Thursday, September 24, 2009

Walk Away from that Mortgage

Now that the Federal Reserve-stimulated asset bubble has burst in the housing markets, and the subsequent follow-on government attempts to fix a government-created economic crisis are failing (see cash for clunkers and the market-distorting "first time homebuyer credit"), it's time to assess your current situation and decide whether or not to walk away from your mortgage.

The government, by changing the rules and allowing the "too big to fail" banks and their executives to escape the consequences of their actions, and ultimately causing the "too big to fail" banks to get bigger, has set the stage for the ultimate moral hazard. What does that mean? By changing the rules and bailing out the multi-million dollar bonus executives, they have shown us that the rules don't apply across the board. If your gigantic "systemically important" corporation gives enough money to Barney Frank and the rest of Congress, you get your bonus even if you've succeeded in destroying your company.

This means that those of us on main street, who were caught up in the Federal Reserve's asset bubble creation (aka, the housing bubble), are stuck holding the bag while the politicians and the bank CEOs laugh all the way to the bank - literally.

The housing market in Michigan won't get back to it's pre-housing bubble days until at least 2023, according to estimates. This means that chances are pretty high that your house is worth far less than you owe, assuming you got a mortgage in the last ten years (and didn't cash out with a home equity loan). In fact, chances are your house is worth 30%+ less than it was just three years ago.

The solution? Walk away from your mortgage. There's a handy calculator that will tell you if it is worth it to walk away. You can try out the calculator here.

I can hear it already. Moral obligation, doing the right thing, living up to promises, etc. Yes, you might have been right five years ago. Now, the rules changed in favor of the oligarchy. That means that all bets are off. We, the taxpayers, are stuck with an exponentially-growing national debt. The federal government continues to take on bad debt from the private sector. We get saddled with bad debt; the bank get to keep their bonuses and get even bigger.

The housing market isn't coming back any time soon. In fact, it's going to continue to get worse as we are hit with a deflationary depression. Japan did exactly what the US government is doing now. They've been stuck in a deflationary spiral for over ten years.

Fix your family budget. You alone will look out for yourself. Don't expect the politicians or CEOs to do anything that's in your best interest.

  1. Consider walking away from your mortgage. It's suddenly in vogue to rent again. You can rent a house nicer and bigger than the one you have for less money.

  2. Move all of your checking/savings/investment accounts away from the big national banks. Find a local credit union. Credit unions didn't participate in the housing bubble run up. They don't screw over their customers with outrageous fees. They are non-profit institutions that return profits back to members.

  3. Pay off unsecured credit card debt as fast as you can. Cut up the cards. Pay for everything else with cash (or your credit union debit card).

  4. Stockpile CASH. In a deflationary spiral, cash is king. Instead of (government-created)  inflation eating away at the value of your money, deflation increases the value of your cash.

  5. If you lose your job, stop paying on debt immediately. Build up savings, if you can. Only worry about feeding your family and keeping a roof over your heads. Foreclosure can take more than a year as the banks are overwhelmed.

This isn't capitalism any more folks. This is oligarchy.

WARNING: If you are considering walking away from your mortgage, it is extremely important that you work with an attorney experienced in foreclosure and short sales.

Update: See my latest post on this issue: Housing and Taxes.