Flood of People Set To Walk Away From Their Mortgage

Panicked by rising foreclosures, banks and the government are willing to do just about anything to stem the tide. More regulations, rules, bailouts (primarily directed to the banks themselves) may slow the reckoning, but ultimately doesn’t the market need to do what the market does?

We’ve discussed this before here… The catalyst to the current economic crisis was real estate and although there are many other fundamental problems with the US economy (debt, trade deficits, weak dollar, etc.), real estate is the primary problem.

The trouble with realestate is that prices went up so much so quickly. Naturally, nobody complains when the market is driving prices up at an absurd rate. When things go the other direction (even falling just 5% so far), regulators and politicians act as though the sky is falling.

The tipping point: Walk Aways (AKA MilkWalkers)

Fact is things can, and probably will, get much worse. Right now, a number of market forces are doing their thing… correcting the market and driving down real estate values. These forces squeeze even the non subprime homeowners. Putting their biggest “investment” in the red.

Adopting the Milk And Walk Strategy

Underwater on their homes, reasonable, responsible homeowners must ask themselves if it’s worth sticking it out. At some point, more and more homeowners who could afford to pay their mortgage will simply stop. They’ll stay in their home not paying the mortgage for as long as they can. And when the bank says they need to leave, they’ll just walk away. This Milk and Walk strategy is shockingly effective. As more people discover it, it’ll become widespread.

In fact, I know two people that are doing this right now. One hasn’t paid a mortgage payment in 11 months. He’s still in “his” home that he “bought” two years ago for 2,500,000. He’s stalling the bank through a variety of strategies. At the end of the day, he’ll simply walk using a years worth of mortgage payments to fund his future rental home.

Barriers to Milk Walking…

As prices plunge there’s only a few things keeping people from pulling the plug on the mortgage payments and voluntarily going into foreclosure.

  • Future Prices Psychology: If the homeowner believes that things are bad now and only going to get worse, they’re far more likely to stop paying, milk the clock on the bank then just walk away. Each individual does what they think is best for them and their family.
  • Social Stigma: If homeowners think they can cut their losses and walk away from a bad investment without being looked down upon by other people they’re far more likely to do it. There might still be some negative view of people who walk away from their debts, but more and more it appears that homeowners are being cast in the role of victim. This makes it far easier for them to walk away from the “injustice of unscrupulous brokers, banks and appraisers.” As more people turn to a Milk the clock then take a walk strategy, others will follow in greater and greater numbers. The “social proof” that Milking/Walking can be done and that others are doing it will cause numbers to increase massively.
  • Availability of other options: Homeowners truly struggling probably won’t be too picky about the housing they’ll be in after they decide to walk, but better heeled homeowners will. If there are good rental housing options at reasonable prices then these folks are much more likely to make the decision and pull the plug. Given the available inventory of unsold homes on the market, I’m guessing many will have to be converted to rental. If this happens then these “MilkWalkers” might be able to walk away from a mountain of debt in their old home and actually UPGRADE to a better home as a rental saving thousands of dollars along the way.

Quite frankly, if this trend picks up I don’t see what can stop the downward spiral in the economy. It could be bloody. The trillions of dollars “lost” in this scenario would make the losses to date look like a rounding error. I think if the trend picks up, government officials might step in with a carrot and stick approach to solving the problem perhaps going to the extreme of making it a crime to walk away. That would certainly be a frighteningly high level of government intervention in our “free markets”, but so far they’ve indicated they’ll do just about anything.

Inflation is our friend!

If you don’t subscribe to http://dailyreckoning.com/, you should. It’s free, funny and a much needed bit of financial common sense. Today, Bill Bonner republished a portion of an old SNL skit.

Dan Akroyd pretending to be President Jimmy Carter on Saturday Night Live and 30 years ahead of his time:

“President Jimmy Carter: Good evening. On Tuesday, we Americans will have the opportunity to exercise our role as citizens in a free democracy. Yet, only a third of the eligible voters will actually cast ballots. The other two-thirds are, in a sense, very lucky. Because they do not know what’s going on.

“Last week, I delivered a message on inflation. Since then, the dollar has dropped in value, the stock market has sustained record losses, and the whole Dow price index increased 0.9%. In other words, our economic system is screwed, blued and tatooed! We just have to face the fact that there is simply no way to fight inflation in a capitally-intensive, highly-technological, conflict-riddled, anything-for-a-thrill world of today. That’s why, tonight, I want you to try to look at inflation in an entirely new way: Inflation is our friend.

“For example, consider this: in the year 2000, if current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean – most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn’t you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would! But what about people on fixed incomes? They have always been the true victims of inflation. That’s why I will present to Congress the ‘Inflation Maintenance Program’, whereby the U.S. Treasury will make up any inflation-caused losses to direct tax rebates to the public in cash. Then you may say, ‘Won’t that cost a lot of money? Won’t that increase the deficit?’ Sure it will! But so what? We’ll just print more money! We have the papers, we have the mints. I can just call up the Bureau of Engraving and say, ‘Hi! This is Jimmy. Roll out some of them twenties! Print up a couple thousand sheets of those Century Notes!’ Sure, all these dollars will cause even more inflation, but who cares? Everyone will be a millionaire!

“In my speech last week, I said that America would have to undergo an austerity program, but since this revolutionary new approach welcomes inflation, our economy will be free to grow, and we can spend, spend, spend! I believe the watchwords for the ’80s should be ‘Let’s Party!’ And in that spirit, I’d like to say, ‘Live, from New York, it’s Saturday Night!’”

Don’t worry inflation isn’t a problem….except

I remember having a conversation with my portfolio manager nearly two years ago about inflation.    I was telling him that despite the official numbers, it seemed to be common knowledge that inflation was running rampant.    He agreed with me that the exclusion of Food and Fuel (the only two things you need to buy) from the CPI made the numbers incredibly misleading, but we had divergent opinions about how serious the problem was.   For my part, it seemed clear that it was taking a big toll on average citizens.

Even though it’s well accepted by nearly everyone I speak with, our “leaders” keep telling us that we’re just out of touch with the economic realities.    Meeting with economic journalists last week, President Bush dismissed several polls that show Americans are down on the economy. He expressed surprise that inflation is one of the stated concerns.

“They cite inflation?” Bush asked, adding that, “I happen to believe the war has clouded a lot of people’s sense of optimism.”

That’s right, Americans are just out of touch and have a clouded “sense of optimism”.    While it’s understandable that Americans might be a little pessimistic due to the planned “generation of warfare” against the “evil doers” (who they are exactly, no one can be sure.),  I think the pessimism comes from a source much closer to home.  The grocery eisle, for example:

According to McClatchy Newspapers– The Bureau of Labor Statistics said in its July inflation report that egg prices are 33.7 percent higher than they were in July 2006. Over the same period, according to the department’s consumer price index, whole milk was up 21.1 percent; fresh chicken 8.4 percent; navel oranges 13.6 percent; apples 8.7 percent. Dried beans were up 11.5 percent, and white bread just missed double-digit growth, rising by 8.8 percent.

These numbers get lost in the broader inflation rate for all goods and services, which measured 2.4 percent for the same 12-month period. Across the economy, rising food prices were offset by falling prices for things bought at the mall: computers, cameras, clothing and shoes.

If you’re in the market for a new flat panel HTDV,  you’re in luck.  If, however, you’re trying to feed your family, fill up your gas tank or simply save for the future you’re probably feeling like stretched to the max.    Add in the recent market, credit, and housing turmoil and it can seem like the sky is falling.   Or maybe that’s just my “clouded optimism” speaking due to the 41 tragic and unnecessary deaths of US soldiers in Iraq this month so far.

Are you feeling the effects of inflation?   What impact is it having on your daily life?   I’d love to hear your comments on this important topic.