Strategic default on mortgages will grow substantially over the next
year, among prime borrowers, and become identified as a serious
problem. The sense that ‘everyone is doing it’ is already growing, and
will continue to grow, to the detriment of mortgage holders. It will
grow because of a building backlash against the financial sector,
growing populist rhetoric and a declining sense of community with the
business world. Some people will take another look at their mortgage
contract, and note that nowhere did they swear on the bible that they
would repay.
From the WSJ's Real Time Economics.
Alex, it’s just reverse wishful thinking.
From Wikipedia: Reverse wishful thinking is where someone assumes that because something is bad it is likely to happen. This may be to fulfil a prediction made by the speaker or because they are generally pessimistic.
The bible line is a bit odd, considering a number of these same people have certainly been divorced.
Btw, I’m self-aware about the confirmation bias bit. But my point was about the phenomena. They’ve already lost the economic incentive if they are underwater. Now the social, moral, and ethical incentives, and the rational incentive structures built around those are fraying. Whether the prediction comes through depends on the numbers, and I don’t know them. Shiller should.
Speaking as someone looking to sell a house which has lost every cent of value I put into it, and may well be underwater, I’m not sure I see any moral or ethical incentives involved in making sure the bank doesn’t lose any money on my house. I’ve already paid off 34% of the principle, plus 8.5 years of interest. I don’t see how giving them the entire house on top of that rather than repaying the rest of my loan would represent some great moral or ethical failing on my part. (Mind, the economic incentive of not ruining my credit rating is a pretty good reason to not “stiff” the bank.)
It is particularly troubling that one of the most likely reasons for us to lose money is that there is a very good chance (we are informed) that appraisals of our home will come in at less than what we could sell it for — and that shortfall will end up coming directly out of our pockets. It is as if the system is specifically designed to screw us…
Debt contracts are broken all the time. That is why the mortgage is secured by the property; you decide not to pay, because it is in your best interests so you do not. This is what corporations do, and are expected to do. Why should a personal borrower be any different? I have no moral obligation to my lender, just a legal contractual obligation that is breakable.
The hell with the rest of the world, I am going to repay my debts and meet my obligations until it becomes impossible for me to do so. I’m not going to walk away from a debt merely because it becomes convenient to do so or I think I would gain some advantage.
It doesn’t help that financial institutions are walking away from their underwater investments:
http://www.calculatedriskblog.com/2009/12/does-morgan-stanley-walking-away-from.html
Economics as a discipline teaches the idea that one should maximize the outcome of any given situation, for the current and future time period, regardless of what has happened in the past given your current restraints (and I’ve never seen a budget constraint equation with a variable for morals). For many people, that may mean defaulting on their loan. This is the rational and expected outcome given their current options and constraints.
After all, does anyone think even for a second that any of these banks would extend the same courtesy? to repay a loan to an individual purely on moral grounds even when it is inconvenient and financially imprudent for them to do so? I promise you that would not go over well at the next shareholder’s meeting.
All bank X underwater mortgage holders should gather and form a group, and act as a group, and then see what happens. It is the classic Donald Trump argument: You owe the bank $1 million and the bank has got you by the @$&*; Owe the bank $500 million, and you have the bank by the @$%&. Sounds perfect for the internet!!! Anyone underwater with Wells Fargo? We approach them with an offer, wither restructure us all, or we all default NOW. At Once!
If that sort of thing happens, I suppose the same people will complain mightily the next time they try to get a mortgage and suddenly need a spotless credit rating and 20% down.
The Fed has been massively buying up mortgage-backed securities as part of its all-encompassing financial rescue, injecting money into the economy which is currently sitting in banks in the form of excess reserves. The ultimate exit strategy, theoretically, is to sell back those MBSs later in order to draw down all those excess reserves.
The problem is, widespread strategic defaults guarantee that the Fed will not be able to get full price for MBSs that it bought at full price. So a portion of those excess reserves will remain out there, permanently. In a sense, a future burst of inflation has already been baked into the economy.
In the meantime, while everyone was busy arguing over health care, Fannie and Freddie have quietly become the mandatory “public option” for mortgage lending. A permanent change in borrower behavior leads to a permanent change in lender behavior.
@anonymous, You assume that the Fed didn’t anticipate that it would take a hit in purchasing these MSBs. They overpaid, relative to risk, to subsidize the banks.
You don’t have to be too big to fail to get a subsidy.
I hope more people walk away, take the copper pipes and the appliances with you…poor salt on the lawn too….of course they should live there a good 6 or 7 months rent free before they leave the rat infested drywall behind. Find out who your mortgage holding bank is and short the f**kers whilere your taking their copper pipes….you’ll make a killing on both ends and be doing nothing diffirent than what the FED(convincing ignorant americans to buy floating rate mortgages) and Goldman Sachs(selling the re-packaged shit to pension funds around the world, enjoy your s**t sandwich unions!) was doing when they were selling the shit in the first place…this is how the american economy works now! One has to be pragmatic.
I pay my mortgage…just saying that I don’t see the benefit to be gained from a bunch of working class folks with nose to the grindstone away from their children just to ensure that Government Motors liabilities are being met and Goldman Sachs employees can get a 20% higher bonus next year. Is that so bad? So you wish to live in a world where people work 24 hours a day and can’t spend any time with their kids? wow you are messed up.
I guess you think the government was doing me a big favor by inflating the housing market as I was entering the market?
bartman,
you already do live in a world of people like that you describe. They have every right you do, except that of actual voting. They can donate to candidates, engage in free speech, and hire lobbysts to tell their views to office holders.
A lot of comments but no example of strategic default. Why? Anyone familiar with the history of financial crises knows that there is no clear case of strategic default as defined by the sencond sentence in Shiller’s paragraph. People may speculate about what could have happened in case governments had not intervened in a financial crisis, but government intervention is always part of a financial crisis, as creditors and debtors are. In sum, Shiller’s point is a not a good prediction of what may happen with mortagage debts in 2010.
John Thacker wrote: “The only difference is that all future mortgages will become recourse loans, like in the UK, and home loans will all require 20% down and be unavailable to people with bad credit.”
I do not understand why this would be so horrible, since it was standard lending practice in the U.S. until relatively recently, and people still managed to buy houses. In fact, let me turn your question around: Should people with bad credit really be buying houses?
“all future mortgages will become recourse loans,”
Doubtful. There are laws against this, in California at least, and they are unlikely to be changed even if there is a massive wave of defaults.
“Right. His viewpoint here is just as off-base as his position that housing values in West Virginia are tied to the city of Washington’s economy. (Hence the Case-Shiller index for “metro” DC)”
Wait, you mean to tell me the bubble high priest could be wrong about something? Perhaps a little fact that just today, the Washington Post reported:
“Home prices in the far suburbs, such as Prince William and Loudoun counties, have collapsed; those in the District and inner suburbs have stayed the same or increased.”
Time for people of Iceland to strategically default:
http://www.guardian.co.uk/business/2010/jan/05/iceland-president-blocks-icesave-compensation
Referendum vote will give people of Iceland a chance to derail the policy of their government to indenture them to pay off foreigners who lost money on foolish “investments” in incompetent and/or dishonest private Icelandic banks.
(Estimated cost of law in question: 12,000 Euros PER ICELANDER.)
“It’s still interesting to see the lengths to which people will go to convince themselves that people who voluntarily got themselves into debt – not people who were more or less forced by circumstances – should not bear ultimate responsibility for getting themselves into debt.”
Or maybe that should be:
It’s still interesting to see the lengths to which people will go to convince themselves that people who voluntarily lent money – not people who were more or less forced by circumstances – should not bear ultimate responsibility for lending that money.
Does this thread show that one should not lend to democrats?
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The foreclosure law passed in NT has “strategic default” written all over it. With the mandatory waiting period and counseling coupled with the slow court system, one can easily live rent free for over a year.
What about those who sold a home at the peak and then bought at the peak?..
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Honestly, why are you criticizing Williams’ wife? I can only imagine the hurt, shame and disgust she must be feeling knowing that this is a man she had loved and married. Who could have possibly believed that someone like Williams could have commited these heinous crimes…even the cops gave him a pass earlier on in the investigation. As for Wiliams’ wife, why wouldn’t she be concerned about her future? She probably believed that she was set for life…a good husband, good jobs…..and what now? Uncertainty about how the public WILL REACT TO YOUR MASSIVE PENIS
It’s great thinking. Keep sharing such wishful thoughts.
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I can only imagine the hurt, shame and disgust she must be feeling knowing that this is a man she had loved and married. Who could have possibly believed that someone like Williams could have commited these heinous crimes
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