2012: The Year of the Strategic Default?
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There can be absolutely no denying mega-banks have angered consumers beyond anything we have seen since the Great Depression and the backlash from the bailout is a long way from over. The President ordered every financial institution touching the bailout dollars to refinance mortgages in trouble at the new, historically low rates, and the banks plowed on robo-signing foreclosures. Trouble still looms despite one recent class action suit being thrown out.
Here are some interesting stats on the issue:
- Roughly 11 million homes mortgaged for more than they are worth (CoreLogic)
- Approximately 3.5 million homeowners are behind on their payments (RealtyTrac)
- Nearly 1.5 million homes already into the foreclosure process (RealtyTrac)
- 3.6 million foreclosures will take place over the next two years (New York Federal Reserve)
Consumers have caught on to the fact there is no shame in walking away from an upside down mortgage when you don’t even know what bank holds the mortgage anymore or the bank refuses to follow the Presidential mandate. There are now websites such as YouWalkAway.com which instruct homeowners on all of the ins-and-outs of legally walking away from their mortgage without being held responsible. And why not? The banks walked away from their mess and left the taxpayer to pick up the tab. Why shouldn’t a consumer turn around and stick it to the bank in return?
The above mindset is the new reality of 2012 and the major banks have nobody to blame but themselves. Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC) have become synonymous with the sub-prime mortgage scandal followed by the robo-signing scandal. Bank of America has started to demolish entire city blocks in Detroit at the same time the homeless shelters are beyond capapcity.
Now we have commercial websites popping up instructing people just how to walk away. A Web search for “Strategic Default” will turn-up article after article pointing out a person’s credit score will only drop 85 to 160 points upon walking away. In the past you would have had to pay the tax on any forgiven debt, but the Mortgage Forgiveness Debt Relief Act was drafted to spare you those taxes.
On top of all this, the occupy movement turned violent for the first time last weekend. People realize nothing will get done for them during an election year and many have nothing left to lose. Indeed, the “nothing left to lose” theme keeps cropping up in all of the “Strategic Default” articles. One of the things the articles keep stressing is to not get there. They keep advising people that it takes many months, some times up to a year, for a lending institution to complete the foreclosure process. Rather than wait until you run out of money, they all seem to be advising people stop paying the mortgage and put all of the money they would have spent on the mortgage into a savings account at a small financial institution. This would result in them having plenty of cash to pay down their credit card debt. These articles are littered with stories of people who tried to be “the good citizen” and wiped out both their savings and retirement accounts making mortgage payments while Bank of America, Citi, and Wells refused to modify their mortgages.
Given the volume of these articles appearing on-line, and the number of people now taking heed of the advice, 2012 is going to be the year of the Strategic Default. Rather than 3.6 million foreclosures spread over two years, I think we will start seeing stories about how over three million people simply stopped paying their mortgage and started hoarding cash so they could pay off credit cards, cars, and rent for the new landlord when they finally are evicted.
A key question for banks going forward: if the Strategic Default movement hits Wells, Bank of America, and Citi like a brick wall, will they finally modify the mortgages like the President ordered them to when he took office?
Another crucial aspect: Can any of these banks survive a single quarter where none of their upside down mortgage customers make a single payment?
Roland Hughes does not own a position in any of the companies mentioned. Additional insights from Roland can be found at http://www.theminimumyouneedtoknow.com and http://www.infiniteexposure.net. The Motley Fool owns shares of Bank of America, Citigroup, and Wells Fargo. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.