The Foreclosure Freeroll

Includes: IYR, KBE, KME, KRE
by: Kid Dynamite

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

Freeroll! "It's really been a BLESSING!" Of course, the blessing is that the banks have so many houses to foreclose on, that it takes them even longer than usual to evict delinquent mortgage holders, as we find out later in the article:

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

I wonder what happens to this "blessing" when the banks finally get around to these folks... I'm guessing it won't be such a blessing then.

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

OK - but again, like most of our other "solutions," this is no solution!

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers.

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”

Now, ignoring the bizarre sentence about taking equity out of their home to buy a truck for a prize for hired animal trappers, this situation reminds me of the old adage:
If you owe the bank $10,000, you have a problem. If you owe the banks $100,000, the bank has a problem.
Mr. Pemberton has turned this right back on the banks, and, quite frankly, seems to have them by the balls. The logic of "Eff you, we're not paying the $280k because, basically, the lender no longer has collateral for a loan of that amount - the house is only worth half of that," puts the banks in a brutal spot to negotiate from. Obviously, his situation is not unique, and the bigger problem for the banks is that once more people realize this, the effect will multiply and expand.
It's the ultimate financial game of chicken, and the delinquent borrowers may be starting to gain the upper hand.