From foxbusiness.com:
Gene Kessler, 67, may be the new face of mortgage default. The tech industry retiree is in the process of walking away from the home he purchased for $166,000 in 2004 in a small town 75 miles southwest of Minneapolis.
Its value has plummeted to $111,000, wiping out Kessler’s $45,000 down payment and leaving him with a mortgage that’s more than the home is worth. He stopped paying the loan six months ago, and estimates he’ll have to vacate by March 2012.
But Kessler isn’t in financial trouble, and he could afford the monthly payments. He has no other debts and two pensions from former employers, as well as Social Security. He also has a woodworking hobby, and runs a small business selling the artisan lamps he makes in galleries. He’s single now, and his two children are grown and gone.
“I was looking for a way to get back to a larger city, and this was the only way I could get out of this house,” says Kessler, who paid $800 to YouWalkAway.com to help guide him through the process known as strategic default. He’s anticipating a move to a warmer climate and a more active art and dating scene in Santa Fe, N.M.
There’s no data on the demographics or financial histories of the people receiving recent default notices. But among them are some homeowners who have never defaulted on a loan before, at least according to one poll. YouWalkAway.com surveyed several hundred of its clients earlier this year, and just 23% said they had previously shirked a financial obligation.
“The people we are now seeing are nearing retirement age, who never missed a payment on anything in their lives,” says Jon Maddux, co-founder and CEO of the Carlsbad, Calif., firm. “They are trapped. They can’t sell or get a modification and they need to downsize or move for a job.”
Attitudes toward default have also shifted, Maddux says. “Back in 2008 people were very emotional, very scared, in disbelief or denial,” he says. “Now they are simply fed up. It’s a very calculated, black-and-white business decision. People feel very relieved.”
A more widespread understanding of the consequences of default may be a factor, says Brent White, a University of Arizona law professor and author of Underwater Home.
“The conventional wisdom is you are ruined and are not going to recover,” says White, who wrote a widely circulated discussion paper on the topic. But in so-called “non-recourse” states such as California, the bank can only foreclose on the property and resell it. If the price is less than the amount owed on the mortgage, the lender can’t sue the homeowner to recoup the shortfall, says White.
White says underwater homeowners should figure out if they are paying substantially more to own a house on a monthly basis than they would pay to rent a similar property. “Even if you are thousands of dollars underwater, if you are paying the same as you would to rent, you don’t gain that much financially by defaulting,” he says. (The survey by YouWalkAway.com found a quarter of respondents saved 50% or more on housing expenses when they rented after their default.)
In addition, someone who will need a good credit score to run a small business or borrow to meet a goal, such as a child’s college education, should avoid strategic default. “If you have a particular need for easy credit in the future, then it doesn’t make financial sense,” White notes.
As for Kessler, he is looking forward to biking, tennis and skiing in the Southwest next year. “I don’t feel guilty at all about walking away from the place,” he says. “The banks really did it to themselves. They made a ton of money with me over the years. I owned four or five houses. But I don’t think I’ll ever buy another house. I’ll probably just rent until they put me in a nursing home.”
This just in:
Hi Jim – Don’t know if you knew but you just had about 10 seconds fame on Aljazeera English (Meltdown : The Men Who Crashed The World, Part 1). Not sure how many of your fans are San Diego/London dual residents (Aljazeera is on terrestrial TV here) but I recognized you instantly from your many videos. Keep up the good work! Cheers,- Michael
I don’t get it. The guy paid $166k and it’s now @ $111k. So, it’s lost $55k in value. The guy put down $45k. So, his mortage is about $120k and he’s “walking away” for $10k?
$10k isn’t worth the impact to his credit.
I think the credit impact is no longer a worry.
One can save up a lot of money on the rent free program. Then rent for a couple years and save more…then buy a house outright.
You heard it here first- it will take a generation for this all to play itself out. One generation.
These articles are usually missing key elements. My guess is that while he purchased for $166k in 2004, the probability that he refinanced to a higher mortgage is great.
Thus, he likely lowered his cash loss, but the house is probably significantly under water and he doesn’t imagine it rising to meet that loan balance in his lifetime. Great time for a free pass to Santa Fe.
It would be perfect karma if this action haunts this man for the rest of his life. However, I don’t doubt he can make this work to his immediate benefit. If nothing else he should have the intestinal fortitude to say he is a lying weasel who is taking the easy way out. Saying “They (the banks) made a ton of money with me over the years” is nothing more than wussy excuse for not keeping his word.
What makes him the arbiter of how much the banks are allowed to make? He wanted the loans. Fees, costs, and interest rates were disclosed before he signed the paperwork. Why will (ultimately) the tax payer be bailing out this guy’s lack of moral standing? He has two pensions, Social Security, a side business – how about if someone arbitrarily decides he only needs one pension and no Social Security. If that happened you would hear him scream bloody murder from the rooftops about how he had a contract and promises were made to him that must be enforced.
It is unfortunate that many will see what he did as smart thing to do rather than the right thing to do.
I suppose I shouldn’t be surprised that he $800 to a service to guide him through the strategic default, but I am.
He’s going to Santa Fe for the “dating scene”. What a catch.
“Honey, you’re sick and have become inconvenient. I’m leaving. It’s a black and white business decision. Hope it works out for you.”
Known strategic default? His Social Security should be confiscated until the debt is paid back on the government guarantee.
I’m surprised at how bitter a few of my fellow commenters are!
so long as MN is a non-recourse state, then he is fulfilling his obligations by giving the house back to the bank in the same condition that he got it when he got the loan.
he didn’t sign a paper saying that he had to stay in that house until he found some sucker to buy it, just that he would pay the note if he wanted to stay there. he doesn’t, he isn’t, and he is giving it back to the bank. if the bank made a foolish decision to lend money based on a bubble valuation of the asset, that is there problem (again, if MN is non-recourse).
why all the opprobrium?
I agree with Freedom. Banks need to tighten up their contracts if they want to be better secured.
Hi everyone, I read this blog alot but have never posted. This post pulled me out of the shadows. Because of the bank bailouts and the behaviors of the banks afterward (not lending to small business, not adjusting mortgages, not auctioning homes in foreclosure, etc), people no longer see paying their mortgage as a moral obligaton. The banks were given money to keep things moving and instead just took care of themselves. The banks certainly haven’t felt any moral obligation. Now people are following in their footsteps and taking care of themselves by walking away. I don’t blame them.
If you look at your financial picture through a business perspective, defaulting makes business sense. Businesses shut down nonperforming and underperforming units all the time. I don’t intend on defaulting on my mortgage, but have seen others do it and agree with them.
Moreover, the people I know doing this are very wealthy, so to them it’s just another financial decision. They are now renting (no one had any trouble finding nice rentals) and don’t plan to buy for a number of years.
HotelDelFan – thanks for commenting!
I’m with Charlene.
In fact, instead of costing you $800 to facilitate a foreclosure, for those who are thinking of walking away, I’d like to save you about $800 – and make it more bearable.
Just turn your phone off, and wait.
Your time will come.
The thing that’s being missed is that “the banks” aren’t eating the losses. It’s the Federal Government (they guaranteed them, remember?) and that burden is passed on to me and you because “we” are the government. Unlike a business default, which usually impacts the investors that intentionally took the risk, I have no say in the matter.
This is just indicative of the moral decay in this country. Once a default / loss of a home / divorce / bankruptcy was shameful – as it was a sign of personal failure. Now? It’s a “business decision”. How many of these same people made a “business decision” to share the profit with “the bank” if they made money on the sale of their home? None. It’s a game of “heads I win, tails you lose”.
And, yes, the laws are written that way. The laws are also “quaint” in the fact that they were written when people weren’t as cavalier about screwing each other as they are today. They were designed for true hardships, not a “business decision” of convenience.
Lastly, any amount of debt that was incurred to buy a bass boat or take a cruise should not be able to be discharged without bankruptcy – where a creditor has a whack at all your assets before you can be released of liability. Then guys such as our MN friend would think twice as his retirement might end up a little less grand than he anticipated.
There’s going to be plenty of debts that society is going to default on over the next 10-20 years. Usually the first ones out get the best deal. I’d be willing to bet sometime in the not too distant future one of this guys pensions is going to suffer the same default decision and he’s not going to be happy about it. The reality for retired people is they live by collecting debts from the productive member of society. If everybody starts making decisions that they don’t have to pay when it doesn’t suit them good luck collecting public pensions, social security, and other forms of retirement income.
You know your nation is in deep trouble when the homeowners now behave like the banks.
Ordinary citizens starting to think like bankers is probably the worst long-term societal impact of the mortgage debacle. As el katz suggests, the lack of honor and ethics they’re starting to apply to their financial decisions will inevitably spread to the way they live the rest of their lives.
A loan is a business transaction. Once banks start collateralizing honor we are all in big trouble.
Do Dave and el katz feel the same way about the Tishman Speyer and BlackRock Inc. strategic default on the Stuyvesant Town and Peter Cooper Village loans? Why the hate for individuals walking away but not a corporation???
I’m still very old-fashioned about borrowing money. Being unable to pay back money you borrow is a failure. Being unwilling to pay back money you could afford to pay back is contemptible.
Defaulting on a mortgage is a business decision not a morality play. The lender is not left with nothing, they get the house back. The property is the security for the mortgage, the lender knows that going in.