Walk Away...

In the New York Times this week, there is an article entitled “Walk Away From Your Mortgage!”

“Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials.”

“And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.”

You could see this coming. I wrote the following on December 18, 2009 -

http://nbcharts.blogspot.com/2009/12/jingle-mail-jingle-mail.html

“How freakin' stupid is Morgan Stanley? If they are mailing in their keys, then what is to stop all of those Millions of homeowners currently with Negative Equity?”

“2010 will be a referendum on Washington's conduct towards Wall Street. So expect the anti-Wall Street rhetoric to pick up in Washington after the Health Care socialist-wealth-transfer-scam is passed or shelved.”

Geithner uncapped the losses at Freddie and Fannie, so that they can be turned into giant land banks that will own millions of vacant houses. This will be done to keep this excess supply off the market, to make it easier to artificially prop up housing prices via state-subsidized low interest rates.