One of the smartest and most well respected economists around, William Fleckenstein, recently wrote a piece for MSN.com where he reiterated something we said on the YouWalkAway.com blog about 6 weeks ago…
Ok, well we actually said “Strategic Default could save our economy”, but who’s counting. The basic premise is the same. Banks are taking their sweet time in actually taking back the estimated 8 million homes currently in default, but yet to become bank owned. As such a large number of the owners and occupants of those 8 million homes are currently living mortgage free, which frees up thousands of dollars every month. As good materialistic Americans, of course a portion of that newly found money goes to shopping, travel, eating out, etc…
All of which is very good for the economy. That’s not to say this is a long term fix, but to quote our last report on this subject:
“The plan so far as been to give banks hundreds of billions of dollars, supposedly to stop foreclosures by lowering monthly mortgage payments, start lending to small business, etc… this is supposed to keep jobs, free up a portion of peoples’ income, and so on, all of which is supposed to have the trickle down effect of giving people more money to spend on shopping, traveling, going out to eat, etc.
The problem is, banks took the money, yet refused to lend to small businesses or help homeowners by reducing principal or even lowering interest rates in most cases. So we’re left with a huge number of homes in default, the highest unemployment in decades, and the lowest consumer confidence levels since it’s been measured.
But strategic default changes all that, by taking the power from the banks and putting it back in the hands of the people, along with thousands of dollars every month.”
And this article re-iterated our point. It goes on to give real life examples – the woman who walked away from her $525k mortgage, bought a similar place for $200k, and bought herself a nice new car. The working couple who decided it didn’t make sense to keep paying on the grossly upside down mortgage and took their newly freed up money and took a family trip to NYC. I’m sure we can find countless other stories. Feel free to share yours.
But at the end of the day, no one’s saying people should strategically default so that they can buy a new car, or take a trip. At YouWalkAway.com, we urge those who are going through strategic default to pay down other debts, or save up money for a rental once the foreclosure process is completed. But, sometimes it feels good to take that vacation you’ve been putting off for years because money was too tight. After all, you only live once. If it takes strategic default for a family to feel a little less trapped and get to enjoy their life a bit more, rather than working 2-3 jobs to pay for an upside down mortgage… AND they give the economy a much needed boost in the process, sounds like there are worse things that could be going on.