The Great Depression Online

Great Depression Online Archive Issue:

The 'Strategic Default' Era

Great Depression Online
Long Beach, CA
April 23, 2010

Inside This Issue You Will Discover…

*** Uprights and Squares
*** A Hidden Stimulus
*** The ‘Strategic Default’ Era
*** And More

Uprights and Squares

Not long ago defaulting on your mortgage wasn’t just a financial failure, it was a character failure.  It was something you’d go to any and all lengths to avoid…even if it meant borrowing money from your brother in law.

How times have changed?

Only uprights and squares care about character anymore.  What’s more, defaulting on your mortgage – even if you can still afford the payments – is now considered a shrewd financial decision.  In fact, there’s even a name for it; if you hadn’t heard, it’s called a ‘strategic default.’

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Take Shana Richey or Jay Fernandez, both of Palmdale, California.  Since they strategically defaulted on their houses they’ve freed up plenty of cash and are enjoying the good life. 

“Ms. Richey’s family used some of the money to buy season tickets to Disneyland,” reported the Wall Street Journal.  “Mr. Fernandez takes his girlfriend out to dinner more frequently.  He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.”

Not bad, if you’re for stiffing your creditors.

A Hidden Stimulus

Last week the Commerce Department reported consumers spent a seasonally adjusted $363 billion in March…up 1.6 percent from the previous month and 7.6 percent from a year earlier, not adjusted for inflation.  Of that, sales of motor vehicles, clothing, and furniture rose a seasonally adjusted 6.7 percent, 2.3 percent, and 1.5 percent, respectively.

Where is the money coming from?

With unemployment still near 10 percent and income growth stagnant, where are people coming up with the dough to buy cars and furniture?

One source of new consumer spending, it seems, is the ‘strategic default.’  Many borrowers, upon stiffing their creditors, live for free until the lender forecloses.  From what we gather, with the flood of would be foreclosures overwhelming the banks, many defaulters are getting a free ride for a year or longer. 

Having neither a mortgage payment nor rent these strategic defaulters now have quite a slush fund to buy stuff with.  Indeed, the strategic default is a hidden stimulus for the consumer economy.

The ‘Strategic Default’ Era

The sheer scale and magnitude of the default situation as a part of the overall economy is enormous …

“Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010,” reported the Wall Street Journal.  “If one in five of those households defaults, the losses to banks and investors could exceed $400 billion.  As a proportion of the economy, that’s roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.”

Plus, if one in five of those 21 million houses were to default, 4.2 million houses could conceivably hit the market.  Imagine what that would do to real estate values if those houses all went ‘for sale’ at once?

Of course the banks would never do that.  They like to drip their defaults back on the market at a snails pace to distort prices to the upside.  The growing pool of nonperforming, non-foreclosed houses is being called the shadow inventory.

“The average number of days from when a borrower stops paying on his/her mortgage to when the bank sends out the first foreclosure notice is 417 days,” reported CNBC on Tuesday.

What a marvelous world? 

You see, in the strategic default era, a spendthrift can live mortgage free and rent free for nearly 14 months without hearing a peep from the bank.  During this time they use their extra cash to load up on iPhones and Red Bull energy drinks.

After that they move back in with mom and dad and play video games.  Sometimes, for kicks, they go on Facebook.


M.N. Gordon
Great Depression Online

P.S.  Most people think the markets are too risky and their approach is “hit or miss”, pure speculation, or worse.  Not with the Barefoot Trading System.  Even as the markets shift, and the economy changes…this system will always work.

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