Should I walk away from my mortgage?

If you are like many U.S. homeowners your mortgage is more than your house is worth.  If you are in Nevada you are in the 2/3 majority, in some California counties the number is even higher.  So you are asking yourself whether you should walk away from your mortgage since your bank has refused to reassess and reduce your mortgage.

There is a lot of writing on this subject mostly from financial columnists (MSN, Kiplinger, etc.) who were advising you just a short while ago to not worry about ARMs and to get into the real estate market to "build equity".  But they never really get to the point about what you should do now.   Even state and federal governments aren't doing their responsibility to fully help you know your options, take for instance Feddie Mac which I think puts undue pressure on staying in your "under water" house: http://www.freddiemac.com/avoidforeclosure/your_options.html.


My view is that if your mortgage exceeds the market price of your home by  more than 15% you should give the keys back to the bank.  Why?  Because making up 15% is a long way back for the real estate market and it won't happen for a long time, probably more than 5 years.

Simple example: you bought a $500,000 home with 10% down. You've been making payments for several years and your mortgage is now $425,000.  Your neighbor's house sold for $350,000 in Q4 2009 (Oct - Dec).   If you sold the house today you would have to find another $75,000 (plus fees associated with the sell) to pay the bank which is 20+% of the sales price.  If you have that much additional cash sitting around, save it and buy some I Series U.S. Savings Bonds. 

I came to my conclusion after reading a lot of opinions on the subject.  The writing that most influenced me was from Professor Richard Thaler at the Univesity of Chicago writing in "Sunday Money" at the Times.  (There's also a paper by Prof Brent White:http://online.wsj.com/public/resources/documents/WalkingAway1029.pdf)  Here are the main points:

• One can have a good credit rating again--meaning above 660--within two years after a foreclosure.
  
• If lenders and big property owners are doing what is in their interest, such as defaulting, then why shouldn't home owners? (Example: Tishman Speyer of New York)
  
• In states like California and Arizona, mortgages are non-recourse which means that the lender has no claim on a borrower's other possessions separate from the home.  In fact says Professor Thaler, homeowners in California and Arizon pay extra for the right to default without recourse.
• The economic and social costs of giving the house back to the bank is far less than the cost of paying off an underwater mortgage.

So if you are "under water"  on your mortgage seriously consider giving the keys back to the bank and look forward to another day when you might be in a position to re-enter. It will be a big burden of your back (and heart) and it's not as big of a deal as you might think.

Krugman was Right

When President Obama came to office in January 2009, the U.S. ecnonomy that he inherited from his Republican predecessor was headed into collapse. The jobs report and the stock market indices were shedding big numbers. As the president considered what to do he turned to this economic team of Larry Summers (the Treasury Secretary under Clinton who championed allowing banks to gamble with credit default swaps and went on to earn tens of millions at hedge fund DE Shaw) and Tim Geither (former NY Fed Reserve boss who signed off on allowing Goldman and JP Morgan to get away with billions in US tax payers money by paying them 100% on their insurance contracts with the failed insurance giant AIG).

The advise he got from Larry and Tim was not only bad for Americans out of work, it was also bad for the president's future.

What Larry and Tim advised the president to do was to go easy on the banks saying that if he did so they would start lending money, everyone would just forget about what the banks had done to cripple the economy and the who scary story could just go away.

Paul Krugman at the time wrote that this was folly. He said that the president needed to inject significantly more money directly into the real economy to create jobs not give it to the banks. Krugman also said that if the president didn't take this direct course of action that he would lose political support.

The election of Republican Brown to the seat held by the late Teddy Kennedy shows how prescient Mr. Krugman was.

U.S. Markets Head for A Crash

U.S. stock markets and institutional investors and traders wanted desperately to forget about Oct 2008 and the year-long pain that ensued. For them the Dow was back up and they wanted their bonuses. They did not care that careless decisions made by banks and insurance companies had brought the U.S. economy to the brink of total collapse and resulted in the greatest economic downturn since the Great Depression of the 1920s and 1930s.

The likes of JP Morgan Chase and Goldman Sachs had off-loaded bad loans to the government (i.e., Bear Sterns) and had changed their form of incorporation to benefit from the government bailout (as did Goldman when it gave up its investment banking classification to become a commercial bank) and they were sailing free.

Then in December 2010 came the election for a U.S. Senate seat in Massachusetts held by the Kennedy brothers for half a century. When the results were in, a Republican had won and joined the all Democratic Mass delegation.

The election served as a wake-up call for the President who realized that his financial advisers (Larry Summers and his protege Tim Geithner) were out of touch with the anger the American people held for what the banks had did to their jobs and retirement savings. The president realized that the people correctly saw that the banks were sailing free while they, the people, were feeling the pain.

The president remembered the words of a past Chairman of the Fed Reserve (Paul Volker) who had argued for the reduction in the size of banks and for the elimination of "casino-like" operations at the banks. The president called a press conference to let the banks know we was ready for a fight to change their ways.

The bankers realized they weren't smooth sailing yet.

The champions of the banks (Bernake, Summers, Geithner) started to worry about their jobs.

And the markets and investors headed for the exits.

Observers started to wonder if we would see a crash when markets opened on Monday.

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US Market (Dow) past 1 month (as of 1/22/10)












US Market (Dow) past 1 year (as of 1/22/10)

U.S. Supreme Court Legalizes Bribery

In a remarkable display of judicial radicalism, the U.S. Supreme court ruled 5-4 to legalize the unlimited participation of billion dollar corporations in bankrolling politicians.

The ruling, Citizens United v. Federal Election Commission, overruled two precedents: Austin v. Michigan Chamber of Commerce (1990) and McConnell v. Federal Election Commission (2002).

On this issue the U.S. Supreme Court has taken action more radical than any other court in U.S. history.

Here are the 2 arguments being made in support of the ruling:

1) The "middle class" argument - Proponents of this line of reasoning say that today only rich candidates bankrolling themselves can win in U.S. politics and so by allowing corporations to bankroll less well off candidates this decision is restoring democracy. But what about the influence and hold that these billion dollar corporations will have on candidates they've backed with cash? It seems to me that the real problem here is our system of financing of elections. Rather than have corporations bankroll our democracy, why not remove all private money and have 100% public financing for election? Now that would really level the playing field between rich and poor and return government policy-making to the people.

2) The "First Amendment" argument - This argument is popular among right-wing thinkers and was used by the Supreme court Justices in their 5-4 decision. They argue that the First Amendment applies to corporations and that money is a form of free speech. Here's what the First Amendment actually says:

"Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances."

It always amazes how conservative jurists can switch from following the exact text to being expansive in their reading of the Constitution when they want to be.

I have to believe that the framers of the constitution were not oblivious to money matters and that if they had wanted to they could have made the First Amendment specifically include money as a right in elections, not just "the freedom of speech".

Bad Supreme Court decisions don't stand that test of time. Who today would agree with Plessy v. Fergusson? Citizens United v. Federal Election Commission will come to be remembered as the decision made by 5 right-wing Justices out of step with where American democracy stood in 2010.

It is also the case that while U.S. corporations can be fined and their executive sent to jail for bribing foreign officials (see: Foreign Corrupt Practices Act), they have a free ride when it comes to bribing domestic ones.