Along with easy money, the economy has gotten a boost from practices that let many homeowners stop paying their mortgages and use the 'extra' money elsewhere.
The real-estate market will soon see banks take a much more aggressive approach to foreclosures. It will be interesting to see how the economy is affected as rates are ratcheted up in earnest.
This story line, the focus of this week's column, draws its inception from the government's easy-money policies and the bank bailouts. To this point, the economy has gotten a substantial boost from homeowners who simply don't pay their mortgages and use the "extra" money for other things.
Can you walk away from a mortgage?
I have condensed his observations for Contrarian Chronicles:Ignoring debt for fun and profit Over the past six months, it has become more and more obvious to me (and others, I'm sure) that our government has a well-defined, unspoken policy (or plan, if you will) to increase consumer spending by reducing the debt of the very people with the highest propensity to spend.
As more and more people told me specific stories about others living rent-free, reducing credit card balances, walking away from $600k+ homes and then buying the same style house for $275k, I wanted to know more! Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=bf5f400f-6881-40d0-8a4e-fa665e458bc1,5ac40fcc-eba5-46e6-ade3-e64c33468d4f,762c249a-afe6-4cce-85fd-f507847398a5,fd6786ff-8f45-4fee-aecf-b5ed17fb8118,230212f1-261c-412a-a57f-cd8bf6b69d25,7cf1cd2e-6c12-42fd-aaf8-8450ca4e6b68,0e697638-a663-4fa9-98e0-b39d2eb76a75,01eecfdd-9d71-4bf3-9a51-32089ae2e6f6", "player.fr": "iv2_en-us_money_article_Investing-ContrarianChronicles-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=bf5f400f-6881-40d0-8a4e-fa665e458bc1,5ac40fcc-eba5-46e6-ade3-e64c33468d4f,762c249a-afe6-4cce-85fd-f507847398a5,fd6786ff-8f45-4fee-aecf-b5ed17fb8118,230212f1-261c-412a-a57f-cd8bf6b69d25,7cf1cd2e-6c12-42fd-aaf8-8450ca4e6b68,0e697638-a663-4fa9-98e0-b39d2eb76a75,01eecfdd-9d71-4bf3-9a51-32089ae2e6f6;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');I started a little project to expand my sample size. Admittedly, it is nonscientific, and I wouldn't want to have to defend my methodology to a statistician, but I stand by the results. I asked people that I knew and that I could count on for accurate information. I then asked them to expand my horizon by doing their own research. We were looking for valid instances of debt repudiation, not anecdotal tales.
Almost everyone in my "survey" is aware of, or knows, someone living rent-free in their home for an extended period of time, having stopped paying their mortgage. Many of these free boarders are spending lavishly on non-essentials.
A friend owns a small manufacturing co. He tells me of one of his female employees who was saddled with a $450,000 home she purchased almost five years ago with no down payment. One year after her purchase, she pulled $75,000 home equity and purchased "fun stuff," including a boat. She recently walked away from the house (now saddled with $525K mortgage), purchased a new house for $200,000 (in her sister's name) and kept all the goodies purchased from the home equity withdrawal. With the much lower mortgage payment she just bought a new car.
My hard-working part-time assistant knows two different 35+ yr olds who have enjoyed over 9 months (one is up to month eleven) of rent-free living in very nice homes they purchased in 2004/2005! Both are employed and both enjoy a non-frugal lifestyle. My assistant wonders if he should do the same or have me pay him more so that he, too, can enjoy the "good life."
My sister is a nurse with 25+ years on the job. She told me of a young couple that she is good friends with that both work at her hospital making a decent joint income. They didn't like the fact that they grossly overpaid for their 3000 sq ft home in 2006. They stopped making hefty monthly payments six months ago and haven't yet been contacted by the bank. They have decided to wait until contacted and then walk away. In the meantime, they just returned from NYC from a week vacation in the Big Apple.
I can list numerous other, verified examples. And these are just from my tiny, tiny universe. I can't help but assume if I know of this many instances, there must be millions of similar stories across the country. And I am sure many of your readers have first- or secondhand knowledge of similar situations.
Continued: Forbearance and money printingMore from MSN Money
Another view: Why the housing market is about to turnMarch foreclosures set a recordInflation won't be invisible for longAnd now, the great health care bailoutInflation warning etched in steel1 | 2 | next >
Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.300175; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=573;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Contrarian Chronicles ArticlesInflation won't be invisible for long 04/09/2010Inflation warning etched in steel 04/02/2010And now, the great health care bailout 03/26/2010More . . .Contrarian ChroniclesAbout Contrarian ChroniclesLearn the Contrarian Chronicles lingoSubscribe to Market Rap on Fleckenstein CapitalFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='k3mxrpjk28ev7b34wfv5bvnvfmsjy9eb';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 10 of 22PreviousNextGD60 #1Sunday, April 18, 2010 8:28:15 AMBlah blah blah higher inflation blah blah blah. four years and counting. Keep predicting, due to business cycles it will come true eventually. Of course a prediction of future events is useless without a specific timeframe. "sometime in the future" is a useless prediction.ReplyReport AbuseGD60 #2Sunday, April 18, 2010 8:31:46 AMHere are three predictions of future events. The markets will go up, the markets will go down. there will be inflation. What's that you say, I didn't say when this would all occur? Well Bill's been predicting runaway inflation for at least four years and we're still waiting.ReplyReport Abusereelken #3Sunday, April 18, 2010 9:39:46 AMYou left out all the Wall Streeters that took millions out and enjoy a lavish life style of mega-yachts, multiple residences in resort areas, private jets, fine arts, fancy cars from the bonuses resultant from the transactions that bankrupted the USA ... no the WORLD.
Nice try at a diversion by pointing the finger at a few that got taken and then figured their own little way to game the system.
ReplyReport AbuseLoyal-one #4Sunday, April 18, 2010 9:08:48 PMYes, and Bill would have been spot on if the government would not have bailed out all the failures with taxpayers money. The government is procrastinating the inevitable, and the longer this country is propped up the harder the fall will be. I think the party will start this week. If nothing else, look this up in a year and let me know what suggestions everyone has at that point. We can discuss mortgage rates at 6%, still high unemployment and more foreclosures still being processed through the system.ReplyReport AbuseDrew99 #5Monday, April 19, 2010 7:35:34 AMThanks for this article, which shows that much of those defaulting on paying their mortgages, or being given REDUCTIONS in the MORTG. BALANCES by the Govt. now (where's my mortg. reduction, how come honest Americans don't get them?) are in fact those taking advantage of the System. And we can thank the Govt. for this, including Congress cleared the way for "discretionary defaulters" to "game the system" and bilk the country of hundreds thousands each, by having changed I R S Law to no longer consider these defaulters gains by reneging on Debt to be "Income". Its a loss to the Banks, who then pay less taxes, so why wouldn't it be income to the defaulters? Normally a bad debt is income to the party who doesn't pay it.
I also know 3 Strategic Defaultes who "partied on" with the Banks Money over-borrowed when Real Estate prices high, and have lived FREE FOR NEARLY A YEAR while not paying their mortgages, and then stuck the banks with over $100,000 losses. One has done this with her homes in Suburban NY and Palm Beach FL. She over-borrowed against both, SPENT $500,000 above value of both homes long ago on lavish living, and now wants people to feel bad for her as she'll eventually be foreclosed on. Meantime, the past year, she started renting one home out and COLLECTS RENT while still not paying the Bank its mortgage payment, even as she collects rent.
ReplyReport AbuseSurfer Joe #6Monday, April 19, 2010 8:06:13 AMWhat the hell is everyone so concerned about? We are all going to be dead by 2012. Live it up! Get naked and run through the streets! Myself, I'm wearing a Mickey Mouse hat and I'm going to go next door and hit on that retired lady that lives with all them cats...ReplyReport Abusedisillusioned101 #7Monday, April 19, 2010 8:24:04 AMGreat article Bill.
When the dis-national corporate elite sold our so called leaders on the idea the free trade would lead to more jobs world wide, they neglected to tell the idiots that the good old USA would be the net looser big time. Now the housing market must adjust to a new much lower basis.
It is simple economics, as wages adjust to a lower basis due to global competition there will be fewer people able to support the old price levels. The old price basis can only go one way after such an action and that is down.
Now, I must admit that I’m a bit jealous of these folks who walk away from the homes moving down the block for more then half the price. I bought right on all my properties and paid most down. Walking away now doesn’t make business sense YET. When interest rates jump up and prices drop like a stone it will be my turn.
ReplyReport Abuseanothername #8Monday, April 19, 2010 8:26:24 AMMany of these folks who are living large and for free will soon learn that in many states mortgages are recourse loans, so while they can walk away from the house they cannot so easily walk away from their legal and contractual obligation to repay what they borrowed.
These folks will also learn a new term called deficiency judgment. This is where the bank forecloses and sells for whatever they can get, but the borrower still owes the difference between the sale price and the amount owed on the mortgage. The courts will issue a deficiency judgment ordering the deadbeats to pay. There will also be many fees and interest added to the amount and the fees and interest will continue to accrue until the debt is repaid in full.
There’s also a chance that banks will scrutinize the loan documents of non-payers and if a person lied they may file criminal fraud complaints against them. This situation will get much uglier before it gets better.
ReplyReport Abusemartin223 #9Monday, April 19, 2010 8:26:55 AMI propose a new hunt club. The game will be identifiable and verifiable liars who have defrauded investors, taxpayers and the government, especially those who have gotten scot free, or those who got a slap on the hand and are free as a bird. If our laws can't do anything, then where will we be if there are no checks and balances on this behavior. ReplyReport AbuseJimmy Jay4 #10Monday, April 19, 2010 8:50:10 AM
Installing computers in retail stores for a living I see alot of America.In 2008 I visited Flint Michigan and later in the year Stockton California. Flint was pretty quiet, "sad" as the French say. When I was told to go to Stockton ,What was then being described as "The foreclosure capital of America" I expected Flint with palm trees. I pulled into a gleaming new retail plaza full of cars and entered a store packed with shoppers on a tuesday. Aisles full of Black,White Latin and Asian shoppers speaking lots of different languages spending hand over fist. When I left at 5 am the lot was still 10% full but I noticed almost every parking spot had trash , fast food wrappers, even diapers thrown down. I remember hearing about Lehman Bros as I drove to my hotel that morning. I joked with co- workers at the time that the stores were busy because no one was paying their mortgage. I was only kidding.
ReplyReport Abuse1 - 10 of 22PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/the-easy-mortgage-era-will-not-last.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*Almost everyone in my "survey" is aware of, or knows, someone living rent-free in their home for an extended period of time, having stopped paying their mortgage. Many of these free boarders are spending lavishly on non-essentials.
A friend owns a small manufacturing co. He tells me of one of his female employees who was saddled with a $450,000 home she purchased almost five years ago with no down payment. One year after her purchase, she pulled $75,000 home equity and purchased "fun stuff," including a boat. She recently walked away from the house (now saddled with $525K mortgage), purchased a new house for $200,000 (in her sister's name) and kept all the goodies purchased from the home equity withdrawal. With the much lower mortgage payment she just bought a new car.
My hard-working part-time assistant knows two different 35+ yr olds who have enjoyed over 9 months (one is up to month eleven) of rent-free living in very nice homes they purchased in 2004/2005! Both are employed and both enjoy a non-frugal lifestyle. My assistant wonders if he should do the same or have me pay him more so that he, too, can enjoy the "good life."
My sister is a nurse with 25+ years on the job. She told me of a young couple that she is good friends with that both work at her hospital making a decent joint income. They didn't like the fact that they grossly overpaid for their 3000 sq ft home in 2006. They stopped making hefty monthly payments six months ago and haven't yet been contacted by the bank. They have decided to wait until contacted and then walk away. In the meantime, they just returned from NYC from a week vacation in the Big Apple.
I can list numerous other, verified examples. And these are just from my tiny, tiny universe. I can't help but assume if I know of this many instances, there must be millions of similar stories across the country. And I am sure many of your readers have first- or secondhand knowledge of similar situations.
Continued: Forbearance and money printingMore from MSN Money
1 | 2 | next >
You left out all the Wall Streeters that took millions out and enjoy a lavish life style of mega-yachts, multiple residences in resort areas, private jets, fine arts, fancy cars from the bonuses resultant from the transactions that bankrupted the USA ... no the WORLD.
Nice try at a diversion by pointing the finger at a few that got taken and then figured their own little way to game the system.
Thanks for this article, which shows that much of those defaulting on paying their mortgages, or being given REDUCTIONS in the MORTG. BALANCES by the Govt. now (where's my mortg. reduction, how come honest Americans don't get them?) are in fact those taking advantage of the System. And we can thank the Govt. for this, including Congress cleared the way for "discretionary defaulters" to "game the system" and bilk the country of hundreds thousands each, by having changed I R S Law to no longer consider these defaulters gains by reneging on Debt to be "Income". Its a loss to the Banks, who then pay less taxes, so why wouldn't it be income to the defaulters? Normally a bad debt is income to the party who doesn't pay it.
I also know 3 Strategic Defaultes who "partied on" with the Banks Money over-borrowed when Real Estate prices high, and have lived FREE FOR NEARLY A YEAR while not paying their mortgages, and then stuck the banks with over $100,000 losses. One has done this with her homes in Suburban NY and Palm Beach FL. She over-borrowed against both, SPENT $500,000 above value of both homes long ago on lavish living, and now wants people to feel bad for her as she'll eventually be foreclosed on. Meantime, the past year, she started renting one home out and COLLECTS RENT while still not paying the Bank its mortgage payment, even as she collects rent.
Great article Bill.
When the dis-national corporate elite sold our so called leaders on the idea the free trade would lead to more jobs world wide, they neglected to tell the idiots that the good old USA would be the net looser big time. Now the housing market must adjust to a new much lower basis.
It is simple economics, as wages adjust to a lower basis due to global competition there will be fewer people able to support the old price levels. The old price basis can only go one way after such an action and that is down.
Now, I must admit that I’m a bit jealous of these folks who walk away from the homes moving down the block for more then half the price. I bought right on all my properties and paid most down. Walking away now doesn’t make business sense YET. When interest rates jump up and prices drop like a stone it will be my turn.
Many of these folks who are living large and for free will soon learn that in many states mortgages are recourse loans, so while they can walk away from the house they cannot so easily walk away from their legal and contractual obligation to repay what they borrowed.
These folks will also learn a new term called deficiency judgment. This is where the bank forecloses and sells for whatever they can get, but the borrower still owes the difference between the sale price and the amount owed on the mortgage. The courts will issue a deficiency judgment ordering the deadbeats to pay. There will also be many fees and interest added to the amount and the fees and interest will continue to accrue until the debt is repaid in full.
There’s also a chance that banks will scrutinize the loan documents of non-payers and if a person lied they may file criminal fraud complaints against them. This situation will get much uglier before it gets better.
Installing computers in retail stores for a living I see alot of America.In 2008 I visited Flint Michigan and later in the year Stockton California. Flint was pretty quiet, "sad" as the French say. When I was told to go to Stockton ,What was then being described as "The foreclosure capital of America" I expected Flint with palm trees. I pulled into a gleaming new retail plaza full of cars and entered a store packed with shoppers on a tuesday. Aisles full of Black,White Latin and Asian shoppers speaking lots of different languages spending hand over fist. When I left at 5 am the lot was still 10% full but I noticed almost every parking spot had trash , fast food wrappers, even diapers thrown down. I remember hearing about Lehman Bros as I drove to my hotel that morning. I joked with co- workers at the time that the stores were busy because no one was paying their mortgage. I was only kidding.
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