The Big Walk Away

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This is another in our occasional series, The Best of Capitalstool.com. Thanks to Schonthaler for their thoughts!

The Big Walk Away is coming.

It’s only a matter of time before the Big Walk Away becomes even bigger. That’s right, when you get right down to it, why does anyone have to meet their obligations? Just take the Big Walk Away. Why should homeowners try to make payments on over valued property? Just walk away and all your troubles will be over.

In fact your Government is telling you not to worry, Uncle Sam will bail you out. Your government is bailing out huge corporate institutions at time when the Federal government can’t meet its obligations. So why not walk? You have nothing to lose. If leveraged buyouts were rewarded and are now backstopped by your tax dollars, then why not get some of your tax money back?

Now thousands of individuals are taking the Big Walk Away. But wait, is it limited to just the consumer? No. Every institution will take the Big Walk Away – everything from Corporations to Cities to States.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also provide analysis and charts for David Stockman's Contra Corner which I developed for Mr. Stockman. I’ve had a wide variety of finance related jobs in the past 44 years, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

  23 comments for “The Big Walk Away

  1. Mike
    May 8, 2008 at 10:57 am

    As a Mortgage Lender, this sounds senseable except for a few things. “Your troubles” are not over, they are just starting. The Mortgage Industry treats a forclosure in a worst light that a chapter 7 bankruptcy. By “walking away” your credit will suffer tremendously and this will greatly impact your ability to rent, buy auto insurance and a host of other things.The market WILL turn at some point and houses will gain in value. It may take your credit a lot longer to recover from a “walk away”. THINK before you act!!!
    You will also be adding to the popular belief that nobody is responsible for thier actions or word. Remember that when someone breaks thier word to you, remember that when you enter into a contract with someone and they break or “walk away” and leave you holding the bag.

  2. Frank
    May 8, 2008 at 11:06 am

    Whoever wrote this article is an idiot. First of all, whats your point? Secondly, you spelled “lose” wrong…

  3. Hank Jestor
    May 8, 2008 at 11:33 am

    Mike:
    I hate to get of subject, but this is what I start thinking about when I hear bankers threaten via Fico.

    6He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead,
    17so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name.

    18This calls for wisdom. If anyone has insight, let him calculate the number of the beast, for it is man’s number. His number is 666.

    Fico score for good credit is 660-670

  4. Don
    May 8, 2008 at 11:37 am

    Anyone that believes that protecting a credit score is a valid reason for continuing to pay a $650K mortgage on a house worth $350K is smoking crack. The assumption that housing prices “WILL turn” is fallacious at best. Housing prices were completely out of line with income fundamentals and could not be supported over the long term without the easy credit terms that fueled the bubble. They will not return because they weren’t real. Each homeowner should properly evaluate what is in the best interests of their own family, and make the appropriate decision. Why is it that only individuals are held responsible for their actions, but institutions can engage in reckless and irresponsible behavior and the individual tax payer is left holding the bag?

  5. May 8, 2008 at 11:50 am

    Exactly. And since Frank didn’t get it, thanks to Don for restating it.

    But then, Frank never gets it. Goodbye Frank, again. You continue to prove yourself.

  6. Michael DaVinci
    May 8, 2008 at 1:02 pm

    I’ve been a mortgage lender for over 20 years. In the last few years I have seen people clammer to get into that exotic home so they can brag that they live in an exclusive community. I practically begged one of my borrowers not to take out a loan for a purchase of a $600,000 home. They cashed out thier fathers $60,000 IRA for a down. They took out a teaser ARM to qualify.

    Just found out the home is now valued at $410,000 and they are in foreclosure. I do not feel pity for those that were intoxicated by greed and bragging rights. You truly reap what you sow.

  7. RD
    May 8, 2008 at 1:10 pm

    I am with you Don!
    If it comes down to feeding your family or keeping a credit score, I say ditch the house & take care of you and your family! Your credit will allow you to buy again in 2-3 years. Yes during those first couple years after a BK & or a Foreclosure, you will need to start to re-establish your credit. I can tell you though that you will be able to rent as rental companies are looking at foreclosures right now with a blind eye. They know that folks are in hard times due to not only their lack of education on financing, but because lenders helped put them there. This is not a small story that no one knows about. All of those property managers have home or family with homes & they know what is going on. You can buy a car right after a BK discharges. You can even get credit cards while your in BK. It costs more, but is do-able. Don’t let anyone tell you that you will suffer greatly if you walk. Sorry, but it is just not the truth. If you notice, generally it is the lenders telling you this! There is a reason they are telling you this, they want to keep their jobs! They make a LOT of money and with all of the Legislation that is coming down the pipe to reform lending and with all of the mortgage companies going under, if everyone who was upside down walked (or even a few more than already have) it is putting them out of work & their H3 Hummer payments are killing them!
    I say, if you can afford the payments, like the house & are able to still eat & you can afford to stay, then your one of the few. I believe you should stay then. If your taking money off of credit cards, 401K, borrowing from your family, or are late on your mortgage, not sleeping at night, this is causing problems in your marriage, you don’t have the money to buy food or clothes for your family…… Get the heck out!
    Everyone deserves to live and not worry about a roof over their head and feeding their children. There are a few (stupid people) that will look down on you, but as long as you know your doing what is best for you and your family, then you can hold your head up high!!!

  8. The Man
    May 8, 2008 at 1:14 pm

    Far of you are to narrow minded to see what has transpired here! The big walk is indeed a real way to save the family from a downward spiral. House values are far from the upturn as we face next years big event of Option arms resetting. House values will then spiral downward out of control further more. If it comes to saving the family and putting food ont he table or paying a upside down mortgage my bet is to feed the family and walk. Common sense to many of us would be to walk, even if credit ratings are effected, does that really matter? The credit standards will be revised in the future as there will be many walk outs, and if lenders want to stay in buisness then they will have to figure out a way to overlook credit as who in their right mind would pay a mortgage that they are upside down in? Maybe the people on here that are saying don’t walk have more to lose by customers walking! Worried that you will be forced to buy back that horrible loan you sold your client?!

  9. Sarah
    May 8, 2008 at 1:28 pm

    I agree foreclosure temporarlily can reduce your credit standing. But also know that there agencies I have worked with that will remove foreclosures, BKs, judgements, etc. from credit reports in a matter of months. So, what’s the real risk?

  10. JRB
    May 8, 2008 at 2:05 pm

    I appreciate thoe of you that are stating what so many of us are coming to realize; If it’s between paying the bank or feeding and clothing my family, well, I’l let you decide which is better.

    Either the people who continually spout-off the “pay your mortgage no matter what” rhetoric do not have families to support, or they really do work for a mortgage lender or bank and are deathly afraid of being the one responsible for pulling their company under with the countless loans they’ll be buying back. There is nobody in their right mind that believes for one second that paying the bank first and your family second is responsible. NOBODY.

    There are speculators who deserve pain for the 100% Option Arm loans for that non-owner occupied purchase(s), but this has just gotten so much larger than that now that it’s really hard to even put into words. Those adversely affected now are not just those wild-eyed crazy speculators or the uninformed and/or wreckless people. This is now a nationwide, heck global, problem at this point. EVERYONE is affected now.

    Grow up Frank, and those like him, and focus on what’s really important now, and that’s protecting the family. Protecting theirs (and your) futures. DO NOT drain every dime of your savings account, your 401k, your 529 college plans, max-out every single one of your credit cards, etc. just to pay your mortgage. That mentality is the upper-eschelon brass of every bank and brokerage’s go-to mantra now, and it certainly doesn’t have anything at all to do with your family’s well being, nor the well being of the economy. You, and even Frank, know what their intentions are.

    How is it that the banks and brokerages have access to all the money they need to use, lend, or “borrow” (don’t bet the farm they’ll pay it back), but our family members getting their asses blown up and shot up, risking their very lives every second can’t even get the half-wits running this government to get them the money they need to by bullets to protect themselves for crying out loud (agree or disagree with the war you don’t use our soldiers as political pawns, period).

    Shows you exactely where this governments real concerns are huh. It’s not YOU.

  11. EasyEd
    May 8, 2008 at 2:14 pm

    As the housing bubble deflates it isn’t going to matter, because a tremendous amount of people will have to make the decision to survive or pay big banks etc.
    They will choose to survive and we will be in depression. Ed

  12. May 8, 2008 at 2:17 pm

    I believe with the new Fannie rules you would be able to buy a home in 5 years.
    FHA and VA would be much quicker.

  13. ReadingNLearning
    May 8, 2008 at 2:54 pm

    The Whole of the Credit-Industry-Ponzi-PayDay-Loan-Loan-Sharking-Legalized-Theft Ring is about to blow sky high anyway — so don’t pay any attention to the complaints of those who have been sucking on that tit for 30 plus years. The whole Grab-And-Run bunch is going into the toilet and few will be left to feed their Im-Swankier-Smarter-Than-You Lifestyles on the backs of the poor, dumb, illiterate, never-reads-the-fine-print consumer. What kind of financial world will emerge from the toxic, nuked ashes of the old is yet to be known or predicted, but even JULS knows it ain’t gonna be the same as old Fat-Harvey the Wall Street MBSandCreditCard Loan Shark knew and loved. So who gives a RATS-Behind about your credit score and all that fictitious rot promulgated by the Sewer-Living Loan Slime when compared to escaping Debt-Slavery forever and securing what assets you can to survive the coming Financial Armageddon.

    Idiot’s abound — but you don’t have to believe them!

  14. Dave P
    May 8, 2008 at 5:23 pm

    If I were in trouble on credit cards I wouldn’t hesitate to shaft those userous theives. With mortgages you have truth in lending and the facts are presented to you in a pamphlet by law. The borrower even signs a paper certifying as such, that he has read and understands. With credit cards, no such thing and very dishonest tactics. The terms are burried in a blizzard of 6 point type in legalese. SCREWEM. A mafia loan is more honest than Capital One.

  15. Thomas
    May 8, 2008 at 5:36 pm

    Don,

    You said it, the banker can take a hike, they really need to get a clue. If they had a clue, this ‘bailout’ circle wouldn’t exist.

    A 750-800 FICO score ain’t worth $200 grand to me. Especially, paying interest on that $200 grand – which makes it $350 (notwithstanding inflation).

  16. Tina
    May 8, 2008 at 6:53 pm

    I can not believe what I am reading. Do you all realize that all the people giving back their homes signed contracts (not in 6 point font) that said they would repay a debt for the money lent by the banks. If you do not repay this loan and you “stick it to the banks”, do you have any idea what kind of pressure this puts on the rest of the economy? The banks tighten up lending even more, business starts to suffer even more, more people get laid off from their jobs (this could include you because this does not only hurt loan officers and bankers it hurts every industry needing consumer money…um every company), and the economy pushes deeper into recession. I do understand all sides of this equation and I know people in many industries that have been hurt by this down housing market so I really do feel for the people that have lost their homes for things that were beyond their control.

  17. DK
    May 8, 2008 at 7:14 pm

    If it is a choice between family and a mortgage, take care of family first. Keep in mind, a foreclosure stays on a credit report 7.5 years at a minimum. Sarah may have used a service that got a foreclosure off a credit report temporaily, but as a public record, it will come back on, don’t believe the fantacy that it wont come back on. The banks will not lend to someone who has had a foreclosure…. period, unless there are mitigating circumstances such as health or employment. FNMA has intimated that they will persue this policy. As a mortgage broker, I have received several communications from lenders that a foreclosure in a borrowers history automatically precludes financing.
    Still, It will probably be 2-3 years to the bottomn of the housing market so waiting to buy for 8 years probably works anyway.

  18. Thomas
    May 8, 2008 at 7:45 pm

    Tina,

    Yeah, understand – its a secured loan – secured by the value of the property that came via appraisal. If your local pawnbroker would lend you 500 bucks on burned out light bulbs, what would you do with your burned out light bulbs? It’s easy, you pay the loan or they get the property back. Depending upon your state, they may (or may not) have recourse again you.

    Don’t pretend the banks are innocent victims in this mess, they fostered it. However, so far they haven’t been proactive in dealing with the crisis. It isn’t as simple as you elude, never is. There are extenuating circumstances that come into play, usually when you want out of a home – you sell it.

    Today, that just isn’t possible if you’re upside down. Unfortunately, life events force change sometimes during the 30-year ammoritization rate of a mortgage loan.

  19. z
    May 8, 2008 at 8:33 pm

    please,

    for everyone with say a $300,000. mortgage, where the house is now “worth” just $200,000., and payments have become unaffordable:

    is there anyplace that lists the pros and cons of walking/foreclosure AND pros and cons of bankruptcy AND pros and cons of “short sale” at $200,000.?

    any reason one of the three options is better?

    thanks! from all of us.

  20. Bob
    May 8, 2008 at 8:36 pm

    The big walk away is not only occurring by homeowners, but from what I heard yesterday, there are 600,000 bank letters in the mail to homeowners canceling their equity lines of credit.

    Tit for tat.

  21. Julio
    May 8, 2008 at 8:43 pm

    Good comments, but my take is that all stakeholders are at fault here. Many mortgage brokers, lenders, many greedy borrowers and speculators who came to think of rising home prices as a right. And of course, the grand Maestors Fed with its great credit creation swindle. Walking away hurts the investors and depositors..but that’s what you get in a fiat money system…Make no mistake, the root cause is cycles of pessimissim and greed, and almost equally, the mots corrupt and doomed to fail monetary experiment/fraud in history…walking away is what the banks and government derserve..unfortunately, at the end of the day, tax payers will suffer immensely via significant increases in property and income tax (and reduced services..al of this is a classic confiscation of wealth through inflation and tax increases)and future home buyers and savers through higher and lower rates respectively..Lee, a call to action for all people is needed: Abolish the Fed, transition to a gold backed standard, change fractional reserve banking and ensure fiscal responsibility..until this happens, there will be no true long term prosperity..what a world where one homeowner who put a lrage down payment and lives withimn their means is left in much the same position as a reckless subrpime borrower who essentially walked away from a low cost/free call option on a house…Cheers

  22. Ed
    May 9, 2008 at 5:09 pm

    The NASDAQ was once up at about 5,000 back in 2000. Then it crashed as PE ratios came back down to reality. You may note that NASDAQ still trades at less than half of that peak. It will be a long time before home prices “recover” their recent bubble run up asset values; a very long time.

  23. May 9, 2008 at 11:13 pm

    I’ve already cut up my credit cards. FICO can kiss my *ss.

    So many people will be repudiating their FICOs that the score itself is likely to become worthless.

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