exposed his life to the other's power to be taken away by him, or any one that joins with him in his defence, and espouses his quarrel; it being reasonable and just I should have a right to destroy that which threatens me with destruction; for by the fundamental law of Nature, man being to be preserved as much as possible, when all cannot be preserved, the safety of the innocent is to be preferred, and one may destroy a man who makes war upon him, or has discovered an enmity to his being, for the same reason that he may kill a wolf or a lion, because they are not under the ties of the common law of reason, have no other rule but that of force and violence, and so may be treated as a beast of prey, those dangerous and noxious creatures that will be sure to destroy him whenever he falls into their power.
§ 17. And hence it is that he who attempts to get another man into his absolute power does thereby put himself into a state of war with him; it being to be understood as a declaration of a design upon his life. For I have reason to conclude that he who would get me into his power without my consent would use me as he pleased when he had got me there, and destroy me too when he had a fancy to it; for nobody can desire to have me in his absolute power unless it be to compel me by force to that which is against the right of my freedom - i.e. make me a slave. To be free from such force is the only security of my preservation, and reason bids me look on him as an enemy to my preservation who would take away that freedom which is the fence to it; so that he who makes an attempt to enslave me thereby puts himself into a state of war with me. He that in the state of Nature would take away the freedom that belongs to any one in that state must necessarily be supposed to have a design to take away everything else, that freedom being the foundation of all the rest; as he that in the state of society would take away the freedom belonging to those of that society or commonwealth must be supposed to design to take away from them everything else, and so be looked on as in a state of war.
These words by Locke are an apt description of old-style justice seeking when there is no higher authority on earth to which to appeal. We risk too much.
dela, personally i don't feel obligated to do anything, except when i choose to do so. all choices have consequences. we must all decide for ourselves what choices & what consequences we are willing to bear in our lives. that is a personal choice, and i choose to believe that 'karma' is more than a factor in that decision than anything else. i think what a.mouse was alluding to was more in line with that reasoning than the legal ramifications of it.
but to answer your direct question, no, absolutely not. but that's my choice and my choice alone and i'm willing to bear the consequences of that choice. i do not expect anyone else to make that same decision based on my decision.
by the way, you should ask that same question over at HuffPo the weekend before 4/15.
Donald Trump is rich as shit, owns golf courses, and is sleeping with a hot Eastern European chich half his age.
Just sayin'
Oh, he gets away with it, and I am constantly surprised how lenders fall for it over and over. He is dishonorable and has ripped the faces off many a lender, but they come back and say, "Thank you sir. May I have another?"
On the other hand, he is on TV and so is better than you or me.
Sorry, itchy mouse finger
I have told many that have come to me for advise that it is just a Business decision. There is no morality about it. The Banks do it you can too.
It will hurt their credit for a while but with everyone in the same boat at this time the stigma will be reduced. Banks will eventually have to reduce their lending standards as they will have no one to lend to.
So, take the credit hit, move on and start to rebuild.
Agreed, I have been saying this for months. If you are underwater, just stop paying.
Credit "score" is the most meaningless thing in the history of the human race.
Credit Score is not meaningless when they need to get that credit card to buy the groceries. Cash is saved for weed.
Oh, forgot to add-- and if I had a 1% (or less) borrowing cost (like some bank holding company), I could have a $750K mortgage for about $2400/mo. Credit cards --no problem. But nope, the vampire squid's gotta get their tribute come hell or high water. Oh, and if you don't pay you're a bad, evil, collie molesting reprobate.
My collie takes umbrage to that remark.
Agreed, Gordon. A credit score is indeed useless when there is no more credit. I'm more surprised by the huff-n-puff by a few people posting who think that folks walking away (or staying and not paying) on a small % of mortgages is what caused this blowup. Wrong target! Way late on the chain. Getting your cc int rates jacked up from 8% to 32%, getting your wages reduced at work (or losing that previous 'solid' job), the unavailability to refi your existing debt (even if you've always paid on time)--- those are the kinds of events that hit individuals before they have to make a decision on default.
The basic is a massive ripoff by the highest level bankers et al, who've instructed the lapdog media to go after some Joe and Mary Deadbeat as the cause of all our woes. That makes about as much sense as you (as a slave) beating up another slave because Da Man said slave #2 wasn't working hard enough and you all were going to be punished. Fuck! It's slavery!! Beating up the other slaves will not handle the source of your suppression, no matter how many you beat or how often you do it.
Yeah, I'm suprised that the huff-n-puffers have even found this site.
How come that this isn't happening in the bigger EU countries like Germany, France, Belgium, the Netherlands, Italy... there prices of real estate are still going up. In 2009, prices went up 5.2% on average. Same thing for azia, but with even higher price increases.
I wonder about the same thing. Why is this so concentrated in the US? If I took a short position on RE back in 06, I'd be sure to keep pounding it down. I don't know but then again take a look at japan.