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Source link: http://archive.mises.org/11213/the-new-american-dream-strategic-default/

The New American Dream: Strategic Default

December 10, 2009 by

After all the government subsidies that have been poured into home ownership in America since the Great Depression, raising the percentage of homeowners to over 69% in 2004, the WSJ reports that defaulting and renting: “It’s just a better life. It really is.”

“For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven’t paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month — an injection that in the long term could be worth more than the tax breaks in the Obama administration’s economic-stimulus package.”

{ 8 comments }

giladr December 10, 2009 at 9:12 am

When looking just on the title, I first thought this meant that the American people hope that the US govt’ would default sincerely on its debt (instead of using inflation to default).

Bogart December 10, 2009 at 10:18 am

I hope the WSJ goes the way of the other papers in this country just to force the Keynesians from spouting their economic magic through a vehicle that is supposedly free market oriented.

Is is neither bad nor good in any aggregate sense, other than that these folks may depend on the welfare state, to have 50 billion in mortgage payments vs keeping the money for other consumption. It is actually better that they save it.

The borrowers face a dilemma: 1. Pay the mortage on a home whose value is less than the mortgage or 2. not pay it. Obviously the borrowers feel they are better off with option 2 leaving the lenders worse off. Unfortunately this is the best the situation can be as the conditions present at the signing of the mortgage are now different. If the borrowers pay the mortgage then they are worse off and the bank is better off. So we have a zero sum game.

HL December 10, 2009 at 11:29 am

Rational default is the way to go. If only the populace would do the same with taxes. Or better yet, if only the Gov would do that with its debt.

The definition of “sucker” today is someone who is 150%+ loan-to-value on a house, using his credit cards, 401k and other devices to keep that house. Poor fellow, holding on to a fallacious idea just when the common man suddenly realizes just how fallacious it is. When his cost-cutting employer administers the coup de grace, where will the poor fellow turn?

If it wasn’t for the wife, I would have short sold my home a while ago.

Ohhh Henry December 10, 2009 at 1:01 pm

“… others are simply halting payments until the bank kicks them out. That’s freeing up cash to use in other ways … family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. … takes his girlfriend out to dinner more frequently.”

Way to go America, use the breathing space you’ve been provided as an opportunity to build a better foundation for the future … er, not.

All this squatting and lack of foreclosure process reminds me of the old stories from Conceived in Liberty about homesteaders refusing to pay unenforceable quit-rents to their absent landlords.

But watch them try to clear title after they get all comfortable and then start making home improvements. And speaking of home improvements, how does a tradesman make a lien against a house whose owner is essentially a squatter? Sounds like a good chunk of America is going to turn into decrepit squatter’s shacks, and much of the rest will be decrepit public housing.

If you want to see what I mean, find the youtube videos where they drive through Detroit or the parts of Calif. where half the houses are either foreclosed and vandalized or else inhabited by unforeclosed defaulters who no longer see the point of watering the lawn.

Laura December 10, 2009 at 5:49 pm

Or, do like many investors are doing – default and then buy your own home back in the short sale.

Deefburger December 11, 2009 at 9:19 am

But the defaults are not being foreclosed.

The lenders are filing the foreclosures, but not processing them. Instead, they are keeping the assets on the asset side of the balance sheet.

The Home(owner) stays in the home, waiting for the axe to fall, the lender leaves them there, waiting for the currency to inflate to balance the books, and the economy outside Wall Street flounders, because the capital is stuck in nevernever land.

My CPA clients are having trouble with this. They don’t know what to do. Write off the house that isn’t forclosed? Or the income that isn’t invested in the house, but is still inadequate for daily living and current debt service, is MORE taxable without the mortgage payment! OUCH!

Artisan December 22, 2009 at 4:37 am

Great article. For many reasons this report is unimaginable in Europe of course. Too much romantic emotions are stuck in housing here, to tell the story straight forward like that. It starts with those street names taken from the chess board… (names like Lafayette street are bad enough), when you are used to live on the “descending little bridge road”.

Bill George August 16, 2010 at 7:33 am

Another subtlety which seems to be slowing foreclosures and motivating banks and investors to relegate homes in default to the “shadow inventory” is the delay of the implementation of the Financial Accounting Standard Board’s implementation of mark-to-market accounting for some infrequently traded assets. (See the Wall Street Journal article titled, “Congress Helped Banks Defang Key Rule” June 3, 2009 by Susan Pulliam and Thomas McGinty. And see, mark-to- market accounting on Wikipedia)

Completing a foreclosure would force the bank to reprice the asset (mortgage) or sell the property at true current market value.

It makes one wonder about the effect of such repricing on bank balance sheets, and the true fractional reserves of banks with significant mortgage holdings. It also makes one wonder how mis-stated the financials of other big mortgage investors (like pension funds) might be.

The squatters are helping the banks and investors by preventing looting and vandalism. And, as long as they stay in the home the property taxes, homeowner fees and municipal assessments are (arguably) still their obligations. The mortgage lender isn’t the property owner until the foreclosure is complete.

Banks and investors seem to have decided to wait out the bad market. But, the question is, will the market recover with the uncertainty caused the huge overhanging shadow inventory. . . .

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