Intentionally Default? Maybe. Read On. [Karl Denninger]

If you have any qualms about the morality of intentionally defaulting on your mortgage - not because you can't pay, but because the value of your house has declined to less than you owe, listen up:

“I can make the payments. That’s not the issue. It’s a business decision,” Watts said. “I tried to work with the lender. The lender didn’t help. They said, go ahead, do a short sale. It’s strictly business.”

Who is this guy? He is not Joe. K. Random.

Watts, the chief prognosticator for the Orange County Association of Realtors, once was one of local real estate’s biggest boosters. Where others saw a market slump, Watts kept seeing price gains.

Got it?

Good.

It's strictly business folks.

The banks, Realtors and mortgage brokers didn't pump real estate, stoking the fires of starry-eyed profits, for your benefit. It was not so your children would have a nice place to grow up. It was not so you and your wife, husband or significant other would have a great place to live.

Nope.

It was strictly business.

That's right. Every nickel of profit that those Realtors, Banksters and Brokesters could manage to connive out of your pocketbook, they did. They issued rosy predictions like this:

In 2006, Watts forecast a 15% price jump. Instead, sales dropped 28% and prices rose a meager 2.4%.
In 2007, Watts predicted that local house prices would increase 7%. Following the subprime mortgage meltdown, and prices ended the year down 10%.
In 2008, he thought gains of 3-5% were conceivable for houses. By year’s end, the whole economy had tanked, and Watts had issued an apology. Home prices fell 30%.

Yeah, he apologized, but you lost money.

This is not one random guy either. Remember these books?

Google him.

Look, I understand "it's just business."

I'm a capitalist pig and I'm proud of it.

But back in the day of The Internet, I had plenty of cover to prognosticate 500% annual growth rates for the next 20 years if I wanted to. Everyone else was.

I refused, because I knew that mathematically such a prognostication was dishonest.

It is rather clear that anyone who bothered to do the math on home price appreciation and compare it against income had to know that too, on a forward basis for any material length of time, was impossible to maintain.

I understand that this realization ultimately included you, the Home Buyer - if you bothered to do the math (and you should have.)

But the Brokester and Bankster made those loans knowing this as well, and they're the subject matter experts, with their HP12Cs and fancy computer programs. They all had to know, if they bothered to look (and they had a duty to look, at least for the buyers of their "debt instruments") that the loans they were writing and the "affordability products" both weren't affordable and those loans had a high probability of exploding.

It's simply math.

So consider what Mr. Watts did.

Make a business decision, and only a business decision.

Do not allow yourself to be guilted by people like Sheila Bair of the FDIC or others, all of whom in the government also knew the math, into intentionally screwing yourself when in point of fact you should do what makes the best business sense for you and your family.

We cannot, ladies and gentlemen, get to the bottom of this economic morass until the excessive debt is flushed from the economy. This means that it must be paid down or defaulted.

The market must clear this excessive debt in households, corporations and even government.

All the whining from government about the "horrible" effects of foreclosure on neighboring property (the value decreases) is in fact backward. In order to return to sustainable home ownership we must get home prices down to 2.5-3x incomes on a median basis. The sooner we do, the sooner we achieve sustainable home ownership. True home ownership.

So while it sounds twisted, intentional defaults, where it is a proper business decision on your part and made in consultation with your own experts, help this process along.

The government is heavily invested in seeing the banks get the better end of this situation (of their own making!) even if it impoverishes you in the process.

Only you, in consultation with an attorney and CPA, can make a business decision on whether to attempt to renegotiate and/or walk away - that is, what the best business decision is for you - and only you.

Make that decision not based on the bleating claims of morality among those who either intentionally misled you or sat silently while firms and individuals over whom they had regulatory authority did so, but rather strictly as a business decision.

After all - they both did a few years ago and are again - here and now - today.

I’m with you, Centurion. From a “business morality” standpoint, yes, it’s also deplorable. I don’t consider this (probably undecidable) issue a moral absolute though.

There was of course a time when owning a home was the cat’s meow, gateway to prosperity; etc; etc; At the present time, there are masses of folks who are 30-60% underwater and will be making payments on a principal balance essentially double those of a potential bottom-fishing new neighbor. Meanwhile, the responsible parties will be paying heightened taxes at nosebleed levels....mostly for the bailout of bankers foreign and domestic....and, if housing has bottomed right here and now (which I do not agree with but as a matter of discussion) then at 3-4-5% appreciation, a 50% underwater owner will very likely NEVER see breakeven. Morality is morality but self-enslavement isn’t attractive for an ideal that’s been seriously shot down.

Owning a home as cat’s meow is IMO equivalently an emotional state of mind as walking away is deplorable.

All this article advocates is treating the dilemma as a business decision. After all: If you’ve bought the home as a place to house your family, then it doesn’t do much good for that same family for you as breadwinner to beat your brains out, enslaving yourself for the next 27 years.

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