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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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SD - I can't speak for all, but in the case of Germany, it's because
1. They don't have a 30 yr. mortgage vehicle. Mortgages are much more a rolling refi where you don't have an actual "pay-off". At the end of the term, whatever your remaining principle balance is gets re-fi'd based on present interest rates. You do have flexibility on your term, 3, 5, 7 year, and the longest I've seen is 10 years. I have a second home in Bavaria, and when rates in Germany were at 5% back in 2005 or so, I locked in 10 years while the getting was good.
2. Germany banks never allowed the shennanigens that US banks did. They actually required that:
a. You have a pulse.
b. You have a job.
c. Your debt to income ratio was something affordable.
So, no housing bubble in Germany, because consumer credit was kept in check, but that's not to say that the German banks were any smarter in the end. Everything that they saved by not letting the German Joe Sixpack use his home as an ATM, they subsequently lost by speculating on our US MBS mess, and investing in other equally worthless trash coming out of Eastern Europe.
yes, real estate in europe is different
europe has smaller older homes, it is the norm, plus one small car per family for the most part, petrol is expensive, with there sociaist programs, in the end it kind of evens out
yes, prices are high but on a gross adjusted income, not too bad, it's all relative,
also alot of real estate is family owned for generations owned clear and free, thus, supply is not like merica where there is unlimited land, with new roads for mickey d mcmansions
So much of banks "profits" the past couple quarters has been taking down loan loss provisions. Woe unto them when the next wave of deflation hits. Don't these people watch tv? Tsunamis ALWAYS have multiple waves.
And hyperinflation is a deflation caused currency event...
You're damned right it does. The numbers don't add up, especially on retail, and money.
Listen, you're folks just caved later, much later. People are on the internet, they know this stuff goes on, yet, no one in there immediate circle would ever ever admit.
This is Bens problem, you save the banks they embarass and screw everyone with bonus's and more shenanigans, and no one does crap about financial reform. This is the huge un-intended consequence, you see every tom dick and harry getting a break,or committing a crime and finally you put on your Risky Business and say, what the f............a credit score, jeeze people act like those are badges of honor or something, roflmao, if you got cash people take it, if you got the down payment people luv you
Think about it, ur underwater, 2k a month, 12 months, tax free, cause if you does this u might as well fudge that, and alot of problems are solved, hmmmmmmmmm, just like the stinking banks, lol.
If you talk to folks on the inside, there own files are so screwed up, they are so far behind, hell they don't have the money to hire more staff, it woud look bad on the bottom line, lol..........
Todays new program is a joke, they can't even get folks on the phone, let alone do a refi, lol.
Thousands of unfortunate stories like this, on Mainstreet. Plus, people are burning out (financially and mentally).
The collective exhale will be a cold wind.
Plus, people are burning out (financially and mentally)
This is so true and it is very sad, particularly the mental anguish folks are going through.
Bruce: it is so wonderful of you to help these folks out...you're a good man!
Thanks DH. I did nothing for them. I told them a year ago that they were on a crash course and should stop paying and drawing on the HELOC to do it. I would give the same advice to anyone who would listen.
However, the consequences of my own advice scares the shit out of me.....
bk
Corporations just default on their debt, stop paying their bills, go into bankruptcy, get reorganized and come out smelling like a rose with a clean slate. Wall Street considers them smart businessmen for doing that, and it lines up to buy the new debt/equity the minute they come out of bankruptcy. The company is treated like a conquering hero, with no stigma attached to them whatsoever. Congress, bought and paid for by big business, thinks that's a swell idea.
But let the little guy who got hit by the tsunami do it and he's a freaking criminal. The fact that a reasonable man who worked hard, had a good credit history, did the right thing his whole life, and maybe even put 10% down originally, could not REASONABLY have foreseen losing 40% or more of his principal value in the house, and maybe his job too, doesn't seem to enter into the equation - he's still a criminal in most eyes if he does what corporate America does every day of the week.
that is right - the problem here is that normal people - who are not investment professionals and who had no idea that the United States real estate market was a giant pyramid scheme - got totally screwed.
Not the flippers or the speculators or the developers or the brokers ... Think of your average Joe - who had a good job, then got married - and soon enough the wife wants kids and a house in a good school district. So Joe puts down 20% cash on a house worth $500K. Then, suddenly, the house is worth $200K. That guy is wiped out, and can never recover. He was the last one to buy before the game of musical chairs stopped. Everyone in front of him got paid, and now he - and his family - are fukt.
Ordinary people - dentists, office managers, truck drivers, video game salesmen ... had no way of knowing that the real estate market was at the very edge of a cliff and would soon lose 80% of its value. The brokers did know. So did the bankers. So did the regulators. So did the Federal Reserve.
To pretend that this is all some normal 'economic correction' is self serving delusion. Blaming the victims in all of this is despicable. The people that are being wiped out are those that worked hard, saved, bought in ... NOT the idiots who got no doc BS government subsidy FNM bull s*.
Wall Street needed an exit strategy for all that paper. The exit strategy are the poor fools who made the mistake of having a family at the WRONG time and being the "last sucker in" - having no idea and no way of knowing they were to be sacrificed for the good of the bond-holders.
Now, the USG is forced into hyperinflation - because the sight of tens of millions of suddenly homeless "upper middle class families" would be too much for the political class to withstand. People know they have been tricked and sold down the river by Washington and Wall Street. They don't buy the idea that "well, sometimes you win sometimes you lose." They feel in their bones that they've been conned. And now they want their money back and they want to see high ranking financial professionals, regulators, and public officials to go to prison.
"And now they want their money back and they want to see high ranking financial professionals, regulators, and public officials to go to prison."
Something which, unfortunately, they'll never see since the perps are either part of the government or effectively own the government, so they are the ones actually in charge of both the legal system and the prisons.
great comments madcow
my only question is, where's the visible outrage? Seriously, on the surface there is some anger and resentment, but at some level people must realize that this is a generational theft of such vast proportion that I am continually amazed there are not demonstrations bordering on riots in Washington and on WS. Instead, people bitch privately, but no acting out. Does this continue forever, or will there be a tipping point where everything just explodes out of control.
There are a lot of fat cat criminals who must be wondering the same thing.
"my only question is, where's the visible outrage?"
The minority whose financial wellbeing has already been negatively affected in one way or another, while being well aware that something is seriosuly wrong, don't know who to _correctly_ blame. The majority, who have not YET experienced a major dent in their bread and circuses don't care enough to get off their sofas and, if they did, they'd probably be misinformed anyway thanks to the maniplated and/or superficial _garbage_ they get from what we call our mainstream media.
exactly.
right now, people suspect something is deeply wrong, but hold out optimism for change they can believe in. any sign of improvement is embraced with zeal and delusion.
what breaks the delusion is financial assets suddenly losing their value (mutual funds, stock funds, pension funds, insurance polcies ...) or prices at the grocery story suddenly doubling and tripling in prices. or tax increases suddenly making other bills unpayable. or massive and sudden tax sales, eviction notices, foreclosures, etc. etc. etc. that's when it becomes impossible to pretend.
Put yourself in the shoes of Ben Bernanke. All he can do is admonish Washington - gently, for fear of retribution and criminal indictment - and suspend all deflationary dynamics (including tax abatements, foreclosure suspension, accounting rule relaxation, etc etc). But the rents shut down because there's no cash flow. The engine shuts down. The pyramid scheme blew up in AD 2008, in the United States of America.
Now, the system collapses - or they replace it with another pyramid scheme twice as large. and quickly.
the tea pots still on simmer . Think of Pre Pearl Harbor . When nearly every Anerican feels and then KNOWS they are being personally assaulted by Washington , Big Banks , Big Pharms, and Corporate America , the outward workings of the inner feelings will explode . Rightfully and justifiably, but the end result will not be good I fear .
What about the mental anguish I have gone through? Did everything right and stayed out of that nasty market but rented and paid (still pay) premium rent (to live in a premium location) — no bail outs for me, while tens of thousands haven't paid their mortgage for two years, all the while taking the tax deduction that I subsidize. Now on top of that they want me to bail them out on their speculation. Nobody bailed me out on my loser trades. F' them and their grubby pick pocket hands.
The essence of this argument is not who wins a pot or who loses a pot, as Bruce suggests. For after all this is not poker. This is life. And in America we were proceeding on a program where individuals could earn money through their labors and use that money for their own interests.
What is being suggested here is that keeping that money by responsible action means a person has won something that other people need and a third party can decide who can take that money and give it to the “right” people. Obviously, those will be the people that the third party selects.
This kind of arbitrary theft reminds me of the arguments Bruce put forth this past December when he called for a one-year payroll tax suspension to create jobs and “put hundreds of billions back in people’s pockets.”
The “flaw” was that it would devastate the Social Security Trust Fund. So he proposed a property rights grab from targeted seniors. It was socialist to the core; he wrote:
There is a way to do this Revenue Neutral to the Trust Fund. It is relatively easy. You just have to cut current and future benefits that the Fund pays out. That would be extremely unpopular...
There is one approach that could work. A “means” tax on benefits for a stated period of time. A simple rule: If one has taxable income over $150,000 they do not get benefits for the following year. If this were in place for approximately five years the Fund would have offset the shortfall incurred in the first year where no taxes are collected.
The number of individuals who are both 65 and earn $150,000 is not large. They may yell and scream at this, but they are small in number. Those same individuals have significant irons in the fire. They would benefit from the robust economy that would follow. To make it fair, the amount that had been withheld could be deducted from future death taxes that will come due. My point is, this deal is sellable. The bulk of the "Panthers" would love it.
Someone suggested at the time that it was a fine plan if Bruce used his own money, rather than other people’s. Bruce’s current recommendations seem to ignore the fact that many underwater homeowners put down zero to 3%, were given cash rebates to take out the loan, pay as little as 3% in mortgage interest, receive property tax relief, were provided a one-time insurance payment and came out better than if they were paying rent.
As for myself, I don’t recall ever requesting this game of poker.
You've done well. Congrats. Think of it like poker. When you win a pot they rake a bit for the house. You just won a pot and now have to pay. But you still won. Don't sweat the small stuff.
Having pondered this issue some more from earlier today I think that there is plenty of blame to go around.
Not just the unwise folks you counseled (who essentially chose to get in over their heads), but the bankers, brokers, Wall St. cheats, derivatives, Paulson/Geithner/Bernanke, Bush/Obama, and Congress spending too damn much as well. All of 'em. All of us too...
You sort of point out that there is going to be a LOT OF PAIN to come. I believe you are right.
Also, I have enjoyed reading many of your articles. Keep up the good work. I really enjoyed your article about the Greenwich party you went to over the Holidays. Always brings a smile to me when I think about you tossed in the tank with the rich snobs.
Taking a tax deduction for interest not actually paid, (I believe that is what you are referring to) would get you audited pretty damn quick. That's an automated flag for the IRS because the interest number gets reported directly to them by banks. Now, if you are cartoonishly wealthy, you can just pay Earnst and Young 40K to use some accounting tricks and off shore accounts and you'll shave a couple million off of your tax bill. That you can get away with.
Agreed. People are just not mentally equipped to deal with this sort of stress. They are not equipped to "go without". Our society's attachment to the meaningless, material, status seeking existence is going to undo us big time.
If you can, detach yourselves, now.
Very accurate SteveNYC but we are witnessing in daily life a type of detachment born from necessity for many people.
I look around my major Urban environs each and every day as I wander to look at my retail properties and what I see is an ever increasing plethora of vacancies and underutilized Merchants.
People are "getting it"....they are cutting WAY back---not totally but noticeably.
Wait another 9 months and it will be shocking how much we will see of the LOSS of the old normal.
Another leg down of 15%-20% in consumer engagement will be damn near overwhelming.
And no Job growth?
And more negative household budgets?
WHEW....these quibbles about walk away Homeowners will be old news.
Great anecdote... My completely irresponsible friends were all insolvent by 2008.
This is something different. A bigger trend is emerging, where the silent majority of responsible, fairly conservative middle Americans are making a business decision.
I ve got a similar case. However in my situation a client is more than capable of making payments right now but can not refinance his mortgage into the traditional fixed loan because the house is underwater. Now given the loan is option adjusted & will triple in 2015 this guy will be facing a sinister choice, retirement or underwater home.
I suspect that in western states especially in CA, there are plenty of people who are bound to default after their principal payments and new rates will kick in sometime in between 2013 and 2017 (first 10 years of interest payment only looked very affordable but then .. no one has illustrated to those people what will happen later or they didn't care or ... ELSE.)
This is the catch. The banks said "look at this shiny mortgage with this low payment! When the payment goes up, all that you have to do is refinance."
Now they won't let you refinance. Lowest mortgage rate in ages and all that the banks will say is "No soup for you."
An Option ARM in CA? He should just default now. 2/3rds of his colleagues already have.
Umm, good advice for some, terrible for others:
http://www.usatoday.com/money/economy/housing/2010-03-25-underwater25_ST_N.htm
and I wonder if BAC is opening up a Pandora's box here:
http://seattletimes.nwsource.com/html/businesstechnology/2011432198_mortgages25.html
Pretty soon, everybody will be asking for reduced mortgage principal!
Do you really think any mortgage process without principal reduction make any sense?
If at all you are surpised at the stupidity of the people
who are underwater and yet pay the mortgage.
The only sensible way is to
"WALK AWAY IF YOU CAN! WALK AWAY WHILE YOU CAN!!"
Each time you pay your mortage on an underwater home,
you are punishing yourself in the name of morality!
Come on each of us make quite a few mistakes in
our lives. This is one of those .. buying a home
you can't afford which was sold to you bu banksters
whose only interest was the bonus at the end of
the year.
LET THE BANKS ALSO PAY!!
Treasury again is helping the bank reduce the
losses by pilfering from the tax-payers all in the
guise of helping the home-owners ..
It is a pity America is acting like a third-world country
Actually yes, I have done everything right, played by the book, been responsible, and I get nothing while those who behaved like idiots get bailed out all around me, with my tax dollars!
I want a mortgage reduction, and quite frankly I fell I deserve one.
What happened to the debtor's prison?
debtors' prisons were created by the rich powers to enforce pay-back of debt by the not-rich powerless. It was a tyranny by the rich powers, because they could manipulate wages and prices of food and housing to pressure and force credit upon the not-rich. And religion/morality played a role to convince the not-rich to accept their lower status. When the not-rich realized the unfairness of that tyranny, the rich powers had to change their system...the debtor's prison was abolished.
However you define money-- whether currencies, coin, goods & services,gold, iou's--- all money-games are created and established by those who have it...any other money-game created gets extinguished and never established. Such is the power of the money-trap.
The money-trap might be expressed as: Any currency will become a tyranny if it is not tied, with transparent understanding, to delivery of actual goods and services. All fraud is a failure of that transparency. All promises and iou's and risk ventures depend on transparent, mutual understanding. The money-trap occurs when the transparency can be gamed to fake the mutual understanding,,, as via trickery, deceit, clever strokes, fine-print, omitted data, wrong definition, mis-translation, etc
Justice requires fairness.
Seek justice. Only justice. The rest of law is commentary and confusion.
macfly
Banks like BAC are now dependent on the US Treasury for survival and also I might add on their stock price. However, the TARP fund balance available is under direct control of Treasury after the extension. If BAC was bailed out again, politically there must be the chance that they will be repaid. If the stock price falls such that the initial investment took a huge haircut, much like the original BAC warrants, it would be very hard to justify another expenditure. Add to this the difficulty in BAC successfully offering stock on its own with any drop in confidence. In many ways the future of BAC in 2010 is dependent on its stock price.
From a business standpoint BAC = US Government. It is just a policy puppet at this point. A testing ground for extend and pretend.
So other than a huge waste of tax payer money, what is the purpose of BAC at this point?
1) To delay Bank recognition of real estate loss. Overall, it is important to delay this loss relative to Gov program timing.
2) Prevent a deflationary spiral by inflating (stabilize) real estate price.
BAC has become just another tool at the mercy of the Treasury and FED. An extension of FED powers if you will. The insolvent BAC current loan actions do not have any bearing on original mortgage agreements from the standpoint of what's fair in the market.
I lot can be learned from looking at the situation from a Bankruptcy standpoint. Which is what should have happended to BAC. That is, what would be the value of the loan if it was offered to another bank through bankruptcy. Well, once the appraisal was done the asset may be over priced by 40% depending on the location. In the end the FDIC would probably subsidize the loss anyway.
The bottom line is the programs being offered to "deadbeat" mortgage holders is not to "help" these people as a matter of policy, it is to extend the banking system loss recognition to protect the banking industry. Which, by way of action, is the highest priority of the FED, Congress and the Administration. The FED must control the rate of de-leveraging real estate debt, regardless of who may benefit or not.
Good place to understand the misdeeds of congress and TARPism links.
http://cop.senate.gov/
Under Reports tab, the web page will have links to the right side including SIGTARP. I must warn you though. That in reading items like the latest SIGTARP report to Congress, it will probably make you ill.
Mark Beck
When they nationalized F/F, i told a colleague "heaven help us if everyone wakes up one day and stops making payments on their conforming mortgages". Seemed like low risk since coordinated action like that must overcome significant inertia and (for some) a moral belief that a promise to pay must be a promise kept.
When individuals such as those in this article are backed into a corner financially, it becomes simple self-preservation. The risk of collective action is much much higher. We have 12 months more. Maybe less.
Macfly -
1000's of Americans , specially the "late boomers" feel the same way as you , myself included . Reward idiocy " in some cases" and make those responsible , to the old rules, accountable to the fools. For myself , the "unfair" seems no different than a sibling getting a cookie and I did not. However - I beliveve Gov't wants to split us all, divide and conquer in any way possible , class warfare , interclass warfare , inter family warfare . By helping the dolts, and robbing the "haves" they accomplish the impetus for just that . I will not let my petty jealousies feed the socialist goal .
Starve the beast is my goal . Credit Unions , cash on hand , lots of it. Hard assets , not paper fiat crap. Dissing 401k to starve the lying beast .
There is a concept called equal protection under the law.
Nobody has brought up a constitutional challenge to this nonsense yet.
"Nobody has brought up a constitutional challenge to this nonsense yet."
Supreme Court interpretations of the Constitution have long ago made it irrelevant in many areas as far as the people are concerned. And there is no need for any kind of Constitutional challenge anyway. Many LAWS have been broken in the process of this massive fraud that led us here, but do you see the kingpins being prosecuted? Hell no, they remain in charge!
This country became a nation of men and not laws many, many years ago.
They tossed out the constitution some time ago. With the sociopaths who've been in control the last 20 years, we are all in deep sh!t.
I paid my mortgage off in 2008. I want a rebate
I say someone should organize a movement to get everyone to skip their mortgage payment for a month, say for the May payment.
I have plenty of equity in my house, and can afford my mortgage, but I would do it. So you take a ding to your credit, if you feel bad about it, you can always catch up next month.
But it would scare the hell out of the bankers, i can tell you that. Can you imagine if they got no mortgage cash flow for a month? That would be fucking hilarious.
"Can you imagine if they got no mortgage cash flow for a month?"
As much as they'd deserve that, recent events seem to idicate that in the end we would pay for it rather than them. Or, rather, we would be the ones getting it in the end.
I have been watching this "mob"' thing where people show up someplace and get ugly. A twitter thing? There is a lot of anger out there. Maybe you are on to something. Most people would not do this. They know that they would have to pay a big fine the next month. But if if is got visible and it had some type of a sponsor (I nominate Jimmy Carter as the spokesman) then you might just get 10-15%.
If 15% of all mortgages missed a beat it would be a massive event. It would mean that the next time it happened it would go to 30%. That would be the Black Swan that everyone has been looking out for.
I am pretty sure there are already 10% of total mortgages currently in some stage default. You would be adding 10-15%, which would bring the total to 25%. Of course Fannie, Freddie and the FED hold most of the paper, and at this point I wonder if they really care. The US treasury has backstopped the entire mortgage market.
I do like the idea, but I think those default rates will become a reality on their own soon enough.
Yeah macfly,
I want half of somebody elses mortgage reduction for not getting in over my head, and another half because I saw this mess coming and sold my house before the bottom fell out.
Fucking bailouts!~
Another vote of someone who bought only what they could afford even if they had a financial setback, and is current on it, and is getting raped from all directions by being honest and responsible. Course I also paid nearly 50% in cash so walking away doesn't seem like a good idea at the moment. I want my bailout. I want my "entitlements". I want, I want, I want, I want! You get the idea. Our country today is a triumph of immoral half-literate monkey kleptos.
Don't worry, consider those who fold their cards to the banks as newly signed foundation members for the NWO where membership gains you such priveledges as unlimited work opportunities for no wages
+84
-- People getting into too much debt, mostly their OWN fault
-- Entitlement mentality, a real killer for us.
Me too. I'm sick of this shit. The government steals money from me and literally gives it to bankrupt banks so they can pay out bonuses for performance. Now they steal more money from me and give it to banks to bail out people who bought as much house as they could afford based on better-than-perfect economic conditions, but who can't make payments when the economy goes in the tank (who'd've thunk it?). Why the fuck should I pay? Because it's the right thing to do? Who is there that's on top of this financial pile that's doing the right thing? No one, that's who.
Either the rules apply to everyone, or there are no goddamned rules and we revert to Locke's "State of Nature". This bit with the government picking winners and losers is a lot of horseshit.
The problem our government and the banksters keep changing the rules. Concepts like "good faith", "rule of law", "honest exchange", etc... have been tossed out the window. TARP was the end of any shred of capitalism and corporate responsibility. Your credit score is the invisible choke chain around your neck by your debt masters. They took "taxpayer" money to bail themselves out, now take some of their "out of thin air" money to bail yourself out.
It's one giant cluster fuck, and we are not getting our reach around.
Not sure if we're reverting to John Locke's State of Nature or if this amorality is top down, with people justifying picking my pocket because Wall Street is corrupt. But Jim Sinclair has it right today, "When the Devils are in charge, virtue become a crime."
Ditto. Great post. So where does this lead us?
Lose the debt.
Gain the gold.