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WSJ: The Tail Wags the Foreclosure Dog

posted by Adam Levitin

The Wall Street Journal's economics blog had a poorly thought-through take on foreclosures. The main point of the piece was that the time from default to foreclosure has grown much, much longer. (Not noted is that the timeframe varies significantly by state).  The piece has scant analysis, but it's conclusion is that longer times to foreclosure makes strategic default more attractive as in lengthens the time a home-owner can remain in the home and consume housing for free.  The blog concludes that therefore we need to speed up foreclosures. 

This really gets the strategic default problem backwards. It has the tail wagging the dog. The problem is that the homes are underwater, not that foreclosures are taking too long, and strategic default actually plays a very important role in market clearing on housing prices.

If homes weren't underwater, the time to foreclosure matter very much.  Indeed, even when a home is underwater, I'm quite skeptical that the marginal difference in time to foreclosure from say 244 to 492 days is actually swaying anyone's decision to default. The WSJ piece certainly doesn't present any evidence that it matters, and given that there's so much more wrapped up in the decision to default, that another average 8 months rent free is unlikely to make the difference in most cases (not least because homeowners don't know how long they themselves will get rent free).

It's nothing new to see the WSJ favor free market economics...until the market gores the WSJ's pet oxen. But I would posit that from a free market perspective, strategic defaulters aren't a bunch of deadbeats, who are "stiffing the bank."  Instead, they are the heroic invisible hand of the market that is forcing housing prices to clear at their market value, rather than at a morally-inflated value. A more technical way of saying that homeowners are "stiffing the bank" is that homeowners are "exercising their mortgage put option." I'm sure no one would say that a bank was stiffing its counterparty if it exercised an in-the-money put option.  That would be called smart business.

Clearly there is a double standard between business and consumer credit. We've seen this with cramdown, we've seen this with BAPCPA, we've seen it elsewhere. Clearly there are differences between businesses and consumers, and they should be taken into account in the law, but if one truly believes in the market, one wants to see options exercised when they are in the money. That's part of how prices to clear at the market level. But who ever said that the WSJ actually believed in the market? 


"Strategic default" is a slippery term worth putting under the spotlight. Do homeowners who can no longer pay have a moral or ethical obligation to vacate immediately? If so, why, and to whom? It is generally difficult to get lenders to accept deeds in lieu of foreclosure, and without that the owner remains in some ways legally responsible for the property. Shouldn't he be entitled to remain in possession to protect it, and himself? When a no-longer-paying owner does move out promptly, current reality makes a lengthy vacancy likely. To whose benefit, if anyone's, is that? On the whole, aren't we better off when properties destined for foreclosure remain in the hands of the departing owner for as long as possible?

The fact that Mark Whitehouse based the WSJ piece on Lender Processing Services generated data alone made my brain glaze over and stop accepting information from my eyes... Same thing occurred a year or two ago with the FRB Boston paper from Willen, Adelino and Gerardi...

"If homes weren't underwater, the time to foreclosure matter very much."

Missing word there?

I am a strategic defaulter. I started the process Dec. 2009. I vacated the property, moved out, sent a letter to the bank that included a quick deed for the property and requested a deed-in-lieu. The back did not contact me until I was 3 months in the rear and told me that they did not have the paperwork I sent them. Then sent me a packet which I filled out and again included a quick deed. Numerous phone calls from the bank, they claimed never to have received my letter or faxes. I tried to remain pleasant always asking them what they expected me to do. It was like asking a deaf mute. The service finally began foreclosure in July. I contacted their attorney with all the the correspondence I had sent the bank. He said he would notify the bank. Finally, got the foreclosure notice which I answered that there was no need for the foreclosure and the could save themselves the expense and trouble by accepting the quick claim deed. That drove their attorney into a hissy fit claiming I had to right to even suggest a deed in lieu. They haven't set a summary judgment date yet probably because I requested the original note. The unit I abandoned was rented by the condo association.

Those engaging in academic study of mortgage default risk and quantitive measurement of both default loss frequency and loss severity have been treating the mortgage finance arrangement as including an implicit borrower PUT option based upon housing prices for more than two decades.

Only with the subprime euphoria were the other variables used as inputs in the valuation and pricing of this PUT option driven to such ridiculous levels that both investment bankers and ratings agencies IGNORED six decades of solid empirical research showing that these mortgage arrangements were perilous and that the options were being underpriced.

As observed in the post, borrowers are merely exercising the option that was built into the arrangement (and MISPRICED) all along. Those who believe that strategic default is immoral need to go to the Comedy Central web site and view the Jon STEWART Show clip on the strategic default of the Mortgage Banker's Association of America.

We can remain equally confident that faced with similar financial adversity that Dow Jones & Company would default in a heartbeat!

What about strategic fraudulent lending, strategic securities fraud, strategic foreclosure fraud, strategic loan mod fraud, Strategic Tax evasion, startegic defaulting to the counties Tax Recorders' Offices, and strategic, pre-meditated RICO conspiracies on behalf of the foreclosing entities?

Tell the bankster boot-licking shills who blog for their masters to lay off the defrauded homeowners, citizens, and taxpayers.

Rob Harrington
Co-Founder National WAMU Homeowners Support Group.

Simple minded drivel from this WSJ Story. I have heard so many people reveal their ingorance by saying such things. If he was a professional reporter, that would mean actually doing some research on the origins of the housing crisis before writing about it.
I have no interest in hearing anyone cry about free market solution after we paid everyone and their brother on Wall Street for bringing the eoncomy to its knees.
The truth is most people are making a smart business decision to walk away from a home with a 200% LTV. I don't know how many times the banks and brokers what to get paid for this debt. The all were paid to sell the paper, then paid by the government to prop up their balance sheets and now they want to collect full value from the home owner.
There is no slippery slope of strategic default. It is an option that comes with the contract. The problem is that the negative stigma attached to a default makes most people think they have no leverage with the banks. The Reality is that anyone can renogotiate with the bank at anytime and they can leave any time.
The banks have done very well by having people fell so obligated to fulfill their contracts. Even know with people 50 % under water, nearly all of the are trying to keep up with payments.

People just seem to get such a righteous attitude when it comes to housing. I don't remember any news calling Donald Trump a dead beat when he went bankrupt, so why the double standard.

And finally, who in their right mind would turn to Wall Street as their guiding more compass. Talk about Dead beats.

Well ok now finally, Everyone needs to remember that the banks willing appraised the property for the amount of the mortgage. They willingly took the property at a much higer price as collateral. It is fair game to give them back the keys.
The banks have been running the country for some time now. And we need to shift the balance of power.

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