What Did We Learn?

by Ron Daly

2009 has been a year of learning. We've learned all about credit default swaps. We've learned how badly our new members had been treated by their former big banks. We've learned how to do more with less when it comes to marketing budgets, collections budgets, staff shortages - it's been a make-or-break year for the industry, to say the least. 

Here's some basic lessons: 

1) The amount of financial advice out there in the world is astounding. The quality of that financial advice is embarrassing. 

2) Just when you think our industry has hit the bottom of the problems we're facing from this recession, someone throws us a shovel and yells "keep digging". 

Let me cut to the point here...did you ever think we'd be looking at a time in our country when walking away from a mortgage was a good idea? How about a time when people recommended it? 

People like Dr. Brent T. White. A law professor at the University of Arizona, Dr. White recently published a paper titled "Underwater and Not Walking Away: Shame, Fear, and the Social Management of the Housing Crisis".  

His recommendation? The 15-million people with underwater mortgages should just walk. 

15 million people? Let's be optimistic and say those people only borrowed $300,000 on average. That's $4.5 trillion dollars that'll never be recouped. For better or worse, the housing market will never again be what it was. So banks and CUs won't be able to unload those houses, nor does the land beneath them necessarily mean anything to anyone, as developers in personal and business real estate aren't making any moves until the picture's less bleak. Whenever THAT is. 

What's more, it doesn't seem as though Dr. White is in the minority. This story from NPR.org highlights "walk-aways" and a service designed specifically to help them work toward a strategic default.

This isn't a new problem (that NPR story is from two years ago, when the bottom just started coming up at us). A segment of this Newsweek piece from March states: 

The study is based on the data of some 45 million properties that carry a mortgage, which accounts for more than 85% of all U.S. mortgages. The data was filtered to include only properties valued between $70,000 and $1.25 million. 

The most severe "underwater mortgages"—mortgage loans that are 125% or higher than the value of the property—are in five states: California (723,000), Florida (432,000), Nevada (170,000), Michigan (128,000), and Arizona (122,000). Underwater homes are of serious concern because for some homeowners there is little incentive not to walk away and allow the home to fall into foreclosure. Foreclosed homes drag down the prices of neighboring properties, possibly dragging more homes underwater. 

A veteran real estate broker in Las Vegas who declined to be named said that in 2004 there were only 2,000 homes on the market; now there are some 20,000 and growing. "Everybody became crazy," she said. "In certain areas [home prices are] off 60% from the peak. It's really sad because there's no equity and people can't refinance."

We're looking at a quicksand situation here. If people start walking away from their mortgages on "good advice" like that mentioned above, it will just topple what little is left of the housing market like a string of dominoes. And whatever happened to "promoting thrift"? We must not be doing a great job of that, considering the number of bad mortgages floating around out there. But, then again, maybe people weren't as willing to listen to us "conservative lending institutions" then as they are now. Is now the time to remind people that running away from your crummy mortgage will hurt you? When and how can we make people learn that cut-and-run won't do?

I haven't read Dr. White's entire paper, but I do know this - a default isn't a good thing. And no, I don't agree that you can recover from it inside of two years by paying down the balances on your cards and being otherwise responsible. Where do you live after you've been booted from your home? How do you start recovering? Because like it or not, those two years back to your healthy credit rating are going to be a tough slog.

I'm sure there is a great counterpoint as to why consumers should just walk away...I'd love to hear it.

Comments

[Anthony Demangone]

His argument is that more consumers who are under water should do a cost-benefit analysis. If you are $200,000 under water, how important is it to keep your stellar credit score? Is it worth more than $200,000? The tax liability has been removed, so if someone is fairly certain they can obtain rental housing, this paper makes a compelling argument. It is certainly worth reading, as I'm sure there are more than a few consumers paging through his paper this very moment.