Creative Destruction

HT: Policies of Fear

This whole pressure to keep people paying their mortgages creates some really ugly situations and really is destroying people’s lives and their financial future. Look at this one from the above article:

Unfortunately for Sam and Chris, the housing market began to collapse in 2007. Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.

Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity – assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.

They face a choice of either 60 years to get out from under this debt monster, or they can default and spend two years building their credit back up.

assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 – within two years after a foreclosure

Why do they not just walk away and start renting? It’s a big fraud that people are being told that it’s somehow immoral to walk away, and that they must sit for sixty years under this debt monster.

Mish’s Global Economic Trend Analysis: Government and Lender Policies of Fear and Shame Help Keep Homeowners Debt Slaves.

Mish just posted a really interesting article detailing the social pressure which prevents people from walking away. It is interesting that “society” claims that homeowners need to act “morally” and keep their “promise to pay” above and beyonds of the term of the contract that they signed, but “society” makes no such claims on the lenders.

Everyone must walk away. Seriously. It’s the only way the excess debt will get flushed out of the system and the economy can recover. Walk away, default the excess debt, and then rebuild. Otherwise we will just drag on forever and have multiple lost decades, like Japan.