Strategic Default = A Free Rent. Really??

I am sick and tired of posts like this one. It is yet another moralistic, snide view point from a person without an ounce of common sense.

The Times story features Alex Pemberton and his mom, Wendy Pemberton, who both live in St. Petersberg, Fla., and who both pay an attorney $1,500 who says he does “as much as needs to be done to force the bank to prove its case.”

That $1,500 these homeowners are paying in lawyers fees is considerably less than what they’d pay to keep up with the mortgages. So they pay the lawyer and justify their defaults by saying that this is simply business. And nowadays, homeowners finally seem more apt to approach homeownership in a cold, even ruthless business manner

I have two major problems with the above statements: For one, how does the author know that paying on the mortgage would cost less than the $1,500 that these homeowners are paying the attorney? Moreover,  where in the story does it say they pay the attorney $1,500 per month?

For two, businesses walk away from bad investments all the time. No one raises a hue and cry over them when they do it; in fact, they’re applauded for having made sound financial decisions.  Many homeowners are deciding that their home purchase was just a bad investment and are making a business decision to walk away.  What is wrong with that? Homeowners  en masse doing it might cause the banks to feel some of the pain that the rest of us have had to endure, and that so far, they’ve been able to avoid.

For borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’

The natural question then is: Why did you agree to buy a house that required you to pay $2,500 a month in the first place?

Again, my question to this blogger is how do you know this man’s circumstances that you can issue such a smug and blithe comment like this? How do you know he doesn’t have an ARM that adjusted upwards?  If the bank wants to prevent this gentleman from walking away, then it ought to modify his loan so that it is not only affordable but is in line with what his property is actually worth.

You see, the real reason that a lot of people are walking away is negative equity, a situation where you owe much more than your property is worth.  If most people had only slight negative equity and they felt that they had a fair shot at regaining that lost equity in the near future,  they would stay in their homes and continue paying their mortgages.

However, this is not the case. As this blogger notes, the number of homeowners who are underwater exceeds 5 million, and what he doesn’t note, is that a majority of them are significantly underwater, at least by 20%.  In fact, these are the borrowers most likely to default, according to this Wall Street Journal article.

The point is that this crisis is bigger than anyone could imagine and the normal rules don’t apply. Homeowners are doing something that they haven’t done in a while:  look after their own interests.

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