There was an informative article on Marketwatch.com this week about strategic defaults on home mortgages. Strategic defaults are when borrowers who are underwater on their home loans, decide it's not worth it to stay current on their payments each month. Typically borrowers who strategically default continue to meet their other financial obligations like credit cards and auto payments. According to research presented in the article, Morgan Stanley estimates that 12% of all mortgage delinquencies in February were the result of strategic defaults. And the trend is growing.
The trend is growing because the stigma is disappearing. "Stigma" has long been the scarlet letter of the financial industry when it comes to delinquent borrowers. Stigma used to be an effective tool because it used to be, not so very long ago, that there were jobs, that there was access to credit, that there was a market in which to sell your home, and if you defaulted, it was likely due to some lack of responsibility on your part. That used to be true. But by and large, not so, anymore.
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Most people who have been swept up in this financial tsunami cannot get a job, because few jobs exist. They cannot get access to credit, because nearly 3000 banks are borderline insolvent. They cannot sell their home and come out whole because property values continue to decline and banks have a shadow inventory approaching 8 million homes that will continue to suppress home values for years to come. What can the individual do? Whatever it takes to survive economically. And that list now includes strategic default.
In fact, some states are now engaging in strategic defaults themselves. The state of Illinois currently has over $6 billion dollars worth of delinquent bills dating back to October. Like other states, Illinois is cutting spending and raising taxes, but they are also simply ignoring a significant amount of unpaid bills. Office rent is not being paid, prompting some legislators to receive eviction notices (which isn't entirely a bad thing). Services to the elderly and sick are going unpaid putting them in jeopardy and pushing vendors who supply those services to the brink of bankruptcy themselves. Illinois prisons are being asked to prepay for bullets because vendors don't believe they will be paid. And the list goes on and on.
These problems are coming to a city, county or state near you, very soon. These problems are not going away, they are just beginning and there is nothing you can do to prevent them. So what can you do? Prepare now and position yourself and your family to survive in any kind of economic crisis that could impact where you live. If you don't know who your neighbors are, get to know them. If you get involved with anything, get involved with people and organizations in your own backyard. Because when "IT" hits the fan, your strength will come from your family, your neighbors, your friends and your community. Because just like Dorothy says in The Wizard of Oz: "there's no place like home".
In fact, some states are now engaging in strategic defaults themselves. The state of Illinois currently has over $6 billion dollars worth of delinquent bills dating back to October. Like other states, Illinois is cutting spending and raising taxes, but they are also simply ignoring a significant amount of unpaid bills. Office rent is not being paid, prompting some legislators to receive eviction notices (which isn't entirely a bad thing). Services to the elderly and sick are going unpaid putting them in jeopardy and pushing vendors who supply those services to the brink of bankruptcy themselves. Illinois prisons are being asked to prepay for bullets because vendors don't believe they will be paid. And the list goes on and on.
These problems are coming to a city, county or state near you, very soon. These problems are not going away, they are just beginning and there is nothing you can do to prevent them. So what can you do? Prepare now and position yourself and your family to survive in any kind of economic crisis that could impact where you live. If you don't know who your neighbors are, get to know them. If you get involved with anything, get involved with people and organizations in your own backyard. Because when "IT" hits the fan, your strength will come from your family, your neighbors, your friends and your community. Because just like Dorothy says in The Wizard of Oz: "there's no place like home".
