“Hurry, Bank of America, This Offer Expires Soon!”

If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.

–John Paul Getty

Why can’t a [debt restructuring process] be put in place to help the millions of American homeowners who for whatever personal reasons ” usually no less justifiable than those offered up by G.M. or Chrysler ” are unable to make their monthly mortgage payments? Why do the corporate fat cats get a respected and legitimate way to flush their unwanted debts but individual Americans homeowners don’t?

–William D. Cohan, “What’s Good for G.M. Is Good For Homeowners“; The New York Times (1/19/2011)

Here’s a brainstorm:  underwater homeowners’ problem isn’t that they owe too much money — it’s that they owe too little.

Fortunately, in the age of Groupon-style volume discounts, mortgage securitization, etc., that problem is easily remedied.

So, all underwater homeowners need to do to exert General Motors-scale leverage over their too-big-to-fail creditors is to band together, and consolidate their cumulative debts into one, truly eye-popping number.

Say, $10 billion.

Threat of Strategic Default

How would such a strategy work in practice?

Using Groupon-style technology, 100,000 underwater homeowners whose negative equity averaged $100,000 would unite to present Bank of America (or Wells Fargo, or Citigroup) with this offer:   ‘reduce our mortgage balances by 30%, or we strategically default.  P.S.:  You have three days to think it over.’

Why would the bank(s) go for it?

Because losing $30,000 per home is better than losing $75,000 (the loss associated with the average foreclosure).

And because, just like other Groupon participants, there’s an economic benefit to dealing in volume — not to mention that quickly converting 100,000 delinquent mortgages into performing assets would do wonders for the bank’s balance sheet.

Leverage — and Safety — In Numbers

And if the bank(s) didn’t accept?

The defaulting homeowners would move on to cheaper rental housing elsewhere — just sooner than they might have otherwise (and with more cash left in their pockets).   

And while defaulting homeowners would take a hit to their credit, the sting would be blunted by their sheer numbers.

Put it this way:  when a (relative) handful of homeowners strategically default, there’s a stigma; when everyone does it . . . there isn’t. 

Repeat the foregoing process 50 times or so — a rough estimate of how many homeowners are down more than $100,000  — and, Voila!, the housing crisis would be over.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.
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