Saturday, December 12, 2009

The ethics of stiffing the bank

Megan McArdle gives her thoughts.


  1. I suspect the outrage over the bonuses awarded to the banksters is leaving people with a bad feeling towards the banks, and this probably makes it easier for people to justify walking away.

    Over the question of walking away, I am torn. Many lenders were giving loans to people they had no business giving loans to, so who is at fault here? I guess to a degree both parties are at fault, but many people in society aren't very sophisticated financially, and if a bankster tells them that they can get a loan for a given house, they might not be likely to question what the bankster is telling them. The bankster tells them that the payment won't go up that much, or that they can easily refinance. Or the bankster makes up income details for the borrower. The banksters didn't really care - I think they knew that many of the homes would default, and they assumed that they could foreclose and sell for a profit.

    On the other hand, many of the buyers were stretching, and hoping that they could flip. There were stories all over the place about flipping, and many buyers were hoping to strike it rich. To me these buyers deserve what they got.

    Then there are the buyers who panicked and were afraid of being forever priced out of the market. While they may have made a bad choice, to me they bear less responsibility than those who were flipping.

    But at the end we have no way of knowing what was in the heads of the borrowers at the time they bought the house, so there is no way of proportionally assigning blame.

    My own way of stiffing the banks is to use a credit union instead.

  2. The 30 year fixed loan was always there as a choice. Most people got loans they didn't care to pay off because their intentions were to sell the house shortly after purchasing it.

    Screw these people. They got what they deserved and if there's anything such as karma in this world, they'll get even more of what they deserved.

  3. I largely agree with Jack Russell.

    I place potential foreclosures in four categories:

    1) Homeowners who can't afford the home due to no fault of their own (job loss, health care debt, etc.).

    2) Homeowners who were deceived by the mortgage lender.

    3) Homeowners who knew (or should have known) they couldn't afford the payments, but bought anyway in order to chase a rising housing market (i.e. speculators).

    4) People who can afford the payments, but want someone else to bear their loss.

    I have no problem with people in categories 1 and 2 walking away from their house. Its categories 3 and 4 that bother me. It's people in those two latter categories who are greedy and selfish.

    I think it is impossible to proportionately assign blame, and attempting to do so is a fool's errand. The banks were 100% responsible for being reckless with their lending. Many borrowers were 100% responsible for being reckless with their borrowing. Does this mean each party is 50% responsible? No, because each party had 100% ability to prevent the situation.

    My little running poll on this blog says banks, the Fed, politicians, home buyers, and Realtors all bear responsibility. Any one of these groups could have prevented the whole mess. It required all of them working together to cause the bubble and subsequent bust.

  4. James, it just doesn't bother me the way it bothers you, but I can understand that we all have things that get to us.

    For me, I would say what bothered me so much more was when people were thoughtlessly buying these things in the first place. First, the irrationality of thinking real estate values can rise forever, and all normal people can be priced out. Come to find out that most of the people doing this were never thinking about paying these debts back out of their lifetime wages.

    I feel that being offended by high prices is a normal reaction. If you went to the supermarket and ground beef were suddenly 20 dollars a pound, people would be outraged. But they will be wage slaves forever to an overpriced piece of crap house because just maybe they can get a piece of that action. Suckers!

  5. ANON:

    While the people who were dumb enough to buy overpriced homes may or may not be slaves to the house (as we are witnessing, many are not because they feel they are entitled to break their contract)...we still pay the price...that's what's bothering James.

    If all this occured in an isolated way...where ONLY the idiots were paying the price, then it wouldn't bother me either. But that's not the case. And it's not as if people did this accidentally. Their actions were done with intent and malice and that affects me and you.

    What do they call that in a court of law?

  6. When they walk away from the house though, it frees up the inventory to be repurchased at a sane price, and aids in price discovery. In my view, the damage has already been done when idiots overpaid for houses. And we are definitely all paying for it. My view or hope is that when they walk out on the mortgage, it helps with price discovery and helps to get this pain over with faster. I'm just more angry about the high price in the first place. I have zero respect for people who overpaid...but I was more mad a couple years ago. Now I just want it to be f'ing over already.

  7. What is the difference between IndyMac Bank and Bernie Madoff?

    Bernie's in Jail.

    The IndyMac people are sailing off newport and Starting PennyMac.

    Indymac and National City and all these others had no problem floating paper at people they were willing to walk away from too.

    GM floated pensions and benefits
    that they never could pay for.

    The point of bankruptcy is to establish a clean slate going forward.

    I'd be fine if everyone were filing bankruptcy, it would clean up the balance sheets across the board.

  8. Some of you need to read "The Sellout" by CNBC's Charlie Gasparino. If you do, you'll have a much better grasp of how and why it all happened. One of the main reasons that it happened, is that the dems, and to a lesser extent, the cons, wanted to make it easier for lower income families to get into a home. They lowered lending standards, and limited oversight. There were many components to it, however.

  9. James said...
    Its categories 3 and 4 that bother me. It's people in those two latter categories who are greedy and selfish.

    Welcome to Libertarianism.

    CEOs who laid off thousands of employees and took a bonus. Or, Private Equity funds that demolished businesses (workers) as part of "unlocking shareholder value."

    Now individuals had the opportunity to exercise the same self interest, and free marketeers are suddenly "concerned?"

    Be careful what you wish for. You may get it.

  10. Mark F: Yes, that's a good point. To average people, Wall St has gamed the system in their favor, and average workers get screwed in the process. I suspect that a lot of average people wouldn't lose any sleep over stiffing the bank as a way to "even up the score a little".

    The problem with stiffing the bank is that you lose your house, and that's a painful step for a lot of people.

  11. JackRussell said...
    The problem with stiffing the bank is that you lose your house, and that's a painful step for a lot of people.

    I don't think stiffing the bank is a good thing. My only concern is the selective use of collective/social imperatives by libertarian-minded folks.

    They're all for self-interest guiding the market. CEOs who layoff employees and give themselves bonuses for leading the company through "troubled times."

    But, when this shark-mentality becomes endemic, with the average individual focusing on his own amoral and self-interest priorities, suddenly we're all supposed to be concerned with the kind of nation we're creating?

    C'mon. I'm sick and tired of how the elite are supposed to be forgiven their harmful excesses, but it's everyone else's "duty" to think of the bigger picture.

    Economics isn't the only thing that has a "trickle down" effect. So does greed, and worshiping excess like a value to strive for ("Lifestyles of the Rich and Famous?").

    When CEO pay goes from 33x the average employee to nearly 300x, you can bet that the average individual isn't going to give Jack Squat the environment they contribute to by walking away from a commitment (which contractually allows them to).

    Collective concerns should be everyone's concern.

  12. Mark F said...
    "you can bet that the average individual isn't going to give Jack Squat the environment they contribute to by walking away from a commitment (which contractually allows them to)."

    Again, they are NOT contractually allowed to walk way. The contract simply states the recourse available to the lender if the borrower violates the terms of the contract.

  13. Mark F said...
    "My only concern is the selective use of collective/social imperatives by libertarian-minded folks."

    You keep trying to suggest that I believe in different standards for corporations than for ordinary people. That is false. I have stated several times that when two parties sign a contract, they are BOTH ethically obligated to try to fulfill their end of the agreement.

    I have also pointed out that while employers have a right to lay off employees at will, employees have a right to leave their employer at will. (The two weeks notice thing is a double standard which I disagree with.) On average throughout the business cycle, I bet far more people leave their employer voluntarily (often as part of trading up to a better job) than get laid off by their employers.

    It's obvious to me that you are intent on repeatedly misrepresenting my beliefs, as you have done so numerous times already.

  14. If this is still on the subject of ethics and stiffing a contract, keep in mind very rarely is a contract involving a mortgage between two equitable parties. On the one hand you have a bank with large amounts of resources and data and probably teams of attorneys. And on the other you usually have a family. THe contract is prepared by the banks for the banks. Getting the mortgage means accepting all conditions established by the bank unconditionally. Ones only recourse is to have the full cost of the home prepared through other means, like savings. So I find weak the argument that says that a buyer has to stick to the terms of the contract for "ethical reasons".

  15. Oh, Jesus, not that idiot McArdle again...