Part II - Why Homeowners Need to Understand that Ownership Is Not a Business...

I wrote a blog the other day rebuking the idea that a Strategic Default was, and is a "Business Decision".

In my opinion, that's the furthest idea from the truth. Now I have ammunition to back it up.

An article written by US News reporter Luke Landis, "5 Homeownership Myths To Avoid" suggests that buying and living in a home is almost exactly the opposite of running a business:

Your home is a good investment. A business relies on ROI (Return on Investment) and P/E (Price to Earnings) ratios in order to stay relevant and viable. Maybe that's part of the problem we are in today. Some people are looking at the numbers and deciding it's not a good way to invest. It's your home, you moron. It protects you and your family from the rain. If you want to invest, buy gold. If you want to gamble, go to Vegas.

Taxes breaks. Easily offset by the homeowner having to buy a new furnace. Or water heater. Or lawn mower. Whatever.

Renting. Renting can be cheaper than owning because of the upkeep issues associated with owning a home. And it makes the renter much more flexible when it comes time to move.

Forced Savings. That's funny. Forced SPENDING is more like it. Ever heard of the Home Depot ?

Your home is not a good investment. In fact, here's an article with that title "Your House is Not a Good Investment". Hmmm...I wonder what the article is about ?

I understand that during the past 5 years, everyone wanted to be a "real estate investor". People would sell their old home and move into a bigger, better house in that brand spanking new neighborhood. And keep the old property as an "investment".

But there is a significant difference between an actual investor and a "forced" investor. The real investor has knowledge. Expertise. Understanding of the market place. They are professionals. It's their job. It's a BUSINESS.

In my opinion, these "forced investors" should have sold their homes before moving into new ones. Or else stayed put. If it was a new job or requirement to move for one reason or another, that's understandable. But I would almost bet they were not. People moved because "everyone was doing it". And now a lot of these so called "investment" properties set on the foreclosure rolls of the banks and other financial institutions.

Others would take advantage of the newly available "liar loans" and go out and buy five or ten investment properties with Interest Only loans, thinking that real estate would continue to appreciate in perpetuity. These activities were the drivers of the housing boom. And they were also the same activities that drove the housing market into the ditch.

The myth that your home was a good investment has led to society thinking that owning a home was also "good business". Your home has nothing to do with business.

Your home is where you raise your children, grow your tomatoes, play with your dog, get married, cut the grass and paint the walls. Where you work is business.

If you are a homeowner, your home is simply where you LIVE.

What ever happened to just living ?

Strategic Default - A Business Decision. Really ?

I have heard quite a few conversations lately in which people have decided to call the act of Strategic Default a "business decision", so I decided to take a look at the meaning of the phrase "business" "decision".

The Free Dictionary Online site defines the word "business" in the following ways:

busi·ness

1.

a. The occupation, work, or trade in which a person is engaged: the wholesale food business.

b. A specific occupation or pursuit: the best designer in the business.

2. Commercial, industrial, or professional dealings: new systems now being used in business.

3. A commercial enterprise or establishment: bought his uncle's business.

4. Volume or amount of commercial trade: Business had fallen off.

5. Commercial dealings; patronage: took her business to a trustworthy salesperson.

6.
a. One's rightful or proper concern or interest: "The business of America is business(Calvin Coolidge).

b. Something involving one personally: It's none of my business.

It's not until you get to definition# 6 that it actually becomes personal. There are five other more relevant definitions that describe the word business. That's a lot. So using the word "business" as a personal description of an action, or DECISION, is weak at best.

Here is the dictionary's definitions for the word "decision":

de·ci·sion

1. The passing of judgment on an issue under consideration.

2. The act of reaching a conclusion or making up one's mind.

3. A conclusion or judgment reached or pronounced; a verdict.

4. Firmness of character or action; determination.

5. Sports A victory won on points in boxing when no knockout has occurred or in wrestling when no fall has occurred.

6. Baseball A win or loss accorded to a pitcher: has four wins in six decisions.

However - the use of the word "decision" does make sense. People are deciding to default on their loans. But this has nothing to do with business. It's a personal decision.

Using the phrase "Business Decision" sounds much better than "default decision" or "foreclosure decision" or "failure to pay your contractual obligation decision". We do this to lessen the blow, to ease the mental picture of shirking responsibility, and to allow ourselves to do what we know is not right.

Throughout human history, man has used alternative words or phrases to ease his mind of guilt, and to allow the unthinkable or the absurd to take place, simply because they changed what the act was called.

Calling Strategic Default a "business decision" is no different.

Unless you are in the business of buying and selling homes, commonly known as an "investor", your primary dwelling is not part of a business. A person does not buy their home with the idea they are going to treat it like a business, at least not normally. Buyers purchase homes out of sheer passion, or emotion. That's why people who have a family which consist of a father, a mother and one child will purchase a 5,000 square foot home, even though a 1,500 square foot home would serve all of their needs. Unless their building and selling furniture out of their garage, the house purchase has nothing to do with business.

I personally have lost at least 30% in equity in my own home. And I am one of the lucky ones, because I still have 25% or 30% in equity remaining. The reason: I have lived in my current home for the past 17 years. Think of my neighbors that purchased in my area in 2005. They are drowning.

There are currently 3 - 5 foreclosures in my subdivision of 200+ homes. I can't keep up with how many there are, because it seems to change almost every day.

My point is this - if 30% of the defaults are strategic "business decisions", then 1 or 2 of the current foreclosures in my subdivision is due to some homeowner just walking away. Does that hurt ? You darn right it does. Instead of the appraiser having to go outside of my neighborhood to get a more decent comp, he's going to count that strategic default and it's going to keep my appraised value down. It's going to hurt...

People are going to say what they want to say and do what they want to do, and that is their right, it's their prerogative. This is America. But that does not change the fact that when you perform an act such as a Strategic Default, it damages the bank that lent you the money, your neighbors, your community, your state and your country.

And calling it another name does not lessen the infliction of pain we all are feeling now...

Strategic Default Retribution ?

Well, it appears the Mortgage Banker's Association has conjured up a way of penalizing the homeowners who have decided to just walk away from their properties, utilizing the now infamous "Strategic Default" mortgage scheme.

A Strategic Default results when property owners just literally "walk away" from their properties for no apparent reason - other than they don't want to pay the mortgage any more.

The MBA apparently has decided to punish this group of people by requiring theme to wait up to 8 years before allowing them to enter the mortgage financing arena again.

If this is a scare tactic, as I have heard it may be, than I think it's a waste of energy. It may be that the MBA would like to slow down the strategic default rate, but people are smart. If they don't put teeth to it, it will not work. You need the GSE's (Fannie & Freddie) to come out and support the idea of punishment. Otherwise, the initial scare will go away, and the strategic default rate will continue to rise.

However, I do think this is fair, as long as it is genuine. If the MBA is going to use it's influence and choose to punish the Strategic Defaulters, it must be fair and not try to conjure up it's own "default" scheme of another name, whatever that may be. Check out today's TBWSDaily.com video. There is a suggestion that the MBA may have used the ol' Short Sale scheme themselves...

Everyone seems to be taking advantage of the distressed real estate market these days. It's sad, because we all are paying dearly for it as well...