Why a Strategic Mortgage Default May Be Your Best OptionWednesday, February 24, 2010
Here is an interview that I did in early February 2010.
Many entities, from the White House to various mortgage banking leaders to self-professed pundits, are trying to put a shame element to borrowers who find themselves with acute negative equity in their homes. Is it possible to successfully shame these people into staying in their mortgage loans and not walk away from their homes?
DeCoster: Federal officials like former Treasury Secretary Hank Paulson, along with powerful special interests that profit from central planning policies, have an interest in keeping people hogtied to the sinking housing market. They are trying to depict struggling Americans as irresponsible scoundrels who are recklessly walking away from their commitments. In fact, the multi-millionaire Hank Paulson, who was one of the architects of the Wall Street bailout, told the Wall Street Journal that borrowers “have a responsibility to keep paying.” That’s a pretty broad statement to make that: 1) ignores the default option on the typical mortgage contract, and 2) disregards each homeowner’s unique options and financial situation.
The broad statement was intentional. The overall scheme calls for treating each individual debtor as one piece of a collective pool of citizens who shall be enslaved by the collapsing economy. The people who insisted, for years, that there was no housing bubble, no debt dilemma, and no recession on the horizon are the same people who are now telling us that everything is fixed, the recession is over, and therefore we should go back to our old habits – buy more stuff we don’t need, take out more loans, and buy houses and cars. The government has subsidized the purchase of both cars and houses, in spite of the fact that an abundance of Americans are still saddled with debt and holding underwater mortgages.
The Obama administration, in its massive campaign to socially engineer America, is pressuring banks into renegotiating mortgage payments in order to keep people captive in their mortgages. The goal of the elites in power is to keep up the appearance of prosperity and keep folks in debt to the big banks. Mass defaults will injure Wall Street – Washington D.C’s favorite constituency. Additionally, there’s John Courson, an FOB (Friend of Banksters) who runs all over the country trying to spread the moral message to middle-class people who are pawns in this Bankster mess. Courson is the Chief Executive of the Mortgage Banker’s Association, so whose interests do you think he is representing? Courson advising homeowners on their moral and financial strategies is like a crocodile telling the neighborhood children they should take a shortcut home through the swamp. These so-called “leaders,” unfortunately, have the necessary wealth, political power, and media access that enable them to introduce their disingenuous platform and influence the masses. For those who aren’t empowered by the political establishment, there’s no equal opportunity for commanding the public stage.
The schemers know they don’t have to deal with a level playing field, so yes, it is possible to shame people into debt subservience. In fact, the masses are already succumbing to the morality message. The elites don’t give a damn about the plight of average people who have little to no financial knowledge, feel trapped, and have nowhere to turn. That’s why those folks need to reach out to a local CPA or other financial advisor they can trust. Furthermore, they need to tune out the moralizing that flows from the fat cats and special interests that get wealthy by keeping them equity deficient.
Why is it that strategic defaulting at a corporate level is not actively challenged, but it is being challenged at a consumer level?
DeCoster: The notion of approving business defaults while flogging one’s neighbor for walking away from his mortgage is entirely irrational. One snag is that the general masses have no understanding of financial matters. No matter how “educated” they may be in the college sense, they are financially ignorant and cannot conduct basic analyses of their own financial matters, let alone weigh the costs and benefits of a complicated situation that is unique to another individual. There are plenty of talented and smart people who don’t have the skills to sort out budgets, expenses, debt, and investments. That is not a criticism – it is just a fact.
The condemnation of homeowner defaults is brought on by a knee-jerk, emotive response. People feel – they don’t think. You can thank public schools for teaching self-esteem and groupthink as opposed to business and analytical/critical thinking skills. The public schools are churning out a nation of drones, or trained monkeys, as I like to say it. Welcome to the Oprahized nation where logic and reason are abandoned in favor of emotionalizing hot-button issues for the purpose of “feeling better.”
Challenging other people on this issue, when you know nothing about their state of affairs, is something that is fired off from the gut level. The morality element is a great focal point for drawing out emotional energy. Focusing on other peoples’ behavior that you deem evil, while you avoid the objective aspects of the issue, is pathetic.
An individual’s financial options can be objectively assessed and the most favorable course of action can generally be determined. Businesses entrepreneurs and managers are constatntly analyzing and estimating various strategies, and that is how businesses become enduring and profitable. Individuals and households are no different in terms of planning best course scenarios and minimizing waste and losses. Except individuals and households suffer personally and emotionally by bearing an unfavorable financial condition. For that reason, they must take actions to alleviate uncertainty and keep their financial house in order.
Do you expect to see more strategic defaults in the coming year?
DeCoster: The majority of American homeowners are delusional about the nature of the housing bubble and the ensuing bust. They think the post-bubble housing crash is the aberration, and the housing market will return to “normal” at some point in the (near) future. They don’t understand that the bubble was the aberration, and those days are over and dead. They thought the bubble prices were the new norm. And the strange thing is that they liked it. They delighted in receiving a high price for their home, and never seemed to be able to grasp the fact that they would also pay a higher price for another home.
Moreover, new homeowners start off their purchase with a faulty – and dangerous – assumption. The word often used is “investment.” People have been sold on the erroneous view that their home is an investment. This defines the home as an appreciating asset. Real estate professionals and mortgage industry hacks help to sell that idea to prospective buyers who don’t know any better.
This notion began when central planners and social engineers misappropriated the term “the American dream” and put it into use as a slogan to convey a sense of entitlement and equality as they began to shape and subsidize the home ownership nation that got started with the creation of Fannie Mae in 1938. James Truslow Adams coined the term “American dream” in his 1931 book, The Epic of America, to describe his ideal social order based on one’s capabilities and merit. Post-WWII the term “American Dream” came to be a synonym for home ownership. During the bubble-boom years, the term “American dream” came to be defined as a McMansion for everyone with promises of perpetually rising values. This turns every homeowner into an instant entrepreneur, as opposed to a sap who gets ripped off by overpaying for a durable good he can’t afford.
A home is not an investment – it is a durable consumer good. If it were an investment it wouldn’t be the primary family shelter. This is a dangerous perception that has been hammered into the American culture, and this way of thinking will end in disillusionment. Why do folks want to see housing prices go up when that means they pay more for housing? Because of the “investment” mentality – they want to see their “investment” rise in value, even while they pay higher prices for someone else’s “investment.” Make sense? No, but it makes homeowners feel more prosperous in the end. In general, the masses have bought into a system that makes them house poor and turns them into slaves to perpetual debt.
It’s important to remember that for each individual there is an objective financial analysis that can calculate the costs of various alternatives. That analysis determines whether a homeowner is better off staying in the home or leaving the home and becoming a renter. Furthermore, there are qualitative factors to consider that are subjective to the homeowner. I think the attachment to home ownership will have people putting a heavy emphasis on those qualitative factors. Since walking away from a home is a huge lifestyle change, staying in the current home will be the most uncomplicated choice for many people. Consequently, many homeowners will remain in their homes unless they can no longer make the payment. They will dig in their heels and ride out what they think is a temporary storm while claiming the moral high ground. There is also the perception that it is somehow “superior” to own a home as opposed to renting something similar, even if ownership keeps in you in a financially inferior condition.
Henry Blodget has been discussing consumer defaults in the media, and he takes the proper position: don’t take the strategic default route just to stick it to the banks and Wall Street in a fit of anger. Don’t default to get back at the banksters, but only resort to that strategy when it’s the right business decision. All the same, the banksters, with much assistance from the banking-congressional-corporate state complex, had a major role in creating the housing bubble, engaged in reckless lending practices, defrauded scores of borrowers, and later spent a ton of loot lobbying their favorite Washington D.C. politicians and agencies for multi-billion dollar bailouts. So why should Mom and Pop on Main Street care if the bank gets the rotten end of a mortgage deal that it agreed to after assessing its potential risk?
Looking at the statistics on upside-down mortgages, there should be far more strategic defaults above and beyond what is occurring. According to Deutsche Bank Securities, about 21 million U.S. households will be underwater on their mortgages by the end of this year. Plus, between 2010 and 2012, more adjustable rate mortgage (ARM) resets will drive payments higher, making ownership even less desirable.
In reality, strategic defaults will help drive housing prices back down to market values. If the economic/monetary policy planners within the government would abandon their efforts to keep interest rates low, and if they stop pushing more debt onto American consumers by lying to them about the future of housing and the economy, then perhaps the correction will be able to occur, and the overpriced assets – houses – can be cleansed from the market. Shedding debt and overpriced housing will help clear the way for economic recovery. Talk about a real stimulus!
I agreed to do an interview that was just published on mortgageorb.com: “Why is Karen DeCoster Advocating Strategic Defaults?” The interview is different than the one I gave, which is always a risk any time you defer to someone else’s judgment on matters of your writing. It was heavily edited, perhaps for length considerations, but also, questions were added to the interview that I did not receive, and therefore they are questions I did not answer. I understand the author was trying to lead in to some of the lengthy content I sent him, yet I still expect that I should have final approval over substantial changes to content. So much is missing from the edited version that I have chosen to publish the interview here, in full, as it was originally conducted. I prefer this version to the one I have up at mortgageorb.com. This interview was conducted shortly after I published this article on LewRockwell.com in January: “It May be Financially Irresponsible to Pay Your Mortgage.”
Karen DeCoster, CPA, has a Master of Arts in Economics, and is an accounting/finance professional in Detroit. She recently published “It May Be Financially Irresponsible to Pay Your Mortgage.” Her website is at Karendecoster.com.