The ‘F’ Word…It’s Now a Business Decision, Not a Negative

Posted on October 8th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I was just noodling around with respect to default modeling. You all know my views on negative equity as the leading cause of loan default across all paper types.  I am seeing in real-time much higher paper grades defaulting due to negative equity, as borrowers strive to de-lever their balance sheet.

Remember, until the past five years or so, allowable debt-to-income ratios were only 28/36 or 33/38 on Jumbos. With the advent of 50% debt-to-income and even higher given Stated Income, Interest Only and HELOC’s, homeowners are totally leveraged in their home.  They can’t sell, refinance or save money.

What is the easiest way to de-lever and maintain their lifestyle? You got it; leave the home and go rent a similar home for half the price. Immediately, they are able to save money, take vacations, keep their SUV and get on with their life. This describes the move from the Subprime Implosion into higher paper grades I keep warning you about.

Now that bailouts and foreclosure are the norm with even the top Republicans taking about ‘getting people right in their homes again’, how does that effect psychology?  Has it become ok to default on your mortgage?

I can hear the guy making $120k a year with a 750 score right now say ‘if values would not have fallen by 50% I never would have defaulted. The market made this decision for me. All my other credit is perfect. I am not having any financial trouble. This was a business decision’.

How do you model that?


Mr Mortgage

10 Responses to “The ‘F’ Word…It’s Now a Business Decision, Not a Negative”

  1. Here’s your model. Assume everyone is going to default out of their homes, due to the fact that everyone around them has and their house will not regain value for 10 or more years. If they rent and save the surplus that would have gone to the mortgage, they will be far better off in 10 years than keeping the house.

    Scenario: bought a house to the max of ability. Figured hey, if we really can’t do it, we will sell at cost and get out. 80/20 HELOC int.only, 5 year than principal kicks in, 10 year balloon. Never intended to stay in the loan, but ok it gets you in. Now, tanked market, economy and doom and gloom on the horizon…. What is the best option.

    A: Work your ass off, possibly get a second job, stay broke, no time for the 4 kids, no money to do a thing and can’t sell the house.

    B: Cut your losses while you can, (before the gov. moratoriums foreclosures) and pay the losses you incur, then rent.

    I chose B.

    Next wave of interesting loans will be “equity sharing loans”. Not only will you be responsible for half the losses, with no way out.. They will get half the profits if you sell. Take some risk out for them. Hmmmmm…….

  2. dr, what the Sheeple do not realize, and maybe it is a good thing for us prudent folks out here to witness, is that a lot (most) of these redo’s if you will are now recourse loans and these Sheeple that partake into these arrangements will now be responsible for probably most of the rest of their lives if they fall for these scams (which is truly what they are). The need for the Government to keep these Sheeple in debt and tied to their homes is huge and the cost to the Sheeple is huge as well. Walk now and pay nothing but a bad credit mark or sign up to be bailed out and when not if you default again you are on the hook for life. They will attach your pay check if needed.

    This may be the next bubble in the making for the middle class. Hey, don’t think we are not the target for a second. The rich get rich on our backs and the pols stay in office by pretending to save us over and over again (See Recent $700 Bail Out Bill). The Sheeple are what keeps this giant scam going on where Pols are career Pols and really get the time to build these plans to fruation…

    You reap what you sow…

  3. It is a business decision and soon everyone will look at it this way. The shame of going through foreclosure is a thing of the past. The only way to stop it is to make sure you have enough skin in the game so you will think twice. FICO SHMIKO. It doesn’t mean a thing. The greedy banks and money changers will always find a way to loan you money. They can’t help it. It’s in their genes.

  4. I’ve been talking to many people latley and there’s talk of lay-offs from high paid software people to attorneys. It’s the worst I’ve seen in my life time. You throw in being upside down on the house, and these people will not think twice about walking. They’re well educated people and can do the math pretty fast. I see 2009 as the year the high priced areas of CA start to see some real price drops.

  5. Stu, The sheeple are waking up. Most know that a re-fi makes you into recourse. I know I tell everyone. Same with most mortgage mods. If you want non-recourse in the contract…well…good luck. Check this.
    The scenario I spoke of, is my own. 8 months into the loan, in the midst of all the turmoil of the subprime meltdown, I get a call for a freebie re-fi out of this loan. Sign on the dotted line. Couldnt make the payments at the level they wanted, so no-thanks, plus the recourse part kinda got me. So we didnt do it. THANK GOD!!!!! We would still be where we are today and be in even worse shape.
    God how I wish I found this site before I bought a house. Live and Learn.

  6. Collective default means collective poverty. No honest borrowers = no willing lenders. No willing lenders means people will start stealing more to get the money they need/want.

    Pay your bills on time; it is good for the soul.

  7. Wow that is quite the leap there Michaela.

    So the middle and lower income individuals who should not have been able to qualify for the loans they were given are now all criminals, crooks, hooligans etc… You are an obvious Republican to try to send horrific spin such as this.

    Everyone walking will quickly deflate the market down to a value that is sustainable. These 6 or 8 to 1 ratio’s of cost/income are not sustainable. An average wooden box that an average person lives in should cost no more than 3 times his/her salary.

    But go on dreaming and putting down us normal individuals… And maybe, just maybe we will save some cardboard and a spot on the sidewalk for you.

  8. TimL,

    your post says a lot about you and clearly you belong into the category that always looks at the glass half empty. My post was to suggest for those people that got 100% loans to start looking at what they had gained in those years of home ownership, instead of just concentrating on having to go through foreclosure.

    You’re obviously one of the whiners, that is unable to ever see the silve lining and always blames others for their bad life.

    Boy, am I glad to be me and not someone like you.

  9. And another thing, Tim,

    it’s so easy for you Americans to always categorize people who’s opinion you don’t like or don’t understand into whatever the opposite of your party is.

    FYI – I’m not American and don’t vote here. I don’t care what the different parties are and do the things that I believe are right. And I’m one of those people that will always land on her feet, no matter what happens to me. It has nothing to do with political parties, but in what I believe I’m capable of. Most people are capable of a lot more than they think. But it’s the old ‘if you think you can or you think you can’t, you’re right either way.’ And most people in this country believe themselves to be victims and that’s what they become.
    Have a nice life.

  10. I have read several posts alluding to the opinion that there are only two types of people in this mess…those who lower their standard of living by reducing luxuries so they can honor their steep financial obligations and those who simply walk away in an effort to maintain the luxuries they have become accustomed to. I beg to differ. I am admittedly a member of the new wave of future foreclosures who is educated and makes good money but sees that the only way to ensure a secure future is to do both, walk away from a severely underwater home and lower my standard of living. I honestly have very little investment savvy but I can clearly see the financial benefit of walking, downsizing, and renting for at least a few years in order to establish a 2-3k per month positive cash flow. Conservatively, I can save 2k per month which could put my savings at ~ 100k in 4-5 years. The housing market will not recover to the point where I could do that in 30 years so it just makes sense. And the damage to my credit will do nothing but force me to only buy what I can afford, as cash payments will be my only option. And saving money is like losing weight, it is tough at first but once you start to see results, you almost become addicted to it. Only with saving money, it doesn’t get to the point when it starts to become damaging and unhealthy. For those of you who think this is unethical or immoral, rest assured that I am not alone in this line of thinking. The same mentality and actions will be revealed in droves in the very near future.

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