‘Strategic Default’ the new name for deadbeats and defaulters
Image by AFP/Getty Images via Daylife
The Los Angeles Times reports that an increasing number of homeowners who are able to afford their mortgage payments – despite the falling value of their homes – are walking away from their obligations, calling it a ‘strategic default’.
Their excuse? The banks screwed them now they are going to screw the banks.
While one would be hard pressed to find anyone who dislikes banks more than I, or holds them in higher disregard for their criminal behavior which led us to the brink of financial destruction, the logic of these defaults eludes me completely.
Certainly, the banks played a huge role in tanking the economy, taking the world to the edge of economic ruin and remain in serious need of regulation as a result of their unconscionably risky business practices. However, those risky business practices very much involved giving ridiculous loans to the same people who now want to ditch their obligation – even when they can afford to honor them.
Clearly, the public at large who has suffered from these irresponsible practices have every reason to be angry. But for the beneficiaries of these practices to now feign anger and moral indignation when they were ones who received money they should never have gotten is absurd and disingenuous.
Wynn Bloch bought a home in the California community of Palm Desert in 2006 for $385,000. Comparable homes are now selling for $200,000. Deciding that the house was never going to see a return on her investment during her lifetime (she is 66), and believing that she was ‘duped’ into buying an expensive loan when she purchased the house, she’s walking away.
The way Bloch sees it, it was the big banks who were responsible for the nation’s woes. Since the banks got bailed out while she was left ‘holding the bag’, there is justice in her sticking it to the bank by defaulting on her loan obligation and walking away from the home.
Wrong. People who pay their mortgages, even though the value of their own homes are not what they used to be, are the ones left holding the bag.
In making her case, Bloch says,
There was not a chance that house was ever going to be worth anywhere near what my mortgage was. I haven’t cheated or stolen.
Via Los Angeles Times
Bull.
Ms. Bloch most certainly has cheated. She signed a contract agreeing to pay back the loan when she bought the house. The bank made no guarantees that real estate values would remain inflated. The bubble was riding high in 2006 and anyone with any sense knew there was a risk it could burst. It had happened in California before and there was every chance that it could happen again.
If Ms. Bloch was lied to and fraudulently ‘duped’ into a more expensive loan than she realized, she has every opportunity to sue the bank or mortgage broker responsible for any such fraud.
So, what is driving people to walk away from these obligations when, in the past, to do so would bring more shame than applause for financial shrewdness?
So-called strategic defaults accounted for about 35% of defaults by U.S. homeowners in December 2009, up from 23% in March of 2009, according to Luigi Zingales, a professor at the University of Chicago’s Booth School of Business. He and colleagues at Northwestern University’s Kellogg School of Management reached that conclusion by surveying homeowners about their attitudes and experiences with loan defaults. They found that borrowers were more willing to walk away if someone they knew had done it, and that the greater a homeowner’s negative equity the more likely he or she was to default, even if the monthly payment was affordable.
Via Los Angeles Times
In other words, it’s now more socially acceptable.
If Ms. Bloch, and others like her, make a financial decision to bail out on their obligations, that is up to them. But to pretend it’s socially and morally acceptable to do so because the banks who gave them too much money are bad guys, is nothing short of preposterous.
Buying into such arguments is just another step along the way of the decline of social responsibility.
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Really? The logic strikes me as quite simple:
Additional amount paid in interest on future loans as a result of worse credit < the difference between the value of the home and the value of the mortgage.
Perfectly simple, perfectly reasonable. If the amount you're underwater by is far more than the future cost of your ruined credit rating, walking away is perfectly logical.
That’s not true. She signed a contract agreeing to pay back the loan or suffer the terms of default, which is what she’s choosing to do. The bank gets the full contractual recourse – they take ownership of the house. Nobody’s getting cheated. The bank, after all, has been listing the value of this asset at its purchase price this whole time, remember? They can hardly object now. As far as their balance sheet is concerned, they now take ownership of an asset worth exactly as much as the full mortgage amount. They don’t even have to give back what Bloch has already paid!
If anything the bank has come out ahead. If it’s the case that they can only get cash value for the home by selling it at a lot less than its value, well, that’s just poor business acumen on their part.
I don’t see what’s immoral about it. It’s a perfectly sound financial decision that, frankly, benefits both parties. The idea that its somehow the case that individuals have a “moral obligation” to pay their debts under all circumstances (while, at the same time, corporations can default on debt as a purely strategic decision) simply disadvantages the individual in the marketplace. I see no reason why the same obligations, or lack of same, shouldn’t be applied to all participants.
1. “Really? The logic strikes me as quite simple:
Additional amount paid in interest on future loans as a result of worse credit < the difference between the value of the home and the value of the mortgage."
Were we discussing the financial logic, I think we are all clear on that. But that is not the logic under discussion – it is using the macro bad behavior of the banks as an excuse for defaulting on a loan that can be paid.
2. "That’s not true. She signed a contract agreeing to pay back the loan or suffer the terms of default, which is what she’s choosing to do."
That's about the most ridiculous interpretation of contract law I've ever seen. You're suggesting that no one ever really defaults on an agreement because there are always remedies provided for, either within the four corners of the contract or by law.
3. "I don’t see what’s immoral about it. It’s a perfectly sound financial decision that, frankly, benefits both parties. The idea that its somehow the case that individuals have a “moral obligation” to pay their debts under all circumstances (while, at the same time, corporations can default on debt as a purely strategic decision) "
I believe you don't see what is immoral about it – which is why I would be reluctant to enter into a contractual relationship with you. And who has suggested that a corporation defaulting on contractual obligations is any more permissable than individuals?
You have a strange way of thinking – or maybe it's just one that suits your own purposes. You seem to think that corporate defaults are different than personal defaults. if a corporation defaults on an obligation to me, I don't let it go simply because they made a 'strategic decision" that suits them. I will pursue the remedy.
I hope you aren't a lawyer as, if you are, you clearly missed those first year classes where you learn that contract law is very much about morality. Ever hear of punitive damages?
In response to another comment. See in context »This amuses me. I have never understood why people place the homeowners in the current housing crises in a moral light instead of a business light. The decision to strategically default is a business decision. Did they default on a contract? Yes. But sometimes it makes sense to.
Why should a woman have to pay twice what her home is worth? If memory serves, California is a non recourse state. Dont the banks know this? Clearly, the banks were responsible for the housing bubble by bidding against themselves on property for several years. They were in a place to know the risks and plan for them. Presumably, they did this through service fees, interest rates, etc.
We dont go after the banks when they maintain in their credit card contracts that rates are subject to change at any time for no reason whatsoever, yet when a private citizen decides to take an action that might screw a bank, they are immoral.
This is the most incomprehensibly right wing post I have seen from you.
California is a non-recourse state and banks do know this.
In response to another comment. See in context »My gripe is not that the banks are being hurt – I really couldn’t care less about them. And if people want to say they’ve made a financial decision to let the house go – as I said – that’s up to them.
But when they say they are justified in defaulting because the banks were bad guys who ruined our economy by lending these very people money, that’s bullshit. If you want to stiff the bank, then stand up and say I’ve made a financial decision in my best interest. Don’t pretend that you are morally justified because the banks are evil. That’s absurd.
“But when they say they are justified in defaulting because the banks were bad guys who ruined our economy by lending these very people money, that’s bullshit. If you want to stiff the bank, then stand up and say I’ve made a financial decision in my best interest. Don’t pretend that you are morally justified because the banks are evil. That’s absurd.”
Regardless of their motive or stated motive, I see nothing wrong whatsoever with people doing this. In many cases, it is foolish to hang onto the property. If they are not violating a law, more power to them.
A time or two, I helped a guy who repossessed cars many years ago. If they people didn’t make the payments, he picked up the cars. It messed up their credit rating, but it was no criminal offense. As for morality, they had a deal — make payments or lose the car. For whatever reason, they chose not to make payments.
I’ve had this discussion before, and for the life of me, I can’t understand why people would expect someone to stay in the house in such a situation. If a guy gets a $1 million business loan using his two beagles as collateral, loses the money and forfeits his beagles, he got the better end of that business deal. And, morally, he totally kept up his end of the bargain. There’s risk in loans: that’s why they demand higher rates than T-bills.
In response to another comment. See in context »Do people take this view because of the impact they feel such behavior has on their own house’s price? That’s all I can come up with. Bailing is smart with a capital S.
Craig – you should know better. I don’t write ‘right wing’ or ‘left wing’ posts. I write what I think should be written.
In response to another comment. See in context »I don’t think you could ever accuse me of defending banks – quite the opposite. But when individuals use bullshit excuses for ditching their obligations, that is equally crap.
The world does not exist on the right or the left. The world exists with problems to be solved. Having on obligation to stay on one side or the other is dishonest and seriously counter-productive.
I have not read the LA Times article, just your synopsis of it, but I am not sure that the parts you quoted equal the contention that they are saying this is because banks are evil and not that this is an economic decision.
The first quote is a woman saying the house was not going to be worth her mortgage. The second was a quote saying that the larger the amount of the negative equity, the more likely someone was to default? How are these not economic considerations? Why should you pay an extra 185k for something when you are never going to see a return on that? That is the legal structure. To the extent that people did mention that the banks screwed them and they got left holding the bag, why wouldnt this be expected? Ever since the housing crisis began, there has been a public smear campaign against people being foreclosed on. Maybe knowing that they have and will have mud thrown in their direction makes them a little more likely to throw mud themselves.
As to your second point, you do go both ways on the political spectrum and I appreciate this, but I feel you missed on this one. Banks exist in a world of bankers, lawyers, actuaries, etc. Why blame the homeowner? The banks are far more sophisticated. The banks knew the risk, but continually bid against themselves, driving up prices. Finally, a less sophisticated party was left holding the bag.
The quotes that you excerpted fully pointed to this economic reality. The parts that you summarized seem to point to the fact that they were not real happy with the banks. I think they can be both. And when you are being put in the LA Freakin Times as some sort of posterboy for the decline of personal responsibility in America today, you might deflect a little.
In response to another comment. See in context »Not sure where you would get that I’m using the LA Times for anything other than crediting them as the publisher of the article that I am discussing – which is what you do when you use an article for reference.
This is simple. My article is clear that I am talking about people who can afford their obligations and chose not to honor them. If they are doing that as a business decision, that is their right. But when they use the excuse that they are morally correct in dong so because the banks are all scumbags, that is bull and should be offensive to anyone struggling to keep their home when they don’t have the money to make the payments. All these people are doing is making the real estate market worse – and tougher for those who are trying to do the right thing – because they aren’t happy with their investment decision.
In response to another comment. See in context »I am a hard supporter – and very much on record for being one – of quickly and meaningfully helping the people who are struggling to keep their families in their home. Telling people who can afford thei mortgages that its okay to walk away on their obligation because it is no longer as good of a deal as they thought it would be, is wrong. I’m not saying they can’t do it – I’m just not gong to say that it’s okay because those banks are such scumbags that investors should be equally as dishonest.I don’t know why anyone would support this.These people are just making it worse for people who are truly in need.
I brought up the LA times article because you mentioned and quoted from it multiple times. I realise that you are crediting it. Not sure what your contention with my charictarization of it was.
My contention is merely that blaming the banks is a gut reaction that is coupled with an economic decision. I seriously doubt that too many people are doing this merely as a big F U to the banks. People that act against self interest to flip off authority typically are not in the position to be buying 385k homes.
As to your contention that they are making it worse- so? The woman in the article was almost 50% underwater and 66 years old. Is your advice to her that she should pay almost 200k after bad on the eve of her retirement? Just for the greater good? That is not sound economic advice.
Iunderstand where you say that you are talking about people who can afford their obligations but choose not to honor them, but I disagree where you say it is simple. Just because you can afford the mortgage does not mean you can afford it. Lots of people were using their home as a retirement plan. That can not happen in this market. If you give me examples of very wealthy people who are a few thousand underwater who say FU to the banks and then walk away, I think you have a point, but your article simply does not support this proposition. There is the example of the 66 year old, and a quote that says that people are more likely to walk away the further underwater they are. This suggest, to me anyway, that people are walking away based on economic realities, and not just because banks are scumbags. To the extent that they say that banks are scumbags, they are lashing out, which is common in traumatic situations. (Such as realising that you are 200k in the whole- that would be very traumatic to me)
Perhaps their words could be better, but their actions seem to be in line with rational economic thought. Dont like it? Dont be a non recourse state.
In response to another comment. See in context »I dont think that anyone is trying to convince themselves of the business value of strategically defaulting. Morgan Stanley hikes away on a 2.4mm plot, and its no big deal, but the author calls everyone else a deadbeat. I think the American people are through justifying the tactics they employ to survive.
Case in point–child has compound tib/fib leg fracture…leaves the hospital with a 56k bill. To hell with them–dont pay it. Physician tuition is subsidized by the state and federal government…they pay less than half of it and still dont want to give back. Now they want to put a child in debt for the first 30 years of his life because he fell off the stairs???
Credit card company wants to jack your rate up by 30%–straight to hell Discovery card, NOT PAYING.
Debit card overdrafts cost you 40 dollars when you bought $5 dollars worth of gas so you wouldnt be late for work–FUCK YOU Bank of America.
If the author of this foolhardy article is underestimating how angry we are that tax revenues were used to bail out balance sheets of the “too big to fail’s”…not the country. If he were right, and it is nothing but a business decision, then people would leave their houses without destroying them. A businessman in Georgia bulldozed his house just so the bank cant have it!!! HE OPENED HIMSELF UP TO FURTHER LITIGATION AND POSSIBLY CRIMINAL CHARGES ON PRINCIPLE ALONE!!! Does that sound like a business decision? The groundswell of support for the man in the local population is undeniable. Now tell me about banks and deadbeats.
The difference between a strategic defaulter and a forclosure in some cases is only continued income. Can you tell me that these strategic defaulters are not walking away because of the perceived future of their employment status? NO. I am an engineer, i got canned. Nobody is safe. Just because you can pay it doesnt mean you should. The fallible logic of the author is exposed by the superficiality of his research. He simply took what the College professors said and ran with it. I dont believe that future job prospects was a criteria given consideration.
The answer is that banks are through lending money for a long while…but they simultaneously want you to keep your credit score up so you may be eligible for a loan??? That is propaganda!!! Pay or i may punish you 35 basis points on your next application that we will be accepting in 2035. To hell with that. Where is the logic? Its nowhere to be found. Credit is a newly extinct dinosaur. It matters less now than ever.
Some states are refusing to appraise property values and are keeping the old values just to suck the rest of the life out of its populace. Now…you have to pay this one, but it doesnt mean that you cant write “fuck off Bob Reily” in the notes section.
Give people a break Rick. You are a pick slip away from renting yourself unless you own your car outright.
Not only did you completely miss the point of the article, you are engaging in the same practice of using bad behavior by others to justify more bad behavior.
In response to another comment. See in context »Wrong is wrong. Every example you give of bank’s bad behavior is absolutely correct. And yet, how does this justify people who are able to pay their bills not doing so? If I am a pink slip away, and I can no longer pay my mortgage, then I will have no choice but to give back my home. But I haven’t received that pink slip, I am able pay my mortgage and so I am obligated to honor my contract. You behave as if it comes as a big shock to us all that the banks were greedy pigs at the time we borrowed money from them. Nobody put a gun to our heads and told us to do it. We knew who we were doing business with.
If people have to default – then that’s what they have to do. But if people are walking away from the their obligations under some notion that its okay to do so because the banks are immoral pigs, then they are no better and no different from the banks.
And, by the way, the example i used in the piece was someone who was not concerned about future retirement – they are already retired. They simply decided that their house was no longer a good investment so, since the banks are such bad people, why should she honor her obligation to them? Why, she’s practically doing a public service teaching those no good for nothings a lesson, right? She’ll show them for having the nerve to lend her money when she asked for it!
How else is bad behavior justified? When one party treats you in poor faith, that’s how you treat them. If a bank is going to treat its loan to you as a financial investment vehicle and not as a moral obligation to engage in George Bailey-style community building, then it’s perfectly rational and moral for you to treat the loan the same way.
You said it yourself. You won’t even consider financial dealings with me simply because you suspect I’m untrustworthy. You justified your bad, poor-faith behavior by recourse to mine. Not even to behavior – just something I said in a post.
It’s perfectly reasonable, when one party reveals themselves as a malefactor, to treat them like one.
In response to another comment. See in context »Why don’t you help us all out and make your point. So far as I can see you are simply being contentious for the purpose of being contentious. You’re making legal arguments that have no basis in law.
Are you trying to say that one scumbag justifies another? Maybe so, and this no doubt gives you license to behave in such a manner. If that works for you, knock yourself out. The problem is that in the instance at hand, which is the point, the behavior of those who are using the banks’ own poor behavior to justify their own, are hurting those who are trying hard to keep their families in their homes in difficult circumstances. Every time someone who defaults and hands their property back to the bank, it further depresses the market and makes it all that much harder for those struggling to hang on to their homes. Can these investors do this? Sure. I never said it wasn’t legal. Do I like them doing it and pretending the reason they feel justified in their behavior is because the banks ruined the country is okay? Of course not. If you do, good for you. You are unlikely to change my mind.
In response to another comment. See in context »I guess I’m saying being a scumbag justifies being treated like a scumbag, even if they weren’t a scumbag specifically to you. That principle seems pretty obvious, frankly, and I wonder how it is you don’t seem to get it, yet.
The idea that anything Bloch is doing is going to make it harder for someone else to “keep their home” is pretty stupid.
In response to another comment. See in context »Here’s the nut of the argument that I disagree with: “But if people are walking away from the their obligations under some notion that its okay to do so because the banks are immoral pigs, then they are no better and no different from the banks.”….
Why do I have to be better than the bank? Why do I have to be more moral than the bank? The bank rewrites its fine print all the time to wring a few more cents out of each transaction. They deposit personal checks in a certain order so that they can charge overdraft fees even when an individual has already deposited the money! They buy and sell congressional reps to create loopholes and new ways to screw consumers out of a few more bucks. It’s a pretty low bar, to try to be more honorable than the bank. And what does that get you, and society, to be more honorable than the bank? It means you retire broke.
In response to another comment. See in context »I suppose you don’t have to be better than the bank. But if that is the way you choose to go, don’t you forfeit the right to complain about the bank since you would be no better?
In response to another comment. See in context »It doesn’t track that we would complain about how poorly the banks have behaved – and they certainly have- and then say that we will simply behave as they do. Where do you imagine this ends up?
I think the banks behave immorally and criminally. I don’t know you, but I’ll bet you don’t behave immorally and crinimally and I don’ think that you are going to start behaving that way if it is not your nature.
I’m certainly not defending banks. But if you are going to go to the bank to borrow their money, then aren’t you agreeing to live by the rules you agree to live by? I know you see the cycle that takes hold here, and that just can’t be good. Why don’t we not use their bad behavior to justify our own and, instead, prevail upon government to regulate the banks to force them to play fair as we do?
Seems like a better solution to me in the long run.
Sorry about the personal shot; I didnt know you would actually read that. However, your argument is about the exception rather than the rule. You argue that all strategic defaulters are disavowing a bad investment. Not true. The rule is–the economy is sinking. Ten percent unemployment is the new norm. People can and must look out for their families first.
Your argument is that social responsibility precedes corporate responsibility. That means the people show good faith and move out into the cold and then hopefully the bank will in turn act in the best interest of society once it gets what it is owed. Goldman Sachs wont have to live in the halfway house.
I reject your logic for the following reasons:
Banks lend…its what they do (or supposed to do, now they make their money trading). Banks made funds readily available for any piece of property on the market because they could bundle and package the mortgage and trade it on the open market. They did this to the tune of a 30:1 leverage ratio (for some banks). This created an artificial increase in prices for housing. But it also created a false supply of currency in which one could tap to buy the property. YOU HAD NO CHOICE FROM 2000-2008 TO BUY INFLATED PROPERTY. The price was set by the market that was influenced solely by the currency that banks were willing to lend. They lent money hand over fist thinking: “if they cant pay, i take the house and walk away.” It was Ghetto loan mentality. End game: Cheap money, inflated house prices, predatory practices, and lack of fiscal accountability. You manage to agree with me on these points as noted in your reply. You accept that is is common practice to suck the life out of the american consumer–to hell with consumer–the American family. BUT IT IS THE MAN/WOMAN WITH THE FAMILY THAT SHOULD HONOR THEIR WORD ON A PIECE OF PAPER THAT SHOULD TAKE PRECEDENT/PRIORITY OVER ALL ELSE??? NO! YOU ARE WRONG! THE PEOPLE HAVE SPOKEN. YOUR ARGUMENT IS ASININE.
I have just laid out that the fault of the bubble falls on corporate shoulders. You accept this. I have stated that for the better part of the last decade that you HAD to play by these rules or live in an apartment (owning a home is the american dream–by the way). But somehow, someway, you still manage to see the light behind the corporate argument. If you are going to err, why not err on the side of the people. If you do, the government will always bail out the banks–as noted by the “too big to fail” designation. They will not bail out the Frank Johnsons of the world.
At the end of the day…people are reactionary. We do not say “hey, i want to refinance my home with an ARM with balloon option clause. Not likely. We, the people, are left with the shapnel riddled bodies of the bubble that was created by the corporations that you make your agument for us to pay. They, however, have returned to profitability.
Explain to me the deadbeat thing again?
In response to another comment. See in context »I truly think you are missing my point, completely.
First, social responsibility should apply to everyone and everything. Secondly, if a home owner believes that have to dump their home to protect their family, I not only understand, but I agree wih them.
Thirdly, when you start out making a point and get all upset and end up with capital letters saying ridiculous things like ‘the people have spoken’ – you really mess up what could be a good argument.
My objection is not people making a considered decision to bail out on their mortage. READ THE ARTICLE AGAIN. My objection is making that decisiion and bullshitting yourself into some moral principal of ‘the only reason I’m doing this is becuse banks are scumbags.” That is very diffent than bailing out because it hurts your family.
Do me a small favor. Just two days ago I wrote the following piece –
trueslant.com/rickungar/2010/03/17/is-‘boss”-boehner-the-worst-person-ever/
It’s short. Go read it. Given the way you insist on interpreting this piece, the article should leave you completely confused as you will be unable to reconcile the two articles. After that happens, read this piece again and see if maybe you start to see that you’re missing the point.
In response to another comment. See in context »John- to better make the point, I should probably reveal that I am not one pink slip away from renting. I could more than pay off my mortgage anytime I wish. That said, I am certainly not going to make the money I had in mind when I purchased the home I am living in. Should I simply default on my mortgage because I timed the market badly? Is that the bank’s fault? Did they hold a gun to my head and make me take the loan?
And before you start with the “well, sure, it’s not a problem for you, so why should you care about anyone else” , I would ask you to focus. Not only am I on record many times supporting fast and real action to help those who cannot afford their homes any longer and are suffering because of it, I would suggest you re-read the article to see who I am talking about. The people in question here are people who CAN afford their mortgages – not those who are struggling and failing to keep their homes. Those people are trying hard to do the right thing and we need to help them. But we do not help them when people like me, who can afford their mortgage and live with their investment decisions -good or bad- walk away from them, and further depress the real estate markets, pretending that we are morally justified because the banks are bad guys who deserve it. That’s bullshit and I think you know it.
In response to another comment. See in context »That said, I am certainly not going to make the money I had in mind when I purchased the home I am living in.
Your career is still haunted by the studio cut of Daredevil? That’s a shame.
In response to another comment. See in context »Don’t start!
In response to another comment. See in context »I have previously apologized for the pink slip shot…but its probably worth another….really sorry ’bout that. After having read your profile i believe you probably deliver the pink slips. JK…dont worry, i am not anti-corp. I have worked for many fine corporations. In fact i dont really have any “skin” in this argument. I am a renter. I travel. But i am also a humanitarian. I have seen the travesties of this “war on the middle class” (i picked that line after having read your profile…ha ha).
I am a traveling contractor. I work in many places and meet many people–mostly in manufacturing. I majored in mathematics and engineering…so over time i have been entrusted with reviewing many of my friends financial dilemmas over the years. Now most of my work is in manufacturing…so the people that i have befriended over time have been blue collar. The mortgage companies preyed on people with some of the most outrageous literature and sales tactics i have ever seen. Fine print is not the word. You can speak to the exception. I have seen too much of the rule. Some woman with 300k in CD’s…75k in a money market…a 85% pension…Yeah, i will admit she is setting a bad example. I will give that slack. But, two teachers that live in my city will make a better example. They make about 100k a year. Not bad. They were hired away from Florida two years ago. They left a house in Palmetto. They ended up renting with two children. The economy turned. Alabama has a proration policy that cannibalizes education first. They could be terminated at any given time. The ARM on their Florida home started shooting for the moon. Employment uncertain….they walked. That is the rule. Investment fools are the exception. I have lived in six states in three years and have spent that time with true “salt of the earth” people. They were tricked, fooled, lied to, and in some cases quasi-coerced into horrible mortgage situations.
Saying goes: can’t draw blood from a turnip. I always end up telling people: In my opinion, if i were in that situation, i would tell the bank where they could stick that letter. I would bankrupt….that way you can gut them on your cars….your house….and your credit cards….fuck them. But that is just my opinion….the choice is yours.”
With your experience, i feel that you are unqualified to speak for the average American. Its sad but true. The majority of the world doent live in your reality. You will always have a few that abuse the system (which may be the examples you listed)….but when the system abuses all, fuck them, as often and as hard as you can.
In response to another comment. See in context »Don’t worry about the pink slip thing as it did not offend me. Also, I have to disagree that I cannot speak for the average American. I was not always in the position I find myself in now and certainly, nor was my family when I grew up. I do understand the problems of the average American and if you read my blogs here, I think you will not be able to help but to come to the same conclusion.
With respect to those who were tricked into into disadvantaged mortgage situations, I am not only all for their seeking redress, you might be surprised to learn that I do quite a bit of that in my law practice. I think any banker in Los Angeles would find it hilarious that I am somehow being painted by this piece as ‘pro bank’ and they really don’t like me very much!
In response to another comment. See in context »My beef is not with those who are in trouble and need to find a way out. As I say, I spend more time than most helping those people. My beef is with those who adopt the attitude of two wrongs make a right. This is not good for society. If you have to bail on a mortgage that this is what you must do. I get it. But if you are taking a position that the reason you are doing it is because the banks are pieces of shit, then this is a sickness I don’t want to see. I would rather regulate the negative instincts of the banks who do screw people. And those who were tricked into bad mortgages are to be going after those who defrauded them in court. If they were truly tricked, they will succeed.
I have read aforementioned article. I understand. This comment will refer to our original conversation.
Of the options i am left with:
1)Rick only wrote this article for the fringe wealthy people who walk out on their obligations–in which case i think the article is a interest piece, but has no true value in educating society on the economic situation currently at hand….
or 2)Rick thinks that all walk aways capable of paying for their mortgage in perpetuity. In which case your argument is just plain and simple wrong.
When i said “the people have spoken” i am sure you laughed. But what you laugh about illustrates your lack of touch with the people who are actually walking away in mass. The average person feels no remorse about stealing from a theif. Dont talk about the moral obligation to pay back something that is not in a reciprocal relationship with you.
If option 1 is the case…and you are pissed at wealthy people walking away from mortgages like Mr. Morgan Stanley walking from his 2.4mm dollar home. Ok, sorry…i posted in the wrong section.
But i think i read you right…and you are out of touch.
In response to another comment. See in context »I may not be the brightest bulb in the box, but do you actually think that I believe that all people from all walks of life are able to pay their mortgage, not only in these times but in any times? And as for the lack of value you see in the piece – sorry but they can’t all be gems.
In response to another comment. See in context »No, i dont believe that you think that everyone can pay their mortgage.
There will always be a few that abuse any system. But i believe these are the fringe cases. The average household income in the US is 52k. It will be these people that could technically afford the houses, but due to economic/employment forecasts, they will walk. I cant fault them.
I dont think that society in general is good, educated, or deserving of many of the chances that this system has offered them. But to grind the proletariat to a pulp is not palatable either.
I supposed i am jaded because of my personal experiences with people. I personally gave money to a family that had their checking and savings withdrawn by a bank (without the account holders consent) through a setoff provision. My experiences have been personal, which is why i seem to get upset. They are not all investment properties in Boca Raton that didnt deliver their required rate of return. It is main street USA. I am 29, and i still have that youthful liberal spirit i suppose, but to see the banks that started the quagmire return to profitability–it truly breaks my heart. That and i may have read too many Goldman Sachs articles by Matt Taibbi…ha ha! Agree or not, know that the situation is a zero sum game. Now, who do you want to see walk out of the ring? Rhetorical question…i have bothered your article enough. Thank you for the forum. Excellent arguments all.
In response to another comment. See in context »Hello Rick,
I think key point here is that these people purchased the house principally *as an investment* not as a dwelling.
From a housing point of view, if the payments are still affordable, it makes no sense to walk away even if the equity is negative. What does equity matter, you have a house to live in.
However, many people purchased houses, even ones they might actually live in, primarily as an investment. They purchased the house in anticipation of increased equity which would then realize with a sale in a few years. that they might use the property to as their domicile was merely a fortunately coincidence, or perhaps financial one depending one’s age and investment history. “Flipping” houses, even one’s own dwelling, was seen as an easy route to, well if not exactly riches, certainly prosperity. For that perspective, their decisions could make perfect business sense. Waiting 20 years to see an increase in equity for a 66 woman is probably not the best plan.
Now the key point for me here is that this sort of business strategy is the very heart of the housing bubble which the Federal Reserve and other financial regulators had encouraged. With the collapse of the “dot.com” bubble ten years ago and the lack of other investment avenues the regulatory agencies in Washington created a housing market ripe for speculation on equity. These people are simply responding to the market forces created by the Federal government.
Agree with everything you say. And if they make a business decision, fine. But don’t try and sell the idea that that business decision is the result of getting even with the bank who loaned them the money for the investment because that makes default somehow more socially acceptable. If you walk away – nobody can stop you. But don’t you think we should call bullshit on people who try to pretend that their motivation is based on the fact that the very banks who loaned them the money deserve to be screwed by them?
In response to another comment. See in context »Hello Rick,
It is a metaphor. The Federal Government, the banking industry, the real estate business, local governments and believed and encouraged others to believe that real estate values would climb endlessly. They were cheated in the sense that they were sold a false dream. Of course it was a dream they very much wanted to believe, which is why it sold so well. That is what they mean, not that they were literally cheated.
In response to another comment. See in context »I disagree. These people are not using this as a metaphor – they are using it as a way of justifying their behavior when they can afford to pay their debts. All they are doing is hurting those who are struggling to stay in their homes by further depressing the real estate market and extending the time before those trying hard to do the right thing can get their heads above water.
In response to another comment. See in context »Hello Rick,
I am sorry, I was not as precise in my writing as I might have been. I did not mean that they meant “being cheated” as a metaphor. Rather, I meant we have to understand what they said as a metaphor. It is like a dream, you cannot take what it says at face value. None of these people were literally cheated, they cheated figuratively – metaphorically. This is not to say that there weren’t people who were literally cheated, just not the people who are practicing “strategic foreclosures”.
In response to another comment. See in context »davidlosangeles
I disagree with you. A lot of people were sold on the idea that a house was a great investment. The idea was that they buy a house, live in it, pay off the mortgage, and all the while, the value climbs. Then in 10 or 20 years when you go to retire, you just merely take a reverse mortgage on the house.
If this was a significant portion of your retirement plan, it absolutely matters that your equity is negative.
In response to another comment. See in context »A bit harsh.
First off I think people are saying they are walking away when in fact they are on the verge of collapse. Second the desperate do crazy things that are not in their best interest…like jump out of windows. Third if banks encouraged and did more short sales more people would be willing to deal. And that’s the rub and I believe the source of the anger.
The banks ran a con game with wall street. Someday they might be punished but right now they have been bailed out and are in no rush to deal with the bad debts. What they are waiting for is the government to come along and reward them for doing mortgage refinancing deals and short sales so that they don’t have to take a hit on all those loans.
The treasury has proposed a very weak incentive program. We’ll see what happens.
http://www.theatlantic.com/business/archive/2010/03/new-treasury-program-to-encourage-short-sales/37168/
Should people be walking away…maybe not…maybe wait for the bank to foreclose. I have friends who got stuff with the bad second…they are going to stick it out…wait it out.
In every good con the conned are as guilty for their greed as the con artist.
People are gullible and usually the poorer or more desperate the more gullible. But hey look at Madoff’s victims…they too should have known better.
I don’t think its harsh.
First off, the people we are discussing here are those who can afford to make their payments. These are not the people who are about to lose their homes because they simply don’t have the money to pay.
Secondly, referring to the evils of the banking system – which you know I fully agree with – is simply not the point. I don’t see why their disgusting behavior should be used as an excuse for individual bad behavior. If you have to give up your house, that’s a different story altogether. If you’re dong it because you calculate you’ve made a bad investment and, based on the same, want to get out as best you can, that’s also something else. It’s the pretending that you’re doing it because the banks somehow did something to you -when you are the very beneficiary of their bad behavior – is what is annoying me. Talk about biting the hand that fed you.
In response to another comment. See in context »I’m not suggesting that at all. People obviously do default. They do so because the option to do so is given by law and by contract! That’s why people don’t go to jail, or get their kneecaps broken, for doing so. It’s an option spelled out in the contract. I fail to see why it’s somehow illegitimate to take advantage of a contractually-spelled-out option.
Or, if you did enter such a relationship, you’d certainly behave differently in it. You’d comport yourself very defensively and be unwilling to cut me a break, not because I’d ever scammed you, but just because you think I might.
In other words, you’d use my “macro behavior” to justify a different level of dealings with me. Exactly the logic you said you couldn’t understand, but now we see that you understand it intuitively. The “macro behavior” of banks justifies these actions because it tells us what kind of entity we’re dealing with.
They are different! How can you think they’re not treated entirely differently? These kinds of debt write-offs happen literally every day. Haven’t you ever tried to get a refund or a rebate?
With what action? Small-claims court? They don’t even have to show up, and can use a typo on the judgement to justify non-payment (or, at least, stringing you along for months.) Of course, be even a day late on payment of your own debts, and it’s collections city!
I’m not any kind of lawyer, and God willing I never ever will be. I’m just someone to whom it is obvious that the moral dimension of debt is very different depending on whether you’re a corporation or a person: that is, I’m a human being with eyes and a brain. Grow up, Rick.
Clearly, you’re not a lawyer – and despite your lack of regard for those of us who are – it doesn’t change the fact that you simply don’t know what you are talking about.
For starters, small claims court? How do you figure that contracts for loans to purchase homes end up in small claims courts? And, not for nothing, a defendant doesn’t have to show up in ANY court of any jurisdiction. It’s not going to help their case, but there is nothing that obligates anyone to show up in a civil matter. As for typos barring judgements, you’ve been watching too much televisions. I do this everyday – typos do not stop execution of judgements.
Funny, I’ve been accused of many things, but needing to ‘grow up’ when it comes to the realities of the law have never been one of them. Further evidence that you honestly don’t know what you are talking about.
As for you analysis that a contract that defines remedy changes the status of a default, you’re lost. The only time this comes into play is in the matter of liquidated damages – and even that doesn’t mitigate the default as the default is still a question of fact that can be litigated. What you are speaking to is the matter of non-recourse loans, as is the case with most states when it comes to real property – which is a matter or law, not contract as it cannot be abrogated by contract.
You are certainly entitled to your opinion, but when you make these definitive statements that are just plain wrong – and then suggest that I lack some degree of understanding on the issues – you really don’t help your case.
In response to another comment. See in context »I don’t recall saying that they did. Do they not teach lawyers to read? I kind of thought that’s what you all did all day, or something. Where did you get the idea that I thought mortgages would wind up in small claims? Mortgages are hundreds of thousands or even millions of dollars. A little large to be a “small claim”, don’t you think?
Blah blah blah. Look, people don’t go to jail for default. It’s not against the law, and it’s not illegal. The entire mechanism of credit reporting exists because, with the demise of debtors’ prison, it stopped being illegal (for the most part) to default on your debts. Fraud, obviously, is something else; we don’t put people like Bloch in jail because they’ve done nothing wrong – morally or legally. Your absurd and immature attitude that it’s somehow wrong for a person to do what corporations are allowed to, to do what the law provides them to be able to do, does nothing but put regular people like you and me at a disadvantage. For no good reason!
In response to another comment. See in context »Okay,
Let’s see. when I was a renter, I read about a housing bubble in 2003, and it all made sense, so I thought I’d wait for it to collapse before buying. If it was obvious to me, a non-economist (I work in IT), I thought it would be obvious to everyone. The years went by, and housing prices kept soaring, I thought, well — I must be wrong. There’s something here I don’t know. Economics are complex. If it were that obvious to me that this is a house of cards, it would be that obvious to everyone and it would have collapsed by now. So as I’m getting older, living in the SF Bay Area, I decide I want to settle down and that I should no longer put off buying a house, or I’ll be paying rent all my life.
So, I get a house in Oakland in August 2007 in a borderline bad neighborhood for almost half a mil. I’m told I’m qualified for a loan for twice as much, but I understand that some of these loans are irresponsible. So I don’t get the ARM. I get a 40 year interest only. I have a six figure income and stellar credit, but this is all the risk I’m comfortable with. Oh, and it was a fixer upper.
So I make a 3% downpayment (because I was not born with a silver spoon in my mouth), I pay about $3000/month for this place, and I spend close to $30,000 renovation, plus tons of sweat equity. The market starts collapsing almost immediately. Oh, I guess I was right way back in 2003. What took so long for everyone else to figure it out? It’s like all the people who voted for Bush in 2004 because they thought he was a good president. I keep overestimating people…
I did not realize that I was competing for a house with unemployed people who lied on their applications (via their brokers, etc.), or who were wholly credit-unworthy, or who were willing to take such ridiculous risks and sign up for loans that they HAD to know they could not afford. I did not realize the system was that corrupt. And this drove up prices, leading me to get stuck with this place that in spite of all my work is in negative-equityville.
End result is, the bank should be HAPPY for me to strategically default. I have renovated the place top to bottom, given them tens of thousand in interest for the privilege (far more then neighborhood rents were), maintained the property, and given them a chunk of change as a downpayment too.
I’m not sure who you think the bank “gave too much money” as you stated. The bank didn’t GIVE me or anyone any money. They loaned it. At a ridiculous risk. For a profit. And they magnified their risk by making these ridiculous loans. They and others in the industry made an obscene amount of money. Since corporations are not people, they are not left holding the bag the way actual, you know, *people* are. Do the VP’s at Goldman Sachs now have to live under a bridge because this bankrupted them? No.
I feel no moral obligation to keep my underwater house for the next 37 years in order to keep enriching the banks and corporations that created this mess.
I see your point.
Here’s the ‘however’…
I too bought a house in 2005. I too have stellar credit which I’ve worked hard to establish. I could have bought the house with a 3% downpayment but I didn’t. (And I certainly was not born with a silver spoon either – whatever I have I earned and saved.) If I was willing to do a loan on a 3% down payment, I could have bought a much bigger home. I understood that when you only put 3% down, the market only has to drop 3 1/2% before one is underwater. So I put down 25%. I could have used that extra cash somewhere else to either buy something I wanted or needed, invest in something else or just leave in the bank or, as I say, I could have bought a larger home. But I don’t think a mortgage with less than 25% down makes sense. The result is, I’m not underwater because I bought down more of the equity to protect myself. Now, if I were to find myself unable to make my mortgage payments, no matter how good my intentions were, that would be one thing. But I don’t see a justification to walk away from my property obligation because I think the banks are scumbags. I knew they were scumbags when I took their money.
When I say, ‘give’ I’m not suggesting it was a gift – I’m saying that nobody put a gun to my head and made me take it.
I’m also not suggesting in this piece that you need to do the banks any favors as they certainly don’t do any for you. I’m just saying that if you decide to give back your house as a business decision – fine. Just don’t pretend that your justification for doing so is to teach them a lesson. Do you see the point?
By the way, I don’t believe you will be underwater for 37 years and, if it makes you feel any better, I do know VP’s from the big brokerage houses that lost their jobs and are in serious financial difficulty. Now. the fact that they had huge mortgages on their homes when they were earning 10 million a year is astounding to me – but that just shows you what morons have been running Wall Street.
Teh moral obligation is not to the bank – the moral obligation is to yourself and a society that functions based on moral behavior. It is pecisely the moral failure of banks and others that have so wrecked our society. When that spreads to people who have always been moral, we are in unbelievable trouble. Better to regulate the immoral impulses of banks, don’t you think?
In response to another comment. See in context »…Really? That’s your whole point? Jesus. I can’t imagine anything more petty or insignificant than their motivations, or more egotistical than to imagine that they or anybody else cares about what you think a proper motivation could be. What’s next for you, “kids today and their devil music”?
In response to another comment. See in context »Since you have no interest in what I think proper motivations are, why are you wasting your time, my time -and everyone else’s time- reading this stuff that is so beneath you? Near as I can tell you’re an angry little guy who has spent too much time inside a university laboratory. I’ve noticed that this is pretty much how you comment on other blogs where I’ve seen you. Meanwhile, you’re negative energy just kind of sucks, I think you should spend your time reading pieces up to your intellectual standards and high level of knowledge- although if your professed knowledge of the law is an example, you might possibly be nowhere as bright as you think.
In response to another comment. See in context »Feel free to have the last word but I’m done. Your negative energy is no fun at all and, frankly, boring. I’m sure you find my writing the same – all the more reason to go elsewhere.
welcome to facebook/slant
I have no idea what that means.
In response to another comment. See in context »I have to agree with you on this, to shift blame is as wrong as thinking two wrongs make a right. I am seeing a pattern here, this pattern continually shows up in all these business books that I like to read, I shall paraphrase- 1) “if your crooked, you don’t belong in business and that said there is nothing wrong with working for someone, 2) if you or your life is screwed up, the way you live is screwed up, you will surely fail in business”. We are a total package, not a mess of conflicting parts, people need to trust you enough to do business with you, and I get the feeling you would agree with those biz gurus!
Ah Joey….I can always count on a fellow Buckeye like you to get what I’m saying. Very much appreciated!
In response to another comment. See in context »craig-
I see what you are saying – but a few points.
The woman who I use as an example just bought her home a few years ago so it wasn’t like she’s had it for a long time and now her retirement is screwed.
Also – I don’t have a problem with someone deciding that their retirement depends on getting out of house to save her funds. But that isn’t what is happening here. For starters, she’s already taken the hit. I can’t say with certainty that the market couldn’t go lower, but in Palm Desert, its pretty unlikely that it would. So, I don’t think it is about preserving capitol for retirement. More likely, its bailing out of the house to use her money to buy something else on the market that is equally cheap. Whatever her reason, I have no quarel with her doing what she thinks she must. My quarrel is suggesting that it is okay to do it because the banks ruined the country. That’s jsut bull. If she had to do it to save her retiremnet – I get that and support that. But this is not what she said. That’s my problem. If you have to bail to save your life, I get it. If you’re doing it because you’re pretending you’re ticked off at what the banks did to us, that’s just leading us down a path where we are no better than the banks. That can’t be good for anyone in the long term. Better to force government to regulate the immoral impulses of the banks.
Do you see what I’m saying?
Maybe its most simply put as two wrongs never equaling a right. IF you key my car, does it really justify my doing it back to you or should I file a police report for you’re having done it?
I see what you are saying, and I dont think we are that much in disagreement, we are just talking past each other. Certaintly, the keying of the car scenario is correct. We agree. As that applies to the housing market, we agree.
My contention is that I do not know that it does apply to the housing market to an appreciable degree. There was not enough info in the article for me to know whether, as you say, the 66 year old had already taken the hit. What was her equity in the home? If she was close to paying it off, she had taken the hit. But if she was still a long ways off, she would take the hit with every payment she made above 200k, where she would never see a return. If she had little equity, she would essentially be throwing away 50 cents on the dollar with every payment she made.
My contention is that people may do things for rational economic reasons and say spiteful things out of trauma. I guess that I am just inclined to look at the financial reality of the situation, and assume that the action was on that basis. If they say something else, I wonder if the say it out of hurt/anger/fear. People are notorious for not saying what they truly mean.
Certaintly, being 66 years old and out 200k is daunting for most people. I also know that as a lot (certaintly not all) people get older, they start to lose a little mental acumen, or at the very least fear that those around them will think they are losing it. It might be easier to say “I am sticking it to the banks” than “I made a horrible decision which has cost me dearly.” Her words say the former, but depending on her equity in the home, her financial situation probably says the latter.
And the article saying that people walk away more if they are farther underwater seems to suggest that on a macro scale, it is more likely to be the economics as well.
We certaintly agree that walking away just to get back at the banks is selfish and wrong (and I would add stupid.) But our difference is that I am still not convinced that this is what is occuring here.
In response to another comment. See in context »Are you saying that sometimes people make weak rationalizations for behavior that benefits only themselves? If so, I agree, but don’t find it particularly newsworthy. The real problem is that the moral stricture of bankruptcy is losing its potency. As you were saying, nobody likes banks, but we rely on the presumption that people will honor their agreements to make contracts worth the paper they are printed on. These defaulters are typical free-riders; the externality of their behavior is that banks become less willing to loan us money.
agreed.
In response to another comment. See in context »How are you agreed? This has nothing to do with the “stricture of bankruptcy.” (That is a whole nother discussion that we could have if you would like to)How can you call someone that is 50% underwater a “typical freerider?” I am truly saddened by your post and this comment to it. The banks may become less likely to loan money, but that is how it should have been from the beginning.
In response to another comment. See in context »Craig – all due respect, I really think you’re missing the point on this. I – and I think MisterB- are not talking about people in legitimate trouble who have no choice but to walk on their homes. I think virtually all of the people who are in that situation would tell you that they would move heaven and earth to stay in their places.
In response to another comment. See in context »This is about people who made a decision, it turned out to be not such a good one, and are using the fact that banks are unpopular as their excuse to walk away from their bad decision and ignore their obligations. As I’ve said here to many times now, if they make a business decision, that is their right – I simply don’t think they should blame it on the banks pretending the banks did something evil to them by lending them money.
I’m sorry if you’re saddened by the post, but I honestly don’t think you’ve really gotten the point of what is bugging me here.
The people who are “walking away” from their houses must have somewhere else to go and live, so they treated this house as an investment not a home. Truth be told, they probably were touting their ability to buy high and sell even higher later, since real estate always goes up. Do you get a “do over” when you buy a risky stock that has been going straight up and you feel it must continue this upward climb since it has been going up for years and then it tanks by 50% shortly after you bought it? The American public seems to have bought into the idea that since some banksters were crooks no contracts need to be honored. We are setting a bad example as a country when we allow such behavior to be considered “good business sense”. I think the housing market is in for a rough 10 years if this is an example of how many people treat this problem.
fleetlee- You understand the point I’m making here. As you can see by the chain, not many do. I think you’ve said it better than I have in my responses to comments so I’m just going to refer the commenters to your note! Thanks.
In response to another comment. See in context »There is no relationship between contract law and morality. Young lawyers are taught that there is so that they can screw over poor people with a clear conscience. If you suggested to any successful CEO that he should honor a contract that was clearly not in the best interests of the company merely because he has a moral obligation to honor contracts he would laugh in your face. The obligation of the CEO is to the shareholders, to make a profit. Therefore it is immoral (as well as stupid) to honor any unprofitable contract.
These “deadbeats and defaulters” are simply behaving as any rational actor would in the same situation.Your morality is fucked old man.
Silly comment. I was a young lawyer once – now I’m an old lawyer. Much of my practice is based on helping ‘poor’ people – not screwing them over. And I never took a course in law school which tried to pursuade me that there was a relationship between law and morality for the purpose of hurting people. Law is absolutely based on societal morality and the importance of consistency when applying rules in society. Your response is a ‘canned’ one of the variety that one sees when someone wants to spew without thinking.
In response to another comment. See in context »This old man’s morality might be ‘fucked’ – but when you say things like this without having any idea what you’re talking about, I’d be more concerned about the viability of your own brain cells or lack thereof.
And the ‘old man’ thing hurt!
The problem is the mortgage system where people
gain from the leverage, the bank puts up most
of the collateral and a slight increase in sale
price means substantial profits for the homeowner or homespeculator as the case may be.
The answer is to make house payments a share
of one’s income. By doing this, one has no
incentive to walk away if the value drops, even
markedly. And one always owns one home, regardless of circumstances, whether one
suffers disability, one’s employer suffers
bad economic times or one becmes the CEO of
a fortune five hundred company.
Bottom line is live within your means whether it is for your primary residence or an investment. I blame the banks, but I cannot relinquish the public from their responsibility as well. If you can’t afford it then don’t do it.
Doesn’t the loan contract stipulate what happens when you don’t pay? I think the banks are covered, they get the house if you don’t pay your load. It is all part of the contract. Banks would seem to agree. Didn’t Morgan Stanley default on loans even though it had the ability to pay?
Say someone who has lost their job, has taken a lower paying one, or finally does some real financial planning.
They look at their cash flow and net worth looking out to 5 years from now for both default vs non-default.
They see that they either can pay the bailed out bank or put that money toward their family.
I do not agree that his moral obligation is to anyone other than his family. Not to the bank, not to me.
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