Mike Konczal is a renter
Mike Konczal is on a roll these days, pointing out how there’s a strong tendency towards having one rule for the rich and another for the poor. On Wednesday he pointed out that when Fed governor Kevin Warsh called for banks to have “readily comparable” funding sources, he was really calling for exactly the kind of vanilla option that Barney Frank lost no time in removing from the act creating a Consumer Financial Protection Agency. The following day, he drew a bead on those — South Carolina Lt. Gov. Andre Bauer among them — calling for drug tests to be administered to anybody claiming welfare payments:
I think I can support this idea if, and only if, it is also required that people who claim a mortgage interest tax deduction are also required to take a drug test.
But Konczal’s not just good at the one-liners: he can also do some serious number-crunching. Right after posting the drug-test blog entry, he unveiled a two-parter on the mathematics of mortgage modifications for underwater borrowers which is required reading for anybody who thinks that we’re achieving anything at all by reducing interest rates and not principal.
It’s worth remembering, in this context, that a foreclosure is essentially a loan modification where the whole mortgage is paid off at once and the principal is massively reduced. That’s why strategic non-foreclosure exists, and why homeowners are sometimes begging their banks to foreclose, only for the bank to refuse to do so — see Konczal, again.
Theoretically, any bank willing to enter into foreclosure proceedings should also be willing to allow the homeowner to refinance their mortgage elsewhere, paying off their existing loan at say 50 cents on the dollar. (Or even less, if the numbers in this chart are to be believed.) But the banks have a secret weapon: foreclosure is extremely painful and disruptive for homeowners. One of the reasons that the foreclosure rate has lagged so far behind the delinquency rate (guess who) is that the threat of foreclosure is one of the most powerful tools that banks can use to squeeze every last drop of blood out of a homeowner before finally tossing them out. Once foreclosure proceedings have started, no homeowner is likely to cough up any money at all.
I spent an hour last Wednesday, along with Megan McArdle, on a Nevada Public Radio phone-in show devoted to the topic of walking away from your home. It turns out that the two of us are really not that far apart, and that Megan is more than willing to recommend walking away to just about anybody who is underwater on their mortgage and who can only make their mortgage payments by dipping into savings rather than simply paying out some of their income. In any case, if there’s one thing that just about everybody should be able to agree on, it’s that if you’re going to lose your home to the bank anyway, there’s no point at all in killing yourself trying to continue to make payments.
So that’s a good place to start, I think: if your bank is being utterly uncooperative, constantly losing your paperwork or telling you that it won’t even begin negotiations until you turn up with a check for $200,000 (one story from a caller in Nevada), then give up: their strategy is clear. They have no intention of trying to keep you in your home, they’re just trying to keep you paying them money for as long as possible before they kick you out.
All too often one hears stories of people who get a foreclosure notice and move out of their homes, only to continue to own the home indefinitely as the bank fails to pull the trigger. That’s an excruciating position to be in. Much better to just stop making your mortgage payments and stay put, ignoring the bank when it says that it will foreclose, until it actually does foreclose. If they overreach and do something like try to change the locks on you before taking ownership of the house, then at that point a good lawyer should be able to keep you in the home for a very long time, rent-free. On the other hand, if the bank approaches you with a sensible mortgage modification — one where the principal goes down rather than up, for instance, and where the lender takes at least some of the losses that they would suffer in the event of a foreclosure — then you can start talking to them seriously. Just don’t hold your breath waiting for that to happen.
And if you’re thinking about buying a house, just remember that there are a lot of very happy renters out there too. Mike Konczal is one of them, and he clearly knows what he’s doing.