Bankruptcy is Ok
I predicted that the social stigma associated with declaring bankruptcy would soon be a thing of the past. Well, look at what the SF Chronicle is reporting:
“Foreclosure used to be a last resort, something that hard-pressed homeowners would scrimp and plead to avoid. But some are deliberately choosing foreclosure as an early option. ‘It’s throwing good money away after bad’ to pay an escalating mortgage on a home that’s plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February.”
“They have no regrets about their decision. ‘I feel like the pressure has lifted off my shoulders; before I was trapped,’ said Nicklaus Skaggs. ‘In the long run, I think this is the best financial solution. I have to do what’s right for my family. I don’t care if someone judges me. I certainly wouldn’t put my family in a position to lose $150,000 if I can help it.’”
“A Discovery Bay man who asked not to be identified said he is ‘upside down’ on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.”
“‘I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool,’ he said. ‘Now I’ve got this fabulous pool and fabulous house, but it’s not worth anything. Why shouldn’t I be building equity over the next four to five years instead of playing catch-up?’”
“The man said he has not made a mortgage payment for five months.”
“‘I’m playing the bank game,’ he said. ‘I’m playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I’m really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I’d love (to have it) lopped down to a $450,000 basis rather than $710,000.’”
“If the bank won’t negotiate, he’ll walk away, the man said.”
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So this will only become more and more common. When will it show up in the market? Right now, banks are playing along to avoid having to foreclose and declare even more losses. But it will be ugly within 6 months.
The volume of short sales will pick up by Summer's end, but the Bay Area won't see major panic until next year. But Banks will continue to tumble. As the man says, why play catch-up when you can walk away and start over. The common man knows that houses are at least $200K over priced. That's a 30% drop.
I wonder how this will affect credit card companies. On the one hand, Mastercard will continue to make a lot more money off higher gas prices and the associated charges. But will defaults rise as folks go bankrupt? I actually think they are safe from this to a certain degree.
These folks have the money for everything but their mortgage, which means that they will continue to spend spend spend.
Which is not to say that consumer spending wil lrise - it will still drift lower. Partly because folks don't need a lot of consumer durables (cars, washing machines, couches, etc). And partly because a lot of folks do think the time has come for belt tightening.
I'd say a 10% jump in gas related charges and a 5% drop in consumer spending. That will be a wash for Mastercard. (gas is ~30% of total charges, I believe). Now throw in the benefits of another rate cut. MA is ok for now, but they'd look like a short candidate in 1 more quarter.
“Foreclosure used to be a last resort, something that hard-pressed homeowners would scrimp and plead to avoid. But some are deliberately choosing foreclosure as an early option. ‘It’s throwing good money away after bad’ to pay an escalating mortgage on a home that’s plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February.”
“They have no regrets about their decision. ‘I feel like the pressure has lifted off my shoulders; before I was trapped,’ said Nicklaus Skaggs. ‘In the long run, I think this is the best financial solution. I have to do what’s right for my family. I don’t care if someone judges me. I certainly wouldn’t put my family in a position to lose $150,000 if I can help it.’”
“A Discovery Bay man who asked not to be identified said he is ‘upside down’ on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.”
“‘I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool,’ he said. ‘Now I’ve got this fabulous pool and fabulous house, but it’s not worth anything. Why shouldn’t I be building equity over the next four to five years instead of playing catch-up?’”
“The man said he has not made a mortgage payment for five months.”
“‘I’m playing the bank game,’ he said. ‘I’m playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I’m really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I’d love (to have it) lopped down to a $450,000 basis rather than $710,000.’”
“If the bank won’t negotiate, he’ll walk away, the man said.”
-------------------------------------------------
So this will only become more and more common. When will it show up in the market? Right now, banks are playing along to avoid having to foreclose and declare even more losses. But it will be ugly within 6 months.
The volume of short sales will pick up by Summer's end, but the Bay Area won't see major panic until next year. But Banks will continue to tumble. As the man says, why play catch-up when you can walk away and start over. The common man knows that houses are at least $200K over priced. That's a 30% drop.
I wonder how this will affect credit card companies. On the one hand, Mastercard will continue to make a lot more money off higher gas prices and the associated charges. But will defaults rise as folks go bankrupt? I actually think they are safe from this to a certain degree.
These folks have the money for everything but their mortgage, which means that they will continue to spend spend spend.
Which is not to say that consumer spending wil lrise - it will still drift lower. Partly because folks don't need a lot of consumer durables (cars, washing machines, couches, etc). And partly because a lot of folks do think the time has come for belt tightening.
I'd say a 10% jump in gas related charges and a 5% drop in consumer spending. That will be a wash for Mastercard. (gas is ~30% of total charges, I believe). Now throw in the benefits of another rate cut. MA is ok for now, but they'd look like a short candidate in 1 more quarter.
posted by Andrew at
9:10 PM
2 Comments:
I am advocating zero interest paydowns. It is the obvious solution.
Credit Card Interest needs to be capped at 50% of the total that was borrowed. Once the 50% interest paid cap is reached, the remaining debt is paid back interest free.
I'd make this retroactive to the year 2000. Anyone who has paid more than 50% would not be entitled to rebate, but they could now pay off their debt interest free.
http://www.credit-card-cap.com
http://www.credit-protector.com
What should happen and what will happen are currently very different. There are two major efforts underway: get the consumer spending again and get exports going.
I agree that the 0% offers are coming. Let's face it: if interest rates drop to 2%, thn we are looking at free money in real terms (2% interest is below current inflation levels).
That will jazz up some consumer spending and it will bring much needed relief to a lot of borderline homeowners. But, as the article in the Chron points out, a lot of folks are strating to wonder. Just because they can maybe afford the mortgage doesn't mean that they will try. It makes little sense to scrimp and save and life a crapppy lifestyle just to cover the mortgage on a home that is now way overpriced.
I don't think 0% is enough to get consumers and homeowners back on their feet.
Your other idea - forgive debt - is another great way to free up the wallet. I wonder how the Government could mandate that retroactively?
I am looking at a 0% balance transfer through August 2009. I have a car that I want to apply that to. I bet this week, after a Tuesday cut, I can expect an even more generous offer.
So, yes, that frees up my cash to spend elsewhere. A little here, a little there, and it keeps the economy ticking away. But it isn't enough. I'm not buying a car - just managing my debt. And I suspect a lot of folks are doing the same
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