Strategic default spreads like a virus

Posted on October 5th, 2014

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One of the great advances which has come from the internet is the quick dissemination of useful information. In short, secrets don’t remain secret very long. Lenders don’t want borrowers to know that their friends and neighbors have stopped paying their mortgages, and their lives have improved. Lenders want borrowers to remain in the dark and fall victim to old beliefs and habits which prompt them to keep paying even when it is not in their best interest to do so. Unfortunately, the quick spread of information on the internet is getting out the word, and “mavens” like myself are not helping lenders out. Too bad for lenders.

What disease and strategic default on mortgages have in common

November 17, 2011 — Jamie Smith Hopkins

A new report conducted for a mortgage-industry trade group likens “strategic default” — walking away from a mortgage you can afford to pay because you owe more than your house is worth — to a contagious disease.

It’s an interesting analogy I imagine lenders embrace. To them it is disease, but to borrowers it is medicine for their debt disease. It depends on your point of view, doesn’t it?

It’s not just the idea that strategic defaulters spawn more strategic defaulters. The report’s authors focus much of their attention on real estate experts — “mavens” — who advocate such a move and sway underwater homeowners to their way of thinking. “Much the same way as a disease spreads throughout a population, so too do decisions to ‘strategically’ default,” the report concludes, adding: “Mavens are more contagious than non-Mavens because people place greater trust in their opinions. … In fragile markets, advice by influential Mavens can result in a flood of strategic defaults, causing a contagious downward spiral of home prices and potentially a market collapse.”

I have certainly been advocating strategic default for many reasons, not the least of which is that it’s very often the best thing for the families. The fact that it punishes the banks who created this mess is a bonus. I have a hard time believing any voice, no matter how influential could really impact a housing market. People are going to do what they are going to do irrespective of what supposed experts say.

The report was sponsored for the Mortgage Bankers Association’s Research Institute for Housing America. Last year, the bankers association’s then-CEO said would-be strategic defaulters should think about the damage they would do to their neighbors’ property values and their own reputations. “What about the message they will send to their family and their kids and their friends?” John Courson told The Wall Street Journal at the end of 2009.

Let’t think about that one. What message does strategic default send to a family, kids and friends? It says I am strong enough to admit I made a mistake and change course. It says I value my families financial future more than the profits of a lender.

That just before the Mortgage Bankers Association sold its headquarters building for millions less than its 2007 purchase price — and millions less than its financing, too. The WSJ reported at the time that the association would not disclose the terms it negotiated with its lenders, but sources thought the group would be paying back only part of the $30 million that the sale price hadn’t covered. Irony lovers had a field day.

Yes, the mortgage bankers themselves strategically defaulted while simultaneously decrying their borrowers from doing the same. I guess when it is a business decision, the agreements signed in the past go out the window. What message does that say to the families, children and friends of the bankers?

 

People have debated the ethics and bottom-line considerations of walking away for several years now. The ethics argument boils down to whether paying your debts is a moral obligation or a contractual one (i.e. “I pay the mortgage or I give you back the house, so here’s the house, buddy”). On the financial side, there’s the chance to get out from under a house that might never be worth what you paid for it vs. the effect on credit scores, the ability to get security clearances and the possibility of future dunning attempts. Some states are non-recourse, meaning that mortgage holders can’t come after you for the difference between what you owe and what they can sell the house for. Others — including New York and Florida — allow the debt collectors to come calling.  Most people I know are well past the “moral dilemma” of strategic default, the sole issue being release from personal liability for the potential deficiency.  What is a “disease” to lenders is a cure for borrowers and their families.