All Things Bubba

No, not the kind that involves ghosts. Unless you count the ghosts of dead mortgages.

The government is readying a plan to bail out homeowners. Fair enough, you might think, since they bailed out the banks that made their ridiculous mortgages. But...it's grossly unfair to people who did the right thing, did not lie on their applications, and paid their bills on time. And those who accept the bailout may find it's a trap.

Karl Denninger puts it this way:

Stop Paying Your Mortgage Today

See, in many states purchase-money first mortgages are "non-recourse", meaning that all they can do is ruin your credit and foreclose on your house.

That's it.

They cannot force you into bankruptcy, they cannot garnish your wages.

And from the time you stop paying until the time you get evicted, you get to live there for free.

Finally, after you have been foreclosed upon, your house (and lots like it if your friends and neighbors do likewise) will drop dramatically in price. Presto! In a year or two you will be able to buy it back at half what you paid for it in 2004 or 2005. Now that's a bargain.

...If your next door neighbor lied about their income to get their house, or took out an exotic "Option ARM" mortgage and can't afford their payments, they will get a big fat bailout.

You will, in fact, get his mortgage bill.

Unless you intentionally default, in which case you will still get to pay taxes, but you won't pay your mortgage, and thus, you won't pay twice.

And what happens to the "lucky" people who get the government bailout?

Your neighbor who goes for the government's "deal"? He gets it in both eye sockets. See, a refinance, which this is, converts your mortgage into a recourse loan. That means if you take their "great deal" and then default later on (e.g. you lose your job in the upcoming Depression) your wages can be garnished forever and, if you earn more than the median income, you can't even get rid of the debt in bankruptcy.

Of course, walking away is not the solution for everyone. Laws vary by state, and if you re-financed, they can come after you. And if you have a lot of equity, you probably wouldn't want to walk away. Still...more and more people are taking the "jingle mail" route. If your home is worth $200,000 and you owe $400,000, why keep making payments?

People are arranging to buy similar houses in the same neighborhood, while their credit is still good, then defaulting on their old mortgage. They can live in the house for an average of eight months without paying a cent, while the eviction process takes place. Then they move into their new house, which is just as good, but costs half as much. Their credit rating will be trashed, but it's a small price to pay. A few years of paying their bills on time, and that will be fixed.

There's even a business set up to do this for you: YouWalkAway.com. For a fee, they'll set everything up.

Is it immoral? Some would say yes; you promised to pay, and now you aren't. But others, like Mish, argue that it's just a business decision. Banks didn't worry about what was moral when they sold people mortgages they couldn't afford, and they have no qualms about throwing little old ladies out in the street if they can't make the payments. Employers don't worry about the harm they are doing when they decide layoffs are needed to help their bottom line. If banks were in the consumer's position, they'd walk away without a second thought.

I don't have a mortgage, but if I did, I'm not sure if I'd walk away or not. I think it is the right thing to do, from a bean-counting perspective. But I'd have a hard time doing it. I'm not the type to break the rules. I've never even gotten a parking ticket.

Sen. Chuck Schumer left a long robocall message on my answering machine today. He should have saved his dime; heck will freeze over before I vote for him. That goes for Hillary, McCain, and Obama, too. They all voted for that stupid bailout for billionaires. It didn't work, and everyone else in the world thinks we're idiots for allowing it. The banks that were given taxpayer money are not lending it out like they were supposed to; instead, it's padding the pockets of shareholders and paying executive bonuses. My European friends don't understand how this can happen, and why we, the people, put up with it. I don't know what to tell them.

Labels: The Greater Depression