Many wealthy homeowners are making a business decision: foreclosure. This strategy is commonly referred to as “strategic default.” In 2011, RealtyTrac revealed that over 36,000 homes with values exceeding $1 million were foreclosed on, and although these foreclosures constitute only 2% of the total U.S. foreclosures, this number is much higher than in years past. Since 2007, foreclosures for homes valued at $1 million has jumped 115%; for homes worth $2 million, foreclosures have skyrocketed to 273%.Typically, these types of homeowners have been able to delay foreclosures because they either have the financial wherewithal to delay or lenders have cooperated with them. However, this latest strategic default trend showcases that wealthy homeowners that can still pay their mortgage are simply making a cost-benefit business decision and are walking away from their obligation. With a foreclosure process that takes a year or more—allowing essentially free rent—and with their debt exceeding their home’s value, wealthy homeowners simply quit paying.
According to CNNMoney: "‘In the lower-priced houses you’ll see more people defaulting because they can’t afford the payments and it’s a choice between feeding their family and paying the mortgage on a home that’s under water,’ said Stuart Vener, a national real estate and mortgage expert with the Florida-based Wilshire Holding Group. ‘In million-dollar homes, you're looking at people who can afford it, but they have to make a business decision: Does it make sense to make payments on a mortgage when the home is worth less than they owe?’ he said. In many cases, it often makes more financial sense to walk away."
While 98% of distressed homeowners are foreclosed upon more rapidly, and are often left simply trying to figure out ways to feed their family and find shelter, the 2% are “strategically defaulting” and often have more than 340 days to live rent-free before they are evicted from their homes.
These numbers of distressed homeowners closely resemble the same notion that has been floating around Occupy Wall Street. While the 99% are struggling to make ends meet, the 1% (or the 2% in this case) use the system to their advantage. Here, although the millionaires can 'afford' to foreclose, this process illustrates the ability for the rich to get richer. They have the means of access to the accountants, stock brokers, and other financial advisers who provide them this fiscal advice. Meanwhile, those struggling are left to their own devices, and I would assume that in some cases, the poor could be making the same "strategic default" if they had the same professional investment resources available to them. Unfortunately, with the poor unable to afford these services because they are trying to just survive, our system continues to ignore those who need our help the most.
ReplyDelete-MNissim-Sabat
I agree with Michael that this is illustrative of "the ability for the rich to get richer." I would add that this is yet another example of how our laws permit this to be done in a lawful manner. It seems to me that this kind of legal gamesmanship could result in more difficulties for the housing market, creating more uncertainty in a market already riddled with uncertainty.
ReplyDeleteIn order to remedy this strategic default, I think it would be prudent to pursue legislation that punishes a defaulter who does so only for strategic reasons. Although this may be difficult, I think such legislation should look to an individual's assets and reported income to determine whether he or she could pay the debt accrued. If an individual is able to pay, the bank (or other lender) should be able to add a substantial fee to the foreclosure proceeding due to the bad faith nature of the foreclosure. This would discourage such gamesmanship and, if properly drafted, avoid punishing those who are in default due to a real inability to pay their debt.
I agree this is something that is an example of the wealthy taking advantage of the housing market as it was pre-2008. However, it might be worth considering that banks may simply not be eager to foreclose on these million dollar properties because they would be exceedingly difficult to sell in this current housing market. Million dollar homes are not exactly a hot commodity with credit being tight and unemployment much, much higher than pre-2008. A customer on the hook for a million dollar home is better than trying to find someone buy the property anew. A million dollar home is only worth it if someone can buy it. Even selling it at a heavily discounted rate would not be in the bank's best interest.
ReplyDeleteNoah A. Barnes
Cheap and moderately priced housing and property would be a stronger commodity in this environment because people can afford it and resell would be much easier. Banks would want to gobble those cheap and moderately priced properties up very quickly.
I think that goes to heart of the post in that this is simply another example of the lack of political clout the poor have in the foreclosure crisis and thus are treated very different than wealthy home owners. It is also an example of how much this country was tilted in favor of the wealthy pre-2008, so much so that the wealthy owed enough to the bank that they controlled the bank's actions.
Noah A. Barnes
Just like anything else, owning a home comes with business decisions. I agree with the article in that, why should you continue making payments when the house is worth less than you owe? It makes no sense to continue pumping money into a house that has become a drain financially. Just like any other decision in the business world, there must be a cost-benefit analysis, and obviously the answer is that the cost of keeping the home far outweighs the benefit thus allowing the house to be foreclosed upon. With foreclosure comes a year of rent-free living, as the article states. So why wouldn't these homeowners just let the house go back to the bank? It is likely that these homeowners have other houses so when the bank finally does take the house back, they will have another place to go. It is unfortunate that people with less means don't have the luxury to just move into their second home, but this article isn't about the unfortunate circumstances of some of the lower classes. It is about investments and knowing when an investment has become a financial drain.
ReplyDeleteJennifer Wolfe
I dont see any problem with walking away from a bad investment! The bank made a deal when you bought the home and so did the homeowner. Strategic default makes alot of sense and I know many people doing it, both rich and poor. Its purely a business decision.
ReplyDeleteI have to disagree with my classmates, in that I don't believe that everything that occurs in this country can be blamed on "class warfare." The banks took a chance loaning all of these individuals money to buy a home - rich or poor. Does it seem right that the rich can walk away from the house even when they can pay for it because it is a bad investment? No, but that doesn't make it illegal. The laws shouldn't be changed so that the government can now control when an individual can invest and what he or she can invest in. Do you want the government to tell you that you must buy 1000 shares of either General Motors or Disney - nothing else? Then the government shouldn't decide when you can buy a house and when you can't or when you can sell/foreclose on a house. The "poor" people being referred to that are defaulting are doing so because they cannot afford to pay the mortgage. Why should they be allowed to stay in a play they are not paying for indefinitely? That doesn't seem very fair either.
ReplyDeleteThere is no easy or "fair" fix to the housing crisis. However, believing the government is the answer to everything, usually never solves a problem either. If a stock is falling a shareholder either has to hold out for the bumpy ride or sell and cut their losses, the same goes for houses. Individuals can keep their "home" or see it as a business decision and run like the wind. As another comment states, buying a house is a business decision. It might be the American dream to own a home, but it is nonetheless a business decision.
I think my reservation in this matter is not about the bad investment - it makes sense to get out of a bad investment and minimize losses. My concern is that these are people who are not financially unstable and are able to make the payments. It bothered me that these people didn't even try to put these homes on the market before entering into the foreclosure process (at least that's how I read the article). These people aren't being forced to foreclose, but are rather making a choice. I don't know that I would say it allows "the rich to get richer," but it certainly allows the rich to not get any poorer. The 2% do have access to better financial advisors because of their economic status. I just can't imagine that these 2% making "foreclosure decisions" is helping the housing market in any way. I also was interested in the suggested legislation by Dallas as a solution. Even if the 2% was barred from foreclosure because of assets and income, they can still try to sell or rent the property.
ReplyDeleteI agree with Katie Niland in that banks take the chance when they loan people money to buy a home. However, I do not agree with the comments made above that it is ok to walk away from a bad investment. It may seem sentimental, but I think there's a real trend for people to view a house as disposable- a bad investment to walk away from. Where is the sense of pride in ownership? Where is the pride in owning a home and making it your own? That being said, I think the bigger problem with foreclosures is that banks are giving loans to people that can't afford them, and people are living outside their means. Not everyone can afford a McMansion... or even a smaller home, and banks should have the wherewithal to not make such risky loans when it is unlikely that people will be able to make the payments.
ReplyDeleteI agree with Katie Dean that viewed in isolation, this is a business decision that appears to make sense. However, I am troubled by the fact that these wealthy people are taking advantage of the empathy most Americans feel for people who have lost their homes in the foreclosure crisis. Usually, people take their financial responsibilities very seriously; the inability to pay off one's bills is typically humiliating for most people. I think Americans were horrified to learn just how sinister the mortgage lending practices had become prior to the market's failures and (for the most part, I know prof. cummings has written about some notable exceptions to this rule) rightfully voiced their anger at the mortgage companies rather than being critical of the people whose homes were foreclosed upon. Now, in a surprising twist, the mega-rich have used this public show of support for people who couldn't afford to keep their homes to make more money while sheltering themselves from the social judgment that, 10 years ago, would have prevented anyone from so shirking his or her financial responsibilities.
ReplyDeleteAlthough there are obviously differences between purchasing a house and purchasing a car, I bet you don't find very many of these homeowners buying expensive new cars whose value depreciates as soon they drive it off the lot, deciding to quit making payments just because they owe more on it than its bluebook value, and waiting for the bank to come repossess the car. It's just not socially acceptable to do so, and they would be embarrassed for members of their community to learn that the bank had repossessed their stuff.
I also think Noah's point that the banks aren't in a huge hurry to foreclose on these homes because since there isn't a market for these McMansions, they can't make money on them is telling. For these parties, the whole transaction is driven by money, while for the rest of us, homeownership is primarily about having security in a place to sleep and live and less about an investment in the pure financial sense. Although I hesitate to outright criticize people who choose to default on their McMansions in what they believe is a savvy business decision, I think it's really disgusting that these "strategists" have no compunction about squatting in these homes until the actual date of foreclosure.
Over the course of this semester, I’ve read many things that mad me take a step back and look at how our country has been overrun with instant gratification/reward. When I read this article I saw it fit to place blame on all three groups – the banks, the non-wealthy defaulter, and the wealthy defaulter.
ReplyDeleteI think we’d all agree that the banks definitely deserve the biggest part of the blame. Packaging deals that were too good to be true to unknowing, eager borrowers, banks bet the house on the potential to make a profit by preying on an unsuspecting group. Problem is, they thought they were only betting the borrower’s house on these mortgages. Apparently, they did not have the foresight to see the cliff they were headed toward (or maybe they bet and won on government being forced to come to their rescue).
I understand why the “98%” would risk these mortgages. People want a home and nice things to call their own; I’m sure we all have similar wants. But we often want things we cannot afford. And in our “right now” society, waiting until we are in a better financial situation is the last option anyone wants to take. I mean, how many of us took out student loans to pay for our education? It very similar – we couldn’t afford it, we wanted it, and it was good for us. The difference is the risk. If we can’t get a job after graduation our obligations can be lessened. If it takes us a couple decades to pay it off, the government will forgive the remaining debt. We won’t be thrown out in the streets and have our family displaced. The mortgage crisis came with such harsh realities. The worst part is that most of these victims had no idea what they were committing to, and once they realized they couldn’t meet their financial obligation it was too late.
But I don’t understand why we should be angry with the “2%” of people who took out mortgages on a multi-million dollar mansion? Just like the 98%, they wanted something that they felt they needed to take a mortgage out to afford. Just because the cost was substantially different does not change the fact the motive was the same. However, I do feel conflicted about these “strategic defaults” because I can see it both ways. If I were ever lucky enough to be in the 2%’s shoes, I would have to agree with Jenn and Katie. But I’ve used the term betting because that’s how I see a mortgage. The lender bets you’ll either pay it off or he’ll make money on the foreclosure, and the borrower bets he’ll pay it off. When you gamble recklessly – willingly or unknowingly – you stand the risk of losing big. Therefore, I feel that the 2% should have to pay the price of their loss. Then again, a wealthy gambler can usually buy back in, so maybe a default here is just another perk of being rich. I am really struggling with this, and I can’t honestly decide what I think is right.
At the end of the day the 2% could weather cutting their losses on one house; the 98% were/are praying they can find somewhere to rest their head; and apparently, someone else gets to pay the loss of the banks.