Borrowers and lenders behaved badly during the bubble. Some were unethical and some were immoral. Today we examine these distinctions to see what we can learn from their mistakes.
Irvine Home Address … 14522 MANGO Ave Irvine, CA 92606
Resale Home Price …… $649,000
{book1}
And it used to be for a while
That the river flowed right to my door
Making me just a little too free
But now the river doesn't seem to stop here anymore
Carly Simon — The Right Thing to Do
Did anyone who participated in the Great Housing Bubble stop to consider what was the right thing to do? As long as the money flowed in a river to homeowner's doors, few cared. The river of free money isn't flowing any more, and now we have to examine why this happened, or we risk doing it again.
In yesterday's post on Walking Away from a Mortgage to Secure Their Children’s Future, I presented the argument that people should walk away from their mortgages if they are facing the choice between defaulting or paying on an underwater mortgage when renting is less expensive. The astute observations from that post are among the most interesting in recent memory at the IHB. Today, I want to recap some of the arguments made and delve deeper into this contentious issue.
Ethics and Morality
Finding a good definition of ethics or morals is difficult because the terms have different meanings in different contexts. For purposes of the discussion today, I will define morality as the individual's sense of right and wrong, and ethics as the code of conduct as defined by a group of people for common benefit. Ethics can change with the group and the circumstances whereas morality is consistent for the individual.
Also, consider this definition:
The difference between ethics and morals can seem somewhat arbitrary to many, but there is a basic, albeit subtle, difference. Morals define personal character, while ethics stress a social system in which those morals are applied. In other words, ethics point to standards or codes of behavior expected by the group to which the individual belongs. … So while a person’s moral code is usually unchanging, the ethics he or she practices can be other-dependent.
When considering the difference between ethics and morals, it may be helpful to consider a criminal defense lawyer. Though the lawyer’s personal moral code likely finds murder immoral and reprehensible, ethics demand the accused client be defended as vigorously as possible, even when the lawyer knows the party is guilty and that a freed defendant would potentially lead to more crime. Legal ethics must override personal morals for the greater good of upholding a justice system in which the accused are given a fair trial and the prosecution must prove guilt beyond a reasonable doubt.
The prosecution and court must also deal with the difference between ethics and morals. In some cases past actions of the accused might resonate with the current charge, but are kept out of evidence so as not to prejudice the jury. In a sense, the prosecutor “lies by omission” in representing the case, never revealing the prejudicial evidence. The same prosecutor, however, would likely find it reprehensible to fail to tell a friend if her date had a potentially dangerous or suspect history.
Another area in which ethics and morals can clash is at the workplace where company ethics can play against personal morality. Corporate greed that blurs its own ethical lines coupled with unreasonable demands on time can lead to having to chose between a stressful, demanding and consuming work ethic, and family obligations seen as moral obligations to spouse and children. Conversely, people lose jobs every day because of poor personal morals, employee theft being a common reason for dismissal.
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 immoral, but society has stated is it not illegal, so it goes on..gif)
Ethics and Morality in Lending
Lending has its own code of ethics. Lenders underwrite loans based on the representations from buyers that they will repay the money. If borrowers do repay, they are considered an ethical borrower, and they are extended easy credit. If borrowers do not repay, they are considered unethical borrowers, and they are not extended easy credit.
Lenders spend much time and effort trying to accurately measure borrower ethics. This measurement system is encapsulated in the FICO score. 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. I consider this in the realm of ethics because it is nothing more than a measurement of how likely a borrower is to play by the rules of the game. FICO scores have nothing to do with morality.
Lending between friends and family members generally does carry a moral obligation. Friends loan money because they are friends, not because it is a carefully considered, arm’s-length business transaction. The friend is not motivated by profit, and they are not weighing the risks involved. They are relying on the borrower's 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 or family 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. Lenders will also warn other lenders of the borrower behavior through credit reporting. This is lender ethics. Morality does not enter into the equation.
Breaking the ethical rules of lending may or may not be immoral. Most people who do not repay loans are unable to repay. Their ethics as measured by FICO would be lowered, but this does not diminish the character and morality of the borrower. If the intent was to repay, the borrower may have sterling character and still be considered unethical because they defaulted on a loan, particularly if the reason the borrower cannot repay is because the lender loaned them too much money under terms the borrower did not understand. (That defense is used too often, but in rare cases, it is accurate.) 
Ethics Versus Morality: Strategic Default
Strategic default is a conscious choice by a borrower to behave unethically by the rules of the lending agreement, and the borrower is going to suffer the consequences through a lower FICO score and diminished access to credit in the future. In yesterday's post, I argued that his behavior is not immoral because the borrower has other moral obligations that outweigh their ethical concerns. Strategic default is unethical, but it is not immoral.
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? These people will pay a price for their decision to walk: 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.
Immoral Lending
When lenders loan too much money to borrowers, they are behaving immorally. Lenders create the circumstances where borrowers are hopelessly in debt, then they churn them with fees and usurious interest rates and keep them in perpetual servitude. That is immoral. The borrower benefits in no way from this arrangement.
Lenders want borrowers to believe they have a moral obligation to repay them. 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.
When lenders do not face the consequences for foolish and immoral lending, they do more of it. That is moral hazard. In our current circumstances, lenders are being spared the pain of their foolishness because of misplaced borrower morality and a variety of government bailouts.
Ethics and Morality in Borrowing
When I wrote, HELOC Abuse Grading System, I discussed the fine line between gaming the system out of ignorance or out of malice. Intent matters, and those who knowingly gamed the system were immoral. All were unethical.
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 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.
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 whole cast of characters who participated in the housing bubble were unseemly. it is easy to create cartoons about these people because they were all unethical and immoral in one way or another. No matter how I represent them, if it is negative, it will resonate. The lenders, investors, realtors, mortgage brokers, borrowers, HELOC abusers, government regulators, the Federal Reserve, the Treasury department, everyone who was involved indirectly conspired to steal wealth from savers, renters and prudent homeowners who did not participate in the madness. Some were immoral, most were unethical, and all have benefited from their deeds at the expense of those who had nothing to do with it.
The Big Lie
The bankster bailouts did NOT save us from the second Great Depression. We could have wiped out all the equity and bond holders, recapitalized with taxpayer funds, then sold the public interest later. Sweden did this in the mid 90s, and it worked well. 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 in bankruptcy. 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. Of course, now that the crisis has past, lenders are lobbying to prevent financial reform that may diminish their paychecks.
Our government is participating in a mockery of the principles of fairness and morality this country was founded on. We now have an out-of-control financial sector sucking in the resources of the nation while providing little in return. In the years leading up to the 2008 crisis, the financial industry accounted for a third of total domestic profits — about twice its share two decades earlier.
I hope the government gets financial reform right. It is our only hope to counteract the moral hazard created by everything else the government has done….
Government reform is our only hope?
We're doomed.
Irvine Home Address … 14522 MANGO Ave Irvine, CA 92606 
Resale Home Price … $649,000
Home Purchase Price … $590,000
Home Purchase Date …. 11/15/2004
Net Gain (Loss) ………. $20,060
Percent Change ………. 10.0%
Annual Appreciation … 1.7%
Cost of Ownership
————————————————-
$649,000 ………. Asking Price
$129,800 ………. 20% Down Conventional
5.16% …………… Mortgage Interest Rate
$519,200 ………. 30-Year Mortgage
$136,840 ………. Income Requirement
$2,838 ………. Monthly Mortgage Payment
$562 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$54 ………. Homeowners Insurance
$43 ………. Homeowners Association Fees
============================================
$3,498 ………. Monthly Cash Outlays
-$489 ………. Tax Savings (% of Interest and Property Tax)
-$606 ………. Equity Hidden in Payment
$264 ………. Lost Income to Down Payment (net of taxes)
$81 ………. Maintenance and Replacement Reserves
============================================
$2,748 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,490 ………. Furnishing and Move In @1%
$6,490 ………. Closing Costs @1%
$5,192 ………… Interest Points @1% of Loan
$129,800 ………. Down Payment
============================================
$147,972 ………. Total Cash Costs
$42,100 ………… Emergency Cash Reserves
============================================
$190,072 ………. Total Savings Needed
Property Details for 14522 MANGO Ave Irvine, CA 92606
——————————————————————————
Beds: 4
Baths: 2 full 1 part baths
Home size: 2,210 sq ft
($294 / sq ft)
Lot Size: 6,650 sq ft
Year Built: 1974
Days on Market: 8
MLS Number: S613431
Property Type: Single Family, Residential
Community: Walnut
Tract: Cp
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
PREMIUM cul de sac location on large lot with fully enclosed SUPERESIZED BACKYARD!! Soaring vaulted ceilings, upgraded laminate flooring and full bedroom and bath on FIRST LEVEL!! Spacious family room with sit-up bar and master bedroom with balcony. Shopping & schools nearby. Compare to other sales and you'll know why this one will sell FAST.
The dumbest loan ever made
This property was purchased on 11/14/2004 for $590,000. The owner used a $472,000 first mortgage and a $118,000 down payment. The owner did not HELOC the property.
On 11/17/2007 — several months after the credit crunch took hold in August of 2007 — World Savings bank give this guy an Option ARM for $595,000. WTF were they thinking?
When you consider the timing and the general state of the mortgage and real estate markets when this loan was made, it makes you wonder if the borrower knowingly gamed the system to get his down payment back. I have given him a D, but a case can be made for an F.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,
Irvine Renter
Whether people consider the homedebtors unethical or immoral is irrelevant to me.
I know people who borrowed heavily against their homes and I warned them about it as far back as 2005.
They didn’t want to hear about it.
In 2007 as things became obvious (to us bubble bloggers), I told them that there were going to be issues with the economy and it would be wise to start paying down their debt and saving.
Once again, they didn’t want to hear about it.
Come 2008, NONE of them had changed their lifestyle or had tightened their belt.
I wouldn’t be surprised if some have walked from their mortgages by now.
Do I care?
No.
I don’t talk to them at all anymore.
Life is too short to surround yourself with stupid, greedy, shortsighted people.
I’ve had the exact same conversations.
Come to thing of it, you and I must
have the same firends!
No, sounds like you both live in Orange County.
If I excluded everyone who didn’t heloc their house during the boom and acted generally irrationally towards their home value, I could only be friends with renters in Orange County, and even many of them would be excluded.
Chuck Ponzi
CP
Yes, I do live in the O.C.
Must be a variation of ..
“… one [rational renter] was sick and
the other refused to march alone…”
Believe it or not, they weren’t in O.C.
And yeah, they became such assholes and made it “personal” that I did actually lose a few friends.
“When lenders loan too much money to borrowers, they are behaving immorally.”
When lenders loan too much money they are not behaving immorally, they are behaving stupidly. Bubble lenders may not have expected to be repaid out of income but they expected to be repaid nonetheless either by subsequent sale or off-loading the loan or whatever. That is what asset backed securitization has brought us.
Borrowers behaved stupidly too but where is the surprise in that? They were offered free money with the assurance that repayment would not compromise cash flow or lifestyle. After all, housing values could not fall, right?
If there is immorality in all this it is in government bailouts and banksters bellying up to the trough as if they were owed taxpayer salvation which continues even now. What happened when you last went to the Fed’s discount window and asked for a couple million $$ interest free so you could buy some 3.9% Treasury paper and live off the spread?
“What happened when you last went to the Fed’s discount window and asked for a couple million $$ interest free so you could buy some 3.9% Treasury paper and live off the spread?”
The average person does not understand this. The government’s bailouts are in full force as long as we have 0% fed rates. Meanwhile I am loosing tens of thousands of dollars in interest so Citi can rake it in.
Plus, what about all the elderly living on interest for savings that now have little or no income. My heart goes out to them.
It’s a tax, pure and simple. Call it what it is.
Interest is already taxed at income tax rates, as opposed to a preferred dividend rate. The government could raise the tax on interest to 90% (because you’re wealthy if you have savings, right?) to pay for the bailouts. How do you think this would go over?
So they do it stealth style. And Obama can claim he hasn’t raised taxes on families making less than $250K. I guess he doesn’t run the Fed, does he?
Were you complaining in 2003 when Greenspan had the fed rate at 1% and 10-yr bills were at 4.5%??? That’s nearly the spread of today, but on one cared. Was the economy really better off? Unemployment of 6% is really worse than 10%?
Were you upset by investment banks getting SEC exemption to increase their leverage ratio, in effect printing money? Would you rather have Lehman printing money or the Fed?
If you can point to any instance where you were upset by the massive money supply increase in the mid-00’s, then I’ll listen to your complaints today, otherwise it’s political.
Very interesting series of posts over the past couple of days. While I might not agree entirely on the ethics vs morality issue, it seems to be that the major failing in the bubble has been that both banks and borrowers have been insulated from the consequences of their foolish actions. That is, they’ve all been allowed to make decisions that it would have been better to avoid.
Actually I’d agree that defaulting on payment of mortgage might well be the best decision an individual can make in some circumstances. The consequences of such default are defined in the mortgage contract and in law, if someone chooses the pay the penalty so be it. But, I still despise the frequent special pleading for principal reductions etc, all of which have to be paid for by someone(else). Is a borrower being moral when they expect another to pick up the tab for the consequences of the borrowers action?
Of course, its the same for the banks – if a bank makes loans that turns into an economic sh@t sandwich, it should be the bank that eats it, all of it.
Apparently, its ethical to involve a nation in fixing the errors of a minority. But doesn’t strike me as moral.
Fortunately for now none of the ‘principal forgiveness’ programs really forgive anything; they’re just more amend/extend/pretend tactics. The house of cards is going to collapse, it’s just a matter of time.
The House of Cards already collapsed 3 years ago.
What’s left is the clean up and current construction of a new house of cards.
You shouldn’t waste any time worrying about whether a similar financial crisis will happen again. The government is already making plans with the banks to set up a fund for the next banking collapse. It’s already a foregone conclusion that it WILL happen again.
When I hear people talk about moral hazard I alway laugh. The whole point of American capitalism is to create as much moral hazard as possible. The rules are set on purpose.
That’s fine but you still should be made aware of the moral harzard and not be advised that “you can always refinance later”. I believe it was that kind of information that did us in and will continue to destroy people as we evolve into a gambling economy where only the rich win, no matter what. That’s all we left.
Re: “Government reform is our only hope? We’re doomed. ”
Yep, this appeared in the US press very briefly yesterday before the forces that be whisked it away, went looking for it today and finally found it at a UK site.
http://www.independent.co.uk/news/world/americas/democrats-happy-to-keep-goldman-contributions-1951967.html
The Democratic party said it would not be reimbursing almost $1m of campaign contributions from Goldman employees to Mr Obama, and candidates in this year’s mid-term elections are resisting calls to return the money. “We have not accepted contributions from specific individuals accused of wrongdoing,” a spokesman said, “nor have we advocated for positions that big Wall Street banks generally favour.”
There were 2 sets of ethics governing the bubble, either:
A. Spend as much money as you can
B. Make as much money as you can
Those in group B are doing very well now.
Those in group A are now seeking a new morale:
C. Get the repsonsible to pay for it
If you didn’t fall into A or B you lose, you already subsidized group A and B and will continue to do so.
And most of “the responsible” will turn into A and B after the sad realization of how our “system” really works. That’s the ultimate price of moral hazard.
Quick thought experiment – I assume most of IHB readers are responsible folks who did not participate in the bubble mania (i.e., they are neither A nor B). If they were given the opportunity to get in a time travel machine and go back to 2005 and relive the past 5 five years, and knowing what they know today, how many of them do you think would honestly say they would NOT change their life style the second time around?
My change of lifestyle in 2005 was to prepare to flee Southern California in 2006. I wouldn’t change that decision. It kept me from going bankrupt trying to keep up with insane rent increases that ate up 65% of my income.
Nor would I have been stupid enough to saddle myself with a loan for an overpriced shack. By the end of this year, I will have no debt save my student loans; I wouldn’t trade that for a free-flowing river of ill-gotten HELOC goods.
On a related topic, over the past year and a half I have stopped talking to my kids about the importance of being moral, ethical, taking responsibility for their actions or anything else like that.
I feel like I would be saddling them with a character defect that will cause them to suffer and lose out on what they need to take care of themselves in our society if I teach them to behave that way. And if they ask, I now counsel them to do what’s best for themselves first, and worry about what’s “right” second. It’s too late for me, but I hope not for my kids.
Gemina13,
While I certainly admire your choice, I can’t help but think your choice is not the “norm”.
I highly doubt there is a clear line that separated the responsible from the irresponsible during the bubble era. IMO many “responsible” people acted responsibly not because of their higher moral conviction, but rather due to their risk aversion tendency and more importantly, a misguided belief (in hindsight) that our “system” rewards the prudent and penalizes reckless/irrational behaviors. These people acted in a responsible way because they believed it would serve their best interest to do so in our “free market” democratic system. Once this central tenet of our society is violated by the repeated bailout schemes these same people will quickly come to the revelation that our system is really designed to benefit gamblers and debtors, and brutally punish the prudent, and they will adjust their behaviors accordingly down the road. This has nothing to do with morality. After all, capitalism seems to have worked well in the last 200 years not because of its moral persuasion, but rather its ability to channel collective force of individual self interest to productive use (Adam Smith invisible hand, bla bla bla).
Ultimately, people’s behaviors are shaped by the ongoing dominant social environment and norm. Morality is often just an after-thought. Take a look at some of “backward” countries in the world where corruption runs rampant. Would you assume people in those countries are inherently bad and corrupt? They act that way because that’s the “best” way to get around in that system. Unfortunately, our society is quietly heading that direction as we speak.
OT – Just read this and had to share it:
“Despite the noble goals assigned to it in textbooks and offered in Congressional hearings, the Federal Reserve exists for only one reason – to make sure the federal government gets all the dollars it wants to spend, …” – James Turk
I think the frustration here is a a percentage of the population (maybe 20-30%) are abusing the system and the rest of us have to pay for it. I know their FICO score will be lowered, but it should start at 0.
I have seen too many people driving brand new land rovers and mercedes, eating $100/plate meals, attending $100+/ticket events, and squatting in their houses until it is finally taken away from them.
They are not providing for their families as the next few (maybe even 10) years they will have to live well below their means. I bet they are not saving for college or even retirement. So while there are many situations where a strategic default is better for a family, it is not always the case.
Personally I would like to see for the next 10+ years these *defaulters* and *heloc abusers* have limited access to financial products. Maybe along the lines of if you want this car, pay 50% up front. I am a big fan of limited government, but if we are all required to pay for this mess, I would like the abusers to pay extra for the next 10 years or so. Maybe bump their tax rate up another bracket and don’t allow itemized deductions.
Why give them any access to credit at all? Why shouldn’t they have to save up for their next car? What’s the difference between saving $500/month for a car and paying $500 in principal and interest on a car you already have? Just timing and cost.
In our government’s infinite capacity to reward bad behavior…
Fannie Mae wants to help some troubled borrowers get back into home market
Here’s some good news for people who had to give the deed on their house back to the bank because of financial problems, or who have done a short sale to avoid foreclosure: You may not have to wait the typical four or five years to re-qualify for financing to buy another home.
Instead, it could be as little as two years. In a bulletin to lenders April 14, mortgage giant Fannie Mae said it is relaxing rules that prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for extended periods of time. The new rules are scheduled to take effect July 1.
This will be a scathing post next week.
Two years? It will be 24 hours, with strict income verification and DTI limits.
Yeah, I think banks will be kicking themselves that they didn’t ramp up short sales earlier so there would be more 2008 drop-outs ready to pick up a new house on the market now.
🙂
In fairness the 2 year time frame does require a 20% downpayment.
I know I know, they should have been able to accumulate that in 2-3 years of free rent, but still.
That’s what I was going to ask: have to pay 50% down payment? If they can’t be trusted with credit, then no credit. What’s so bad about paying cash for a car anyway? Every car I’ve ever owned has been bought with cash, an old-fashioned system that still seems to somehow work ok.
I was trying to be somewhat fair as these abusers normally buy on 0 down (cars, houses, large purchases). If I were a bank, I would only lend to people with 100% verified income and who have not gamed the system before (although impossible to verify, shortsale/foreclosure is a good indicator.) But if I were a bank I wouldn’t be publicly traded and would not do insane things to drum up an extra billion in profit each quarter.
Why we are still letting people buy houses with <10% down is beyond me, especially for people that overbought a few years ago, then are going to turn around and do it again.
World Savings Bank aka Golden West Financial killed Wachovia as an independent bank. Wachovia had already bought WSB by the time this loan was made.
Wachovia paid $24B for WSB and got $60B in losses for their trouble. Those loans are now Wells Fargo’s problem.
GWF – most admired mortgage company in 2006
Wachovia has its origins in the Austrian name Wachau. When Moravian settlers arrived in Bethabara, North Carolina, in 1753, they gave this name to the land they acquired, because it resembled the Wachau valley along the Danube River. The area formerly known as Wachovia now makes up most of Forsyth County, and the largest city is now Winston-Salem.[wikipedia]
I shudder to think about how those Moravian settlers from 250+ years ago would view what has become of the Wachovia name.
IMHO, there is one more responsible party. Loan brokers and other financial intermediaries, who originated mortgages to sell them.
I define morals as good vs evil, and ethics as right vs. wrong. To me, morals are absolute, like faith or religious values. Ethics is more secular and knowledge-based.
The three principles that govern the code of conduct in a human society is morals (good vs evil), ethics (right vs wrong), and law (reward and punishment). These 3 works like a trinity in balance. If one becomes dominate, the society will lean away from balance.
From the “stupid things that banks did” file: We opened a heloc with Ditech, and then two or three years ago they left the heloc business and froze all of their helocs. Even if we had used our heloc, we’d still have over 50% equity. We had to open another heloc and close out the Ditech account, and we went to B of A. We asked for a heloc with 1/2 of the balance that we’d had with Ditech. They refused, and said that we had to qualify for and take out a heloc of the same amount or they wouldn’t approve one at all. We did qualify, but what were they thinking…
The Big Lie
The bankster bailouts did NOT save us from the second Great Depression. We could have wiped out all the equity and bond holders, recapitalized with taxpayer funds, then sold the public interest later. Sweden did this in the mid 90s, and it worked well. 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 in bankruptcy. 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. Of course, now that the crisis has past, lenders are lobbying to prevent financial reform that may diminish their paychecks.
I don’t think foreign debts were the issue here-domestic debts were the main problem. I assume you are basically saying here that the government should have nationalized the failing banks, like AIG and GM? That certainly would have solved the problem, but I know some people (namely, the man who was president at the time (Bush)) would be against such wide scale nationalization.
IR,
While a house is listing as short sale, does the owner still have to pay the mortgage?
I guess they still do, otherwise the house would be in default?
Owners may or may not be paying during a short sale, but I doubt very many are. Why would they? Nobody is kicking them out, and they aren’t going to get any of that money back. Continuing to pay while selling short seems pretty foolish.
The notice of default is at the discretion of the lender. Most lenders have not been filing their notices. Many, many more borrowers are in default than what shows up in notices.
417 days is the current average time it takes from first day of default to NOD filing.
Can you provide a link to that piece of data? I would like to quote it.
Try the Coto Housing Blog’s “Free Rent”.
http://www.cotohousingblog.com/?p=11132
I would say very few are paying because what bank is going to approve a short sale if the loan is current? It is hard enough to get it approved if there has not been a payment in 6 months.
I don’t see why account status of the loan would matter (either way) on approving a short sale. So, if the loan was current, and assuming prices are stable and signfificantly less than the amount owed, why would it be in the bank’s best interest to reject it? So then the owner simply stops paying for six months and then the bank would approve a short sale? The net result is the same, except the bank gets (a portion) of their money later.
Good post, but I had hoped you would address the 1099/tax forgiveness issue
When a borrower does not pay back money to a bank that they promised to pay, they are hurting someone else, (stockholders or bank owners), with their lack of integrity, therefore they are not only engaged in unethical behavior, but they are also immoral. A promise is a promise, and although not absolute, the integrity of the one making the promise is defined by their behavior, not the motivation of the receiving party.
Two examples: WW2, you own and live in the a house and are hiding the Frank family upstairs. Nazis come to your door and ask if there are any Jews in the house. You lie and say no. You are both ethical and moral even though you lied because you lied for unselfish reasons and they were for the moral good.
Next example: You strategically default even though you can afford the payment. You may not be able to pay for your kid’s college, but they won’t starve. You have broken your promise at someone else’s expense, (you have appropriated someone else’s kid’s college money), for your own selfish wants. And it is fairly close to theft when you put it in that perspective.
“When a borrower does not pay back money to a bank that they promised to pay, they are hurting someone else, (stockholders or bank owners), with their lack of integrity, therefore they are not only engaged in unethical behavior, but they are also immoral.”
“You have broken your promise at someone else’s expense”
Here is where we disagree. That “someone else” you are referring to knowingly took on the risk of the broken promise and factored that in to their interest rate return. If the loan was made at less than market value for other reasons (like friendship or family), then there is a broken promise that breaches good morals. However, if the transaction is an arm’s-length transaction, the borrower’s potential lack of integrity has already been factored into the deal through the interest rate.
Unless banks start going around making below market rate loans based on moral issues (disaster relief or something), morality does not enter into the picture.
When a person drops off their kid at daycare, they assume a certain amount of risk that someone else may not care for their child property. If the care provider is care negligent, have they not engaged in immoral behavior? The parents assumed a certain amount of risk. It is a business to the care provider. The parents have entered into a business transaction.
This is the right analogy and this is precisely why the bond holders got bailed out.
I get really scared when PR agrees with me.
Not everyone can be as smart as you, but the lesser intelligent folks like myself can take solace in making more money than you.
True colors.
Dude, that is no big brag. Just about everybody makes more money than me.
“If the care provider is care negligent, have they not engaged in immoral behavior? The parents assumed a certain amount of risk. It is a business to the care provider. The parents have entered into a business transaction.”
In that instance, the parents entered into a business transaction with a service provider. As part of that transaction, the daycare provider carries a fiduciary duty with moral implications. The fiduciary duty of the daycare provider for the well being of the child establishes what standard of care is required. The parents do risk their children’s safety, but there are extremely punitive laws to prevent wrong doing by the provider. The cost of service to the parent does not contain an element of financial risk other than the offset for any special insurance the daycare provider must have.
That situation is not analogous to a purely financial transaction where health and personal safety are not involved.
I cannot think of any instance of morality where there is a purely financial transaction without misrepresentation, fraud, or some health and safety concern.
People who risk money charge higher interest or demand higher returns for the associated risk. They automatically factor in the chance other parties will not perform in the price they charge for the money. The performance of the parties to a contract is not a statement about morality.
In any state with only judicial foreclosure or on a non-purchase loan in a non-judicial foreclosure state, will the judge in a deficiency judgement suit agree with you that there is an implied risk of a broken promise and that risk is factored into the interest rate or any other terms of the loan? And if not, why not?
If a paid for care provider is negligent with your child, their behavior is immoral, and if they are negligent with paying back a personal loan, their behavior is immoral, but if they are negligent with paying back a business loan, their behavior is moral? Is that your position? What if a paid for provider is negligent or abusive with your pet? Your house?
“If a paid for care provider is negligent with your child, their behavior is immoral, and if they are negligent with paying back a personal loan, their behavior is immoral, but if they are negligent with paying back a business loan, their behavior is moral? Is that your position?”
Yes. Although it is more precise to say that the failure to pay back a business loan is not necessarily immoral. It is not good behavior.
“What if a paid for provider is negligent or abusive with your pet? Your house?”
Negligence is always immoral as it is a breach of a fiduciary responsibility. There is no contractual fallback position for such behavior that could be factored in to the service. It is why we have laws about those kinds of things.
awgee,
The daycare behavior can be immoral and punishable with death in some case. The is the written aspect of the contract and the implied contract. A daycare that rapes and kills multiple children will likely face a capital charge.
The interest rates by commerial lenders are set with a risk assessment. Higher risk, higher interest. Too bad the risk assessment was all smoke. Loan between family and friends are usually without risk assessment or highly subsidies interest rates. To walk away when on can pay for the latter two types is unethical and immoral. The walkways are factored into the contracts of a commerical loan’s interest rate, down payment and trustee sales or should have been factored in. I would not feel good with walking away, but it is my legal right.
I was either too ethical or too stupid to game a system that encouraged no money down or equity withdraw.
The promise to pay is not unconditional. The contract itself provides for the conditions of default. It is anticipated and mortgage contracts prepare for it. Also, the law provides for many other conditions that aren’t included in the contracted promise.
And I am making daily decisions that are hurting others unrelated to any decision to default on a mortgage. My decision to bring my lunch to work hurts every nearby food server. My decision to contribute to my 401k hurts the current government. My decision to not purchase a car for the past 13 years hurts people working in the auto industry.
Strategically defaulting on a mortgage promise is not a black-&-white moral issue.
Is it hurting or just not helping those industries?
Are you saving the environment by being lunch, reusing your used car…?
401k system is to boost the stock market and mutual funds adn the need to be on the govt dole.
Apparently, the 401k system worked best for the former two.
When a borrower does not pay back money to a bank that they promised to pay, they are hurting someone else, (stockholders or bank owners), with their lack of integrity, therefore they are not only engaged in unethical behavior, but they are also immoral. A promise is a promise, and although not absolute, the integrity of the one making the promise is defined by their behavior, not the motivation of the receiving party.
I dunno. The loan terms are basically “You will give me $X to buy a house. If I don’t pay you $Y every month for thirty years, you get the house.” Walking away just means they get the house.
This is an accurate description of the legal ramifications of a no recourse mortgage. That question is pretty much settled. But this discussion was about the ethics and morality of borrowing and lending. If your point is that the legality of of a course of action ipso facto squares it with ethical and moral considerations, please make that case for us.
Most states require a judicial foreclosure and the mortgage contracts are recourse. Non-recourse is the exception, not the rule.
That is not true.
Lenders (financial institutions) are faceless corporate entities that by design have nothing to do with morality. Their sole mission of existence is to maximize profit, not to uphold moral standard. In fact, the whole purpose of American Capitalism has always been about maximizing profits and returns on capital. Even business “ethics” and contractual obligations are merely arbitrary rules set up to ensure a sense of fair play, i.e., if I agree not to screw you, you will reciprocate by not screwing me either. In essence, capitalism has nothing to do with morality, and no corporate entities are created to be “moral” (they are out there to make money within the confines of established business rules and regulations, pure and simple).
The moral code in this country is more or less defined by a Judaic/Christian legacy that is supposed to provide a “standard” for social behavior at individual level. I think that’s why most of anger from IHB readers has been directed to deadbeat house debtors and HELOC abusers – after all these are the average Joe we can relate to – they are your neighbors, your coworkers, or ex-friends you no longer speak to. They grew up in the similar household, went to the same school and church as you did, so they should know better and be responsible as you are and act morally as you do, right?
Without religious connotation you may consider “morality” in today’s society as a protocol that regulates interpersonal conduct, that is, to ensure “fair play” in human interaction. You don’t do to others the things that you yourself would not want to be on the receiving end. Morality to individuals is what ethics is to business entities. The tragic product of our gov’t policies during the Great Recession is the rapid demolition of both ethics and morality in business and personal domain. “Gaming the system” (translation: screw the others to get ahead) will be the new “morality” for your average Joe six pack.
How can you expect morality for those that don’t even believe in the concept of morality? I recall a 1980’s conversation with a grad. student on who’s morality should be used to judge history. In other words, it’s all relative. The seeds of relativity planted in the late 1800’s/early 1900’s have sprouted and now in full growth. On co-worker called another immoral for lying and under handed behavior — She should of used “amoral” would have been a more accurate term, because the concept of good and evil was foreign to him. The realization that a person could be amoral was foreign to her — she was young and innocent.
“That “someone else” you are referring to knowingly took on the risk of the broken promise and factored that in to their interest rate return.”
Query: In any state with only judicial foreclosure or on a non-purchase loan in a non-judicial foreclosure state, will the judge in a deficiency judgement suit agree with you that there is an implied risk of a broken promise and that risk is factored into the interest rate or any other terms of the loan? And if not, why not?
I believe that most strategic defaults are both unethical and immoral. It is a general moral imperative that a person act ethically unless there are overriding reasons that compel a person to take actions that would be unethical but that serve an important facilitating force in creating a moral outcome of greater importance than the immediate ethics of the action. In the case of strategic default, most of them that I have knowledge of are made to increase the cash flow of borrower in the face of a loss in the prospect of asset appreciation. But the ethics of this decision can only very rarely be influenced by the value of the house because ethically, legally and morally the borrower already owns the house with the consequent risk of loss of value as well as the gain from increase in value. It is strictly a matter of paying the debt or not. It is not an ethical lapse for a person not to pay a debt if they cannot pay it. But if you can pay the debt, there are only a very few kinds of cases where it is clearly moral to default. Here are two hypothetical cases. Your sister is killed in an auto accident and you now have her three children to care for on your same income. You had enough income to pay your loan and support your own family, but this added burden makes it impossible. Or one of your parents passes away and the other needs your help, but will not relocate. You have the income to pay your loan, but not the savings to cover the loss of a short sale, which your lender is dragging their feet on approving anyway. What I think clearly is not a moral imperative is when you notice that you could rent a house for $xyz/month less than you are paying for your mortgage when there has been no change to your situation that compels you to use the money to satisfy an important changed moral obligation in your life. Yesterday’s case, at least what we know of it, fails this in that there was no change that compelled the decision to default. They have a daughter and wish to provide her with a college education 12 years from now. The moment to have thought through the impact of servicing this level of debt on the prospects for his daughter’s education was prior to agreeing to the debt. At that time, one assumes, they concluded that paying this debt and saving for her education are compatible goals. What changed? Nothing ethically or morally significant. This is pretend morality.
There’s always a reason or excuse. Almost everyone does right in their own mind, even when what they do is evil. Guilt and shame have been removed from society except placing them where it doesn’t belong. People feel guilty for not providing their HS kids with a BMW or some unknown family in Africa or Asia, but no guilt or shame for shafting a known person for personal gain. Sad but that’s the post-modern morality.
In additional to financial reform and health reform, we will see a lot of more other reforms, such as immigration reform, education reform, military reform and all these reforms are part of Obama’s reelection campaign efforts.
IMHO, all the reforms are rather an expansion than reform. Obama is a great president and great politician , all his policies and “reform” will get passed by Congress because the perfect execution. Must give him an A+ by watching how he beautifully KO his opponent .
For the health reform, the Republicans called him a socialism , actually the reform is more of health benefit expansion which opens a blank check and let tax payers and next generation to pay off. This is not reform and not socialism, the reform means make thing more efficient and socialism means everyone share fixed amount of resources. But the health reform does not address the major issue of the cost reduction or utilization. In here, Obama uses the minimum resist to get max political achievements and Republicans can only sentence him for giving the wrong reasons. This is a beautiful strategy.
Same as financial reform, the meaning of financial reform should improve government’s debt level. But didn’t Fed already project at least $1 trillion annually debt for next few years. And the “reform” will expand Fed role to have more control of the market.
In addition immigrant reform, I predict there will be an education reform in some time next year and which will allow government to inject fund to public school (this is actually good idea). and the peak of the reform movement will be 2012 military reform which Obama will withdraw the troops from Iraq and claims the V. All these are well planned for 2012 president election.
Actually I kind agree this is good for us and for the country at certain level. If we cannot find a Great leader of all time that can help US to become country totally denominates the world again but at least we have an A+ leader that can shut down all other politicians’ mouths.
Perspective: “Strategically defaulting on a mortgage promise is not a black-&-white moral issue.”
Should soldiers die fighting for their country or “strategicaly default” for their families?
The answer is pretty black and white. One strategic defaulter always wins. Army of strategic defaulters always lose.
Economic crisis is just different kind of war.
IR: “The lenders, investors, realtors, mortgage brokers, borrowers, HELOC abusers, government regulators, the Federal Reserve, the Treasury department, everyone who was involved indirectly conspired to steal wealth from savers, renters and prudent homeowners who did not participate in the madness.”
Just wondering, what about the sellers?
Or more exactly, those sellers who went “realtor shopping” to enlist the “go-to” realtor who could “get the right price” and who worked with an appraiser “who can get the right number” for the most “value.”
What about them? Does the seller share some culpability in what you describe above?
*wonders*
~Misstrial
I completely agree regarding the immoral actions perpetrated by the banks. Irresponsible lending shouldn’t be rewarded with bail outs.