Jingle mail and the mortgage crisis

By Felix Salmon
June 1, 2010
David Streitfeld has a great NYT piece on the way in which jingle mail, or strategic default, seems to be reaching its logical conclusion. Right now, about 24% of all mortgaged properties are underwater. And if you're being foreclosed upon now, you probably defaulted 438 days ago. In New York, that figure is 561 days.

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David Streitfeld has a great NYT piece on the way in which jingle mail, or strategic default, seems to be reaching its logical conclusion. Right now, about 24% of all mortgaged properties are underwater. And if you’re being foreclosed upon now, you probably defaulted 438 days ago. In New York, that figure is 561 days.

What’s more, the “limbo” period between default and foreclosure is growing fast: it has risen from 251 days in January 2008. Doing the math, that means that the average amount of time in limbo is growing by 1 days roughly every 4.4 days. Which means that if you default today, then you probably won’t get foreclosed upon until about 567 days from now — or roughly Christmas 2011. That’s 19 months, give or take, without having to make any mortgage payments at all. And if it turns out that your mortgage is one of the millions whose documentation is so screwed up that the loan servicer can’t prove you actually owe them any money at all, then there’s really no end to the amount of time you can sit in your house rent- and mortgage-free.

This turns out to be a great business for opportunistic lawyers, who can gross over half a million dollars a year just by spending a few hours per client stringing the mortgage companies along:

About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time. “I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.

Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then.

In the vast majority of these cases, we’re not talking about borrowers with loads of money who are trying to take advantage of the non-recourse nature of their loans. We’re talking, instead, about people who overstretched on their house, who borrowed much more money than they could realistically pay back, and who now realize that they’re actually in a pretty strong negotiating position with respect to their lender.

Needless to say, the more people who jump onto this bandwagon, the worse the effects for the solvency of America’s banks. Right now, the banks are still marking at par any performing mortgage, even if the principal amount is much greater than the value of the home. But if those borrowers stopped paying tomorrow, the value of the mortgage would have to be marked down to much less than the value of the home, since foreclosing and selling the house is likely to prove extremely difficult.

Clearly, the banks’ plan A — laying the world’s largest guilt trip on their borrowers — is falling apart, even as Plan B is conspicuous by its absence. House prices in the US aren’t plunging vertiginously any more. But that doesn’t mean the mortgage crisis is over. In fact, the worst might be yet to come.

10 comments

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What’s described in Streitfeld’s article is more like squatting than ‘jingle mail.’ And– given that the various now-bankrupt fee-collecting intermediaries that passed these mortgages from hand-to-hand had little or no interest in real estate per se– it’s hard to see who’s really losing anything.

Posted by MattF | Report as abusive

Nothing wrong with strengthening one’s bargaining position, but let’s all take the lessons of the last decade to heart and remember that borrowing much more money than one can realistically pay back is bad, mmm’kay?

Posted by Mega | Report as abusive

‘Tain’t squatting, it’s defaulting on a loan and staying in the house until the bank makes you leave. It is ludicrously elementary to file the eviction papers and call the sherriff. If the bank won’t do it, that’s the bank’s choice. Indeed, the bank has a strong incentive to keep you in place, even paying $0: your tenancy preserves the property, versus the stripping and vandalism that accompany vacancy, and the bank wants to market its properties as the market takes them up, not dump them en masse. See also the pretty adequate Comicle article on the subject of high-end foreclosure at sfgate.com/cgi-bin/article.cgi?f=/c/a/20 10/06/01/MN3M1DKGLM.DTL

As for borrowing the money, I think the folks who did so did absolutely the right thing. When someone offers you a government-subsidized non-recourse loan on an appreciating asset, they’re giving you a put option. The more you borrow and the less you put down, the more that option is worth. These borrowers maximized their leverage. The market turned, and they exercised their put options. They are not the dumb ones, they are the smart ones. The dumb ones are the ones who gave away the farm lending this money.

Posted by wcw | Report as abusive

A better lesson to take is that it’s not a good idea to loan people more money than they can realistically pay back. Especially when the lender is exposed to much of the risk of a decline in the value of the underlying asset.

Posted by OwnedByTwoCats | Report as abusive

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

This looks to me like a case where people believe the laws are biased and crap, and so start disregarding them. Everybody knows that a compromise would have been better, but some parties weren’t willing to give enough for it to work. Hence, we have a kind of de facto compromise worked out.

Mrs. Pemberton is lucky. In another Lost version of Limbo, she had to vacate her house.

Posted by DonthelibertDem | Report as abusive

Companies make these kinds of strategic decisions all the time. Executing buyout previsions, renegotiating debts, etc. I fail to see why an individual isn’t allowed to do the same thing.

Posted by xenadu02 | Report as abusive

It’s about time! How many economists have to recommend the banks write down the value of the mortgages in huge numbers to get consumers spending again! So far, Joseph Stiglitz, Nouriel Roubini, and Niall Ferguson are heavyweights that all advocate a debt for equity swap, meaning the bank writes down the value of the mortgage in exchange for a future ownership interest.

This is the best way to keep folks in their homes and paying. The sooner the banks are required to do this automatically across the board, the better off the economy will be and the better our chances for avoiding a near-Depression.

Posted by Farcaster | Report as abusive

things have gone completely crazy in the US
i have never seen so many office spaces for lease or sale, i live in southern california…where the residential real estate crash began…it’s scary, every 4th building is for lease or sale…

remember 50% of Americans believe Sarah Palin is qualified to be president.
50% of America believes Noah built an arc and put 2 of everything that didn’t manage to interbreed together for a few months…

these are scary times.
go SHORT, in fact go ULTRA Short.
DRV
SDS
SRS
SPXU

these etf’s provide considerable reward in a deflationary environment.

Posted by vxp | Report as abusive

Loan mod programs were DOA. Banks have eviscerated foreclosure defense proceedings. What choices are left? Banks knew these people could not afford these homes when they entered the contracts.-Liz, Attorney in WA
http://www.mystrategichomedefault.com

Posted by defaultstrategy | Report as abusive