Monday, July 19, 2010
Sunday, July 11, 2010
Got Questions? Get Answers...DF's Question & Answer Is A Must Read!!!
Firstly, I want to thank you for your site which has provided some invaluable insight into the possibility of strategic defaulting.
My husband and I have been challenged by the recent downtown in the housing market. We have a home (on which I’m the primary, my husband the secondary borrower). We also have condos each (each of us are primary borrowers on one of them). The home is now worth $300,000 less than the $1.2million we paid for it (and $100,000 less than our mortgage). The condos are worth approximately half of the $600,000 we paid for them. I have just lost my job, and job prospects look bleak for me at this time. My husband is working, but cannot cover all of the mortgages.
We have been considering strategically defaulting on all of the properties and moving into a rental property and simply cutting all our losses (effectively starting again). We have also considered strategically defaulting on the home and living in one of the condos (we think this I the better solution). My husband could pay the mortgages for both condos, they are not in a location which can be rented. We’re concerned about the ramifications of such an action however, we are sure that at this point, we must lose at least one of the properties we are making mortgage payments on.
We realize we are in a recourse state (GA). How will my being first on the note affect my husband who is second? Any deficiency awarded against me solely at this point cannot be satisfied as I have no income. As my husband is the only one who is working, how likely is it that any such deficiency will be garnished against his wages?
Thank you for any help you can provide.
DF
GET ANSWERS…
DF, thank you for contacting me.
First things first. You and your husband are equally liable and equally responsible for the mortgage loan if you signed the note and your husband signed the note. I am being specific about the note not the mortgage. A lender or creditor will not differentiate between who signed the note first or last, as long as it has been signed by each party. The note a.k.a. promissory note gives a lender the right to collect all of the money from any person who signed the note. A note is evidence of a loan of money. A mortgage is a security lien against the property. A mortgage is not a promise to pay money.
The primary risk of a strategic default is a deficiency debt. The other risks are:
1. Lower credit score.
2. Loss of the home or property to a foreclosure sale.
3. Recently, Fannie Mae implemented a rule that bans a person from
obtaining a Fannie Mae mortgage, if that person strategically defaults. The ban last for seven years. Furthermore, the United States Government may pass a law that bans a person from obtaining a government insured loan, if that person strategically defaults.
4. Debt collections tactics, including mail, letters, personal visits to the
property, phone calls to cell phone, work, and/or family members. Not all debt collection tactics are legal. You should become familiar with your state’s debt collection protection laws and the Fair Debt Collections Protections Act.
However, my experience has established that most people who strategically default are most concerned about deficiency debt. Most people do not want to be chased down for more money by creditors or lenders.
Let’s go through deficiency debt issues carefully.
A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note or mortgage loan, in full.
You mentioned that you live in a recourse state. You appear to understand that a recourse state allows the lender or creditor to seek an unsecured money judgment for any deficiency. Also, a deficiency judgment has a time period. In some states a deficiency judgment can last up to 20 years. So even if you have no income now, you may have income in the future. Read this link about Recourse and Non-Recourse states to learn more.
If a lender or creditor forgives the deficiency then you will not be exposed to a deficiency judgment. When a lender or creditor agrees (IN WRITING) to forgive a debt as opposed to seeking a deficiency judgment, then the forgiven debt may be considered income by your state taxing authority and the IRS. Forgiven debt is income.
Now consider this. Under current Federal Law if a debt is forgiven on a primary residence then there is no tax due to the IRS. However, this rule may not apply to state tax law.
Read about debt obligations, deficiency, and forgiveness so you can better understand everything that I have written so far.
So, if you consider strategically defaulting on your (primary residence) home AND you can negotiate debt forgiveness with your lender, then you will not have any exposure to a deficiency judgment and you will not have any federal tax liability.
The question is What Does It Take To Get The Lender To Agree To Forgive Your Debt?
The answer is: you must successfully negotiate a principle reduction, short sale, or a deed-in-lieu of foreclosure AND get the lender to agree (IN WRITING) to forgive any deficiency. You want the creditor or lender to give up its right (IN WRITING) to seek a deficiency judgment.
A principle reduction is when a lender or creditor agrees to reduce the principle balance of a loan.
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property. A full settlement of your total outstanding mortgage debt eliminates a deficiency and tax liabilities. A partial settlement still leaves open the possibility of a deficiency judgment or forgiveness of the remaining balance.
A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000.
In all the above cases you must get the lender to agree to forgive the deficiency.
Beware of the Turn In Your Financial Documents Trap. This happens when the lender’s representative asks you to turn in your financials via telephone or fax in order to see if you qualify for a loan workout, principle reduction, deed-in-lieu, or short sale. Before you agree to turn over your financial documents ask the lender to send you something in writing stating that they will seriously consider a work out option if you turn over your financials. Or ask the lender to direct you to their website regarding their loan workout processing rules. The problem I have is this: What happens to your financial documents, if your lender refuses to negotiate a loan workout? Can the lender use this information against you? For example, can the lender use the information during a foreclosure action or during a lawsuit seeking a deficiency judgment? In order to collect on a properly obtained deficiency judgment, the creditor or lender must locate your bank account, or locate your investment account or locate your place of employment or locate any other asset that has value. I don’t think anyone wants to turn over their financial documents to be used in any way to take their money.
If you do decide to turn over financial documents to the creditor or lender, then cross out all of the account numbers. If the creditor or lender refuses to work with you after you have turned over your financial documents then immediately move all of your money and your investments to another financial institution.
A creditor or a lender has the right to garnish wages if it properly and legally obtains a deficiency judgment in a court of law against a person who entered into a legal loan agreement with the creditor or lender. So yes, your husband could be exposed to wage garnishment if the creditor or lender successfully obtains a deficiency judgment against him.
Keep in mind that even if a creditor or lender successfully obtains a deficiency judgment, it does not mean all is lost. You can negotiate a settlement with the creditor or lender. The creditor or lender may take 50% or less than what is owed instead of spending time in court. Also keep in mind to NEVER LET A LAWSUIT FOR A DEFICIENCY JUDGMENT GO UNDEFENDED. NEVER IGNORE THIS TYPE OF LAWSUIT. The simple reason is that you may stop the creditor or lender from getting a judgment or you may be able to use your defense to this lawsuit as a means to negotiate a settlement.
You should seriously consider working with a qualified attorney and/or accountant in order to understand your specific risks.
You have to make some difficult choices. I am confident that once you understand you options you will get through this successfully.
Thursday, June 24, 2010
Government Seeks to Punish Ordinary Citizens Who Strategically Default Instead Of Taxpayer Bailed Out Banks, Corporations, & Investors
Yesterday Fannie Mae sent out a press release titled “Fannie Mae Increases Penalties for Borrowers Who Walk Away, Seven-Year Lockout Policy for Strategic Default”.
Before we discuss Fannie Mae’s, lobbyist induced policy let’s make a few points about Fannie Mae a company that is 80% owned by U.S. taxpayers and part of the largest taxpayer bailout in US History.
Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case.
Fannie Mae And Freddie Mac Bailouts Could Cost $1 Trillion.
Fannie Mae stock will be delisted from the New York Stock Exchange.
Enough said on that. Now on to the most important parts of Fannie Mae's new policy to attempt to punish strategic defaulters. These are the key parts of the policy:
1. If a borrower walks away and a.) had the capacity to pay or b.) does not complete a work out in good faith (workouts are defined as loan mods, short sales, and deed-in-lieu), then the borrower will be ineligible for any new Fannie Mae backed mortgage loan for a period of seven years from the date of foreclosure.
2. Fannie Mae will actively take legal action to recoup outstanding mortgage debt from borrowers who strategically default in jurisdictions that allow for deficiency judgments. Fannie Mae will be instructing servicers and lenders to essentially SPY on delinquent loans facing foreclosure and ask these same servicers and lenders put forth recommendations for cases that warrant deficiency judgments.
This is Fannie Mae's rationale "We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting.”
Well let’s see. Basically Fannie Mae intends to ban strategically defaulting taxpayers from obtaining a mortgage loan from a company that is owned and financed by taxpayers because taxpayers have decided to stop paying their mortgage. On top of that Fannie Mae will get servicers and lenders to SPY on taxpayers to determine if they are strategically defaulting.
The primary ways in which to determine if a taxpayer strategically defaults are the review of tax returns, bank statements, income, savings, and investments. Then balance that against their expenses and liabilities. HMMMM…how can a servicer or bank get that information? The servicer or bank will request the borrowers financial information in order to process a loan modification, short sale, or deed-in-lieu. It get’s the info by PRETENDING to offer a loan modification by taking monthly TRIAL PAYMENTS and then denying the modification anyway…AKA Making Home Affordable Program (HAMP). It get's the info by PRETENDING to offer a deed-in-lieu and then denying it. It get's that info by PRETENDING to allow for a short sale and then denying it.
Can Fannie Mae, a servicer, or lender use financial information collected from a borrower against them in a proceeding for a deficiency judgment?
Of course the missing piece to the puzzle is: Underwater Properties.
What happens if a taxpayer homeowner can establish that their property is underwater thereby establishing it makes economic sense not to pay the mortgage? Which is what Fannie Mae basically did when it was bailed out on its poor investment choice of purchasing and holding worthless mortgage backed securities. It looks like lenders are hoping that the government will shift more of the loss of valueless homes on to taxpayers.
This comes on the heels of the United States House of Representatives introducing a potential law that has a provision barring "government-backed loans for borrowers who had strategically defaulted–walked away from their homes when they could still afford the mortgage payments."
What about basic contract principles? A mortgage loan is a contract between a borrower and the lender. If the borrower stops paying then the lender has specific rights and remedies contained in the contract. Why is Fannie Mae interfering with a borrowers contractual rights?
Can you say "Easily Influenced By Banking Lobbyist?
Can this be legal?
Is this even CONSTITUTIONAL?
Most importantly, WHY DOESN’T THE GOVERNMENT PUNISH LARGE BAILED OUT BANKS AND BUSINESSES THAT HAVE STRATEGICALLY DEFAULTED?
Why is the GOVERNMENT enforcing ECONOMIC Slavery? Why should any taxpayer waste their money on an asset that has no value. Businesses, investors, governments, and countries strategically default all the time.
Oh I see...our government believes banks and business are too big to fail while taxpayers, ordinary citizens are too small to succeed or protest.
Can you tell I am mad. You should be too.
Monday, June 21, 2010
Hip Hop Artist Chamillionaire Gives Strong Reasons For Strategic Default!!!
PBSNews Hour on Strategic Defaulters - Homeowners Who Have Stopped Paying Their Mortgages Even Though They Can Still Afford Them
Got Questions? Get Answers...Mr. D Is Lost In Mortgage Sea
GOT QUESTIONS?
I purchased a home in 2006 for $1,075,000. It is a beautiful lake front home in NC. I have a first for $985,000 and the balance in a second. I invested another $+/-$200,000 in landscaping shoreline, etc...
My income has been impacted due to the economy in the last 2 years. I have tried refinancing with one appraisal coming in at $1,275,000 and one at $985,000. Neither would qualify for 80% equity.
The house has been on the market for 2 years offered for both lease and/or sale with no offers. Real estate professionals say there is a 10 year supply of million dollar homes in my area.
I could take money out of my 401k to keep things going but here is my thought process. If my mortgage is $6,500/month and it may take years to recover or get back to zero, it makes sense from a business perspective to put that money elsewhere.
My loan is with one of the big banks and they have denied me any type of modification or other and said they couldn’t consider it unless I was at least 90 days delinquent. To further clarify, the mortgage is in both my name and my fathers name with me as the primary and him as the co-borrower. He is retired but has retirement money in annuity and ira. He also owns a home in GA that has some equity in the amount of maybe $50-100k. My wife however is not on the mortgage as the home was bought 2 years before we got married.
So I am considering all options including just stop paying, deed in lieu, short sale and loan modification. What are the consequences, likely hood of outcomes and advice do you have as I am lost at sea?
GET ANSWERS…
Mr. D.
First of all thanks for writing.
One key point to recognize is that any decision you make regarding your mortgage will expose your father to the same consequences. Furthermore, he will need to sign off on any option you decide to implement.
It seems as if you have a general understanding of your options. However, I still want to go over each one again. After each option, I will point out the risks. I will also underline key points that are a bit more specific to your situation.
A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000. Keep in mind that the $50,000 difference will become a deficiency.
A deficiency balance can be forgiven or it can become a judgment. If the deficiency is forgiven then there may be a tax liability. The lender may refuse to forgive the deficiency and instead seek a deficiency judgment. This is a legal judgment obtain by a lender after filing the proper legal paperwork in court. If the lender successfully obtain a deficiency judgment then the lender has the right to seize the cash in your bank accounts, garnish wages, or place a lien on personal property, business assets or real estate. You may not owe a deficiency in certain circumstances. The Federal Mortgage Forgiveness Debt Relief Act and Debt Cancellation provides relief to homeowners from paying taxes on any forgiven debt. Also certain states have anti-deficiency statues. This means that state law prevents a lender from pursing a borrower for any debt deficiency. A state that prevents a lender from pursing a borrower for any debt deficiency is called a non-recourse state. North Carolina has an anti-deficiency statute which seems to apply in certain circumstances. I recommend you speak with an attorney to see if this anti-deficiency may apply in your circumstances. A link to the statute is here: http://www.poynerspruill.com/publications/Pages/NorthCarolina'sNewAnti-DeficiencyStatute.aspx
There is certain debt that cannot be attached by a creditor. Under Federal law, there are strict limits against attaching a 401k loan. Essentially, if money is transferred into a 401k just to prevent a lender from collecting then a lender may be able to attach the money. This is generally hard to prove. It may not be a good idea to deplete your 401k account.
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property.
If you decide to utilize a short sale or a deed-in-lieu the lender normally requires evidence that the property has been listed for sale. Furthermore, a lender may ask to see your financial information as part of any negotiation.
It’s best to work with a real estate broker or attorney who has experience in short sales. It’s a time consuming process involving multiple parties. It requires substantial paperwork. If you do work with a professional make sure you negotiate a “pay for success” agreement. Many states have no upfront fee regulations.
If you let the property go to foreclosure sale then the lender will sell your property at an auction. If the lender takes the property back at the auction sale, then you will not have any deficiency. If the lender sells the property at auction for less than what is owed then there will be a deficiency.
As I pointed out before, if a debt is forgiven then it may be consider a taxable event. Forgiven debt is considered income. You should contact an accountant to determine if you may have any tax exposure to forgiven debt. Especially, if you are in a higher income tax bracket.
The lender for the second mortgage may forgo foreclosure proceedings and sue you and your father personally for the loan. Most second mortgage lenders or HELOC lenders recognize that it will not collect any money from the sale of the property once the loan goes into default. However, these lenders are willing to negotiate a settlement of the outstanding balance. For example, the second mortgage lender may take 15 to 30 cents on the dollar with a monthly payout on the settlement amount. You must negotiate a forgiveness of the difference owed to the lender if they agree to settle.
It’s sad to say that you need to be delinquent before a lender will enter into good faith negotiations to modify your loan. It is currently a fact that a lender has no incentive to modify a loan if they are collecting payments.
Your father’s 401(k) should be safe from any creditor collections efforts if a deficiency arises. However, if a creditor successfully obtains a proper legal judgment then the judgment can be placed as a lien against your father’s property or other assets.
The likelihood of success is based on one rule: You need to fight extremely hard to get what you need from the lender.
The next important issue is to preserve you and your families’ cash, savings, and wealth and to limit your exposure once you have decided to implement a solution.
Please read the following articles and posts. This will help you significantly.
What You Need To Know About Debt Forgiveness, Obligations, and Deficiency.
Recourse v. Non-Recourse State.
If you have any other questions please feel free to contact me.
Wednesday, June 9, 2010
Got Questions? Get Answers...WW Wants To Know Consequences of Walking Away From Old Home For A New Home
GOT QUESTIONS?
My wife and I have been trying to sell our home for nearly a year. We have had little or no traffic no matter how much I lower the price. We CAN afford the payments, it's just that the home has become way too small for our family size.
I have been pre-approved for another loan on a much larger house with the payments being almost identical. This would be a new build and the loan would be in place before I defaulted on my current mortgage. I was approved to carry both mortgages.
What are the consequences besides taking a credit hit if I default? My wife and I are both over 750 credit rating. Are there any other options for my situation?
GOT ANSWERS…..
If you default, in addition to the negative impact to your credit score, you may be responsible for a deficiency. A deficiency is the difference between what a lender is owed on a mortgage and what it receives. I will explain this in more detail later.
If you want to keep your credit intact, you may consider selling the property at loss and covering any short fall out of pocket. For example, if you find a buyer for your home at $400,000 and your closing costs including the money you owe the bank are $425,000, then you can come up with the $25,000 short fall at closing. Another alternative is you can look for a tenant for current property to cover the monthly carrying costs when you decide to move. You may have to cover the difference from the rental amount and the carrying expenses. Of course, the key questions are: how long are you willing to carry the house and when will you be able to sell the house?.
If you decided to default, you have various options.
You can utilize a short sale, deed-in-lieu, loan modification or let the property go to foreclosure sale. All of these options will negatively impact your credit and will expose you to a possible deficiency.
A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000. Keep in mind that the $50,000 difference will become a deficiency. A deficiency balance can be forgiven or it can become a judgment. If the deficiency is forgiven then there may be a tax liability. The lender may refuse to forgive the deficiency and instead seek a deficiency judgment. This is a legal judgment obtain by a lender after filing the proper legal paperwork in court. If the lender successfully obtain a deficiency judgment then the lender has the right to seize the cash in your bank accounts, garnish wages, or place a lien on personal property, business assets or real estate.
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property.
You may be able to modify the loan for a lower payment or a reduction in the principle balance.
If you let the property go to foreclosure sale then the lender will sell your property at an auction. If the lender takes the property back then you will not have any deficiency. If the lender sells the property at auction for less than what is owed then there will be a deficiency.
You may not owe a deficiency in certain circumstances. The Federal Mortgage Forgiveness Debt Relief Act and Debt Cancellation provides relief to homeowners from paying taxes on any forgiven debt. Also certain states have anti-deficiency statues. This means that state law prevents a lender from pursing a borrower for any debt deficiency. A state that prevents a lender from pursing a borrower for any debt deficiency is called a non-recourse state.
Please read the following articles and posts. This will help you significantly.
What You Need To Know About Debt Forgiveness, Obligations, and Deficiency.
Recourse v. Non-Recourse State.
Bottom line. Your primary risk is any deficiency.
Sunday, May 23, 2010
Got Questions? Get Answers.. BB Wants To Know How To Handle A Second Mortgage
Hi my name is BB and I live in Nevada. I have owned my house for 10 years and Zillow gave its value as about $221,000. I have a first of $217,000 and a second of $224,000
I am thinking of either going into foreclosure or trying a short sale. In either case the first would get paid and the second would not. I also own two rental properties that are worth more then I owe.
My questions are any other suggestions to foreclosure of short sale?
In your situation, your primary concern should be about the consequences of foreclosure or short sale. You credit will be impacted negatively. A foreclosure and a short sale stays on your credit report for 7 years. The other issue is a deficiency. A deficiency is the difference between what you owe and what the lender collects. For example, if you sold your house for $200,000, this would leave a balance of $17,000 to the first lender and the entire balance of $224,000 to the second lender. Your total deficiency would be $241,000. A lender has two options when handling a deficiency. The lender can obtain a court ordered judgment for the balance and attempt to collect from you or the lender can forgive the $241,000. Once a debt is forgiven it is considered a taxable event. The reason is forgiven debt is considered income. The IRS and your state tax authority has rules regarding any amount of taxed owed. Please read this article so you understand what I just wrote: What Every One Should Know About Debt Forgiveness Obligations, and Deficiency.
You can also consider a deed in lieu of foreclosure. A deed in lieu is an agreement made with your lender wherein you agree to give the title (deed) to the property in exchange for the outstanding debt owed. Now in your situation, you can only give your deed to the first lender not the second. This can be a viable option if you are unable to get enough money to pay off the first lender.
If I quit paying the second would or could they foreclose on the house if the first is up to date and they would get little or no money out of the house?
Yes the second mortgage lender has the right to foreclosure even if the first is up to date. However it is not likely since the lender will evaluate the chances of collecting on its mortgage. It is more likely that they will sue you personally for the debt since it is not likely they can collect from the sale of the property. Once again read this article:
In Nevada can either lender come after me for the unpaid balance?
You are asking if Nevada is a non-recourse or a recourse state. State laws regulate the actions that creditors can take when trying to collect on a secured loan. In some cases, states prohibit the creditor from seeking more than the collateral used to secure the loan. This is called “non-recourse” or “anti-deficiency,” meaning that if the creditor cannot recoup its loan from the sale or seizure of the asset used for collateral, it has no further recourse. Other states, such as Nevada, are considered “recourse” states. This means a creditor can seek to collect more than the collateral used to secure the loan. Keep in mind Nevada is a “one action state”. This means your lender must choose foreclosure or a personal lawsuit. It cannot chose both.
Will I owe taxes on the unpaid balance?
See my prior answers and read this article --
Any other questions you think I should be asking?????
Here is a link to responses I gave to other readers. There are a list of questions you may find use full in these responses. Got Questions? Get Answers...
Thanks For Your Time
Not a problem. Feel free to contact me at anytime.
Monday, May 17, 2010
Recent Updates from the Strategic Default Monitor
Let's quote the most salient parts of the article. Each quote can stand alone. It points to the realization by WSJ that strategic defaults are real. It points to the realization that Wall Street is concerned and hints that something better be done. It presents a strong summary of the current trend.
"Strategic defaults are on the rise as more borrowers who are underwater on their home loans decide it's not worth it to stay current on their payments each month. That trend could have repercussions for the housing market, and for borrowers, in the future."
"These homeowners neglect their monthly principal and interest payments, but still pay other bills on time, including credit cards and auto loans"
"Growing social acceptance of this behavior could have ramifications not only for personal credit histories and the health of neighborhoods, but also for the future of mortgage lending...As more people watch their friends or neighbors choose to default, the more it becomes a viable option for homeowners who may otherwise wait years just to return to a positive equity position in their properties"
"If it really does become a legitimate problem, the implications are pretty dramatic for anyone that wants to buy a home in the future...[t]he lenders would have to build this into their risk models with either larger down payments or higher interest rates"
MY COMMENT : I find the above quote the most interesting of all. How could a lender price strategic defaults into its lending risk model. Is the implication that those individuals who strategically default will face higher interest rates and down payment requirements than someone else who unintentionally defaults on their mortgage? Or will lenders just price this risk generally, across the board, so all borrowers will face higher costs for loans? Whatever the implication, I am interested in seeing the underlying factors that will make up this new risk model. I doubt it will amount to much except an excuse for lenders to charge more for loans and blame it on strategic defaulters.
"In our data, what we've noticed is at about 25% negative equity, the behavior of owners begins to mimic that of investors -- they're more ruthless and rational, they're looking at it from a cash-flow perspective...The default rate rises as the negative equity gets deeper and deeper...People are also learning they often have one or two years before they get thrown out of a home after stopping payments...CoreLogic estimates that the typical underwater borrower is five to seven years away from regaining their lost equity...If people figure they'll wait more than a decade before regaining the equity they've lost, they're much more likely to cut bait and leave."
MY COMMENT: Its about time that owners behavior mimics investors. Why should any individual, investor or not lose money on a worthless asset.
Bottom Line: The Wall Street Journal has taken notice and the larger investment community is nervous. If consumers start acting like all business players aka "action rationally (not emotionally) about investments where does it leave investment models as it relates to consumer behavior.
Let's explore another update:
JP Morgan Warns Investors that Strategic Defaulters Will Cause Losses.
Before I get into this article, my initial comment is HUH!. I thought the losses had to do with exposure to bad bets on credit default swaps and derivatives, declining values of asset back securities, poor lending practices, acquisition of Washington Mutual (albeit for only $1 billion with none of the WAMU lossess) and throwing money to international ventures that went sour.
Let's look at JP Morgan's explantion in detail:
Now I do not want to be dismissive but lets get to the bottom line of JP Morgans recent announcement. Recognizing that negative equity is a primary factor for people to choose strategic defaults, JP Morgan reported "As of March 31, [2010] 27 percent of the home mortgages in its consumer credit portfolio were worth more than than underlying property, meaning those homeowners are underwater, according to the bank's Monday filing with the SEC. At the end of the previous quarter, which ended Dec. 31 of last year, that rate stood at 26 percent, according to the bank's filing...JPMorgan's Washington Mutual loans, though, are detailed in the bank's SEC filing -- and they're even worse than JPMorgan mortgages: The entire portfolio -- $98 billion of unpaid mortgage principal -- is underwater...And those mortgages are even deeper underwater at the end of this year's first quarter than they were at the end of last year's fourth quarter. The options ARMs loan-to-value ratio was at 113 percent, meaning they were 13 percent underwater; now they're at 119 percent, according to JPMorgan's Monday filing. Home equity loans were 15 percent underwater; now they're 20 percent. Prime mortgages were at 6 percent; they've climbed to 11 percent. Subprime jumped from 10 percent underwater to 13 percent." UH OH! That's Huge.
MY COMMENT : So in essence, JP Morgan understands that consumers who own properties with no value and such property having little chance of regaining value, are likley to stop paying their mortgage even if they could afford to pay. Hmmm...seems like something JP Morgan would do. JP Morgan doesn't like it but respects it.
The company respects it enough that it felt compelled to make mention of strategic defaults as a factor in future lossess.
So let cut to the chase. JP Morgan is using a very tangible issue by putting it out in the press. Essentially, the battle lines have been drawn. The consumer who strategically default (because it was in their best finanical interest) will start be to get a negative label. Where this goes, no one really now because this represents a major and permanent shift in consumer behavior. To further emphasize this point just read the following:
"[D]uring a conference call with investors and analysts, Dick Syron, Freddie's former chairman and CEO, in noting that the firm had seen a rise [in strategic defaults], used different terminology to phrase it...'[T]he term that['s] used for people walking away when they are caught up upside down, more frequently used in autos than it is in homes, is ruthlessness. Right? And we are seeing an increase in ruthlessness and I think, it is probably not just speculators or investors, but [I] think it is a different period and the changes... we have seen an enormous amount... [have] the potential for changing consumer behavior'...It's that change that JPMorgan Chase is warning its investors about."
And so it is.