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The Epidemic Spreading to Millions

Written By Brian Hicks

Posted May 10, 2010

People are going to walk away from their homes.

Some have little alternative. Government plans aren’t helpful. Banks aren’t doing much to prevent foreclosure. Regulators failed in their oversight. Politicians walked away from protecting Americans and would up opening the floodgates to predatory lending and over-leveraged derivatives… And Obama’s plan to help the unemployed will fail.

Still, homeowners (under-water on mortgage) are supposed to be the responsible ones and pay for the great con game of housing, while struggling to pay for their families?

And then you have the dimwits that are in homes they couldn’t afford in the first place.

Truth is – housing is in trouble… there is no bottom. Foreclosures will mount. People will continue to walk from their homes. It’s going to get worse.

And this isn’t the first time we’ve warned of this catastrophe. And it won’t be the last.

60 Minutes Finally Reported On It

Even 60 Minutes is finally getting in on the story that we’ve been reporting on for years. Here’s what they recently produced.

According to reports, “People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders – the banks – with the homes. In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away. Walking away does affect your credit and makes some feel guilty.”

“60 minutes contacted banks and stated they would not talk publicly about strategic defaults but that they all indicated they would be unwilling in most cases to help underwater homeowners who can afford to keep up their payments. They will only help those that are unable to make payments.”

Here’s what we had to say about defaulters in recent Wealth Daily reports.

Strategic Defaults Boost Retail Spending

What’s Really Driving Consumer Spending & How to Profit as Millions Just Walk

America is back and stronger than ever… Right?

Forget for a moment that unemployment is high, or that wage growth has been just about flat. What matters is that the feel of recovery is in the air and consumer spending – the very lifeblood of our economy – is growing and beating analyst expectations.

Still, it doesn’t really make sense… There’s no growth in income; it’s not as if we can use our homes as personal money machines anymore.

How, then, is this sustainable?

Two Words: Strategic Defaults

These very powerful two words have allowed millions to put money in their pockets that would’ve gone to mortgage.

We’re talking about $8 billion in “saved” cash that’s burning a hole in the pockets of more than six million people, according to Moody’s reports. 

And this would explain why consumer spending continues to spike despite rising unemployment, falling incomes, and rising foreclosure rates.

Even Bloomberg News’ Caroline Baum sees this: “Those deadbeat homeowners, facing possible eviction and in some cases unemployed, are throwing caution to the wind – and money at retailers.” 

We wouldn’t call all of these people “deadbeats,” though. For some of these people, finding a new home and having money to raise their families – rather than watching a mortgage eat away at life savings – is better. 

Let’s be clear that they’re not all rushing out to buy a new Mercedes.

And, no, it’s not sustainable. We don’t expect the spending spree to continue much longer.

What we’re seeing is that some of these “defaulters” are still living in the homes they no longer pay for – until the banks’ foreclosure. We’re talking about close to 10 million people. 

But despite the reason for walking, they have this “saved” cash to spend on retail, boosting spending numbers.

We believe their newfound riches will soon run out; the extra cash for retail will dry up. And that’s because banks are foreclosing faster than ever, forcing defaulters out of the homes they no longer pay for.

In fact, foreclosure filings on more than 367,000 happened in March 2010 – an increase of about 20% from the previous month. 

And Bank of America, for one, is rumored to be increasing its foreclosure rate by 600% in 2010.

A long time ago in a faraway land, we would all do anything to pay our mortgages

People would put off that new car or the vacation to Maui, even take a second job to pay a mortgage.

But times are different.

Unemployment is still high. Some are deciding to walk from homes that will foreclose anyway. And others are walking from underwater mortgages, as negative equity does nothing for them; it’s not as if they can refinance or sell the home with an underwater mortgage.

Others are walking because they lost their job… or just can’t come up with the money.

And this “mess” is far from over.

That Obama plan to keep the unemployed in their homes… It may not help much, if at all.

Turns out when new rules go into effect, unemployment benefits will not count as income for determining whether or not someone qualifies for a reduction in mortgage payment. That means that if you’re unemployed and receive benefits, you’re out of luck with mortgage modifications.

And it’ll result in more strategic defaults and foreclosures.

But the most devastating of all could be the coming Option ARM resets.

When the resets hit, payments on a $400,000 mortgage could easily jump from $1,287 a month to more than $2,593 a month. These people will likely default and walk away.

And many will use that “saved” money for something else, driving consumer spending through the roof and padding GDP numbers with favorable spending numbers (as we’re already seeing).

So, how do you profit from this?

You simply buy the very companies that process foreclosures after these people walk away… and you make a killing from it.

Options Trading Pit readers are doing exactly that. And if this interests you, I suggest you read on for more information on these companies.