Like yelling "fire" in a crowded theater, borrowers will run to the exits when they realize their moral obligation to their family outweighs their false moral obligation to repay their mortgage debt. Lenders are praying this does not happen.
Irvine Home Address … 28 ERICSON AISLE Irvine, CA 92620
Resale Home Price …… $469,000
{book1}
It's got me under pressure,
It's got me under pressure.
I'm gonna give her a message,
here's what I'm gonna say:
It's all over.
She might get out a nightstick
and hurt me real real bad
by the roadside in a ditch.
it's got me under pressure.
ZZ Top — Got Me Under Pressure
Lenders are pressuring owners to repay their underwater loans by appealing to morality. As people strategically default and their lives improve, they tell their friends which triggers the next wave of strategic defaults. The pressure of morality gets less and less effective, particularly when borrowers realize the false morality to lenders is superseding their real moral obligations to their families. 
Homeowners Who 'Strategically Default' Are Under Moral Pressure
Walking away from a mortgage seemed like a crazy idea to Chris Schreur, a financial adviser, and his wife Valerie thought he had gone mad when he mentioned it. It wasn’t just the financial hit, but the shame of defaulting.
“I think it is the number one reason, by far, that more people aren’t doing this,” Chris Schreur said.
If that is truly why people are not defaulting, then we are going to see more and more strategic default as people realizing their morality is misplaced.
After buying a house during the boom of the mid-2000s, many homeowners are now finding themselves underwater; meaning they owe more than their homes are worth. More than 11.3 million, or 24 percent, of homeowners were underwater by the end of 2009, according to a report by First American CoreLogic.
Finding themselves more than $130,000 underwater on their mortgage, the Schreurs chose to stop making their payments, even though they could afford it. “It was completely crazy to keep throwing good money after bad,” Mr. Schreur said. Their credit score was in the 800s and they had never been late on any payments before then. They owed $430,000 on their California home.
“Objectively the hardest part was the hit to the credit rating,” he said. “Defaulting on a debt is the hardest thing to accept.”
Schreur did some research and found he could get more house for less money by renting.
“My degree is economics, so I understand that you don’t keep putting money into a losing proposition just because you already put money in,” he said.
But it was his child’s future that made the decision clear and helped ease the shame factor.
“I think of it as a choice between either defaulting and writing the debt off now, and potentially not being able to send our daughter to college in 12 years,” he said.
That realization by that borrower, once spread around the country, will cause a stampede toward the exit door.
A borrower's family should be more important than the ego of the head of the household. When borrower's take what they consider to be the moral high road, the only people who are going to know or care will be the borrower's family. The people at the bank couldn't care less about why someone pays their mortgage. Borrowers are nothing more than a number to them. It is the borrower's family that pays the price so that the borrower can hold his head high and believe that other people think he is behaving morally. In truth, nobody else really cares. The borrower's pride and ego hurts their family. 
Continuing to pay a bloated mortgage is not a matter of morality. The borrower and the lender have a contractual arrangement, and if this conflicts with the needs of a borrower's family, the borrower has a contractual right to get out of the onerous payments and divert those resources back to the family unit. In fact, the only moral imperative in this situation is the one between the head of household and the family members within it. The right thing to do when hopelessly underwater and paying far more than rent is to walk away.
When excessive housing payments burden the borrower's family members — the people the borrower's really do have a moral obligation toward — then the borrower making the financial decisions is putting the needs of the bank above the needs of their family. If there is any moral imperative, it is to get out from under the crushing debt while there is still time to save the family's future. The house can be replaced; the family members' education cannot.
…The threats and stigma of defaulting seems to be the coercion banks are using to stop them from defaulting, said Schreur. “So the [banks think] it’s better to go that route than it is to just renegotiate with the people who, all things being equal, would rather stay in their homes.
“I think a lot of people feel stuck,” he said. “You do have choices. Staying in your house is a choice, walking away is a choice.”
The Schreurs are renting a home a mile away from their foreclosed place for $1,000 less per month than their mortgage payments.
Borrowers who are not underwater and who have payments at or below rental parity don't walk away. They don't need to, and they don't benefit from it. If walking away results in a higher monthly payment, people won't do it. And properties with positive cashflow rarely decline in value because financially prudent buyers would see the value and support pricing. The entire walkaway phenomenon is a direct result of the false appreciation created by lenders who are being burned by the walkaways. Lenders are getting what they deserve.
Jodi Romanello walked away from the Florida home she and her husband planned to retire in. … After approaching the bank and being turned down for a refinance or lower payments, the Romanellos chose to strategically default and their last payment was in November 2008. …
As with the Schreurs, the shame and moral factor was the biggest stumbling block for the Romanellos.
“The banks are making it sound like a moral issue, like you’re defaulting on something you promised,” Romanello said. “And I’m very angry about it, because first they’re taking taxpayer’s money; and they don’t try to work with you at all.
People should be pissed. Lenders inflated a massive Ponzi Scheme, and when it collapsed, they have the nerve to accept government bailouts and cajole people with morality. Lender's displayed no morality whatsoever, so why should borrowers?
I predict that by the end of 2010, when someone in lending suggests that is it wrong to stop payment, borrowers are going to laugh at them. The Great Housing Bubble will eliminate any pretense about the morality of repaying bank debt.
… Despite homeowners increasingly walking away from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. A study by Brent T. White, associate professor of Law at Arizona University, examined why.
“Most homeowners choose not to strategically default as a result of two emotional forces,” the study concludes. The first is the desire to avoid the shame and guilt of foreclosure; and the second is exaggerated anxiety over foreclosure’s perceived consequences.
These emotional constraints are “actively cultivated” by the government and other social control agents to encourage homeowners to keep paying their mortgages; “and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision,” the study said.
The study, “Underwater and Not Walking Away: Shame, Fear, and the Social Management of the Housing Crisis” was released in February.
I recently wondered Why Do Struggling Homeowners Keep Paying Their Mortgages? Dr. White's study is an attempt to answer that question. His conclusions are difficult to argue with. Once borrowers stop thinking default is wrong, and once they realize the consequences are not as dire as they imagine, many more underwater homeowners are going to walk away.
The only thing keeping debtors in place is kool aid intoxication and the false belief that they will get their money back soon. realtors are already talking up the market as they always do, but look for more kool aid from lenders and the government as both parties are now deeply involved in this Ponzi Scheme.
Jon Maddux, CEO of You Walk Away, said they get a lot of inquiries from people who think that they have to file for bankruptcy—which they don’t.
“It’s a blip on their credit,” he said, adding that most people can apply for a loan in three years after foreclosure.
“It’s important that people understand it’s not the end of the world; it’s not something that will financially destroy them,” Maddux said.
The company has helped about 4,000 people walk away from their mortgages and gets thousands of inquiries per month. Of their clients, 90 to 95 percent have tried to work things out with their lender first, Maddux said.
“The nature of the act of walking away has always been associated with being a deadbeat, a failure, etc,” he said. “But it is now seen as a business decision.”
Strategic default is the natural response to the situation. Once strategic default becomes the norm, the market will truly be entering the capitulation stage of the decline.
A microcosm of the bubble
Today's featured property illustrates many of the problems of the bubble and its aftermath. This property was purchased for $637,000 in September of 2005. The owner used a $509,600 Option ARM with a 1% teaser rate, a $63,700 stand-alone second, and a $63,700 downpayment.
The buyer could never afford this property. Since the buyer had some of money in the deal, they held out longer than others.
Foreclosure Record
Recording Date: 06/11/2009
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 03/05/2009
Document Type: Notice of Default
The property was purchased at Trustee Sale by Aurora Loan Services. This property has been held off the market by the service sine 7/9/2009.
How many other bank-owned properties are out there in hiding waiting for a little uptick in prices before they get dumped?
Irvine Home Address … 28 ERICSON AISLE Irvine, CA 92620 
Resale Home Price … $469,000
Home Purchase Price … $637,000
Home Purchase Date …. 9/29/2005
Net Gain (Loss) ………. $(196,140)
Percent Change ………. -26.4%
Annual Appreciation … -6.4%
Cost of Ownership
————————————————-
$469,000 ………. Asking Price
$16,415 ………. 3.5% Down FHA Financing
5.24% …………… Mortgage Interest Rate
$452,585 ………. 30-Year Mortgage
$99,782 ………. Income Requirement
$2,496 ………. Monthly Mortgage Payment
$406 ………. Property Tax
$10 ………. Special Taxes and Levies (Mello Roos)
$39 ………. Homeowners Insurance
$140 ………. Homeowners Association Fees
============================================
$3,092 ………. Monthly Cash Outlays
-$417 ………. Tax Savings (% of Interest and Property Tax)
-$520 ………. Equity Hidden in Payment
$34 ………. Lost Income to Down Payment (net of taxes)
$59 ………. Maintenance and Replacement Reserves
============================================
$2,248 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,690 ………. Furnishing and Move In @1%
$4,690 ………. Closing Costs @1%
$4,526 ………… Interest Points @1% of Loan
$16,415 ………. Down Payment
============================================
$30,321 ………. Total Cash Costs
$34,400 ………… Emergency Cash Reserves
============================================
$64,721 ………. Total Savings Needed
Property Details for 28 ERICSON AISLE Irvine, CA 92620
——————————————————————————
Beds: 3
Baths: 2 baths
Home size: 1,760 sq ft
($266 / sq ft)
Lot Size: n/a
Year Built: 1989
Days on Market: 3
MLS Number: P731539
Property Type: Condominium, Residential
Community: Northwood
Tract: Othr
——————————————————————————
According to the listing agent, this listing is a bank owned (foreclosed) property.
FANTASIC 2 STORY CONDO IN IRVINE IN GREAT LOCATION. CATHEDRAL CEILINGS. COZY FIREPLACE IN LIVING ROOM. SEPARATE LAUNDRY ROOM. BEDDROOMS WITH MIRRORED CLOSET DOORS. LARGE MASTER BEDROOM AND BATH WITH SKYLIGHT. SPACIOUS AND OPEN FLOOR PLAN. PRIVATE BACKYARD PATIO AREA. LOW MONTHLY HOA DUES. ASSOCIATION POOL AND SPA. HURRY OR MISS THIS FANTASTIC DEAL. **BUYERS TO SATISFY THEMSELVES WITH PERMITS**MUST SEE AGENT REMARKS**
Doesn't the thought of buyer's satisfying themselves seem rather undignified?
.
Sep 29, 2005 Sold (Public Records) $637,000 16.2%/yr Public Records
Mar 31, 1999 Sold (Public Records) $240,000 -0.3%/yr Public Records
Sep 29, 1989 Sold (Public Records) $248,000 — Public Records
‘nuf said
March 31, 2015 Sold (Public Records) $618,000
Not when the US taxpayers are bailing them out.
My favorite quote is Mr. Schruer explaining how is economics degree enables him to understand that you do not keep throwing money into a “losing proposition” just because you already have money in it. This is just plain silly; it does not take a 4 year degree to figure out that 05 was a really dumb time to buy real estate in CA nor does it justify walking away.
Of course we also see The Children canard make it’s usual appearance. Suddenly, it’s all about The Children when a house debtor realizes he overpaid for a house and needs to stroke himself into believing it’s OK to walk away and let AZDavidPhx pay it instead.
Notice that this story makes no mention of financial hardship. They say that they walked away even though they could afford it but they had to do it so the children can go to college some day. Sure.
Again, this is another example of borrowers who engaged in willful ignorance during the boom. They took out huge loans with no intention of paying them off. As long as the house appreciated they would make payments. Now that the house depreciates, they stop making payments. I have no sympathy for borrowers in these kinds of stories as they were implicit conspirators in the scheme.
How moral is it for these people to walk away and have their neighbors pay the debt?
Just another stupid consumer passing the buck off to the rest of us to avoid taking responsibility for their own mistakes. Many more to come; get out the tissues and violins.
I am shifting from banging so much on people that choose to do this to pointing out how lame the reporting on this is. It is so easy to poke holes in to the claim being made here that this is fundamentally so he can send his child to college in 12 years. Simply ask the gentleman what he would have done had the value of his home stayed exactly where it had been at the closing, so that he was not putting good money after bad. If the answer was that he would have continued to pay the mortgage, then ask how his cash flows and savings capacity would be any different in that case than in the case where he pays off his underwater mortgage and listen carefully for a coherent answer – which undoubtedly would not be forthcoming. The circumstances are simply that he had the chance to walkaway from an obligation and pickup some money doing it. To say it was for a daughter’s education is simply to pick a nice sounding rationale for a profoundly unethical act. Is it too much to ever find a journalist that is going to knock over this transparent nonsense: these people speculated that they would pick up easy appreciation bucks and now that it isn’t going to happen they choose to stick their lender with the loss. To drag their daughter in as a public reason for their actions just shows deeply dishonest instincts of these folks.
The difference is that with the house, he was assuming that with 12 years of paid-down equity (no small chunk) + 12 years of appreciation, even if a minimal 1%/year, he could hawk the house for the education, either by sale (yeah right) or with a low interest HELOC.
Since instead his “principal” payments were going into the black hole of debt reduction with no equity gain, rather than into a forced savings plan, he wouldn’t be able to tap it for college.
This was in answer to Queen City Eddie. Don’t know why it ended up down here… sorry.
“The difference is that with the house, he was assuming that with 12 years of paid-down equity (no small chunk) + 12 years of appreciation, even if a minimal 1%/year, he could hawk the house for the education, either by sale (yeah right) or with a low interest HELOC.”
That is exactly what this guy believed, and he was not alone. The house was supposed to be a wage earner, and people planned their lives as if this were the case.
What he “believed” is irrelevant. Whether the house was going to appreciate or if Christ was going rain equity upon him from the heavens – I don’t care what his beliefs may have been.
What interests me are his actions which were to buy a house that he could not afford, make payments until the house across the street sold for less and then call it a business decision to stop paying so that his children can go to college.
I think what annoys me the most about Mr. Schreur is what I perceive to be as inherent dishonesty. He is using The Children to justify walking and using corporate gamesmanship lingo like losing proposition all in the same breath rather than just admit that he was a failed speculator who didn’t want to get left holding the bag.
People like Mr. Schreur ought just shut their mouths and go away – stay out of the media and not insult the intelligence of their neighbors with lame excuses.
What about the 12 years of paid down equity? (plus another 3? since he bought). Yes, that still involves the implicit and totally untrue belief that real estate never goes down, but it’s harder to call that speculation. The house didn’t need to be a wage earner for their college funding plan to work, it just needed to not depreciate.
This was the fail-safe position people thought they were taking. They thought that in the worst case scenario by the time the kid went to college, they would have paid off a couple hundred thousand in equity which they could then tap. They were very very wrong. But for most borrowers I don’t think it was a case of tails I win heads the bank loses, so much as tails I win, heads I don’t win but I don’t lose either.
It’s all the same anyway because he was planning to pay for his daughter’s education with debt no matter what and probably still is.
If houses appreciated the plan was for some other sucker to pay for his daughter’s education by having the next guy over pay a higher price for the same 12-years-older house.
If houses had stayed flat, he would have “unlocked” his paid-in equity by taking a loan on that money. He thought he could have his cake and eat it too. Buy a non-producing asset and enjoy the comfort of the home, and use the same money twice to pay for education. So he would have gotten a lowish interest HELOC loan to access the money.
Houses went lower. In 12 years he would have the same amount of his paid-in equity in the house. Will his house still be worth less 12 years from now? If not, then nothing changed. He could STILL “unlock” the equity through a HELOC. If it’s worth less, then he could have taken a regular student loan at higher interest than a HELOC, presumably.
Bottom line, the education was never at stake. What’s at stake is his ability to lever up to a lower-interest loan than a regular student loan. It’s all about the monthly nut. And of course a bit of free money through the appreciation Ponzi scheme.
You have made my point in a round-about way. It was always a speculation on asset value. In a way it is much more dishonest – or at least revealing – that he uses his daughter’s education as the rationale. For most people, a child’s education is a very high priority. But here we have a person who apparently has planned to fund it leveraging a highly uncertain asset value. Had he said, “well, our daughter’s education is very important to us, so we have that covered, but this house is going to cut down my chances to start that motorcycle collection I always dreamed of” it would have been more honest and less slimy by a long way.
Money is fungible, so it is entirely proper to find this couple’s most frivolous expenditures and say that that is what the walkaway is funding. In fact, there is no other rational way to think about it, as barring the extra cash, those are exactly the purchases they would not make. This is all about “Should I pay the mortgage, or should I step up to 20-year old single malt scotch?”
$1000 cheaper to rent than your current mortgage is dramatic and makes the decision process clear. But for most of the country that’s hard to replicate. Or at least it’s hard to replicate if you put 10% or 20% down. Clearly today’s featured property also qualifies since a teaser rate was needed to make buying attractive over renting in the first place.
But for most it’s a balancing act, $100-$200 a month adds up, but it may not be enough to push a buyer to default especially if they’re also walking away from their own lost down payment. Yes, that down payment is “never” (effectively never) coming back, but pyscologically it’s very difficult not to continue to throw good money after bad.
Some where in the continuum of underwater lies the breaking point of each borrower. “normal” underwater like every FHA buyer is as soon as they take the keys (due to transaction costs) won’t make people walk away. 30%-40% underwater would make almost anyone walk.
The statistics show default rates go up dramatically as soon as people submerge, but this could be primarily the result of negative cashflow. Being underwater may simply be a catalyst.
I have not seen any analysis that compares both negative cashflow and being underwater. That would be an interesting study. I suspect they would find that positive cashflow borrowers are far less likely to walk when they are underwater as opposed to their negatively cashflowing counterparts.
The figures are relative. “Saving” $100-$200 monthly for a household earning $200K is not a sufficient incentive or reward for walking. This household can save $100-$200 monthly by simply ordering fewer drinks when they eat out on the weekends.
Similarly, being underwater $100K isn’t as daunting if your household income is $200K.
These reporters need to paint more complete pictures so that we can truly judge the decisions being offered for our sympathy.
The emotional and other non-economic aspects of moving are a serious deterant to walking. Moving is emotionally and physically draining, and can have signficant expenses on it’s own. People get emotionally attached to their homes and neighborhoods. Parents don’t want to have their kids switch schools.
For most people to walk voluntarily, I believe the economics need to be overwhelming. A couple hundred a month wouldn’t qualify.
Who do you want to take financial advice from, Mr Scheuer, or IrvineRenter? Who would have given you good advice in the mid-naughties at the peak of the bubble? If this guy made such a bad choice back then, why would you listen to him now?
Would you listen to someone who told you to buy JDSU at $1000/share while it’s cruising at $13/ today? Actually, a lot of us are still taking advice from dot-com bubble cheerleaders, because they didn’t lose their jobs for their terrible advice.
How was(is) Kevin “dow 36,000” Hassett still writing finance columns…and people still reading them?!?
He has an economics degree that didn’t help him see the housing bubble back in 05 but now it helps him justify walking away.
That’s pretty EPIC FAIL for an economist. Spend 4 years of your life studying ecomonics and completely miss the housing bubble.
And to think that this guy has a job somewhere being paid money for his expertise. AMAZING.
He wasn’t the only economist who missed the bubble…
Sadly true. My point though was that Mr. Schreur was invoking his educational credentials to establish credibility in his reasoning. If I were in his shoes, I’d be so embarrassed for having an economics degree and having missed the bubble that I would opt to keep my mouth shut and not give people the impression that my education was obtained from a Cracker Jack box.
C’mon. Missing the bubble is a feature not a bug for economists. Bubblistas weren’t and aren’t serious. Real economists believe prices are always right, everywhere, all the time. Greenspan the elder only said that some markets might be frothy – with all the cappucinos and lattes the residents might enjoy!
Seriously, the worst was Geithner’s listing his house around a bubble-era price. He is making decisions steering our whole economy??? Even after the crash he still didn’t see a bubble? Even Greenspan could see it after the fact.
“Mr. Schreur was invoking his educational credentials to establish credibility in his reasoning.”
He was probably invoking his credentials when he made the purchase back in ’05: “I’m using a sophisticated loan product for this transaction. The home price may seem high, but for someone with my background, it is okay…I know what I’m doing.”
Of course they all missed the bubbles. Haven’t you realized that some of the most salient tenets of our modern economic/financial/social doctrines are nothing but pure Plutonic intellectual construct that bears no resemblance to the real world – (1) free market; (2) people are rational in making decisions; (3) information is always accessible and transparent; (4) price always reflects equilibrium established by demand/supply; (5) market is efficient…. on and on.
It took me the last couple of years to “de-educate” myself and purge all the BS that have been pounded into my brain from those economics/finance/political science/MBA courses I had the misfortune to have sat thru.
JDSU brings back memories. I had a friend that I tipped on JDSU about 6 month before it went skyward. He bought hundreds of thousands worth and sold about half way down the bust arc and used the money to buy a house close to the sand in Newport. He could have sold it and tripled his money again, but he did not and still lives there.
Me, I nibbled on the shares and made a few $$$.
I remember when JDSU was trading at about $130 a share back in 2000 when the CEO went around talking up the stock. Shortly afterward, the share price plunged to about $3 per share.
Not to be age-ist, but why do you really write a barely 10% DP loan for a retiree? It makes sense to go with a small DP for someone starting their career, but a retiree should have some money saved up for a DP, or be able to get some equity out of their other sale. I would have asked Ms. Romienello if she and her husband viewed their ‘retirement’ home in FL as an investment. If it was an ‘investment’ it should have warranted a much higher than 10% DP. Too many ‘investment’ homes in FL carried 10% or lower DP’s, and that pure speculation helped push prices.
It’s not ageist at all. It’s common sense. What business do banks have issuing 30 year mortgages to people in their 50’s 60’s 70’s 80’s, etc. It shows you what a Ponzi scheme it really is.
The whole point is to keep everyone in debt their entire life. From your 18th birthday to when you hit the grave, keep you making payments.
It’s why I keep asking what is so magical about 30 years? Let’s just increment the magic number to 40 and make 40 year loans the new norm and get all these debtors a lower monthly payment. Hell let’s do 100 or 1000 year loans get 5.00 monthly payments on our housing. The money is all created out of thin air anyway. Why do we keep up this 30 year charade?
100 years is the standard in Switzerland. I never understood that, but I keep hearing about the mortgage interest deduction. (You can even deduct credit card interest paid!) Because it’s always “worth it” to spend a dollar to save 30 cents.
30 years actually makes sense to me. 35 seems to be a good age to settle down, have a family, get a steady job, etc.-that is, prime house buying time. Then, at 65 (after 30 years), you retire and have no house payments, so living on social security, investments, and/or a pension is more reasonable.
Of course, this assumes you will be with the same company or at least the same city all your working life.
Not necessarily true. Don’t dump folks in their 50s with the rest, please. At that age you’re still working and making good money.
You need to look at the entire estate planning. It could be that a refinance could lower your cost and allow you to start to make the accelerated payments into your 401K. Then, when you retire, you can pay the lower mortgage from your additional 401K income.
It saves you tax…
We did this when I turned 50. Our monthly payment went down by 500 bucks! So, the 401K is doing great, in money and bonds.
PBS underwater owners in Florida
last payment in December 2007. Still hasn’t been evicted. Now that’s impressive. That’s a teaser payment for you.
It seems to me that many properties are underwater because the owners used their homes as ATMs. They serial refinanced and kept taking “equity” out as the supposed value of their home increased and they were able to refinance larger and larger amounts of money. It does not appear that anyone coerced or mislead these folks into refiancing and it was they who spent their children’s college education money on new cars, vacations, etc. Don’t they have an obligation to pay back that which they spent? Or were they entitled to spend someone else’s money and decide not to pay it back when it no longer seems attractive to them? Should not a moral society encourage people to take responsibility for their actions, even if responsibility costs? I can not think of a single circumstance where someone was forced to manipulated or coerced into buying a home they could not afford. It was the homeowner’s decision. And now, when it seems like that bad decision will cost them, it is ok to abrogate responsibility for that decision? It occurs to me that is why we have more and more people lining up at the trough and less and less folks plowing the fields.
Borrowers are under no moral obligation to repay. They have a contractual obligation, and if they fail to meet their obligations, they have financial consequences (repossession, limits on future borrowings, and so on).
To the degree that lenders convince borrowers they have a moral obligation to repay debts is the degree to which lenders exploit borrowers. If lenders knew their loans might not be repaid, they would loan less money, particularly for unsecured consumer goods. That would be a good thing. Prudent lending should always be secured by assets, and if that asset declines in value (like a car) then the loan should amortize faster than the depreciation.
The borrowers who took the money out of their houses and spent it were stupid. They now have to face the financial consequences of their actions which means no Ponzi borrowing for a while. Lenders should face the financial consequences for their stupidity, but they aren’t because of misplaced borrower morality and a variety of government bailouts. That is immoral.
Nobody is arguing the contractual obligations of what Schruer is doing. That doesn’t mean that morality is moot.
He’s free to go and conduct his business – it doesn’t mean that I am not going to take exception with his practices.
I also take exception with this house debtor logic that transforms a house purchase into a business transaction. Buying a house? Call yourself a businessman I guess.
It’s silly and ridiculous. Buying a house to watch TV, store your junk, eat KFC in is not a business decision like buying a factory, an office building, etc obtaining resources for the purpose of production. A house produces nothing – it just sits there draining money from it’s owner.
These debtors psychologically stroke themselves by calling it a “business decision” but it’s really no different than charging up your credit card at the porno shop on a lifetime supply of blowup dolls and then making the business decision to not pay your bill and mail your credit card and blowup dolls back to the bank. No difference.
AZDavid: You bring up a salient point. What metric would banks use to mark these assets to Market? In some markets the blow-up dolls may have better value………..
Now, to this I say you may be correct. Borrowers have a moral obligation to fulfill their contractual obligations. The question is, what is their contractual obligation. The bank can not have it both ways, and in California at least, the bank is entitled only to the collateral in a non-judicial foreclosure for a purchase loan.
But, what of the other loans? Are the borrowers morally obligated to pay their 2nds, 3rds, and other liens? They sure as heck are contractually obligated.
How are lenders trying to convince borrowers they have a moral obligation to pay? I do not know anybody who has experienced this. As you say, you are just a number to the banks. And from what I have heard, that is how people are being treated, like a number with no morality attached.
Totally agreed that lenders should have to face the financial consequences for their stupidity. And why aren’t they? Because the voters have put into office those who would tell them that the government will take care of everything, including centralized banking.
“Borrowers have a moral obligation to fulfill their contractual obligations.”
No, they don’t. They have a financial obligation, and failure to meet this obligation has financial repercussions, but there is no moral obligation at all.
“How are lenders trying to convince borrowers they have a moral obligation to pay? I do not know anybody who has experienced this.”
I remember when this crisis began Hank Paulson wagging his finger at borrowers and telling them they have a moral obligation to pay their mortgages. Every lender peddles this line of bullshit. I can’t believe you are suggesting that lenders don’t use this gambit all the time.
I disagree. It certainly is an ethical lapse to treat act in such a manner. The fact that the remedies for not fulfilling your obligations are detailed in an agreement does not make it ethically neutral to renege on those obligations which one has the capacity to honor. But it is, absent fraud, legal.
Perhaps we need to parse the distinction between ethics and morality. It is not ethical to make representations and fail to follow through when you have the capacity to do so. The people walking away from their mortgages that have capacity to pay are behaving unethically. The price they will pay is limited access to credit via a lower FICO score.
It follows from your argument that if borrowers lack the capacity to repay and they have to default, then they are relieved of the ethical obligation as well.
Morality is something different than ethics. Morality is about right and wrong and duty to one’s family. Financial transactions made at arm’s length live in the world of ethics, not morality. And as your example points out, the ethics shift with circumstances.
Yes, I believe that people who have lost the capacity to make good on their obligations are not behaving unethically when they discontinue efforts to fulfill those obligations. Paying the mortgage on a significantly underwater property can rightly be viewed as spending good money to no purpose. That fact alone has no direct bearing on the capacity to pay the loan back. The monthly mortgage is not buying a house: the house has already been bought. The mortgage is paying back a loan and that transaction and the ethics involved in paying it are not effected by the value of the collateral. Other things may be happening to the underwater borrower which may negatively impact their capacity to pay; in fact I feel sure that much confounding of these has occured, particularly in specific geographic regions where the housing bubble strongly drove employment and incomes higher. But to point at a future, contingent expense such as a child’s education, that the borrower was, or should have been, preparing for in any case as a justification to stop paying a debt is quite tremendously self-serving nonsense. While you can pretty clearly see that it is good for a family to have extra cash every month, I would also argue that it is even better for a family not be headed-up by a sleaze-bag dead-beat who uses his young child as an excuse for a clear lack of ethics. What is the morality involved in pinning the “blame” on her?
Exactly right. It’s the classic 2 wrongs make a right. The bank should not have made the loan so now I am not going to pay it back.
Yea, well the idiot State should not have tried to hide risks by allowing you to mail in the keys and call it a day either.
I wonder how morally fair it is to all of the people in 05 who were outbid by Mr. Schruer and had to go rent because they could not match his borrowing power. They now have to be taxed to make good on his “business decision” to walk away.
As far as I am concerned, their is no moral obligation between Mr. Schruer and the bank – but there is a moral obligation between himself and the community. It’s one thing to lose your job and have no other choice – but for this guy to say that he can afford it and then walk away while calling it a “business decision” is a slap across the face to the community who has to be taxed to bear the loss.
“he can afford it and then walk away while calling it a “business decision” is a slap across the face to the community who has to be taxed to bear the loss.”
AZ, I look at this differently. The community doesn’t have to be taxed. The lenders should have taken the loss and fold. However, because of the recent **changes** that our damn gubbermint had imposed, we’re now hooked on this loss.
I wouldn’t blame it on this guy but rather the damn gubbermint for sticking the bills up our a$$es.
“I wouldn’t blame it on this guy but rather the damn gubbermint for sticking the bills up our a$$es.”
That is how I see it as well.
Isn’t it all the same anyway?
Most banks are insolvent. Everybody knows this by now. That means they don’t have their reserves, which implies bank runs, and the FDIC doesn’t have the funds to take over all the major banks.
Assume the government had let all the major banks fail and go through whatever bank runs might have occurred as a result. I see two possible outcomes:
A) The FDIC would have stepped in, run out of money since the piddly charge they set on banks doesn’t cover simultaneous default of most banks. Government would have stepped to beef up FDIC’s coffers. End result: exactly same, but without government ownership or oversight. Everybody pays through taxes.
B) Government does nothing. FDIC fails. Next morning you go to your bank, it’s closed, and there’s a long queue. Your account is wiped out anyway – the money was spent by HELOCers and so forth. End result: everybody pays through literally wiping out bank accounts.
I’m not convinced people whining about the government have thought this through. Assuming the banks are completely insolvent, I don’t see any outcome where the average American citizen isn’t going to be hurt financially from it. I’m sure the process could have been done better in the details, but would have the final outcome been materially different?
You missed option C: the banks are nationalized, the equity and bond holders are wiped out, and the government recapitalizes the banks. Later, when the government sells its stake in the newly created banks and gets its money back.
The only reason we did not do this is because the equity and bond holders convinced the government that they deserved a bailout. It was a direct transfer of wealth between the US taxpayer and bank bond holders. State sanctioned theft.
The FDIC is a division of the Federal Reserve. It will not run out of money. The Fed will print as much as is necessary to insure deposits. Your options of A or B are a straw man and many of us who realize that we do not need a central bank, fiat currency, and fractionl reserve banking have thought it through.
The government is in the process of getting all of the money back selling the bank stock purchased. It’s easy to make money investing when you set the rules.
The bond holders were rescued at the same time. The bankers would all have their jobs regardless of who owned the banks.
You are missing the real tax payer black hole which is AIG, FRE, and FNM. That will be a gravy train for the next decade or more. Good thing the government has the printing press to make up for that black hole.
“Government would have stepped to beef up FDIC’s coffers. End result: exactly same, but without government ownership or oversight. Everybody pays through taxes.”
That’s not how I see it. Every savers get their depreciated USD minted backed by FDIC and supplied by the Fed. You’ll still have your Franklins, Jacksons, whatever.
BTW, most of the industrialized nations’ currencies would be in the same boat as USD since they’re doing the exact same thing as what Benny boy is doing.
The problem with a total bank run (and this would be a world phenom…not just in US) is that productivity would be in the shittank (as in: nobody is gonna produce anything anymore since money is now practically worthless).
And we chose this gubbermint.
Only if you mean “we” to include the majority that elected ‘our’ particular congress critters. “My” senators are Cornyn & Hutchison yet they do not represent my beliefs & opinions in any way whatsoever except in that on pretty much any issue, we see eye to foot (opposite). If the voting majority of my fellow Texans believe these senators represent their beliefs, then that majority is as corrupt & batsh*t crazy as those senators, especially Cornyn.
I am an equal opportunist blamer. I say we blame them all. It’s this circlejerk of blame that I find most distasteful.
I don’t believe in the assign blame to one party. We had several parties of bad actors that included members of government, members of financial institutions, and members of the consumer class.
This is not a pick your favorite – they all get equal blame and for different reasons. I may find banks more disgusting than foolish borrowers but that doesn’t give the foolish borrower some kind of get out of being a dumbass free card.
“I may find banks more disgusting than foolish borrowers but that doesn’t give the foolish borrower some kind of get out of being a dumbass free card.”
I agree with that assessment. The complete cast of characters is nefarious for one reason or another, and none of them are facing the full brunt of the consequences for their deeds thanks to the various bailouts.
Life is a never ending sequence of fortuitous chances and unexpected mishaps.
Morals and money don’t mix. Human nature seeks instant gratification. Only the enlightened few can avoid this. I think part of being enlightened is not worrying about the human nature of the masses. Understand it and profit from it.
More: Where was the moral obligation to their family when they were incurring their debts?
The borrowers were told they would never have to repay this debt because the house would pay for it. Either the borrowers would be offered serial refinancing with endless teaser rate payments, or some other borrower would pay off their debts when they moved to their next cash cow house. If these borrowers had believed they were going to have to pay these loans back from their wage income — something very few of them considered — then they were ignoring their obligation to their family; however, since borrowers never thought they would have to pay back these debts — a belief lenders fostered — then the immorality is really in the behavior of the lenders.
The borrowers were thieves. But the lenders encouraged them to steal in every way. Both parties were in the wrong, and now all of us who did not participate are having to pay the bills.
“The borrowers were told they would never have to repay this debt because the house would pay for it.” Who told them this? No one ever said that to me. And if someone did say that, does that give the borrower a pass on believing in fantasy and making a decision based on fantasy? Are not people responsible for what they believe and the decisions thereof? If I tell you to buy gold because it is going to $10,000 per ounce in on year, who is responsible for your loss when it goes to $500?
“If these borrowers had believed they were going to have to pay these loans back from their wage income—something very few of them considered—then they were ignoring their obligation to their family; however, since borrowers never thought they would have to pay back these debts—a belief lenders fostered—then the immorality is really in the behavior of the lenders.”So, if the borowers did not consider the consequences of their actions, they get a pass on those consequences? Do you truly think that people did not know that they would have to pay their mortgage? Seriously? There are about 8.2 mil homeowners not paying their mortgage presently. There are that many really, really stupid people? I am in the process of interviewing a couple of people who are not paying their mortgage and neither have given any indication that they did not think that they would have to pay their mortgage? I think every person who signed a mortgage contract knew what they were signing. They were just hoping to ride the gravy train. And they were wrong. I know of what I speak. I have been in their position.
“A belief the lenders fostered”? Seriously? So what? We are innundated with advertising, get rich quick schemes, investment ideas, opinions, etc.. So that means we are not responsible for the choices we make?
And again, I have never heard anybody telling me that a lender said to them that they would not have to pay their mortgage. Who do you know that was told this?
“Are not people responsible for what they believe and the decisions thereof?”
You are conflating financial obligations with morality. They have nothing to do with one another. The borrowers are not getting a pass, they are facing the loss of their property and restricted access to credit in the future. Most of your questions come back to the free pass, and borrowers are not getting one.
“Do you truly think that people did not know that they would have to pay their mortgage? Seriously? There are about 8.2 mil homeowners not paying their mortgage presently. There are that many really, really stupid people?”
Obviously, the answer is yes. People truly believed they were not going to be the ones retiring the debt. That obligation was always going to fall on someone else, usually through the sale of their ever-appreciating house value. That is the essence of Ponzi thinking, and most of the people in default thought that way. They were that stupid.
“And again, I have never heard anybody telling me that a lender said to them that they would not have to pay their mortgage. Who do you know that was told this?”
It was the subject of cocktail party conversation and lender marketing during the bubble. Borrowers believed they would never have to repay this debt themselves. That is why the borrowing got so out of control. People genuinely believed in free money.
“You are conflating financial obligations with morality. They have nothing to do with one another.”
Umm-m-m, really? If I borrow money and agree to pay it back, I am not morally obligated to do so? Now, I am confused.
“Umm-m-m, really? If I borrow money and agree to pay it back, I am not morally obligated to do so? Now, I am confused.”
If you have emergency need for money, and it is loaned to you by a friend with little or no interest, then you would have a moral obligation to pay.
If you are loaned money for the purchase of a house, you have no moral obligation to pay, but if you don’t, then the lender will exercise their contractual right to boot you ass to the curb.
If you are loaned money for consumption, you have no moral obligation to pay. If you don’t, the lender will stop loaning you money, and they will tell other lenders what you did, and those lenders will not loan you money either. That is why we keep track of FICO scores.
Tell me where you see morality entering into either of the second two circumstances. I see none.
During the bubble, my relo realtor was showing us houses and found a “bargain” which she said was “instant equity”. Being new to CA we had no clue what she was talking about and chose to rent instead. But I guess that free money philosophy was alive & well at the time.
Not sure exacly how I feel about this, but I see IR’s point.
A friend is helping you out. It would be bad morals or karma to not pay them back.
The Bank is making a business decision with the motive of profit and they are expected to be sophisticated and make good lending decisions with contracts that protect them. The are not “helping you out”.
I guess this makes the obligation to the bank somewhat less moral if there is such a thing. Still not sure on this. I see both sides.
My morality tells me that if I agree to do something, I need to do it.
In most states, a purchase loan contratually obligates the borrower to pay the diff when foreclosed on. True?
Why is the borrowed money for consumption different than money borrowed from a friend. On the legal side, does not the lender have legal recourse to payment in either case.
What if the friend makes a business decision based on the interest you promise to pay? Why is it immoral to welch on a friend, but not on a business or bank?
“My morality tells me that if I agree to do something, I need to do it.”
I argue that is your sense of ethics, not your sense of morality. Morality tends to be black and white whereas ethics is a continuum of shades of gray.
As a society, when we pass laws, we make moral statements. We prohibit certain behaviors and permit others. Often we draw lines somewhere in the ethical shades of gray. There are a great many unethical behaviors that are not illegal or immoral. IMO, all consumer lending is inherently unethical, but society has stated is it not immoral or illegal, so it goes on.
“What if the friend makes a business decision based on the interest you promise to pay? Why is it immoral to welch on a friend, but not on a business or bank?”
Friends loan money because they are friends, not because it is a considered arm’s length business transaction. The friend is not motivated by profit, and they are not carefully considering the risks involved. They are relying on the borrowers moral duty to repay, and the borrower is appealing to that moral duty. The friendship is the basis for the loan and the moral obligation. (This is also why you should never loan friends money.)
Banks and businesses loan money to make a profit. They are supposed to consider the risks and set the interest rate to obtain an appropriate level of profit. Lenders are also aware of their contractual fallback positions or legal action, repossession and so on. If a borrower fails to pay back a loan, lenders will exercise their legal, contractual rights and try to get repaid and warn other lenders of the borrower behavior through credit reporting. Morality does not enter into the equation.
It is probably easier to conceive the difference if you look at this in terms of ethics. FICO scores are the standardized measure of ethics among active borrowers. Those borrowers that pay their bills on time and in full have very high FICO scores. Those borrowers that do not pay on time have very low FICO scores. Repayment of debt is an ethical choice that concerns lenders greatly, so they developed an intricate system of measurement. FICO scores have nothing to do with morality.
thinking about it
IR is winning me over here.
The idea of price appreciation bailing out owners is one that is to a large degree confined to the bubble states. I do not think that buyers in NC (at least most of the state) thought like this. Serial refi’s also assume ever increasing home prices to cover transaction costs.
Both parties deserve blame, but a strategic defaulter should have to pay a premium for their next mortgage. I know I’ve been asked if I’ve ever defaulted when I applied for our newest mortgage, and they don’t ask when it happened. But then lenders also ‘asked’ if you planned to live in this home, to which people always answered ‘yes’ even if it was an investment property.
Let’s just tell it like it is –
Mr. Schreur saw everybody and their sister making loads of easy money on real estate and rather than use his economic training endowed upon him on Day 1 in the “Free Lunch” lecture – he decided that he was all for the exuberance and was ready for his piece of it.
I am not seeing Mr. Schreur quoted in any media circa 05 talking about how his economics degree enables him to know that there is no such thing as a free lunch so renting makes more sense for his children’s future.
No sir. He joined the herd and now is all for the loss being passed on to the community.
Well shoot, why not just be direct and go get loans to pay for college that you have no intention of paying back? Oh yeah, that’s right, it’s only okay if it’s a mortgage.
How about if this guy’s boss decided not to honor his contract to pay him? There would be plenty of moral outrage then. We’re not just talking about mortgages. Our society depends on people honoring contracts. Mortgages aren’t the only contracts. I’m disappointed in you, IR.
I don’t give a crap about underwater borrowers.
“Well shoot, why not just be direct and go get loans to pay for college that you have no intention of paying back?”
This is exactly why student loan debt is not discharged in bankruptcy. Otherwise, every doctor and lawyer in the country would declare bankruptcy as a matter of routine upon graduation.
“How about if this guy’s boss decided not to honor his contract to pay him?”
Then the guy would exercise his right to go work for someone who would pay him.
“Our society depends on people honoring contracts.”
Contracts generally have contingencies if the parties fail to perform. If people don’t honor their contracts, then the non-performing party has consequences. Lenders already deal with people who don’t honor their contracts by choosing not to loan them money — unless of course there is a government guarantee in which case the lenders will make the gift and pass the loss on to the taxpayer.
“I don’t give a crap about underwater borrowers.”
I don’t give a crap about them either, but they have no moral obligation to repay their lenders, and if they exercise their contractual right, it is not a moral decision, it is a financial one.
I hope to reply to your arguments this afternoon. I simply can’t right now, but this just rubs me the wrong way, obviously.
The contract is…if borrower stops paying the mortgage, the lender takes the house. The contract is fulfilled.
Strategic defaulting is fine. The contract was honored.
If the loan was non-recourse. If the loan was full recourse though the obligation to pay the deficiency claim is still in existence. Now, a lender may deem it too costly to go for the deficiency claim (blood from stone and all that).
If it is ‘moral’ not to pay your mortgage why isn’t it ‘moral’ for the bank to enforce the deficiency claim.
“if they exercise their contractual right, it is not a moral decision, it is a financial one.”
And if they refinanced? The contract they signed allows for deficiency judgement in a judicial foreclosure, correct? Are they then morally obligated to pay? They sure as heck are contractually obligated.
Out of all the defaulting borrowers presently, what percentage do you guess are purchase contracts made in a non-judicial foreclosure state? My guess is about 5%. Maybe 10%. Which would make 90% contractually obligated? And therefore morally obligated?
Here’s my opinion on “moral obligation”.
I don’t personally give a shit if they pay the money back or not. Most peoples loans are now recourse loans due to refi’s etc. Even if the walk, they will most likely have the bank chasing after them for the rest of their lives.
What I will have, in the future, is absolutely NO MERCY for them with whatever their situation is and when they come to me for help they will get a big fat NO from me with a reminder of all the fun they had during the bubble while I was prudent and frugal.
The only answer they will now hear from me is…
NOT MY PROBLEM!
Their children can eat beans and rice for all I care.
IR,
I don’t get your difference in opinion about strategic defaulters vs HELOC abusers. You regularly condemn HELOC abusers, but you have gone soft on defaulters.
Its the same thing to me. In the end it is shirking a commitment for your own financial benefit, passing the costs onto someone else.
Banks are not sentient entities… they are owned by shareholders. Regular poeple whoose pensions, IRAs, and regular investments may own bank stocks either directly or via mutual funds.
Stiffing the bank may feel like sticking it to the man, but it is taxpayers and investors who pay the price.
“I don’t get your difference in opinion about strategic defaulters vs HELOC abusers. You regularly condemn HELOC abusers, but you have gone soft on defaulters.
Its the same thing to me. In the end it is shirking a commitment for your own financial benefit, passing the costs onto someone else.”
I am not going soft on either party. The end result of HELOC abuse is theft. Those that did it in ignorance — which was most of them — acted as thieves, but most of them did not set out to steal. At some level they thought somebody would come along, buy their overpriced house, and pay off the debt. A few of them knowingly took the money with malicious intent, and those people are immoral, the rest were just really stupid and they were enabled by really stupid lenders.
Strategic defaulters have to make a choice: do they fulfill their ethical duty to repay the loan, or do they fulfill their moral duty to provide for their family. Morality outweighs ethics, IMO.
These people will pay a price for their decision. They will lose their homes, and they will have limited access to credit in the future. IMO, it is still the right choice for the family because their moral obligation is greater than their ethical one.
The people facing the ethics versus morality decision are not responsible for what happens to banks or the US taxpayer who is being compelled to pay for the loss. The banks should be allowed to go under, and the US taxpayer should not be responsible for paying the bill. That travesty of justice has nothing to do with the decisions of individual borrowers to walk away from their loans. It does piss me off that I have to pay for it, but I can’t call the defaulter’s immoral for doing what is best for their families. I can and do fault the lenders for creating this situation and the government for allowing it to happen, but what is done is done.
Thank you. I didn’t ask the question, but it was certainly on my mind as I read this post.
As far as walking away from a loan, I have my own thoughts about it, but I want to talk to a couple of friends who fought Washington Mutual and Chase regarding their own mortgages–and the banks’ inept handling of them–before I come back.
Personally, I am fine with people walking away from purchase money loans. Just like I am with Morgan Stanley walking away from their $2.5B for SF office buildings.
The moral outrage that I have is reserved for the .gov enabling.
The law forgiving taxes on monies forgiven should never have passed. If all the walkaways were getting 1099’d, they would be forced to confront the folly of their decisions.
And where is the investigation by the IRS of how all the non-1099’d forgiven debt has been used? How much went back into the house versus vacations and cars?
I say audit them, stick the appropriate ones with a tax debt, and make them pay it off. and no BK for the tax debt.
Personally, I hope that all the holders of seconds and HELOCs sell them to the collection market, and these people are hounded for twenty years, too.
“Personally, I hope that all the holders of seconds and HELOCs sell them to the collection market, and these people are hounded for twenty years, too.”
You can rest assured that is coming. There is no way the mountains of unsecured debt is going to disappear into the ethers. Collection companies buy this debt all the time. Debt collection will be a major growth industry in the next decade.
“There is no way the mountains of unsecured debt is going to disappear into the ethers.”
I live in hope. This will please me more than any economic development I can imagine actually occurring in the future.
I once lived in a high-poverty neighborhood, where it was obvious that a payday-loan business would flourish. I could not live with the ethical questions involved in owning such a business. The same applies to cooking meth: I enjoy each episode of ‘Breaking Bad’, but I couldn’t become a meth cook and live with myself.
Collecting on recourse mortgage debt would, on the other hand, put a spring in my step and a song in my heart! Every day would be a sunny day – smell those flowers! – and each drop of mortgage debtor would taste like sweet, sweet nectar!
This is beyond schadenfreude: collection on these debts is of as much benefit to society as the work of teachers, nurses, and social workers. Every one of these debtors who continues to earn money should pay part of it toward retiring past debts.
I hope that collection agencies which extract money from these people are honored at the White House some day. If not, at least they will have a special place in my heart.
“Collecting on recourse mortgage debt would, on the other hand, put a spring in my step and a song in my heart! Every day would be a sunny day – smell those flowers! – and each drop of mortgage debtor would taste like sweet, sweet nectar!”
ROFLMAO!
I will do some research and see if I can find companies that do this work to invest in. It does sound like a great way to participate in the bubble clean up.
Priceless!
I’d actually consider a job like that.
“The law forgiving taxes on monies forgiven should never have passed.”
I’m usually passive about all the abuse of markets and taxpayers, but this one ticks me off. Something fierce.
The whole idea that a tax break or credit for one set of people is somehow lowering taxes really irks me. It really amounts to a subsidy for that activity and a tax hike on everyone not subject to the tax.
It gives free money to some of the least ethical people in our society. This one tops the bank bailouts for sheer stupidity. It should have been called the “Reward for Failure” program.
They got income. Tax them for it.
Disgusting!
There are some obvious consequences for everybody. If strategic defaults will hit some threshold, it may trigger collapse of US economy.
No, it won’t. It might trigger the collapse of our banking system at which point we will do what we should have done in 2008: nationalize the banks, wipe out the shareholders and bond holders, recapitalize the banks and start over. If we had gone that route in 2008, the recession might have been deeper, but right now, it would truly be over. Instead we have the zombie bank condition of Japan in the 90s and endless extending and pretending. At this point, the only thing likely to prevent the Japanese experience here is our population growth. Japan lost population as its bubble deflated which made it go on for much longer.
Good thing we have so many illegal immigrants contributing to our population growth. With their high paying jobs and contributions to the tax base, it’ll solve all our future economic problems.
Are ‘strategic defaults’ upside down mortgages a big issue in Japan? Given they had a property bubble deflate you would think people would respond the same way to the same incentives. I think ‘extend and pretend’ is a bigger issue in Japan but I’ve never heard about strategc defaults. It would make an interesting study.
Japanese loans are all recourse loans. I don’t think they will let you get out of money owed.
Do you think that Chinese and other foreign governments will take lightly wipeout of their investments in USA?
IMHO, it may be much easier and less dangerous to rob US taxpayers. At least, at this very moment.
It is certainly more expedient to rip off the taxpayer, and that is probably why they did it.
At the time the bailouts were engineered, there was no international treaty or procedure for discharging debt across international lines. The US Government could not force a foreign government to drop its claim to the foreign interests of an American bank. Rather than try to figure out how to make that work, we decided to pay the bills of too-big-to-fail when it failed.
That Zeus/Lightning bolt picture just screams “RELEASE THE KRAKEN”.
Umm. The loans documents contain something called a promissory note for a reason. You promise to pay the money back. Last time I looked it up, promises were moral choices to enforce.
We’re really arguing about how many angels can dance on the head of a pin, rather than accepting what is here (recourse free strategic defaulting) instead of trying to figure a way how to stop it from coming up again in the future.
Once I become Emperor, we’d remove the tax free forgiveness of mortgage debt in a distress sale, ramp up the IRS to see if MEW was spent as housing improvements or lifestyle upgrades, and tax the be-jesus out of anyone who understated their income as they extracted their equity. I’d require lifestyle audits and punish those who conflated their employement allowing them to “afford” the $1m house on a 1040 reported Subway shope employee income.
I’d then reduce Fannie and Freddies maximum debt to income ratio to 30%. If any bank wants to make loans above 30% debt to income ratios, they lose their FDIC insurance. That would collapse the FIRE economy, and lower home prices immediately, but also prevent overborrowing ever again.
Lastly, I’d take Shakespears advice and “Kill all the Lawyers”. Well, maybe shut down a few law school diploma factories…
It would be good to be Emperor wouldn’t it.
My .02c
Soylent Green Is People.
Interesting.
Let’s extrapolate a little further. Would you like to post on what you think these measures would do to the housing market as is? Thanks.
I think he already did that (read it again):
Agreed Lowrydr310.
Gemina13, in August/September 2007 the credit markets froze. Deals cancelled because financing was non-existant. Prices began their downward spiral. If debt to income ratios are lowered from 45-50% down to 30% and no higher, sellers would have to lower their sales prices because financing would once again vanish overnight. Will it cause some pain? Yes – short term pain, which is better than racking up long term debt that is bankrupting the nation and creating a self inflicted victim class through government aided moral hazard. That’s not the America I signed up for.
My .02c
Soylent Green Is People.
Why would the government punish someone who did exactly what the government wanted them to do:
Spend freshly printed money created out of thin air.
Fascinating discussion with great insight from all sides. Have to hand it to you IrvineRenter, you have one of the best, most informed and relevant sites and discussion groups on the web today.
Thank you so much.
Thank you.
The comments have been so strong today, that I may use them for a follow up post.
The Seattle Redfin Forum had a very long comment roll on this very subject. It was 19 pages long, with some great points, as well as the expected piss and vinegar.
http://forums.redfin.com/t5/Seattle/Upside-down-with-mortgage-What-are-my-walk-away-options/td-p/92914
Take a look at people around you – given a choice how many of them do you think will sacrifice their physical comfort for a set of moral principles in today’s society?
Once upon a time (it does seem like a long time ago), most people in this country probably had a strong faith in our superior economic and political system (not perfect, but good enough) that was capable of consistently producing growth and benefits for the lives of average citizens. We can do that because of these inherent features in our “system”:
1. Market is efficient; price always reflects real equilibrium of demand and supply; information and knowledge about markets are public and readily available to everyone who cares to find out.
2. Capital and resources are allocated by the efficiency of the invisible hand of a free market that ensures they always get deployed to the most productive and profitable segments of the economy.
3. Income and wealth distribution (the reward mechanism) is relatively just and fair, and reflects a generally acceptable level of equality (not in a socialist sense of equal income, but in the sense that people get what they (their actions) deserve.
4. Predictable causal link between a set of sound, prudent behaviors (work hard, save, invest, plan for the future, etc) and their corresponding reward. You may not get rich, but at least they will guarantee you a comfortable middle class life style. People who fail in this system usually did not follow these prescribed rules for surefire success. In the other words, our social/economic system is built on a highly predictable formula that by design should mostly reward “good” and “prudent” behaviors, rather than random, wild casino style risk taking.
5. We have a dual party democratic system that is capable of making policies benefiting majority of the population. And more importantly with its checks and balance and two party structure, our political system is supposed to facilitate radical reforms if things go seriously wrong.
6. As a society we (both the gov’t and average citizens) possess a relatively high moral standard than many countries in the less developed world. We always do the right things that are guided by moral principles in lieu of pure financial interest.
The most frightening part of the Great Recession is that all these perceived pillars of our current system have either crumbled or turned wobbly (Or perhaps their existence has merely been a mirage)?
1. Efficient market and price – No need to elaborate here. We all know how efficient and free our housing market is (was)
2. Optimal allocation of capital and resources? You will have to be blind not to see all these colossal zombies – GSE’s, large banks, failed automakers … don’t worry. Give them a few more years they will for sure suck the last drop of blood out of tax payers
3. What’s the term – socialization of loss? Wall Street Socialism? Selective Capitalism? Selective Socialism? Call it whatever you want but the underlying meaning does not change
4. Welcome to the wonderful casino economy – 21st century style. Actually when I likened our economy to a casino, I was doing terrible disservice to the casino. Casinos do not change rule of games every five minutes. As a matter of fact, casino is about the only place in our society today where monetary outcome and risk can be reasonably assessed based on probability (Nassim Taleb says it better in Black Swan), and if one does not want to gamble, nobody would force you.
5. We all know who have benefited from those policies (hint: record bonus?). And reform – What reform? Healthcare reform? Financial reform (don’t be fooled by the pre-election collar-yanking on GS)? Those hope jerkers. Throw you a bone then quickly take it away.
6. It amazes me just how quickly a serious concept like “moral hazard” has turned into a cliché in our society after two short years of mind numbing repetitions. As Charles Hugh Smith astutely observed (http://www.oftwominds.com/blogapr10/gaming-system04-10.html?source=patrick.net) the only way to get ahead in today’s social environment is to “game” the system. Of all the ills unveiled by this crisis this one scares me the most. If the collective weight of the aforementioned factors is not enough to sink our society and its future, this one alone will.
When the rising tide of bubble economy lifted all boats, people just assumed a perfect landscape beneath the surface. Now the tide is gone and we are staring at the real contour and shape laying bare in front of us. Arguing who is to share more blame for this mess seems a pointless exercise at this juncture as it has become clear none of that will change a thing for the future. The more urgent matter is – with this revelation, to figure out how to survive and even profit from all this insanity.
Very astute observation. Thank you.
Ethics and morality asides, the house lender and borrower have a written contract to govern duties, obligations and consequences. The leaders and US government do not have such an written agreement for such a bailout, but an implied contract can be inferred prior bailouts of the banks and select investment houses.
The bank can either do a non-JFC or a JFC in response to non-payment. No broken legs, etc. The borrower can pay or face FC. What the bailout has done, is allow the free-rent for non-paying owners for 1 to 3+ years and rewarding of the guilty.
It would of been better to do a Sweden type bailout of the bank (i.e., nationalize the banks). Nationalization of the failed banks would of lessen the chances to reward the banksters with their retention bonus and excellent recovery bonus for 2008/09 years. The government should of clawed back much of the ill gotten gains and charged the banksters instead of rewarding the guilty and punishing the innocent.
I would say it is both unethical and immoral to not pay the mortgage for years of free rent and trash the property. Too much anger, hate and entillment mentality. The banksters have done more damage to Americans than 9/11 hijackers. Banksters damages are just more diffuse. If only the 9/11 hijackers and supporters made the proper campaign contributions to both Democrats and Republicrats.
You should have done this on April 15, tax day.
I hope the IRS and the State go after “strategic defaulters” with the full force of the tax man.
People like that piss me off, BIG TIME.
We can now consider that a contract is worthless in this country.
How can lenders take the moral high ground when they are not only taking (stealing) public funds to cure their finances they destroyed by building the biggest leverage mountain ever to exist, but when they are defaulting on their own mortgages on commercial properties.
Morgan Stanley, as I’m sure you’ve all read, is “walking away” from five large commercial properties they purchased in San Fran, as they explain in the article I’ve quoted below:
“Dec. 17 (Bloomberg) — Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.
The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.
“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”
Now, how in the hell can they say this is “not a default or foreclosure situation” when they are going to “give them back the properties to get out of the loan obligation”. I mean, Morgan Stanley would clearly not be trying to “get out of the loan obligation” if the properties were worth what they gave for them, would they?
How does Morgan Stanley’s “walking away” from $8 billion worth of loans on overpriced commercial properties differ, morally or factually, from the decision of a buried homeowner, to walk away from a property worth far more than he paid?
There has to be a single standard of morality, folks. How can a financial institution expect any more “morality” out of borrowers who do NOT have billions in capital, to behave any better than they do?
If Morgan can’t be held to its loan obligation, including the multi-billion dollar deficiency that is surely the result of their decision to “give back” these properties, then why should anybody in the country meet his obligations?
Laura Louzader,
How can this be? Some animals are just more equal than others.
MS may have been current on the mortgage or they could of been getting free rent for x years and charging the lease holders. I don’t know. Must use limited liability corporations or secondary corporations to avoid future liability to the parent corporation on failures.
As for some animals being more equal, the govt will make the investment houses or major stake holders whole, while leaving the little guys to pay. The justification is always that the market will collapse and order must be restored.
That’s just the way it is. In my life time, it doesn’t matter if it a DemocRat or a RepublicRat in office.
Awesome post.