New lexicon: “intentional foreclosure”

Originally spotted at the Big Picture (where else?).

This is how it works. Bob paid $420,000 for his home. Then he notices the house across the street, with more upgrades, and is selling for $315,000.

So Bob, who has pretty good credit, decides to buy the cheaper house. He can’t afford both, so then he walks away from his original home, letting it fall into foreclosure. That will hurt his credit, but he’s willing to take the hit for a more affordable home.

“Works” is, of course, a matter of perspective: (a) the bank will be stuck with a house in the worst market possible (until next month), dragging down (on aggregate) the economy – poetically just, if Bob ends up losing his job and the other house as a result; (b) it could be market-based. Just because his mortgage is 420K doesn’t mean his house it. He could move across the street and see his house going for 300k – will be repeat the procedure?

The LA Times has a varied take on the issue:

A homeowner who can’t sell his house tells the L.A.Times, “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on.”

Banks and lenders fear this kind of thinking – that walking away from a house could be the smart economic move – appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: “… people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…”

Calculated Risk notes this is “one of the greatest fears for lenders … that it will become socially acceptable for upside down middle class Americans to walk away from their homes.”

Oof. If banks have bread-baskets, I reckon such a fashion as this would count as a punch right in it. That would have to be the banker equivalent of being chased by giant carrots as a child, surely. Terrifying.

Funnily enough, my wife opened a new bank account over the weekend (with Wachovia: Bank of America, you’re just too big a bunch of dicks). During it she commented on her credit rating (good) – I told her that, 6 months from now, there’d probably be so many bad credit ratings going around that people wouldn’t know what to even do with a credit rating anymore (I’m a foreigner – this will all benefit me because, while mine is good, I barely have one at all)


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