Here's another mystery: Homeowner defaults. Not that there are so many...the mystery is why there are so few...
In Nevada, for example. Two out of three homeowners are underwater...which is hard to do in the desert. Some of them owe hundreds of thousands of dollars on something that doesn't exist anymore - the equity on their houses. Still, most of them continue making mortgage payments. What gives?
It's a case of "asymmetrical ethics," says The New York Times. Lenders don't hesitate a minute to maximize their earnings - using every tool available to them and every trick in the book (including some tricks that have never been published). They default whenever it suits them.
But homeowners? They plod along. Maybe they think their house will come back in price. Maybe they think they'll suffer some awful penalty if they default. Maybe they are just too proud and too honest to take advantage of the non-recourse mortgage provisions. So, they keep paying.
But for how long? Mortgage rates are based upon past behavior. In the past, people regarded mortgage payments as an inescapable, moral obligation. You paid as long as you were able.
It won't be long before the ethics of Wall Street catch on all across the country. Gaming the mortgage system will become as common as signing up for food stamps. When people see that house prices won't go back up...and when they see their neighbors shedding hundreds of thousands of dollars' worth of mortgage debt - and getting away with it - they won't be far behind.
Bill Bonner
for The Daily Reckoning Australia
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- One in Six Homeowners is Underwater
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About the Author
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.
Comment by IMBMB on 4 February 2010:
There is the other explanation. If you stop paying the mortgage you have to move with all the problems that causes. Finding somewhere else to live, moving all your "stuff", finding new schools etc. And can you actually rent somewhere with a poor credit history?
Comment by dinakarananda on 4 February 2010:
I guess they are not waiting for the price to go up but for their job to vaporize. Declaring bankruptcy would be easy when done all at once. Obama tent slum welcomes you.
Comment by Dan on 4 February 2010:
"It won't be long before the ethics of Wall Street catch on all across the country." - and with that, as it indeed was with the Ottoman Empire, another civilization is brought to its knees by financiers.
Comment by CJC on 4 February 2010:
It sounds fine in theory to dump debt by walking away from the home, but if you're living in a house its actual value is irrelevant (you could sell it, but then you don't have a house - and you can't get a loan for a new cheaper house, since your hours were cut/ the banks tightened up lending).
Maybe expect foreclosures to rise if lending conditions improve.
Comment by christina on 4 February 2010:
Maybe they are going to live with their parents for a while, while they rent out their house to others during that time.
Comment by Onsai on 4 February 2010:
Surely you'd cut your losses and rent if logic was involved.
Comment by peterg on 5 February 2010:
maybe if they wait long enough, and enough people are in the same boat (underwater? hehe) they too will collectively be to big to fail and be bailed out, just like Wall St. .. Obama tent city more likely methinks, sell housing to the Chinese to pay for the housing.