Interesting article… There is no question that this is happening, and happening on a grand scale.
I’ve made the following analogy: Who would walk into an auto dealership to purchase a vehicle, agree to terms for say a $35,000 automobile and just prior to signing the purchase order or lease agreement tell the sales manager that they’re going to pay $70,000 for the same car; just because? This is what many homeowners are facing with their properties. They had every intention of paying for the property when they purchased it, never imagining that the market was going to collapse. Many of these individuals took severe pay cuts and/or lost their jobs outright. In the meantime the Federal government has bailed out the banks, but not the individuals, and so these people are left with this dilemma: pay the mortgage knowing the money is being thrown away or make car and credit card payments.
In most U.S. cities people need cars to live, and with no credit and limited funds it’s difficult to get by. Therefore homeowners are forgoing mortgage payments in order to keep up with utility bills, car and credit card payments. Whatever money they have left, if any, they are saving for emergencies, as well as making modest purchases. These individuals are playing the odds, buying time and taking the chance that if they get evicted from their homes, should it get to that, they will take whatever money they have and rent.
If banks were smart they would cut their losses and start reducing principal balances on home mortgages to meet current market conditions. If not, they will certainly be stuck with a lot more homes than they’ll know what to do with. Anyway, in the end, banks will be forced to sell all the foreclosed or short-sale homes for less than what the original homeowner would have agreed to pay at a reduced (negotiated) price. TGO
Refer to story below. Source: BusinessWeek
The first wave of U.S. mortgage defaults was spurred by lenders who made bad loans and borrowers who wound up with larger monthly payments than they could ever hope to manage. Lately, something altogether different has been making an increasing contribution to soured debt: Americans choosing to stop making mortgage payments they actually can afford.
“Strategic” defaults accounted for at least 12 percent of all defaults in February, up from about 4 percent in mid-2007, according to a recent Morgan Stanley (NYSE:MS – News) report. Analysts led by Vishwanath Tirupattur classified a default as strategic when a homeowner who hadn’t previously been delinquent made an on-time mortgage payment one month; skipped payments for the next three months; and stayed current on other consumer debt of $10,000 or more.
Housing analysts say strategic defaults mainly occur when a home’s value has dropped below the balance remaining on the mortgage. A homeowner in that position may decide that continuing to make payments is throwing money away, or may default to get the lender to modify the loan. An estimated one in five U.S. homes with a mortgage has “negative” home equity, according to Zillow.com.
In March the Obama Administration announced it was coming up with a plan to encourage cuts to the principal on mortgages exceeding the worth of properties. Previous government efforts did not emphasize principal reduction but focused on lowering monthly payments.
Whatever you think of strategic defaults from an ethical point of view, they appear to be aiding the economy, temporarily, at least, by boosting consumer spending and allowing homeowners to stay current on their other bills. Consumer spending, which accounts for about 70 percent of economic activity in the U.S., rose at a 3.6 percent pace last quarter, more than economists forecast. The increase, the biggest since 2007, was somewhat puzzling considering that the underemployment rate was at 16.9 percent in March, near the highest level in at least 16 years. (The rate includes people without jobs, part-time workers who would prefer a full-time position, and people who want work but have given up looking.)
All told, borrowers who aren’t making mortgage payments are probably skipping roughly $100 billion annually, an amount equal to 1 percent of consumer spending, according to Mark Zandi, chief economist at Moody’s Economy.com. Zandi likens the money to “a form of stimulus, a little tax cut.”
Not all of that “tax cut” is being spent on iPads, vacations, and lattes. “Presumably these homeowners know they’re going to have to start paying again” to live somewhere, says Zandi. He suggests that falling delinquencies on credit cards and auto loans may be a sign that homeowners are using mortgage money to pay down other debt.
The bottom line: By not making mortgage payments on “underwater” homes, borrowers may be paradoxically helping to boost the economy.
