Feb 04

The recent topic I find trending up (my own observation, not from any particular tracking site) is that of walking away from your mortgage, otherwise known as “giving the bank the keys.”

I’ve been reading about moral hazard and the risk of further collapse in home prices should people continue to default, but it was only when I ran into articles such as Motley Fool’s Why Are Homeowners Idiots? did I realize that there are a number of financial writers not just observing this phenomenon, but advocating it.

Empty Nest Syndrome
Creative Commons License photo credit: bitzcelt

In a New York Times article, Walk Away From Your Mortgage! Roger Lowenstein compares a homeowner to a business which routinely chooses which ventures to keep funding and which to let fail. The reason we’re are not seeing more homeowners simply walk away is that defaults are considered antisocial and even amoral. It’s this appeal to morality that has our president urging homeowners to follow the “responsible” course.

Professor Brent White from the University of Arizona is frequently quoted as suggesting that not walking away from a house that’s underwater (i.e. worth less the mortgage) goes against one’s economic self interest and perhaps shame and guilt keep them from doing so. Even our government has made the process easier. Until recently, forgiven debt was considered taxable income. The bank sells your home and comes up $200K short, it’s as if you got that much extra income that year and a hefty tax bill follows. This is no longer the case as debt forgiven on one’s primary home is no longer taxed.

As with many issues, I don’t find this one to be so black and white. I can use some more time to ponder this issue before deciding, it’s not as though I have a default planned. I’m within about 7 years of being done with our mortgage.


written by Joe \\ tags: , , ,

Nov 14


Maybe too real?

written by Joe \\ tags: ,

Mar 06

Details have been released on the proposed mortgage bailout.

It appears that banks will be invited to lower the interest rate and/or the principal to get the borrower’s payment down to 31% of their income. This should result in a cost to the bank that’s less that that of foreclosure. In theory. Given that the cost of foreclosure is estimated to be as high as 50% of the home’s value, the loan modification plan may save us all some money in the long term. The government is going to offer banks a portion of their expense, a dollar for dollar match to reduce the expense ratio from 38% to 31%, but it seems the bank has to first fund the plan to get down to 38%. I don’t know if the President received my note suggesting that we implement a clawback on all overpaid bankers’ income goung back for the last decade, that would fund much if not all of this plan.


written by Joe \\ tags: , , ,

Feb 20

From Wikipedia;

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

This past Monday’s Barrons had a cover story suggesting that $200B would be well spent buying down all subprime mortgages by 25% (total subprime loans are estimated at just over $800B), i.e. simply reducing the principal owed, therefore reducing the payments. Presumably, this would put the mortgage back to a level below the current value of the house in most cases. When I hear such suggestions, I ask myself, “who loses and who gains by this”? It would seems that this idea protects both the bank who will receive a cash infusion as well as the homeowner who got in over his head. The taxpayer will eventually have to pay up, as this is a zero sum game, wealth is not created out of thin air, and even if the treasury simply prints this money, inflation results which devalues our dollar.

Why do we want to save the lenders? It was their own greed that caused them to write mortgages that made no sense at all. The option ARMs were an accident waiting to happen. Why save the homeowners? Many won’t be able to afford even a mortgage reduced by that 25%, and more foreclosures will follow.

I’d like to offer an alternative variation on the above suggestion. We the taxpayers only put up $120B, but the mortgages are all written down by 30%, the banks picking up that other 15%. Now the homeowner has a mortgage only 70% of what it was prior, at a rate that is fixed (5%) and recut to 30 years. But we don’t walk away from our $120B, all homes will carry a first lean equal to the 15% we put up. Money collect on subsequent sale of the property. The banks still get a cash infusion, and only need to write their loans down by 15%, and the homeowner stands a better chance to make those payments, a much lower percent expected to default.


written by Joe \\ tags: , , , , , , , ,

Apr 07

Earlier this month, I mentioned the Money Merge Account program on my feature site, and, as frequently happens, I find a magazine article coming to a similar conclusion.

The May issue of Kiplinger’s Personal Finance magazine has a brief article titled “Don’t fall for this mortgage pitch.” It’s a pretty brief article which again questions whether even prepaying at all is a good idea, but concludes with this punchline; “Salespeople challenge whether you’ll follow through on your own – as if spending $3500 for software will ensure that you’ll use it. Tell that to couch potatoes whose high-end exercise equipment gathers dust.” Amen to that.

I’ve also added links to highly trafficked discussions regarding this topic, and also written a stand-alone page comparing one MMA agent’s example to my own approach using a spreadsheet. I don’t know what surprises me more, that the shortcoming of such systems is so obvious, or that people are so desperate they’ll pay $3500 for something they can do with a free spreadsheet. I am happy to send a copy of my MMA spreadsheet to anyone that requests it.

(updated 5/4 – I added the link to the article above as the May issue of Kiplinger is now accessible on the web.)


written by Joe \\ tags: , , , , , , ,