How to Walk Away From Your Mortgage and Stay Living in Your House for Up to 8 months

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“Fear rules credit markets,” Bloomberg quotes a source at Goldman.

“Corporate loan market is reeling,” adds the Wall Street Journal. The WSJ does not mean ‘reeling’ in the sense of the Virginia reel…or of a Scottish reel…but reeling like a boxer who has just been hit by a haymaker.

In the battle between greed and fear – the latter seems to be landing the hard punches. Deflation is winning – not inflation…Mr. Market – not the market manipulators. Bust, not boom.

But let us back up to where we left off yesterday.

Were you paying attention, dear reader? We hope so.

Yesterday, we noted that Americans had misunderstood what capitalism is. It is not a system that makes people rich. It is only a context, in which people CAN get rich, if they do the right thing. It is a moral context, in which virtue is rewarded and error is punished. Given misleading signals by their financial authorities, Americans made a big error – they spent too much and saved too little. Now they are being punished for it, even while the feds tell them that they were doing the right thing all along…and that they’re going to get more money and credit so they can continue doing it.

But nature – whom capitalism allows to express herself – will have her way. Nature wants to correct the errors of the past five years, at least. Maybe she wants to correct the errors of the last 25 years…we don’t know. But she’s got a switch in her hand, and we’re staying out of her way!

Yesterday, the Dow went down a further 65 points. Even great companies, with unbeatable brands are going down. Harley Davidson, for example, is off more than 20%.

And now, it appears to us that Americans are learning their lesson. They are finally downsizing…cutting back…making do. Soon, we predict, we will read that they are saving more money. ‘Thrift’ will make a come back.

“More homeowners walking away,” says CNNMoney.

There’s even a website to help them – http://www.youwalkaway.com. It tells homeowners how to walk from their mortgages, but stay in their houses. That’s right, it tells them that they can live in their houses for ‘up to 8 months’ without paying their mortgages…and after announcing to their mortgage holder that they have no intention of making any further payments.

Nice deal for them. But not nice for the lenders. That’s why there’s so much fear in the credit market. They’re afraid they may never see their money again. By the time they get the family out of the house and put it on the market, for example, the house price could be well below the loan amount.

Even at the top end, house prices are getting softer and softer. Forbes reports that Hollywood celebrity Ed McMahon has cut the price of his Beverly Hills house three times, from the $7.7 million he asked in July ’06 down to $5.7 million today. Guns ‘N’ Roses guitarist Slash bought his house in Hollywood Hills for $6.2 million; he sold it last month for $5.8 million.

Toll Bros. announced its seventh straight drop in quarterly income.

And analysts are saying that the coming recession (maybe it is already here) will be “worse than recent downturns.”

It will be a “Year of Reckoning,” says a Wall Street Journal headline. Hey wait, that’s our line!

While deflation is landing most of the solid blows, inflation gets a jab in now and then. Yesterday gold rose $14.70 to over $905. The CRB rose to 506…and wheat cracked the $10 a bushel mark.

Our guess has been that if deflation takes down stocks, property and other assets…it will leave gold RELATIVELY unharmed. Because, though the feds’ efforts to counter deflation won’t really help the economy very much…they should light a fire under the yellow metal. On the other hand, if the feds were able to revive the boom, the inflationary pressures would probably drive gold up more than stocks. Sell stocks on rallies, we concluded. Buy gold on dips.

In any event, gold still looks like a good thing to hold onto – even over $900. It’s gone up nearly 30%/year for the last six years. The bull market probably has a way to go.

If you are interested in getting your hands on our favourite yellow metal simply visit Bullion Vault. http://www.bullionvault.com/from/ausdr1

There is a fair amount of talk in the financial press about how a recession might be not be in the cards…or how it might already be over. Stock markets around the world are down 10% to 20%. U.S. housing is down 10% or so. “The bad news is already all out there,” say the optimists. Then, they look at the banks and the builders and they think they see a bottom.

It could be, of course. You never know. But, the financial world badly needs correction. Housing prices rose 70% from ’97 to ’07. They should go down more than 10%. Stocks rose more than 1,100% from ’82 to ’07. You’d expect something more than a 10% give-back. And the 27-year credit expansion itself was the biggest the world has ever seen. You’d think it would be followed by more than six months of nervous headlines.

“I have a feeling there’s more pain in our future,” says our own Short Fuse this morning. “Just look at all the data that’s out today. Every time I check my inbox, I have another MarketWatch update. Here are just a few:

“‘Wal-Mart’s January sales come in soft’…looks like the thrifty are getting thriftier.

“‘Pending Home Sales Fall 1.5% in December.’

“‘Bank of England cuts key rate a quarter-point to 5.25% as ‘global disruptions’ continue’

“Hmm…I wonder what part of the globe these disruptions are coming from….”

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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15 Comments on "How to Walk Away From Your Mortgage and Stay Living in Your House for Up to 8 months"

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kayle
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In this global credit bubble, the problem boils down quite simply to this: worldwide, banks lent billions of dollars to people who will never pay it back. As such, the damage most evident in the US just now, but it really isn’t only one part of the world where the “disruptions” are going to be coming from. Other countries including Australia are not far behind the Americans. They caught the “bad debt” virus only a bit later. Agree with the positive prognosis for gold. The excess credit has to be purged somehow, and that will be done through currency. The… Read more »
christina
Guest

If people stay in their houses for 8 more months afetr foreclosure, and then the prices go down so the banks get less back, what will happen to people who have term deposites with banks? How the heck will the banks pay the investors back their money?

fajensen
Guest
Watch out for China and Kosovo! China because when their stock market bubble pops, millions of chinese will loose their lifes savings and be very, very angry about it. And who will take the rap? Foreigners, of course, evil invaders profiting off the hard working chinese. The pictures of burning American shops will sort of dent investor confidence. Kosovo because when they declare independence the EU and the US will only too be happy to support a muslim state in europe (in return for some Saudi kickback, probably). Russia will not be amused. Russia will likely divert its export of… Read more »
John
Guest

I’m thinking it might not be a bad time to be a homeowner, with inflation (actual inflation) being higher than mortgage rates, your real mortgage payment actually goes down, as long as you’re in it for the longterm…

Dimitri Kay
Guest

John,

It’s true that inflation will actually give you higher value since you’re leveraged. However, without salary increases to create affortabiliy, you will not be able to sell it to anyone.

Danny in Perth
Guest

John

Your assuming house prices will continue to inflate alongside consumer price inflation. You can’t assume that. Look at the last year in US for example.

Housing seems like a bad investment (considering they pretty much doubled in the last 5 years roughly) especially if you borrow to invest in a house.

Borrowing is also a bad prospect in that interest rates are looking to move to higher levels and stay there at least for the next year or so.

Paul
Guest

it bothers me that so many are brainwashed into thinking owning your own home, or paying it off for 20 years is a good thing… then again if it wernt for sheep the wolves would end up playing canasta. the book “rich dad/poor dad” describes housing as a hole in the land you pour money into.

Sean
Guest
More home owners walk away. Bad for lenders? What exactly was loaned in the fractional reserve banking ponzi schemes for the mortgages? Has anyone read “First National Bank of Montgomery vs. Daly (1969).” All I see is risk management by utilising a reverse liabilities strategem. Good on any of them that walk. The more the merrier. Ditto for other reckless credit creation schemes. It took a lot of blood, sweat and tears to fight the Axis powers in WW2. Just because this Ponzi scheme has been going for hundreds of years does not mean it will not fail. If this… Read more »
John
Guest
When I said “buy a house”, I didn’t mean “invest in real estate”, I simply meant “own a house”. Think about it, rent is going to keep going up with inflation. So is everything else. But if you lock in a fixed loan for 30 years, 10 years from now your mortage will be half the cost it is today (relatively) and it will keep getting cheaper. 15-20 years from now, your mortgage would be cheaper then your car payments, all because of inflation. It’s a way of taking advantage of the coming inflation, in my view. Sure you could… Read more »
Paul
Guest
John, rent will not go up. it will crash according to housing falls because “home payer offers” will be scrabbling for any kind of income from their rental to stop the bank taking the lot. ittl be a rental war the likes of has never been seen before. people will not be able to sell their houses at a price that gives them any profit from the orriginal purchase price plus interest which has to be paid in full at that time. i personally feel that this is perfect karma upon sheep who helped to make housing a fantasy benchmark.… Read more »
Ian
Guest
I was ready to by a house for $300,000 cash but when I saw the bubble I decided to rent. I have an annual rental of $16,000 . which leaves me $284,000 to invest in gold stocks and the physical. I have no rates to pay, insurence or maintenance. The house I rent is far better and in a better position than one I could buy for that money. All I have to do is get back more than the annual rental each year and I’m miles in front. I can move any time I like. In this investment climate… Read more »
John
Guest

Paul,

You’re implying that there’s a rental bubble ready to burst; Rental prices are already considerably lower than mortgages, which is historically inconsistent. Therefore, house prices will come down to match their cash flow value in relation to rental prices. Rental prices will stay pretty constant in real terms, but high inflation will actually make rental prices climb in the double digits in the long term.

Jay
Guest
Hi, The value of my house is now 80k to 100k less than what I owe. I put down 30k on the house and have an arm that has already reset once. The rate adjusts every 6 months and the lender is unwilling to work with me. Heck they won’t even talk to me because I make my payments on time. They claim that I must be behind on payments to be ‘prioritized’ by the ‘home retention’ department. I tried explaining that I was trying to be proactive, and work with them before things get too bad to be workable,… Read more »
beyondtool
Guest
Jay, sometimes it’s easier to start again than live with the agony of the situation. Face the fact that your property is probably going to nosedrive in value over the next few years as oil and fuel increase in price making your life very difficult. After that it will eventually pick up again (one hopes), though you will be treading water with interest for the next few years at least. If your home has no real value for you outside the financial, I suggest you sell now why you can still get a reasonable amount of money for it. If… Read more »
GRAEME
Guest

I WAS JUST WONDERING WHEN YOU THINK IT WILL HIT WESTERN CANADA

BRITISH COLUMBIA / VANCOUVER ISLAND

THANK’S

GRAEME

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