Strategic Defaults go Mainstream – Why the strategic default trend shows us the need for larger home buying down payments.
You know something has gone mainstream when it hits 60 Minutes. The latest episode on 60 Minutes discussed the topic of strategic defaults and how 1 out of 5 current foreclosures are actually occurring because people are voluntarily choosing not to pay their mortgage. This is a trend that started last year and has picked up steam. The reason strategic defaults have gained favor is partly due to the fact that many Americans have chosen this as a path forward in dealing with large mortgage payments on underwater homes.
The 60 Minutes piece is worth watching. It seems like the question of morality comes up a few times. But I can assure you that if people went in with 20 percent down, they would think multiple times before walking away. Also keep in mind that big banks went into deals with little down and have also walked away from giant deals:
“Despite some indications that the economy is recovering, the housing market remains a disaster area. Currently, about seven million homeowners are behind on their mortgages and that number is only getting worse.
Banks, with the help of the government, are offering some relief to homeowners who’ve lost jobs and just can’t meet their payments.
But there’s a growing number who can pay but are simply walking away from houses that are now worth as little as half of what they paid for them.
It’s called “strategic default.” People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders – the banks – as zookeepers of an ever-growing parade of white elephants.
In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.”
Yet one point wasn’t discussed and this was why strategic defaults are only occurring during this housing crisis. That is, people purposely trying to lose their homes. The reason has to do with toxic mortgages like option ARMs that required very low down payments (or nothing). The minimum down payment we should require on all home purchases is 10 percent. Why? To avoid massive problems like this. Someone that has 10 percent in a home will think twice about walking away. They also won’t jump into a home with no skin in the game. Until we change these rules, we can expect more people to walk away from mortgages that are more valuable than the homes they are attached to.
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401k retirement account an antiquated investment vehicle? As economy stalls companies stop matching 401k contributions.
Many Americans are questioning the idea of a 401k. As many baby boomer near retirement, their 401k is largely seen as their primary retirement account yet with current stock market fluctuations, many are wondering if staying with a 401k is smart. Many Americans have already seen the gyrations with housing values and don’t want this to happen in their retirement accounts. But what people forget is that when baby boomers start drawing from their 401k (something starting now), they will need to sell their stocks to draw on their accounts. You already know what happens when you have more sellers than buyers and prices actually go down for stocks. Younger Americans are taking the brunt of this recession and many are not even receiving company matches to 401k accounts. Take a look at this account:
“(PTMoney) Beginning this month, my company is no longer matching my contributions to the company 401k. That’s essentially $2,000 less in compensation I’ll receive this year, if they don’t match for the remainder of the year. They do say that this is a temporary, precautionary move. Still, this is disappointing news.
I thought about making this post a rant about why that is a horrible cost cutting idea (hurts those that are most responsible, doesn’t really save that much, etc.), but I decided instead to talk about what I’m going to do in light of this change. How am I going to respond?
I also don’t want to rant because I know (a) not everyone even has this benefit to begin with, (b) not everyone even has a job right now, and (c) I don’t want to let them (my company) know it got to me.”
And this isn’t just one case. Millions of Americans have seen their employers cut back on 401k matching contributions. Now for the company match, this is usually a good deal because it is guaranteed money (usually up to 3% of your pay). But even that has now been cut for many. Yet the reality is, most Americans don’t even hold that much money in retirement accounts:
“(Census) There was at least one retirement account in 57 percent of the households. The average or mean amount in the retirement accounts was $49,944, but the standard deviation was $174,193, suggesting that the dollar amount held in retirement accounts varies widely by individual households. The median amount held in retirement accounts–$2,000–provides another indication of the wide variation in the amounts held by households.”
The above variation and data simply reflects the fact that the top 1 percent control some 40 percent of all financial wealth. With wages stagnant I’m certain that many Americans are simply keeping their money especially if their companies are not matching their funds. And with massive market volatility, many are wondering if the market is rigged.
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Stock market plunge erased 9 months of a rally in a few minutes. On the same day too big to fail amendment shot down by Senate.
It is amazing what occurred yesterday. The media gave such a historical event little play. In the matter of a few minutes the Dow plunged nearly 1,000 points erasing 9 months of stock gains ($500 billion in U.S. stock market wealth). Stocks around the world also sold off on the event since many were left questioning what occurred. But even before the plunge late in the trading day, the market was already down nearly 300 points on fears of European instability in particular with Greece. The Euro fell to 1.25 against the U.S. dollar as people ran to safety.
To watch this collapse is actually stunning. My streaming ticker was skipping over entire clicks on the downside; -20, -30, -50, etc. It was a break in the systems that govern our capital markets:
What is probably even more stunning is on this same day, the Senate voted against an amendment to restricted and breakup the too big to fail banks:
“(Huff Po) A move to break up major Wall Street banks failed Thursday night by a vote of 61 to 33.
Three Republicans, Richard Shelby of Alabama, Tom Coburn of Oklahoma and John Ensign of Nevada, voted with 30 Democrats, including Senate Majority Leader Harry Reid of Nevada, in support of the provision. The author of the pending overall financial reform bill in the Senate, Banking Committee Chairman Christopher Dodd, voted against it. (See the full roll call.)
The amendment, sponsored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.), would have required megabanks to be broken down in size and capped so that their individual failure would not bring down the entire system.
Under Brown-Kaufman, no bank could hold more than 10 percent of the total amount of insured deposits, and a limit would have been placed on liabilities of a single bank to two percent of GDP.
In practice, the amendment required the six biggest banks — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — to significantly scale down their size. It was touted as a way to end Too Big To Fail.”
Even a 1,000 point intraday drop isn’t enough for Congress to get the memo. 27 months into this crisis and still no real reform or changes in the economy or financial system.
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