Foreclosure moratorium

Lengthy article here in the NYT describing the problem. Of more interest to me is how Connecticut homeowners can use this mess to their advantage. In “non-recourse” states, where banks cannot go after borrowers for the loan balance remaining after a house is foreclosed on and sold, borrowers should probably sit tight and live rent free for the next couple of years while all this is sorted out, save what you would have paid for the mortgage and then move on, with a couple of hundred thousand bucks in your pocket.

In New England, founded by Puritans, there is no such forgiveness and banks can, and do, sue borrowers for “deficiency judgements”; until now, debtors were advised that they had to exhaust all their other assets before walking away from their home. Now those same debtors have great leverage – if the bank wants to salvage anything from bad loans without a lengthy wait, they will need the cooperation of the mortgagor. My advice to struggling homeowners is to consult a lawyer experienced in this field and see whether a work-out or a short sale can be accomplished. Forgiveness of debt can be a wonderful thing.

UPDATE: thinking about all this, I wonder whether it’s not a good idea for everyone to stop paying his mortgage. Bit of a gamble, but if it works out, you should be able to more than recover your own equity and still profit from the withheld mortgage payments. Check the math for your own situation, but a strategic default is looking smarter every day.


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9 responses to “Foreclosure moratorium

  1. Inagua

    Your speculation that it might be a “good idea for everyone to stop paying his mortgage” could be misinterpreted by your critics at the Realty Board as encouragement of a nationwide mortgage strike. I’m sure you meant to say that it might be advantageous for some homeowners to consider a strategic default, as many other commentators and lawyers have previously noted.

  2. Hey

    Universal default is a huge moral hazard and would be horrible long term.

    It all depends on how valuable one’s credit rating is – even with Gwich size mortgages that can be a very bad trade. Not too many prime brokers will lend you a few hundred $M if you walked on your mortgage recently.

    Shortsales do look to be the new new thing, but the tax implications can be brutal. Loan forgiveness is treated as income, but it’s phantom income. You can very quickly have no way to pay the IRS, and so are trading an unpleasant situation for a terroristic one.

  3. OG Reader

    As a small time landlord I say go for it – the more people that are prohibited (for 7 years) from obtaining a government backed mortgage (nearly all mortgages) means more renters and higher rents.

    Also, if you follow hedgie Paulson’s thought, inflation will spike within 18 months, wherein debtors are going to make out like bandits paying back pennies on the dollar for any outstanding fixed rate loans, assuming wages inflate.

  4. shoeless

    Wages have no way of inflating with 10% unemployment. This is the biggest problem with inflation-related themes. We have overcapacity at every turn and globalization will force wages down, not up.

  5. Old School Grump

    Hey, how ’bout us boring folks who bought houses we could afford, didn’t treat them like ATM machines, and are still paying our mortgages? When do we get some goodies? I don’t want to go on a mortgage strike because my monthly mortgage payment is definitely less than rent would be. But now that being financially responsible = being the sucker at the table, I’m feeling the need for a little redress.

  6. just_looking

    OSG, I am with you. Bought high (2007) but w/ 40% down I am not in a good spot to walk away. It makes me nauseous every time I hear about every one who lied, cheated or even made an honest mistake (thought that they would be employed forever at a good wage) all get relief of some sort – except the “idiots” like me who did the right thing. The government has been rewarding bad behavior at an ever increasing rate and at the expense of the people who try to do the right thing, which is why we have less people trying to do the right thing and more asking for forgiveness instead of permission.

  7. just_looking

    I thought the way to do this was to buy a new house in today’s market (before your credit is ruined) and then flake on the old house.

  8. Anon E. Moose

    just looking;

    Largely agree with you. I just point out that in the land of the free we shouldn’t have to ask permission, and government of the home of the brave shouldn’t be dispensing so much forgivene$$.

    On your second point, you think lenders aren’t wise to that? I wouldn’t want to be the second lender to the party on the theory that the borrower will screw the other guy first. Sooner or later, he’ll get around to screwing you too. Treat the second house like an investment property for rates and LTV. If he gets out of the first deal with his a** we can talk about refi-ing the second house as a primary residence.

  9. fred

    Hey said:
    “Shortsales do look to be the new new thing, but the tax implications can be brutal. Loan forgiveness is treated as income, but it’s phantom income. You can very quickly have no way to pay the IRS, and so are trading an unpleasant situation for a terroristic one.”

    I think one will get a 1099 for 10% of what ever the forgiven loan amt is?

    Not sure though. Anybody know the details?