The Economics and Ethics of Mortgage Default 16 comments
-
Font Size:
-
Print
- TweetThis
Noel Sheppard is mad at Kathleen Pender for educating consumers about their financial options. Pender's article is headlined "Are you an idiot to keep paying your mortgage?", and, yes, Joe, it does lay out a pretty strong argument in favor of going into arrears on your mortgage, in the hope and expectation that the loan will be restructured once you're 90 days delinquent.
It's similar to the argument that was put forward by Mark Gimein earlier this month:
Lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth. The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses. I see nothing wrong with that legislative choice.
Except now, homeowners get to have their cake and eat it: Rather than walk away from their house, they can stay in it, become delinquent on a mortgage, and then have their lender restructure their loan into something easier to repay.
A few caveats are, of course, in order. For one thing, your loan has to be owned or guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE), and it has to be worth at least 90% of your home's present value. For another thing, you have to be paying more than 38% of your income in mortgage payments right now. And then of course there's the ding to your credit, the importance of which is easy to overstate -- even the official FICO spokesman says that "one isolated delinquency will do less damage to your score than it has in the past," and that "if it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender", that's what he'd do.
If the government passed a bill giving $1,000 to anybody who asked, then it would be entirely responsible for every personal finance columnist in the land to give advice on exactly how to get that money. And the situation here is similar: The government is passing a bill which essentially gives money, in the form of greatly reduced liabilities, to people who default on their upside-down mortgages. Incentives matter: If you reward default in this manner, then people will be more likely to default, and quite rightly too.
Peter Schiff notes that the scheme rewards more than just default: It rewards seemingly crazy behavior like quitting one's job.
Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.
"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."
He's right: If you can get your principal reduced by hundreds of thousands of dollars just by quitting your job for a few months, that's a deal which makes a certain amount of sense. It's a pretty perverse incentive for the government to give you, but that's the hand that millions of Americans are now being dealt. And it's entirely the fault of the people who dreamed this scheme up.
Remember that it's not a crime to default on your mortgage. The banks are perfectly happy scraping around in the fine print of credit-card agreements to screw their customers; the customers should be perfectly happy similarly to optimize their own situation with respect to the banks. It's an unfortunate situation all around, but it's not something you can blame the financial press for.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 16 comments:
For instance, what if the law says that the gub'mint will have the power to collect any further delinquincies on revamped mortgages from the homeowner via wage garneshments or liens? How much fun would it be to have the IRS badgering you for a missed house payment the rest of your life like they do for people that are delinquent on their student loans now?
Beware, the treatment may be worse than the disease.
In CAL they can't, in most or all other states they can,
But if a person defaults on a mortgage, what other assets are they likely to have?
I read this morning that 25% of the modified loans are delinquent after the first payment beyond modification and 50% are delinquent after mulitiple payments. Why bother? Anyone who would consider this approach to the mortgage note they signed has no right to ever own a home again. In fact I have just bought some new appliances and will happily donate the boxes for their new home under the local interstate highway overpass. I hear they have lots of bridges in California.
By the way, anytime the government offers you money, the collateral is your soul. It is hard much harder to walk away from that lien than it is to walk away from the mortgage.
They're NOT... NOT reducing principal. They're offering- in a MINORITY of cases- a principal forbearance.
Two different scenarios.
Some of my family members are very old school (like you) and they think this is stealing from the gov't... I disagree. I'm making all my payments... haven't broken any laws. I also pay a crap load of taxes (with Social security payments that will, over the term of the loan, easily exceed the loan principal and market interest, the benefits of which (given the crappy state of SS) I don't ever expect to see).
Do you think my decision is immoral?
Is it immoral to engage in legal tax avoidance (for instance selling losing stocks, keeping winners)?
Where do you draw the line, Mr. Cornelison?
Most states are non-recourse. Even if they are, they NEVER go after your assets. It costs too much in litigation.
On Nov 18 11:25 AM NMWoody wrote:
> can't the lender come after your other assets if you default?
Then if somebody bought your house, the buyer often paid for the movers to get you out of their house (you had no money). Then there were your back taxes and several years of lax upkeep to be fixed before it could be sold. It never really paid well, but it was an interesting learning experience.
The whopping majority of homes went back to the bank because there would be no value left after paying off the mortgage. If there was people usually sold the home.
www.homepricetrend.com
You know what is really sad about 99.99% of every self-rightous blogger on the net? It's the stupidity of people like Schiff spouting off crap like this (see below).
Schiff: "The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."
What kind of total myopic moron says something like that without taking into consideration of people that have lost their job in this financial armageddon? We COULD afford our house payment until my plant was forced to cease operations because of this meltdown. But, I suppose my family is just one of those idiots who deserves what we're getting huh? Grow up you effing dumbass.
Oh and by the way, does anyone on the planet Earth know someone who has the ability to merely quit and re-start a job at will? "Hey manager Joe, I'll be quitting for a few months, but then I'll require you to hire me again - Just letting you know Joe."
Felix, your heart might have been in the right place with this article, but you're doing great injustice to hundreds of thousands of decent, hard-working Americans by letting someone get away with a comment like that without tearing their head off verbally.
It's going to be a great Christmas for my family. Merry Christmas Schiff.
I don't think he's referring to people with unexpected loss of income. Why are you so offended?
I agree, people who go in over their heads should not be bailed out. But in the end, we're still in a society where responsible people will somehow pay for the incompetent.
I'm sorry you lost your job, but if you feel you did your best, there's no reason to vent at others. If you're healthy and belong in the group of competent workers, I'm sure you will get through the hard times. Crap happens to good people even during good economy.
Greed will always get to people. It's just like prisoner's dilemma(sp?). Many will do what it takes to gain that extra million, even if it cost a billion to other citizens. Government need to put greed in check and I'm sure the rest will work out. Greed is the reason behind the messes we have.
Andrew
On Nov 18 11:25 AM NMWoody wrote:
> can't the lender come after your other assets if you default?