Strategic Defaults
A strategic default is when a person decides to stop repaying their mortgage even when they can afford to continue doing so. Why would somebody do that? You´ll lose your home and your good credit history will be badly damaged.
If you dig a little deeper, the logic becomes apparent.
Let me illustrate by way of an example. Mr Smith bought a 3 bed condo in a nice residential area of Orlando in 2006 for $260,000 and he took out a $230,000 mortgage which is costing $1500 per month to service. He has a nice job and has no problem paying $1500 per month.
However, he knows that half a dozen identical 3 bed condos in his community, which weren´t sold in 2006 have recently been purchased by cash buyers for $99,900 each and they´re renting out for $1000 per month. When you take the interest into account, his mortgage is probably 4 times the size of the current market rates for that property. So he decides to stop paying his mortgage and instead saves $1500 per month.
It takes the bank 9 months to get round to kicking him out, during which time he lives rent free. After he gets kicked out, he simply rents one of the identical condos around the corner and pays $1000 per month to his landlord. He won´t get a mortgage or a car loan for 3-7 years, but he doesn´t particularly care as he´s done nothing illegal, he´s free of that huge 20 year debt and he doesn´t mind renting for a while.
The moral hazard that traditionally prevented people from doing this is disappearing fast. Ten years ago, a person who got kicked out of his house for not paying a mortgage would feel huge shame and embarrassment. His friends and family would pity him and quietly shake their heads at how bad things had turned out in his life. Not anymore. In 2011 an increasing amount of these neighbours will be wondering how they can do it too.
In the USA, in Ireland, in the UK and lots of other countries, it is becoming socially acceptable to stop paying your mortgage. People will understand and won´t think much worse of you. In the US, they might even admire the way you got yourself out of a huge debt. There are now lots of websites offering casual and professional advice to people that want to default on their loans and declare bankruptcy.
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Let´s get the bad news out of the way first. The views I expressed on Ireland and Spain in the Xmas newsletter in December 2009 have not changed one iota. Both are high risk - low return investment destinations and I can´t see that changing in the near term (it will eventually).
Another global house-price crash looks unlikely according to a new report in the Financial Times last week.
As mentioned above, we did actually view one property that my friend is going to put an offer on. In my opinion, he has found pretty much the only type of property I would ever encourage an investor in coastal Spain to purchase.
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The key reason why some firms thrive while some implode during an financial recession is still a puzzle to many people business-owning business owners. Some wrongly assume that all businesses should suffer via recessionary cycles. But the truth is that some companies are usually essentially recession-proof, and it is not necessarily because they are much larger, better known, or a lot more generously capitalized.
Companies like Arch Coal (ACI) and Massey Energy (MEE) watched his or her stock climbed.
Don´t forget - Florida isn´t a giant property bubble like Dubai.
As you might expect, lenders in the USA hate the fact that a person can choose to walk away from their mortgage. There is no law against doing it. These lenders are lobbying HARD to get the rules changed so that people don´t have an incentive to walk away. For example, they´d like it if a strategic defaulter couldn´t get another loan for 20-30 years instead of 3-7 years. That would prevent a lot of them from doing it.
When the financial crisis first hit in 2008, the economic and political collaboration between Europe & America was unprecedented. That isn´t happening anymore.
Let´s get the bad news out of the way first. The views I expressed on Ireland and Spain in the Xmas newsletter in December 2009 have not changed one iota. Both are high risk - low return investment destinations and I can´t see that changing in the near term (it will eventually).
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