Strategic defaults may be helping the economy

The first wave of U.S. mortgage defaults is now history and since 2007 few are unaware of its impact on the U.S. economy. Primarily spurred by lenders who made bad loans and borrowers who sold “up” to that bigger home, with larger monthly payments. Lately, something altogether different has been making an increasing contribution to soured debt: Americans choosing to stop making mortgage payments they actually can afford.

A recent report suggests that “Strategic Defaults” accounted for at least 12 percent of all defaults in February, up from about 4 percent in mid-2007. A strategic default is defined as a homeowner who hadn’t previously been delinquent, but then skipped payments for three consecutive months; and stayed current on other consumer debt of $10,000 or more.

Housing analysts say strategic defaults mainly occur when a home’s value has dropped below the balance remaining on the mortgage. A homeowner in that position may decide that continuing to make payments is throwing money away, or may default to get the lender to re-negotiate the terms of the loan. An estimated one in five U.S. homes with a mortgage has “negative” home equity, according to Zillow.com.

In March the Obama Administration announced it was coming up with a plan to encourage cuts to the principal on mortgages exceeding the worth of properties. Previous government efforts did not emphasize principal reduction but focused on lowering monthly payments. Still these programs are confusing and only aid a few who qualify for the specific guidelines. This does not address the millions of homeowners who tried to modify their own loan only to be declined. Often the principal reduction is a smoke screen because the interest rate remains high so the interest that is paid back ends up being more than what a low rate modification would be. For people staying long term, it doesn’t make sense, but for those who just want to find a way out of their home in the next year, it may serve them well. That is assuming the value doesn’t continue to decline.

Whatever you think of strategic defaults from an ethical point of view, they appear to be temporarily aiding the economy, by boosting consumer spending and allowing homeowners to stay current on their other bills. Consumer spending, which accounts for about 70 percent of economic activity in the U.S., rose at a 3.6 percent pace last quarter, more than economists forecast. The increase, the biggest since 2007, was somewhat puzzling considering that the underemployment rate was at 16.9 percent in March, near the highest level in 16 years. (The rate includes people without jobs, part-time workers who would prefer a full-time position, and people who want work but have given up looking.)

All told, borrowers who aren’t making mortgage payments equates to $100 billion annually, an amount of 1% of the US economy. “Presumably these homeowners know they’re going to have to start paying again” to live somewhere, because delinquencies on credit cards and auto loans have been dropping. This may be a sign that homeowners are using mortgage money to pay down other debt, which is great. Maybe many of us have really learned our lesson and now understand that debt literally robs us of our freedom!

The paradox is a little disconcerting because by helping to boost the economy now, and affecting their credit which dictates future ability to borrow…what happens when that boost is gone?

You will find a variety of educational content on the HowToSaveMoney360.com website.

Cease and Desist Letter

For anyone who is attempting to settle a debt or re-negotiate with your lender or credit card company. Use the following Cease and Desist letter. Send your letter via Certified Mail Receipt – you can confirm delivery right from the USPS website.

If you have any question, please don’t hesitate to call me personally 623-252-0545.

Date

Company Name

Address

City, State, Zip

Pursuant to my rights under Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. and Section 805. regarding Communication with Debt Collection, and specifically Section 805(c) Ceasing Communication. I am now demanding that you cease and desist communication with me, as well as my family and friends, in relation to this and all other alleged debts you claim I owe. You are hereby notified.

If you do not cease immediately I will file a formal complaint with my State Attorney General’s office so they have a copy on file. Additionally a copy of all notifications including this one will be mailed to the Federal Trade Commission due to your violation.

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Attached are records to prove you have received the first notice. You are breaking the law and my Attorney will pursue you from this point.

Sincerely,

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Name

Address

What's ahead for 2010

As the new year begins many consumers and homeowners are wondering what 2010 is going to look like. First let me begin by stating that I am an optimist at heart. I believe that there is no better time to be alive then now. I also believe that if we as a nation are to emerge from the mistakes of the past and build a healthier and stronger economy, we have to accomplish a few things....together.

Number 1. We all must begin to rid ourselves of debt. We must stop spending more than we earn. The media is a powerful force that conditions us to spend. Turn off your TV. I'm also guilty of this during the boom time, but have been working systematically to rid myself of debt since June 2009.

Number 2. We must understand what we're dealing with. Like the general on the battlefield, he must be aware of the enemy. As consumers, it's vital for us all to know whats happening behind the scenes with the financial institutions "we used to trust". Yes, "used to" because they have all proven to us that they cannot be trusted. See the previous blog about what banks are doing.

SAVE THIS LINK - my next several blogs will detail situations that prove that banks and financial institutions we have all relied on for so long, are nothing more than greed-based, self-serving, monolithic meglo-maniacs.

For this EC360 Empowered Consumer Blog Post, the graph above should have everyone's attention. The graph shows the coming storm in the financial sector. The reason I suspect the next storm will be worse is simple. The next wave of mortgages that re-set will come "on top of" the commercial meltdown that is just around the corner. The graph clearly indicates that we have not hit the peak yet, and this trend will continue through 2011.

The book I wrote Empowering Consumers with HowToTorials in 2006 predicted a crisis. I was wrong about one thing...how big it was going to be. I hope I'm wrong about what's still to come.

Feel free to contact me if you have any questions about your financial future, your mortgage, credit card debt or any other issues relating to your fiscal well-being. I will do whatever I can to help you. You can download a free copy of the Empowered Consumer handbook at www.howtotorial.com