Mike the Mad Biologist

The whole CDO binge (aka Big Shitpile) led to a whole slew of perverse incentives to not help a borrower who is having difficultly paying the mortgage, even though, in the era before mortgages were treated as commodities to be sold, banks routinely went out of their way to avoid foreclosure–usually the costs were too great to make foreclosure a routine act. I’ve argued that if banks aren’t willing to work with homeowners due to financial reasons, then homeowners should also act in their best interests: if that means walking away (‘strategic default’), so be it.

Nicholas Carroll runs the numbers for a family in which one person has lost a job:

They have done a careful financial projection. The total monthly expenses are $5,000, right down to the last dime — which includes $2,500/month on mortgage and credit card bills. That says that if the main breadwinner is not fully employed in 14 months, they will lose the home — and of course take a dip in their credit rating. And if the job doesn’t come until the 13th month, it had better be at the same salary as the previous job, or they’ll lose the home anyway.

Scenario A: Betting on a job, and continuing to pay the mortgage (a.k.a. “doing the right thing,” according to the moralists). They guess that they will be fully employed again in time to save the home. They continue paying mortgage, car payments, and minimum monthly credit card payments….

Scenario B: Prudently walking away. They decide that getting a job might require a career shift or relocation, with some time and money invested in re-education. They immediately stop paying the mortgage and credit card payments. In this scenario, they cut their expenses by $2,500/month (which rises to $3,500/month when they move out and start paying rent). If there is real equity in their financed car, they sell it and buy a used car to replace it.

Here’s the difference between options A and B (italics original; boldface mine):

The difference between A and B is incredible. If the family bets the primary bread-winner will be working within the year and is wrong, they could be leaving their home without enough money to rent a decent apartment in 14 months — exhausted, frightened, and possibly running on bald tires. (People who “do the right thing” tend to leave long before they actually get legal notice to move.)

The family that bets the primary bread-winner will not find a job in 13 months and stops paying the debts will be leaving their home with $33,000 cash in hand, move to a rental (usually in the same school district, if need be), and will have three years for the primary bread-winner to find a job. And that’s their worst scenario — it’s quite likely they’ll be in the house for 18-24 months without making any mortgage payments.

Conclusion: when the writing is on the wall, the best plan is often a prudent walkaway — an escape to the future, equipped with enough cash to get there.

As I’ve said before, this is a business decision. And walking away is something businesses do when it’s the best option.

Comments

  1. #1 Financial Advisor
    March 27, 2011

    How about this:

    A) Banks lend money to people who can afford to oay it back.
    B) People who borrow money pay back the money per the agreement they sign when they take out the loan.
    C) They go to jail if they refuse.
    D) Put Stephen Lerner and all who stand with him in prison in antarctica in solitary confinement for the next 50 years. Traitors deserve no less.
    E) Fannie mae goes bust. We go back to the old way of doing things.

  2. #2 David
    March 27, 2011

    Part of the problem is that our society encourages people to buy houses that are way larger than needed, and way larger than they can afford. the tax deduction for mortgage interest is a prime mechanism for this, principally giving a break to upper-middle-class homeowners who buy above their means. Then when the economy goes south, the homeowner drops into a lower tax bracket (say, one of two wage-earners is unemployed), the tax deduction looses value, and the home becomes unaffordable.

  3. #3 dean
    March 27, 2011

    How about financial advisor go to school to learn that “traitor” has a specific meaning, and it is not “someone who tries to help all the icky working people”. Then maybe he could consider the possibility of jail time for the minority of financial folks who scammed people to get them in over their head. then he could start working on the idea that complex problems don’t have simple universal answers.

    he won’t, of course, because that would require the ability to think.

  4. #4 Financial Advisor
    March 27, 2011

    How about dean go to school to learn that traitor has a specific meaning – anyone who vows to destroy their own home country in order to implement an anti-freedom, anti-God, and anti capitalist marxist freakshow style sysytem. Anyone who vows to crash the stock market and change the system into a marxist one is definitely guilty of treason in the highest order. Getting sent to prison is called lucky. We used to execute people for treachery like that. Lerner is a traitor and anyone who thinks like him should not be allowed to live in or have any affiliation with America. He is not worthy.

  5. #5 dean
    March 27, 2011

    “anyone who vows to destroy their own home country in order to implement an anti-freedom, anti-God, and anti capitalist marxist freakshow style sysytem”

    You really are an idiot.

    “Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.”
    (The Supreme Court has since ruled that the two witnesses are required only the act occurred.)

    “anyone who thinks like him should not be allowed to live in or have any affiliation with America.”

    Condemn people for thoughts and ideas? Pretty low.

    If you really are a financial advisor my sympathies to your clients.

  6. #6 Paul Murray
    March 27, 2011

    “How about this:
    A) Banks lend money to people who can afford to oay it back.”

    Ah – we have a problem with point A. How about this:

    A) Banks lend money to people who can afford to oay it back
    i) Banks lending money to people who cannot afford to pay it back lose it (it’s called taking a risk, people)
    ii) Directors of banks who make predatory loans so they can gamble with them n the CDO market go to jail
    iii) Even if they don’t go to jail, they are placed on a list of “people never to be given a public trust again, ever” and may never again be a company director, hold funds in trust, or even go guarantor for a loan.

    Same applies to people who are directors of companies that – for instance – drop megatons of oil into the sea. The persons on the board are responsible. Not just the CEO, the CFO, or the guy whose job it is to flick the switch. The persons on the board. Director of a public company is a public trust – they should *all* be banned ever again from holding such a trust *as an administrative matter*.

    Do that, and company directors will start – you know – directing them.

  7. #7 Financial Advisor
    March 28, 2011

    @ Paul

    What lead to the housing crisis of 2008 and the economic downturn? Stupid democrats who forced banks to lend to people whether they could afford to pay it back or not. And low and behold if the people who could not afford to pay it back crashed the system. This whole economic mess is becuase of democrats and their stupid ideas on lending money to people who cannot pay it back. That is financial suicide. Then again, we have plenty of traitors and financial terrorists here who want to intentionalyy crash the system to install a marxist one. Sounds like war to me.

    @ Dean

    No, not condemn people for ideas, but prevent them from carrying out terrorist attacks like Lerner is plotting to do. There are plenty of dangerous terrorists here in America that are far more deadly and scary than Bin laden and his group – Stephen Lerner, Cass Sunstein, Van Jones, etc. These people are terrorists to say the least. We could at least get the NSA and CIA to keep a watch on their activities. If the stock market crashes in May like Lerner is planning, do you actually think Lerner and his traitor friends will be safe on any street? I doubt it. I personally would not go after the freaks, but if someone else did, too bad.

    We need to go back to the old ways of doing things. The real world of economics, not this petty “make everyone equal” fake financial crap. We need to lend to people who can afford to pay it back, or we need to start jailing people to debt like we used to do. There needs to be an incentive to make sure they can afford the house before they buy it. No incentive and government bailout equals economic disaster.

  8. #8 Wow
    March 28, 2011

    The collapse wasn’t due to mortgage failures. It was due to the out-and-out gambling of derivatives trading under “naked credit swaps”.

    When financial houses wrap up a toxic debt in some good debt then sell it on and then go and take a bet that the debt is bad, why is this not fraud at the very least?

    If you want to look for traitors, look at the financial advisers.

  9. #9 dean
    March 28, 2011

    ” Stupid democrats who forced banks to lend to people whether they could afford to pay it back or not. ”

    Banks were not forced to loan to anyone – you really don’t understand that?

    “We could at least get the NSA and CIA to keep a watch on their activities.”

    The CIA is not sanctioned to operate inside the US. The NSA is supposed to do so only in rare cases. Seems you’re arguing for a police state.

    It’s becoming pretty clear that your ideas on limiting freedom are a larger danger than anything the ineffectual people you’re afraid of ever will be.

  10. #10 Lynxreign
    March 28, 2011

    @7 Financial Idiot

    Stupid democrats who forced banks to lend to people whether they could afford to pay it back or not.

    Ah, that old lie is still making the rounds?

    You want a traitor, how about someone who has explicitly stated he wants to destroy the American government “I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub” – Grover Norquest, Right Wing Hack.

  11. #11 Financial Advisor
    March 28, 2011

    Sounds like Grover just want to get government back to its original size and intent, not destroy it. Sounds like he is very pro constitution to me. Limited government, not marxist monstrosity! What he is stating is not the destruction of the American government, but getting the American government downsized significantly – the way the framers intended it to be!

    Lerner, Soros, and numbnuts like these wish to destroy it and replace it with a marxist system. Hell, even the ACLU once said their goal was communism. That should have raised a few red flags within tne intelligence community.

    The CIA operates where it wants no matter what rules have been established. The FBI could investigate Lerner and his evil cohorts. Or, are they somehow not allowed to look into terrorist activities either?

    Toxic debts is right. Fannie mae, through democrat control (Barney Frank and Chris Dodd who have yet to see jail time) screwed over the people and led to a meltdown. We need to go back to 1950s banking lending habits in order to stabilize the system. Next we neet cut cut the government waste programs and spending by a minimum 25 percent. Next we need to offer opt-out programs for people who wish to opt out of social security, medicare, medicaid, and so on. These people opting out and not recieving benefits and also not paying in would lift a future burden for both the government and the people as well. I would opt out today if federal law allowed it.

    I am not limiting ideas like some on the left do (Cass Sunstein). I am merely pointing out that making terrorist threats is not freedom of speech. Telling a crowd of brainwashed morons to intentionally crash the system is a terrorist plot in itself. Getting it all on video is priceless evidence for any jury to convict the hell out of them.

  12. #12 Rob Monkey
    March 28, 2011

    You know Mike, I’ve often thought you lacked commenters. You have a great blog, I love reading it, but I’m always perplexed by how few people choose to leave a comment. Then I read Financial Advisor, and I think you’re blessed. FA, I was going to go into your career at one point, but then remembered my parents were married when they had me and it would have been unseemly. Honestly, who wants to take the time to go through your conspiracy-laden bullshit rant. It’s a loose conglomeration of right-wing talking points, the kind of word salad Sarah Palin produces on a bad day, and has no basis in reality. Why not actually try to figure out what’s going on in the world instead of just making it up as you go along? Oh right, cause then you’d have to think, and we all know how well financial types and thinking go together . . .

  13. #13 dean
    March 28, 2011

    @financial liar:
    “Fannie mae, through democrat control (Barney Frank and Chris Dodd who have yet to see jail time) screwed over the people and led to a meltdown”

    Not even close to the truth. Well over 80% of the subprime mortgage created and sold never went near Fannie and Freddy: they were in the “hands” of a series of private companies. Of loans written from 2001 to 2008 those made by Wall Street firms were 4.5 times as likely to be seriously delinquent than those offered by Fannie/Freddy. And the riskiest (read that as sleaziest) loans were ones Fannie and Freddy could not offer. In fact, a study on Community Reinvestment Act compliance, found that CRA-covered institutions were less likely to make subprime loans (only 20-25% of all subprime loans), and when they did the interest rates were lower. The banks were half as likely to resell the loans to other parties. And, before you repeat it again, the CRA [b] does not force banks, or anyone, to loan money to people who don’t have the means to repay [/b].

    I say this with little hope it will sink in – you’ve demonstrated that you have a shitty grasp of facts and no desire to improve on that. As I said, the fact that you see no problem in setting governmental agencies on people simply because you disagree with their political views is the truly scary point of your comments.

  14. #14 Financial Advisor
    March 30, 2011

    A planned terrorist attack on the financial system is not a “politcal view”, it is a threat to national security and should be treated as such.

    Your dear leader Obama had no trouble setting government agencies on people whom his administration disagreed with either. Remember flag@whitehouse.gov ? What was up with that crap? Hypocrit!

  15. #15 Wow
    March 30, 2011

    No, a planned attack on the financial system is no more terrorism than a planned attack on, say, airbases in Libya.

    And please, the actions of financial advisers that sold toxic assets and naked credit swaps was far more devastating than anything mortgage reform managed to do.

    Somehow I don’t think you’re going to agree that this should be treated as a threat to national security.

    Hypocrite.

  16. #16 Financial Advisor
    March 30, 2011

    A planned attack on the financial structure is a terrorist attack and should be treated as such with the FBI arresting the freaks who perpetrate a treason act as this. Any jusry with half a brain would give the death penalty for an act of terrorism like this.

    As for air strike on Libya, you’ll have to consult the great and power Obama on that one. I had nothing to do with it. That’s YOUR president, not mine. It was YOUR revolution, not mine. Blame Google, wikileaks, and the far left radical fascists, not me.

    Toxic assets? The assets would not have been toxic if the democrats would have stayed with homo rights and witches rights and buttplug rights instead of getting in teh way of important financial business to start with. The democrats starting in CLINTON’s administration decided to force banks to lend to people who could not afford the loan the bank was forced to lend to them in the first place. Idiots.

    We need to go back to a pre-Clinton banking system.

    Example: A black family whose income is less than $30,000 per year wants to take out $500,000 loan to buy their “dream home” cannot afford this loan payment and will eventually default on it. Common sense tells the bank to decline such a loan. Democrats tell the baks to give the loan anyway becuase its the family has a “universal human right” to own that home. Guess what, this kind of bullshit is what caused the mess! Get over it.

  17. #17 dean
    March 30, 2011

    “Democrats tell the baks to give the loan anyway becuase its the family has a “universal human right” to own that home.”
    You continue
    “The democrats starting in CLINTON’s administration decided to force banks …”
    As noted before, no such thing happened: despite the number of times you lie and say it did, you are wrong.

    And, since you are unable or unwilling to realize it from the comments above: treason is a crime against the state, not against business organizations.

    “The assets would not have been toxic if …”
    Total bullshit.

    How telling of you to illustrate your fictional story with a black family. Careful – you’ve already demonstrated you don’t have a grasp on reality: dont’t start showing the true you.

  18. #18 Financial Advisor
    March 30, 2011

    “treason is a crime against the state, not against business organizations. ”

    You are exactly correct. Stephen Lerner and his satanic socialist cohorts are plotting a terrorist attack against the STATE – the whole nation, not against a business.

    I am right. The whole thing about banks being forced by law to lend to people who could not afford it is absolute infallibale fact. If you do not believe me, why not call up ole buttplug lover Barney Frank himslef and ask him. Better yet, go look up the info for yourself and prove me wrong.

  19. #19 Troublesome Frog
    March 30, 2011

    Financial Advisor:

    A black family whose income is less than $30,000 per year wants to take out $500,000 loan to buy their “dream home” cannot afford this loan payment and will eventually default on it.

    I would love to see you point to the regulation that would cause such a thing to happen. Specifically. No hand waving. Are those really the numbers you want to stick with?

    I’m also wondering if you might be the person to answer the following basic question about these regulations:

    If you’re a bank and the government is forcing you to make loans that you know won’t be profitable, do you do the bare minimum or do you leverage yourself to the hilt and make as many of those loans as you possibly can? Why did the financial system at large seem to do the latter when it does the former with every other unprofitable regulation?

    For bonus points: What percentage of subprime loans were originated by or purchased by institutions subject to those regulations? How does this affect your take on cause and effect?

  20. #20 dean
    March 31, 2011

    “I am right. The whole thing about banks being forced by law to lend to people who could not afford it is absolute infallibale fact.”

    No, you are, apparently, a habitual (and possibly congenital) liar.

    “You are exactly correct. Stephen Lerner and his satanic socialist cohorts are plotting a terrorist attack against the STATE ”

    And you are unbelievably f*******g stupid.

  21. #21 TTT
    March 31, 2011

    Financial Advisor:
    There are plenty of dangerous terrorists here in America that are far more deadly and scary than Bin laden and his group – Cass Sunstein, Van Jones, etc.

    You are an Al-Qaeda supporter and 9/11 was probably the happiest day of your life, with your only regret being that you weren’t one of the hijackers.

  22. #22 Financial Advisor
    March 31, 2011

    @ TTT

    That would be you, Mr. Weather Underground/Bill Ayers loverboy.

    I have noticed something. Everytime a conservative says something that a marxist cannot prove wrong, the aforementioned conservative is automatically a “liar”. I wonder what page of Saul Alinsky’s book that is from? It’s almost as if you are following exact order from Alinsky himself. Nice try. Real Americans say fuck Saul Alinsky and his worshippers. Don;t try that Alisnky/communist crap with me. That crap only works on those who choose to woship at the alter of malevolent marxism. Nice try try though. Mkaes me laugh knowing there are millions of brainwashed marxist calling someone a liar right now becuase they do not know who to argue facts about the real world. Better luck next time – liar.

  23. #23 dean
    March 31, 2011

    FA:
    I agree that the “Al-Qaeda” bit was over the top. But, it’s really not any more over the top than your repeated assertions. It is highly hypocritical of you to hurl the liar epithet at others and belittle them while deserving the same treatment yourself.

  24. #24 Wow
    April 1, 2011

    9/11 WAS FA’s happiest day of his life.

    It enabled financial transactions to be made in the trillions with less oversight and the siphoning off of large amounts of money to the rich people, where he can advise them where to put it to avoid taxes.

    See, every cloud has a silver lining, as long as you despise a large group of people, as FA does: the poor.

  25. #25 TTT
    April 1, 2011

    It’s not over the top at all to point out that FA approves of Al-Qaeda terrorism, because he DOES approve of Al-Qaeda terrorism. FA thinks a gadfly left-wing academic like Van Jones is WORSE than OSAMA BIN LADEN. Just like Ann Coulter, FA comes right out and approves of violent mass-killing terrorist attacks in American cities because at least it isn’t as bad as a liberal trying to talk.

    You are a pro-terrorism, pro-Al-Qaeda traitor, and ought to share in their fate–the sooner the better.

  26. #26 Financial Advisor
    April 2, 2011

    @ WOW and TTT and Dean

    When the Weather Underground (asshole freaks of nature) tryed to blow up the pentagon (terrorism) just like Bin laden, it was the happeist day of your life.

    Bin Laden is an asshole, but is no worse than the freaks trying to destroy our financial system now. Both are eqaul in their efforts to destroy America. Both are guilty just the same.

    Then again, the hardcore far left are working directly with Islamofascists to end capitalism and overthrow American sovereignty. So, who is more dangerous? The people who carry out the attack or the people who plan it? The people who plan it are evidently the braisn of the operation – the people you go after first.

    I used to like Ann Coulter until she btrayed the conservative movement with her pro sodom stance. I no longer care for her. She betrayed her supporters.

  27. #27 TTT
    April 2, 2011

    When the Weather Underground

    Between that and Saul Alinsky, I don’t grok your ’60s lingo, daddy-o. 23 skidoo. Tippecanoe and Tyler too.

    Here you resemble Ann Coulter again: her use of Bella Abzug to attack liberals today is of a piece with your own grey and wrinkly fetishization of Bill Ayers and Saul Alinsky. If you even gave a shit about your own arguments, you would at least have accused me of liking CONTEMPORARY liberal terrorists like the Earth Liberation Front, or arguably Wikileaks. But that’s the thing about being a conservative: you stand athwart history with your eyes shut and don’t even know enough about your enemies to be able to hate them right.

  28. #28 Financial Advisor
    April 3, 2011

    don’t even know enough about your enemies to be able to hate them right.

    Sorry. I don’t buy into marxist re-education and “revised” history that your perverse comrades now infiltrate into the minds of the youth these days. I’ll stick with the old history that was written before the marxist troublemakers came along in the 60s.

    Now go smoke a dried up dog turd MAAAN!

  29. #29 dean
    April 6, 2011

    “Bin Laden is an asshole, but is no worse than the freaks trying to destroy our financial system now….”

    Don’t assign your low IQ paranoid fantasies about what the “lberal left” is doing to me – you have neither the mental ability nor the required information required to make any assumption about my political leanings. I would point out that the folks who almost destroyed our economy were not “freaks” but respected employees of Wall Street’s most respected companies.

    “I’ll stick with the old history that was written before the marxist troublemakers came along in the 60s.”

    While it would be interesting to see what your thoughts on “old history” actually are, I am positive that after seeing them simple fact checking would show that they are as disconnected from reality as the rest of your comments.

  30. #30 Financial Advisor
    April 9, 2011

    “Old History” refers to the history books that were written before they were “revised” by leftists in acedemia. I have a set of encyclopedias here at my house that were printed in 1961. Now, if I look up the topic “socialism” in my 1961 encyclopedia, and then look it up on the Wolrd Book Encyclopeda webiste today, guess what? The two meanings are almost completely different as it is with a number of subjects. Now, who the hell “revised” history here? I highly doubt that it was a conservative. An academia nut with a Ph.D. in something he thinks he knows about. That’s who. Thanks, but on some subjects, I’ll stick to the old pre-revised editions. The same goes for history books in school. When it comes to the constitution, students should have to read about it from a bokk printed before 1865 just to make sure some “progresive” movement idiots didn’t chnage the history again.

    Over and out.

  31. #31 NJ
    April 9, 2011

    FA @ 30:

    Over my head and out of my mind.

    FIFY.