Benson's Economic & Market Trends
Jingle Mail, Jingle Mail
December 22, 2009
Jingle All The Way; Oh what fun it is today, to just walk away!
Jingle Mail (also known as strategic mortgage default) is the happy-sounding phrase used by banks and mortgage servicers to describe homeowners who simply walk away from their homes and mail the keys back to the bank. The banker can hear the keys jingling in the envelope from a distance so even before it's opened, he knows that for this loan the jig is up. Jingle Mail appears to be the new fad of giving over this holiday season, and next year many more of our neighbors will be seen mailing back keys. For a high percentage of the ten million homeowners with material negative equity, thought will turn to action even if they can afford to make the mortgage payment, because Jingle Mail can put a lot of money in their pockets!
Why are homeowners willing to walk away even if they afford it? First, the government's program for mortgage loan modification is an abject failure. To date, only a small percentage of home loans have been put on trial modification and of those that actually go to final modification, a very high percentage re-default and foreclose anyway. This program is not working because neither the Obama Administration or the banks or Fannie Mae/Freddie Mac, are willing to face cutting the principal owed on the mortgage balance to a realistic number. Second, Jingle Mail can be very profitable!
Here's why Jingle Mail makes so much more sense than continuing to pay an inflated mortgage. Think about your average high-end homeowner. Let's call him Joe. A few years ago, Joe listened to Alan Greenspan and took a huge amount of money out of his house with an adjustable rate or option ARM mortgage. If he bought that house for $900,000 with an option ARM mortgage of $850,000, since most of his interest has been accrued, his mortgage balance has now risen to $1,000,000, while his house has fallen in value to $600,000, leaving it worth $400,000 less than his mortgage balance. Ouch! His situation is crystal clear: He can pay forever, and never own the house!
If he walks away, he makes a quick $400,000 of principal he will never have to pay! Then, if his million dollar mortgage adjusts to a current 6 percent interest payment, he saves the $5,000 a month in interest charges (or $60,000 a year) until foreclosure. Finally, Joe saves the $15,000 in property taxes by not paying them. (Now that the bank owns the house, they can pay the taxes.) Next, he notices a house just like his down the block can be rented for $3,000 (a savings of $2,000 a month), but he decides there's no rush to move out and rent. This translates into a first year gain of $475,000 with $75,000 of that amount in real cash that Joe didn't need to spend. Between principal forgiveness and cash savings, he can pocket a small fortune and for the cost of a single postage stamp, mailing back the keys is one heck of a self-help economic stimulus program.
Because it can take an inordinate amount of time for a bank or mortgage lender to foreclose, for accounting purposes the bank will almost always favor delaying foreclosure, as they pretend the homeowner will eventually honor the loan. But if a bank takes too many losses, the FDIC will take them over and the banker will lose his cushy job. Over the next year, you can count on the banks to become complicit in extending their loans, giving Joe a lot of time before he gets booted out of the house. Indeed, it's common for a homeowner who stops paying the mortgage to live rent free for up to a year or more!
Sure, Joe's credit rating may suffer for a year or two, and in some states the bank might chase him for the deficiency balance on the mortgage. But in the real world, if Joe pockets the money or pays down his credit cards in a short period of time, his credit rating will eventually go back up. If Joe wants to be a home owner again, in two or three years he can save up enough for a 20 percent cash down payment! (Think about how much you could save if you didn't have a mortgage and could cut your monthly housing costs in half by not paying interest and taxes.) If the bank chases Joe, he'll soon discover that his bad mortgage debt will be sold to debt collectors, and he'll eventually be able to settle for pennies on the dollar.
Certainly, not every homeowner is hundreds of thousands of dollars upside down on their mortgage and not everyone is going to save this amazing amount of cash. But then again, a lot of people are worried about making the car payment and feeding their families, so cash-strapped households won't hesitate for a minute to resort to desperate measures by walking away and potentially saving $10,000 or more a year. They certainly weren't responsible for causing this near depression, and they need to survive this economic downturn.
How expensive will Jingle Mail be? Well, rumblings out of the US Treasury suggest that taxpayer support for Fannie & Freddie may have to be raised from a potential $400 billion to $800 billion in losses. The extra $400 billion in estimated losses on government-sponsored prime mortgages is a combination of lingering unemployment and Jingle Mail! Next in line will be jumbo mortgages that are beginning to look catastrophic because the bigger the house the bigger the mortgage, and the higher the taxes. In 2009, mortgage foreclosures will total about four million. In 2010, the total could easily be 4.5 million, with 1.5 million or more Jingle Mail-style defaults. The banks will be rocked by several extra hundred billions of credit losses from people who can afford to make their payments. These additional losses will catch the banks by surprise. Meanwhile, the FDIC and US taxpayer will suffer big time as bank failures reach new levels. When the dust settles, the US taxpayer will once again get stuck with the gigantic bill.
The morality of Jingle Mail has two sides: As a taxpayer, it scares me to death and encourages me to buy more gold, so I'm not stuck paying the massive government inflation tax to pay for it all. And, yes, in a perfect world, people who sign loan documents should honor their obligations even if it means they made a bad decision; they should be held accountable. But we don't live in a perfect world, and the average Joe is being held to a higher moral standard and asked to pay up, while Wall Street and big business get a free ride on Joe's back. Remember, it was the former Fed Chairman, Alan Greenspan, who told the American people there was no housing bubble. We listened and did what he said.
When it comes to stiffing creditors, Joe can clearly see that business is in the vanguard of strategic default. GM, Chrysler, Merrill Lynch, Fannie Mae, Freddie Mac, and AIG stuck it to the American taxpayer big time long before a strategic mortgage default ever crossed Joe's mind. Then, there is Wall Street, where the taxpayers get the losses and the speculating bankers get the mega bonuses. What a den of thieves!
From the point of fairness and equality, Jingle Mail starts to look like an honest grass roots movement for the little guy like Joe, to get his life and finances in order. The honest, conservative, middle-class American got played for a sucker by the subprime homebuyer and the house and commodity speculators. The Wall Street fat cats who made it all so easy kept what they stole, and then got bailed out. The government has done nothing for Joe. Isn't it his turn to fight back?
For 2010, the populist song running in my head has the same haunting refrain and amoral lyrics as the 1975 Paul Simon classic song:
"50 Ways to Stiff Your Banker"
You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just listen to me
Hop on the bus, Gus
You don't need to discuss much
Just drop off the key, Lee
And get yourself free!