Tuesday, December 01, 2009

Law professor: Walk away

A law professor encourages people to walk away from their homes:
Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don't feel guilty about it. Don't think you're doing something morally wrong.

That's the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White argues that far more of the estimated 15 million American homeowners who are underwater on their mortgages should stiff their lenders and take a hike. ...

Better yet, you can default "strategically." Buy all the major items you'll need for the next couple of years — a new car, even a new house — just before you pull the plug on your current mortgage lender.
Scenario #1: You walk into a bank and take a bunch of money that doesn't belong to you. This is called theft.

Scenario #2: You take out a loan, promising to pay it back. Then, after you have the money, you decide not to pay it back. How is this not also theft?

I can completely understand not paying back a loan if you lose your job and are unable to pay back the loan. I can also understand if you get sick and end up with huge medical bills that make it impossible to pay back a loan. I can even understand not paying back a loan if the bank deceived you regarding what your payments would be.

However, if you decide not to pay back the loan simply because you overpaid for your house, then I consider that the moral equivalent of theft.

Keep in mind that being underwater doesn't mean you can't afford the monthly payments. It just means that the value of your house has fallen by more than the amount of your down payment (and any subsequent principal payments). A person who stiffs their lender because their investment didn't turn out as expected is scum. Just because you can steal from a bank doesn't mean you should steal from a bank.

Update: This is not just a moral issue. It's a practical one, too. Mortgage interest rates contain a risk premium. A society in which homeowners eagerly stiff the bank is a society in which it is riskier to lend. A society in which homeowners feel a moral obligation to repay their debts is a society in which it is less risky to lend. More risk means a higher risk premium, and thus higher interest rates. Less risk means a lower risk premium, and thus lower mortgage interest rates. Society as a whole benefits when everyone feels a moral obligation to fulfill their end of agreements.

73 comments:

  1. Phooey...

    A mortgage is not a "promise to pay back" money lent. A mortgage is a legal document between borrower and lender stating that the borrower will either pay off the loan at the agreed terms or surrender the house as repayment.

    Morality and ethics are all fine and dandy, but by the letter of the legal law, surrendering your house is perfectly in keeping with the terms of the binding document between parties. The bank or lender, through its lack of of diligence and due process, "overpaid" for the house as much as the borrower did, and therefore also assumed the risk you state the borrower must burden.

    How many folks in desperate financial straits continue to maintain a mortgage that erodes their ability to finance their lives as a result of this "moral" bolderdash? How many more have to suffer the scorn of walking until its realized that they are perfectly within their legal right to do so?

    For many, walking away is a sound, rational decision in keeping with the terms of the loan agreement. The only immoral part of the whole transaction is the self-serving housing types that would insist one remain in a detrimental lending agreement simply because its "the right thing to do". "Strategically" doing so just means that one has learned from the experience, and is preparing to avoid the same mistake again.

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  2. Scenario #1 is theft. There is a statute on the books that is enforceable.

    Scenario #2 is not theft. If you feel so strongly that it is, write to your Congressman asking them to introduce a bill to make it theft.

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  3. A mortgage is a legal document between borrower and lender stating that the borrower will either pay off the loan at the agreed terms or surrender the house as repayment.

    No, the agreement is not multiple-choice. The agreement was that the lender gives you money now and in exchange you give the lender the money back later with interest. Surrendering the house is the punishment for not adhering to the agreement, not the goal of the agreement itself.

    By your logic, it is perfectly fine to go around parking in handicapped spaces because you are willing to pay the associated charge. It's not a penalty, it's just the meter rate for getting such a nice spot!

    You do make a good point, though, in that lenders should have made the penalty more of a deterrent. That's why larger down payments are a good thing.

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  4. "Scenario #2 is not theft. If you feel so strongly that it is, write to your Congressman asking them to introduce a bill to make it theft."

    James said it's the "moral equivalent" of theft, not theft in a legal sense.

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  5. I guess its not theft if you stop paying on your mortgage and the bank reposes your house when its worth MORE than your loan amount right?

    Its only theft when the house is worth less than what you owe...the bank isnt stealing when they take a house from you that is worth more.

    Give me a break dude. Morality is in the eye of the beholder anyway. The same wife beating 3rd time divorcee redneck would say gays getting married isn't moral either. Pot calling the kettle black is never a strong argument....even when it comes to people not paying their morgages and handing the house back to the banks that played the odds too.

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  6. Anonymous said...
    "I guess its not theft if you stop paying on your mortgage and the bank reposes your house when its worth MORE than your loan amount right?"

    No, it's not. As Boston Bubble said, surrendering the house is the punishment for not adhering to the agreement. It's the borrowers responsibility to repay the loan. The borrower is responsible for fulfilling his end of the agreement. Furthermore, the bank incurs substantial costs in repossessing and selling a foreclosed home. In most foreclosure situations, both the bank and the borrower lose.

    Anonymous said...
    "Its only theft when the house is worth less than what you owe...the bank isnt stealing when they take a house from you that is worth more."

    Again, the bank incurs substantial costs in repossessing and selling a foreclosed home, so even when a home is worth more than the loan, the bank can lose money from a foreclosure. At least you now agree that it is theft when the house is worth less than the balance of the loan.

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  7. The bank has other recourse to get the money owed, just surrendering your keys does not relieve you from the debt. Only bankruptcy can do that. The bank or collection agency can and probably should hound you and sue you for every last cent they can get.

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  8. z, whether the bank has other recourse against you in the event that you default and the house is underwater depends on the terms of the loan. Hence, the two different types of loan: "recourse" and "non-recourse."

    This is an interesting question of morality, and good arguments can be made for either position. However, I would argue that sending jingle mail merely fulfills the terms of the loan. If a bank made a bad deal, that's the bank's problem.

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  9. One could argue on James's assertion about interest rates rising to account for risk that this could lower home prices in the future...thus having a beneficial economic effect in the long term.

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  10. One could argue on James's assertion about interest rates rising to account for risk that this could lower home prices in the future...thus having a beneficial economic effect in the long term.

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  11. I completely agree with the professor. None of these financial institutions have a social responsibilty to borrowers so why should the borrowers be responsible to them? Do you have short-term memories? Were lenders, mortgage brokers and credit rating agencies responsible the last five years? Was your government responsible in its lack of regulating the players in the game of greed? So don't give me this moral turpitude argument. It has no merit in this issue. What about all of these bank CEOs that were profiting from excessive risk taking? And you want poor little Jimmy who is 100k underwater to stay put and do the right thing? That is a bunch of crap!!!! Greed is the root of this problem and therefore all of the rules are out the window. Walk away from the loss like a company leaves town when they are suffering losses. Be a true American!

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  12. I posted the original anon comment above, and will follow with this quote, lifted from the link below:

    "Indeed, the ethical thing to do, is for each borrower who is underwater to look without blinders at their family's financial situation, not just now, but over the long term."

    Mish has been all over this, to the point that I am nothing more than a bobbing head of agreement, as referenced here: http://tinyurl.com/md7ct2

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  13. The mortgage agreement is a *secured* loan. The lender accepts his own risk of default, and that the property will revert to the lender.

    Why should lenders (investors) be immune from their own greediness? Their own committment to accept a default (and reversion of the property to the lender) during a bubble?

    Why is it all the borrower's responsibility when lenders/investors were *eagerly* throwing money at anyone willing to buy a home?

    Don't lenders/investors bear some responsibility for the financial bubble they helped create?

    I think the problem is that the mortgage modification process doesn't impact the lender with a principle write-down.

    The way mortgages have been bundled and collateralized into derivatives, and serviced by detached management companies (who make money from foreclosure fees), there's no way to modify the contract on behalf of perhaps thousands of investors. Instead of writing down the mortgage principle by $50k, the lenders created the problem where the only choice is $100k foreclosure.

    I've read about people walking away from their home and buying it back at foreclosure(!). There's something very wrong with the mortgage system when that's the only way to renegotiate the contract. (Not to mention the problem of derivatives which were at the heart of the loose mortgage lending that drove the bubble.).

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  14. Somebody that was dumb enough to pay bubble prices isn't a victim of theft.

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  15. "It's not just a moral issue..."

    It's not just a moral issue. In fact, it's not a moral issue at all.

    There are parallels in the case of corporate vs personal bankruptcy: in "Moralizing America" folks who declare personal bankruptcy are the scum of the earth. But when the folks who run corporations declare bankruptcy, it's just a natural part of the business cycle, God bless 'em, and thanks for your entrepreneurial spirit!

    You need a perfumed handkerchief to cover the stink of hypocrisy...

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  16. "Morality"???

    Who are you to pass judgment? Give me a break...

    Where were the calls for "Morality" when Wall St. knowingly bundled thousands of crappy mortgages into giant terds called "Mortgage Backed Securities" stamped them "AAA" and sold them as excellent safe investments all the while talking out the other side of their mouths internally about what "vomit" they were pushing?

    Where are the calls for "Morality" when the decision was made to allow banks to mark to model and extend and pretend?

    Where are the calls for "Morality" for the banks that are borrowing at 0% on the tax payers back and yet have to produce a single permanent mortgage modification or worse yet turn around and up the interest rate on credit card customers to 30%?

    Where are the calls for "Morality" to end the insestous cronyism between Wall St. and Washington D.C. that is the order of the day? What of the "Morality" of the Kleptocrats and Oligarchs currently destroying this country from the inside out like a cancer?

    You can stick your "Morality" in your pipe and smoke it. The sad joke is that when businesses and corporations walk away from a commitments when things go sour it is touted as "Strategic Restructuring" or "Cost Cutting", however when an individual home owner makes the very same cold, ration, decision about their own financial future it is "immoral".

    It is a load of hypocritical bull poop.

    As to your statement
    "However, if you decide not to pay back the loan simply because you overpaid for your house, then I consider that the moral equivalent of theft."

    Blow it out your bubblemeter!

    The reason anyone walking away "over paid" is because they were told "You guys can do this!" from 2002 to 2006 by the Investment Bankers, Realtors®, and Mortgage Brokers that benefited from the fees and commissions generated by the Ponzi Scheme that was the housing bubble. They were told "You can refinance before rate adjusts or the loan resets." and "Real Estate always goes up!", "This time it's different!" and "Suzanne Researched This!"
    and "Suzanne Researched This!" http://www.youtube.com/watch?v=Ubsd-tWYmZw

    If the easy money wasn't available, they couldn't have gotten in over their heads.

    I guess I really have to question your blog and your motivation at this point, right at the top it states "Housing prices were simply unsustainable." yet you sound like a mouth piece for the very same shysters that got us to that point.

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  17. "Were lenders, mortgage brokers and credit rating agencies responsible the last five years? Was your government responsible in its lack of regulating the players in the game of greed? So don't give me this moral turpitude argument."

    The problem is, these are not the only parties that you hurt when you default on your agreement to repay your loan. The loans have been sliced, diced, and resold, in many cases to parties who were not the profit driven, cold hearted robots you describe. Losses on mortgage backed securities have hurt large pension funds, which people rely on for retirement, and local municipalities which used them for savings. Pretending that by defaulting you are only hurting those who would have screwed you over in a second is an inaccurate euphemism.

    "You need a perfumed handkerchief to cover the stink of hypocrisy..."

    Or you could just not use the straw man fallacy. James didn't say anything about corporate defaults.

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  18. "Where were the calls for "Morality" when... It is a load of hypocritical bull poop."

    No, you're just throwing up a straw man. Just because James decides to post that he considers strategic default to be immoral does not mean that he has to enumerate everything that is immoral within the same post.

    "The reason anyone walking away "over paid" is because they were told "You guys can do this!" from 2002 to 2006 by the Investment Bankers, Realtors®, and Mortgage Brokers that benefited from the fees and commissions generated by the Ponzi Scheme that was the housing bubble."

    If walking away would only hurt the shysters who created this mess, then I wouldn't be arguing against it. These are not the people holding the loans, though.

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  19. Whew! Impassioned discussion here! Good to see such great discussions of a very interesting problem.

    One question though--if you walk away (have a foreclosure) aren't you prevented from obtaining a loan for another house for three years?

    So, there ARE costs to both the walker and the bank, right?

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  20. James didn't say anything about corporate defaults.

    No shit. That was kinda my point. We look at personal and corporate bankruptcy differently. Our culture has a long history of debtor's prisons for working folks, and liberal helping of forgiveness for the monied classes.

    A person who stiffs their lender because their investment didn't turn out as expected is scum.

    Funny, in my opinion, someone who acts within the terms of their private legal contract--whether that's staying and paying, or walking away and forfeiting--is acting rationally, and I don't see a moral component.

    Meanwhile, I think that someone who bankrupts their family and potentially puts their children at a long-term disadvantage because they didn't want to impinge on Bank of America's revenue stream is scum.

    Diff'rent strokes...

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  21. "Pretending that by defaulting you are only hurting those who would have screwed you over in a second is an inaccurate euphemism."

    You are taking what I said completely out of context. I was not suggesting that the borrower "hurt" anyone. A plain and intelligent reading of my post would reveal that responsible behavior is not a duty on the part of the borrower in light of the irresponsible behavior on the players mentioned. So be careful about your criticism!

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  22. Ok, one more. Just wanted to amplify a previous Anon posting. This thread nails the dynamic:

    Mortgages are not ethical documents, they are legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower two options: pay on time and in full, and keep paper title to the house, and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or, stop making payments, and hand the keys back to the lender.

    Morality and ethics don't even enter the equation. Either option is perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the four corners of the pages of the mortgage contract.


    (http://tinyurl.com/md7ct2)

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  23. And people still want to invest in this asset class? "They" have ruined housing as a stable asset.

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  24. "No shit. That was kinda my point. We look at personal and corporate bankruptcy differently."

    I consider them both safety nets to be used by the desperate and not abused. If it makes you feel any better, I am against all of the corporate abuses you listed too.

    "You are taking what I said completely out of context. I was not suggesting that the borrower "hurt" anyone. A plain and intelligent reading of my post would reveal that responsible behavior is not a duty on the part of the borrower in light of the irresponsible behavior on the players mentioned. So be careful about your criticism!"

    The borrower's agreement is not with the parties you mentioned. The borrower's agreement is with the mortgage holder. How does the irresponsible behavior of third parties who aren't in the agreement entitle those actually within the agreement to act irresponsibly toward each other?

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  25. "How does the irresponsible behavior of third parties who aren't in the agreement entitle those actually within the agreement to act irresponsibly toward each other?"

    You must be a Red Sox fan. I have no more time for you.

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  26. bostonbubble said...
    The problem is, these are not the only parties that you hurt when you default on your agreement to repay your loan. ... Losses on mortgage backed securities have hurt large pension funds, which people rely on for retirement, and local municipalities which used them for savings.

    Just because those investors have been victimized by derivative financial instruments which they didn't fully understand the risks of, doesn't mean the borrower is the victimizer. Investors and borrowers are both victims.

    Using your logic, I could say that if holders of complex mortgage-backed derivatives don't immediately sell them (to show their disapproval for these opaque, unregulated investment vehicles) then they're harming the borrowers (by continued propping up an unsound investment which promised unsustainable returns).

    The problem is that everyone's a little guilty. Buyers let their greed get to them. So did lenders, and the investors who's money was being lent.

    We need a way to renegotiate mortgage principle instead of just the interest. Investors need to take a hit as well as the homeowner. The way the investment vehicle is structured today, there's no middle ground. Investors are forced to take a $100k hit on foreclosure when they could have negotiated a $50k hit with the borrower.

    Otherwise, the only concession investors made was to allow the government to renegotiate interest rates. That's not much of a hit. They'll get less return over 30 years? When they should be worried about the return of their principle?

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  27. "The reason anyone walking away "over paid" is because they were told "You guys can do this!" from 2002 to 2006 by the Investment Bankers, Realtors®, and Mortgage Brokers that benefited from the fees and commissions generated by the Ponzi Scheme that was the housing bubble."

    Anybody that fell for that shit deserves to get fleeced. Sorry, that's not being a victim, that's being a dumbass. If the solution to being a dumbass and falling for the industry's malarkey is to strategically default on a loan you can afford, that makes you a dumbass scumbag.

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  28. "Just because those investors have been victimized by derivative financial instruments which they didn't fully understand the risks of, doesn't mean the borrower is the victimizer."

    When the borrower defaults, he is a victimizer. You are right - there are other victimizers too.

    "Using your logic, I could say that if holders of complex mortgage-backed derivatives don't immediately sell them (to show their disapproval for these opaque, unregulated investment vehicles) then they're harming the borrowers (by continued propping up an unsound investment which promised unsustainable returns)."

    That's a interesting extrapolation, but it's not really equivalent. The lender didn't enter into an agreement whose purpose was to sustain a particular price level. Within the context of the mortgage agreement, the primary purpose that the lender was to fulfill was the advancement of funds needed to initially buy the house. I doubt that there was ever any expectation on the part of the borrower that the lender (and its successors) would attempt to prop up prices thereafter as part of the agreement. While yes, it might indirectly help the borrower if the derivatives holders sold those derivatives, that was not explicitly nor implicitly part of the agreement, and it certainly wasn't the main purpose of the agreement like repayment with interest was.

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  29. bostonbubble said...

    "No, you're just throwing up a straw man. Just because James decides to post that he considers strategic default to be immoral does not mean that he has to enumerate everything that is immoral within the same post."

    No, I am not throwing up the "straw man", don't assume to tell me what I did in my own post. If you truly read what I posted and thought critically about it you would understand that "straw man" does not even remotely apply, the issues I posted do not lead away from the original topic but in fact are only some of the causes of and continue to be causes for why home owners are now put in the position they are in. I don't expect James to enumerate everything that is immoral within the same post, at the same time don't expect me or anyone else to ignore what got us to where we are now. To further point the finger of morality at just the end result is at the very least farcical.

    "If walking away would only hurt the shysters who created this mess, then I wouldn't be arguing against it. These are not the people holding the loans, though."

    Wrap your head around this:

    Walking away isn't what is hurting the people holding the notes.

    The current holders were hurt the minute they were duped into buying what Wall St. was selling. Entire MBSs were comprised of paper that originators and brokers knew dam well could not EVER be paid off (High DTIs, NINJAs, Interest Only ARMS, Negative AMs) or sold off with a percentage of mortgages in multiple tranches already in default. If want to moan about how those holding the loans are being hurt fine. However to point the finger at the homeowner that walks away is both ignorant and incorrect. The note holders were hurt by the snake oil salesmen that made a bundle hawking their wares, the rating agencies that put the lipstick on the pig and by their own inability to understand what it was they were actually buying.

    In my mind to now point at a homeowner walking away from a mortgage that was doomed from the minute it was spat out of an originators printer is a "straw man".

    "that was not explicitly nor implicitly part of the agreement, and it certainly wasn't the main purpose of the agreement like repayment with interest was."

    What was explicitly AND implicitly part of the agreement was the "You no payie mortgage, we takie you housie" part of the agreement. So by your own argument, where is the lack of morality? The contract clearly stated what was expected of both parties and also spelled out consequences of what would happen should either party not perform. In buying the MBS the holders in effect became party to the terms again which are spelled out clearly. So where does morality come into play again? Seems to me the predetermined contract is executed either way as agreed beforehand by all parties involved. So why are you whining about the holders again?

    Honestly for a housing bubble blogger you don't come off very bright and don't seem to quite get it yet.

    Instead of bickering back and forth here all day long....

    Try this one on for size. A little experiment for you.

    Go down to the court house pull up the names and addresses of those being foreclosed on currently.

    Contact them.
    First ask them if they really think that by losing the roof over their head, uprooting their family, and destroying their FICO score for 10 years they are really "sticking it to the man" and screwing someone over.

    Second, share with them your little gem of idea about the morality of mortgage defaults and see what they think.

    I suggest you only perform part 2 of the experiment either over the phone or in person while wearing riot gear.

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  30. bostonbubble said...
    The lender didn't enter into an agreement whose purpose was to sustain a particular price level.

    If that were true, the mortgage loan wouldn't be supported by an appraisal and expectation that the house will act as collateral.

    The investor made as much an assumption about sustainable price levels as the borrower.

    I agree that borrowers walking away from homes has wide-ranging effects. But, the very first wide-ranging effect was Wall St. finding a way to hide lending risk in complex, opaque and unregulated derivative investments.

    The next wide-ranging effect was the division of labor into separate agencies (brokering, banking, securitization, investment, servicing) that were each fee driven, with no concern for how maximizing their own fees would impact other participants.

    The next wide-ranging effect was lenders *eager* to throw money into those investments which they didn't even understand. (Even CEOs of banks holding derivatives couldn't understand them.).

    So, it seems simplistic to complain that borrowers walking away from the tail end of this mess are guilty of wide-ranging effects.

    The ship already left the harbor. There's no reason for borrowers to feel more responsibility to their fellows than anyone else felt as they contributed to the mess over the last 5-10 years.

    IMO, the only solution is orderly dissolution: principal write-down. The problem is that ownership of many mortgages isn't clear due to their securitization using derivatives. Government tried to enact a universal power to renegotiate principal, but investors opposed it. All they consented to was interest renegotiation.

    Now investors are reaping what they sowed: 1) Initial greed and oversight as they invested in derivatives, and 2) greed that interest renegotiation would be sufficient to preserve their capital.

    The whole thing is a dirty game. Nobody has anything to be proud of. But, it's childish to single out borrowers as if they're thieves. They're doing nothing more than corporations choose to "strategically reorganize" (causing wide-ranging effects for those who are laid off).

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  31. oh and for kevin....

    "Anybody that fell for that shit deserves to get fleeced. Sorry, that's not being a victim, that's being a dumbass. If the solution to being a dumbass and falling for the industry's malarkey is to strategically default on a loan you can afford, that makes you a dumbass scumbag."

    And yet many did,
    (Keep in mind however, just because you didn't fall for it doesn't make you a not a dumb ass or a scum bag.)
    Which is great because that is exactly what Washington D.C. and Wall St. wanted. They probably called them dumb asses and scum bags back then too. Thank the lord they did fall for it because, if they didn't they would have had to find something else to bubble up.

    Truth is many could / can afford it, that is until / when their ARM adjusts or Negative AM resets.

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  32. "However to point the finger at the homeowner that walks away is both ignorant and incorrect. The note holders were hurt by the snake oil salesmen that made a bundle hawking their wares, the rating agencies that put the lipstick on the pig and by their own inability to understand what it was they were actually buying."

    I agree with the second sentence. It it no way supports the first, though. The loan holders were hurt by a myriad of parties, and that includes strategic defaulters. It is disingenuous to argue that those not paying their loans are not hurting those who hold the loans.

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  33. "If that were true, the mortgage loan wouldn't be supported by an appraisal and expectation that the house will act as collateral."

    That is an ancillary part of the agreement, not its main purpose. The main purposes of the mortgage agreement are:

    1) For the borrower to receive money now.

    2) For the lender to receive money and interest later.

    These are the fundamental ingredients of the agreement. The parties would not enter into the agreement if these ingredients were not there, and everything else about the agreement is there solely to support these goals. The appraisal and collateral support point #2, they are not motivations for the agreement in and of themselves.

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  34. bostonbubble said...
    The appraisal and collateral support point #2, they are not motivations for the agreement in and of themselves.

    I guess it depends on how you define "support." An appraisal and collateral are prerequisites of the investor to hand over the money.

    As much of a prerequisite as the borrower agreeing to repay the money. So, I'm not clear why you're demoting that aspect.

    Investors wouldn't have handed over their money so easily (undocumented applications, zero-down, etc.) unless they themselves believed the property's value would continue rising, protecting the investor from a default.

    So, it seems like investors are as guilty of the same speculation as borrowers. I would just say that investors have a greater responsibility for that speculation because *it was their money*. Why should the borrower treat the investor's money with more responsibility than the investor did?

    Again, I'm not defending borrowers. The whole thing is dirty. But, I think investors are more dirty than some people want to acknowledge.

    Also, we've talked about how borrowers have negatively affected investors (and investors have affected borrowers, by rejecting government-assisted principal write downs). But, we should keep in mind how those guys (and the financial institution that enabled them) impacted a lot of us who didn't borrow, nor lend. People who were laid off, their 401ks lost 40%, etc.

    Subprimes were a very small fraction of the total mortgage market. So small that Bernanke believed they wouldn't seriously affect the economy (2 months before the meltdown).

    It's amazing that a blog about the mortgage meltdown focuses readers on quibbling over whether 20% of the mortgage borrowers were corrupt (or the lenders to those 20%) -- when that 20% (and the system that enabled them) affected 100% of Americans.

    It's not very informative to lead everyone to emotional sub-topics.

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  35. I think Boston Bubble has hit things on the head, as well as James and kevin. That parking ticket analogy was BRILLIANT BTW.

    Just imagine taking out a loan with a friend. You ask for $10 bucks to buy something, they give it thinking you'll give it back, BUT THEN, they ask, "What if you don't give it back?" So you say, "I'll give you my lawnmower."

    Same with houses. Intentionally giving back your house is like deciding to keep the money for yourself. What could make this worse?

    If you find out your lawnmower is busted and is worthless. So your friend, who thought he could get his money back in the lawnmower, is now stuck with nothing. Meanwhile you did what you wanted to, and got rid of some trash in the process. That's the equivalent of fraud (making the lawnmower out to be worth something, but then it isn't).

    Walking away when underwater simply because you think it is a "business contract," is immoral, flat out no doubt about it.

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  36. "I guess it depends on how you define "support." An appraisal and collateral are prerequisites of the investor to hand over the money."

    If the lender were absolutely 100% guaranteed to get the money back (with interest), an appraisal and collateral would be superfluous, and I see no reason why they would be required. That is my basis for calling them "support."

    "Again, I'm not defending borrowers. The whole thing is dirty. But, I think investors are more dirty than some people want to acknowledge."

    I completely agree.

    "It's not very informative to lead everyone to emotional sub-topics."

    You're probably right.

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  37. Infinity8Ball said...
    Just imagine taking out a loan with a friend. You ask for $10 bucks to buy something, they give it thinking you'll give it back, BUT THEN, they ask, "What if you don't give it back?" So you say, "I'll give you my lawnmower."

    That's a non sequitur.

    1. The loan agreement stipulated that if my friend doesn't pay, I get the lawnmower. It wasn't something that came up later like a renegotiation of the agreement.

    2. The loan was for %100 of the lawnmower, with no money down, and no verification that my friend really had income to pay me back. I didn't care because lawnmower values were rising at astronomical rates. I believed I could *make a profit if my friend defaulted!!!*

    3. It wasn't between me and a friend, but a stranger, through a complicated investment vehicle designed to hide the kind of risks such as my friend not having a job. I didn't care because the investment vehicle was rated AAA and payed almost twice the interest of other AAA-rated securities. I didn't bother to figure out why. I just threw my money at it, digging those fantastic returns.

    It's so easy to make purchasers the whipping boy. All we have to do is dispense with *everything else*.

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  38. bostonbubble said...
    If the lender were absolutely 100% guaranteed to get the money back (with interest), an appraisal and collateral would be superfluous, and I see no reason why they would be required. That is my basis for calling them "support."

    I still don't understand your point that the property (and its potential to repay the investor) isn't as primary to the transaction as the agreement to repay (and, hopefully, he investor's due diligence to verify that ability).

    If the investor wanted a guaranteed investment he would have put his money in a CD paying 2% APR at the time. Instead, he put his money in a mortgage-backed derivative paying 6% which he knew wasn't guaranteed (but, didn't fully appreciate how risky it was due to the derivative being constructed to hide the risk).

    So, the property (and the agreement to accept it if the borrower stops paying) was as integral to the agreement as the borrower promising to pay (under the terms that he could let the property go back to the investor).

    I'd say the property was even *more* important than the agreement to pay. Property values were going up so quickly had a lot to do with lowered mortgage standards. Investors knew borrowers were buying more than they could afford with the hope that they could trade out of the property with a leveraged profit. And, investors thought ever increasing values would prevent zero-down borrowers from walking away. In that sense, borrowers were just conduits for investors to leverage their own money.

    I prefer the term "investor" over "lender" because lender sounds clinical. It loses sight of the fact that at some point, some real person chose to depart from their money. And, they did so with many of the same greed-based factors that borrowers were using.

    The contract was pretty clear. I give the money. You stop paying, I get the house. The motivations both parties had are where the real answers lie.

    Another aspect of this is whether borrowers should be exempt from demands for the balance due after foreclosure settlement?

    In AZ, they had a law prohibiting mortgage holders from suing borrowers for the balance. The state recently repealed that law because it was benefiting so many people who bought homes as investments (to rent, or flip). There was a huge outcry, so they reinstated the protection.

    Were some borrowers different than others? Does the owner occupier deserve more forgiveness/protection than the guy like my friend who bought 8 homes and an apartment complex (and is now letting them all go back)?

    I don't think whether someone was more aggressively a speculator changes the contract that the borrower/investor agreed to. I don't think it changes the investor's responsibility concerning who he gives his money to.

    But, I think it's different somehow. Maybe like the definition of obscenity. I know it when I see it, but don't know how to define it.

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  39. "I still don't understand your point that the property (and its potential to repay the investor) isn't as primary to the transaction as the agreement to repay (and, hopefully, he investor's due diligence to verify that ability)."

    My point was that the lender did not enter into the agreement in order to obtain a house. Their goal was the interest. If the lender's goal was to own houses, why would they have not simply bought houses instead of going about it in a roundabout way?

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  40. A few weeks back I was watching Suzie Orman (the remote was all the way across the room) and she told someone that had the income to make payments to walk away from her upside down house. I think the amount of "strategic default" is going to be HUGE.

    Also for the comments about promise to pay. The 1st line of every mortgage note starts by saying that there is a borrower promise to pay.

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  41. To be fair to James, he is not saying that walking away from your mortgage obligation meets the legal definition of theft or fraud, which it clearly doesn't. One could also state that smoking cigarettes are the moral equivalent of committing suicide. The problem with this, as any libertarian would agree, is that smoking is a personal choice and really has very little to do with morality. Either way, it is difficult to prosecute the "moral equivalent" of any crime.

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  42. bostonbubble said...
    My point was that the lender did not enter into the agreement in order to obtain a house. Their goal was the interest. If the lender's goal was to own houses, why would they have not simply bought houses instead of going about it in a roundabout way?

    I agree. But, if the investor didn't want to own a house (or accept that possibility) they would have put their money in a CD or US Treasury bond.

    It seems like you're saying the investor should be completely absolved from their responsibility for choosing to invest money in mortgages instead of CDs. Their own responsibility for chasing higher gains as a result of higher risk.

    Obtaining the house as a result of default is why the interest the borrower had to pay was only 8% instead of 30%. The fact that the investor might obtain the house is why the investor received 8% instead of 2% on a CD or Treasury.

    It's not realistic to say the borrower agreed to pay -- end of sentence. It wasn't the end of sentence. The agreement involved walking away.

    I think James's remark is relevant here. He observed that a society where people make cold, self-interested decisions (within the terms of the contract) will create a worse society.

    I tend to agree with that. Unfortunately, I think it's a byproduct of a society where CEO pay has risen from 33x the average worker to 300x. Where CEOs make cold, calculated decisions to cut jobs -- and give themselves bonuses instead of being ashamed.

    A byproduct of the top tenth of income earners benefiting the most from decades of deregulatory politics. The top tenth of 1% having the same income share as the bottom 50%.

    It seems like the less-government, think-only-of-youself mentality has finally come home to roost. Why shouldn't a gasbag like Suzie Orman tell the average, unthinking individual "screw everyone else. Why should you sacrifice for the good of society when those who benefit the most don't?"

    I think it's terribly sad. But, I think most people who are eager to dump on borrowers are the least likely to look at the macro view (the disregard for the kind of society we're creating by pursuing self-interested free-market principles like a religion.).

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  43. "It seems like you're saying the investor should be completely absolved from their responsibility for choosing to invest money in mortgages instead of CDs. Their own responsibility for chasing higher gains as a result of higher risk."

    No, no, definitely not. The lender should bear the consequences of stupid lending.

    "I think it's terribly sad. But, I think most people who are eager to dump on borrowers are the least likely to look at the macro view (the disregard for the kind of society we're creating by pursuing self-interested free-market principles like a religion.)."

    I am not trying to dump on borrowers. James' post was about a law professor encouraging borrowers to walk away, hence the focus on borrowers in this thread. I couldn't agree more that lenders, the government, brokers, etc. are just as culpable.

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  44. I guess I really have to question your blog and your motivation at this point, right at the top it states "Housing prices were simply unsustainable." yet you sound like a mouth piece for the very same shysters that got us to that point.

    The motivation of this blog seems to be to downplay the role of deregulation in the formation of the housing bubble. The contributors don't hide their desire to promote a pro-libertarian agenda. Unless you are drinking the kool-aid, you're either confused or employing a straw-man fallacy.

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  45. This post will set a record for comments I imagine!

    My line:
    When housing is pumped as an investment instead of a place to live then you are going to attract gamblers. Lending went silly on real estate and people were buying a basic option on a homes future appreciation and the banks were happy to lend. Now those options are expiring worthless and the undelying collateral (the property) is impaired. In my mind walking away is a sound investment decision on a poor bet.

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  46. There should be the law that if you want to escape from your loan (aka your responsibility), you mist file BC first!

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  47. All nice and fine. But consider that the dot com crash and housing crash were orchestrated in an effort to remove the wealth (and political power) of the American middle class, to help pave the way for the new socialist world regime run by the UN, and it all begins to make sense. I say stop pretending that the UN Agenda 21 and financial oligarchy does not exist... let the long-time international central banking families screw themselves.

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  48. Nothing wrong with not paying and walking away. This is a business decision not a religious choice.
    A home is an investment , the bank invests with you in exchange for equity and an interest rate..the rest is BS.
    If you owe more that it is worth walk away or renegotiate with the bank.

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  49. Anonymous said...
    There should be the law that if you want to escape from your loan (aka your responsibility), you mist file BC first!

    That concept doesn't have a happy history. When the bankruptcy law was changed around '95 to make it harder to get out of credit card debt, credit card companies took predatory lending to new levels.

    I could go along with your idea if mortgage lending was tightly controlled. But, I get the impression that they "make them pay it back" crowd are the same people who believe in less government.

    At some point lending has to be considered a bad investment. Where the investor bears some responsibility for poorly choosing where to invest.

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  50. Whatever reckless, greedy lenders and borrowers do to each other is fair game these days (unfortunately). Encumbering yourself with morals in these financial transactions is like showing up to a street fight and constraining yourself to the Marquess of Queensberry rules of boxing.

    What really is unfair is to throw American taxpayers under the bus to try to mitigate the costs to the guilty parties.

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  51. Why should rich people who own corporations have all the fun? They take your money and declare bankruptcy everyday and no one calls it stealing. Is it only stealing if a consumer does it to a bank? Screw the banks for every cent they've stolen from everyone.

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  52. Wow look at all the posts. We should start talking about gay marriage and abortions too! Morality arguments always get those "holier than thou" types something to get beet red in the face about. Anyone want to bring up Jesus, I think this thread needs some more "morality" talk.

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  53. "Wow look at all the posts. We should start talking about gay marriage and abortions too! Morality arguments always get those "holier than thou" types something to get beet red in the face about. Anyone want to bring up Jesus, I think this thread needs some more "morality" talk."

    So your point is that we should never talk about what is right or wrong because some people take completely unrelated arguments too far? Surely you must consider some things wrong. For instance, murder (I hope)? There are plenty of things for which you don't need to rely on religion to consider wrong. The question at hand is whether "strategic default" fits the bill. My position is that it does because it is a societal norm that using a safety net set up to help the destitute (foreclosure in this particular instance) is wrong when you don't need it.

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  54. bostonbubble said...
    My position is that it does because it is a societal norm that using a safety net set up to help the destitute (foreclosure in this particular instance) is wrong when you don't need it.

    I still don't understand your position. Mortgage default is a contractual business agreement.

    Nothing in the contract says "you won't default if..." If investors expected such a limitation they would have written it into the contract.

    What upside-down homeowners are doing is nothing different than the elite have done for the past 2 decades. Looking out for #1. Living up to the letter of the law, not the spirit of the law. A belief that their actions couldn't harm the society (and its institutions) that their prosperity depends upon.

    It's sad. But, if this is what it takes to drive home the effects of Reaganomic self-interest...

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  55. Capitalism is based on the idea that the greed of all involved parties will counteract each other until you magically arrive at a fair equilibrium. Greed, however, has been considered immoral in almost all religious and ethical traditions.

    In other words, our entire economic system depends on everybody being as immoral as they can possibly be.

    When someone starts telling you that you are being too greedy in a greed competition, not only are they playing you for a chump, they are actually distorting and hurting the efficiency of our capitalist markets.

    As Mr. Gekko once said, "greed is good.

    Greed is right.

    Greed works.

    Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

    Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind.

    And greed -- you mark my words -- will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

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  56. "So your point is that we should never talk about what is right or wrong "

    My point is, what is wrong is in the eye of the beholder. I dont think its immoral for someone to give their underwater home back to the bank....and I dont even own a home.

    The banks played the game and they lost. The "home owners" played the game and they lost too. What is immoral in my book is the finger pointing holier than thou opinions. But hey, thats what I think is immoral and you think what you are doing is just fine.

    See how opinions work? Everyone has one and they arent all the same.

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  57. "[U]sing a safety net set up to help the destitute (foreclosure in this particular instance) is wrong when you don't need it."

    "Foreclosure" is "a safety net set up to help the destitute"?

    This may be one of the more misguided things I've read in the last several months...

    Also, can we have a moratorium on the use of the phrase "straw-man"? I think it's time to set the straw-man on fire, and send him on his way.

    Let's all expand our arsenal, shall we?
    http://www.nizkor.org/features/fallacies/

    :)

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  58. The mortgage contract comes with a "put" option known as the "foreclosure process". You paid extra for this option--if it weren't there, the interest rate would have been lower. (There's also a "call" option, in your ability to prepay the loan; you also paid extra for this.)

    The banks, if they are losing money on foreclosures, mispriced the put. Too bad. They're big boys, it was their job to price it right. (Essentially, they underestimated the volatility of housing prices. Sucks to be them.)

    Doesn't sound like a moral issue to me.

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  59. It's a secured loan. The loan is secured by a home. The homes were over appraised and this whole mess was created, designed, and engineered by the banking industry. Sure I'll pay my mortgage if the home they sold me was actually worth the value for what they sold it to me. It's comparable to a company selling me a BMW and then finding out it's really a FORD Pinto when I got it home. This was a pre-meditated scam by the banks. When you get a chance, do a little research on the financial term "DERIVATIVES". The entire country should walk away from their upside down homes.

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  60. Anonymous said...
    "Sure I'll pay my mortgage if the home they sold me was actually worth the value for what they sold it to me."

    Sorry dude, but unless you bought an REO you didn't buy your home from the bank. You bought it from the previous resident. You negotiated the price with that resident when you bought. If the price was too high, you could have walked away. The fact that you won't even acknowledge this suggests you're just looking for a scapegoat to blame your dumb decision on.

    I knew there was a bubble. Why didn't you? I chose to rent for the past decade while selfish, greedy homeowners like you bragged about how much your home was rising in value. This blog is filled with old posts where homeowners like you called us "bitter renters" because we refused to participate in the housing bubble. This blog was created before the bubble's peak to warn people like you, and the response from homeowners and real estate agents was insult after insult. You're not a victim. The victims are the responsible renters who have been priced out of homeownership for the past decade while people like you bid housing to sky-high prices, thinking it didn't matter what the price of the home was, just the initial monthly payments.

    The vast majority of homes weren't "over appraised". They were appraised using the same flawed mark-to-market appraisal method that's always used.

    The fact that you think "DERIVATIVES" is some obscure financial term that most readers of this blog aren't familiar with suggests you're generally financially clueless. Take responsibility for your own decisions. Take responsibility for your own ignorance.

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  61. "Sorry dude, but unless you bought an REO you didn't buy your home from the bank. You bought it from the previous resident. You negotiated the price with that resident when you bought. If the price was too high, you could have walked away."

    Yeah Im gunna have to say "sorry dude" to you as well James. Cause if the prices witht he resident was too high, the bank would have walked away too.

    Did you know the bank was the one with the actual money paying for the home?

    James if you were a bank (and staying with that guys pinto BMW example). If I asked you for $80K to buy a 1970 ford pinto, using that car as collateral if I default, would you loan me the money to give to the previous owner?

    Of course not. Dont pretend the banks were "moral" and that people walking away from their pintos are the scum of the earth. Quit the finger pointing. The entire situation is a cluster f*ck.

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  62. Anonymous said...
    "Did you know the bank was the one with the actual money paying for the home?"

    The bank didn't pay for the home directly. The bank LENT THE MONEY TO THE HOME BUYER so he could make the purchase. The home buyer AGREED TO PAY BACK THE LOAN. The home buyer who walks away is breaking the agreement. Again, we're not talking about homeowners who CAN'T pay. We're talking about homeowners who can pay but JUST DON'T WANT TO.


    "James if you were a bank (and staying with that guys pinto BMW example). If I asked you for $80K to buy a 1970 ford pinto, using that car as collateral if I default, would you loan me the money to give to the previous owner?"

    No. The banks were stupid. They should expect to lose money when they behave like that. However, that doesn't mean it's ethical for the greedy homeowner to stiff the bank just because his investment didn't go the way he hoped.

    If someone leaves the keys in their car, they should expect that someone will steal it. It's a very stupid thing to do. That doesn't mean the thief is behaving ethically when he steals it.


    "Dont pretend the banks were 'moral' and that people walking away from their pintos are the scum of the earth."

    I never made a claim that the banks were 'moral'. I challenge you to find anywhere on this blog where I have said that.

    ReplyDelete
  63. Anonymous said...
    "James if you were a bank (and staying with that guys pinto BMW example). If I asked you for $80K to buy a 1970 ford pinto, using that car as collateral if I default, would you loan me the money to give to the previous owner?"

    For the record, if I were a bank I would never lend to anyone who has EVER declared bankruptcy or gone into foreclosure. Even as the single human being I am, I would never lend money to such a person. A leopard doesn't change its spots. A person who stiffs one lender once will stiff others in the future. When some foreclosures are strategic defaults, I would have to assume that anyone who has gone into foreclosure may have been a strategic defaulter.

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  64. "I would have to assume that anyone who has gone into foreclosure may have been a strategic defaulter."

    ok but that didnt answer my question. I was wondering if you would loan an unreasonable amount of money to someone with the only collateral being something totally worthless. (Like a $650K loan using a prebubble $130K home as collateral)

    At any rate, banks not only bought these homes for people without a simple background checks, but would do it again if given the chance.

    The banks caused all of this and people are pointing the finger at the people who got caught up in it as immoral.

    I wanna buy a home at a realistic price, so I want EVERYONE to hand their homes back to the banks. I think its immoral that the banks pushed homes to astronomical artificial prices. I dont feel sorry for those S.O.B.s....not in the slightest.

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  65. Anonymous said...
    "ok but that didnt answer my question. I was wondering if you would loan an unreasonable amount of money to someone with the only collateral being something totally worthless."

    I did answer your question in the comment prior to the one you quoted. Here's my answer again:

    No (I would not lend using worthless collateral). The banks were stupid. They should expect to lose money when they behave like that. However, that doesn't mean it's ethical for the greedy homeowner to stiff the bank just because his investment didn't go the way he hoped.

    If someone leaves the keys in their car, they should expect that someone will steal it. It's a very stupid thing to do. That doesn't mean the thief is behaving ethically when he steals it.


    Anonymous said...
    "The banks caused all of this and people are pointing the finger at the people who got caught up in it as immoral."

    Sorry, the banks did not cause this all by themselves. They had lots of help from the Federal Reserve (which held interest rates too low for too long), the National Association of Realtors (which kept churning out inflated estimates of future home price increases), politicians (remember Bush's "ownership society"), television (remember "Flip This House", "Flip That House", and "Property Ladder"?), and home buyers (who often got into bidding wars trying to buy a house at any price).

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  66. borrower-lender... buyer-seller... both sides of the same coin. Each is a counterparty in the transaction. Can't castigate one without the other, whether on moral or ethical grounds.

    On the question of morality... there are limits to caveat emptor and the presumption that a moral dilemma only rests with one party. Sure, part of the fault rests with the buyer and those that walk away have dubious morality. No argument from me there. But when the banks were artificially inflating values all around the country with phoney home appraisals, they were committing fraud at a systemic level. To fault the buyer alone who probably stumbles into this wider deception paints an incomplete and disingenuous picture. Sure, the buyer was stupid. But you're not arguing intelligence here. You're arguing morality. And fraud, even if systemtic and widely accepted, is just as immoral, if not criminal.

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  67. I knew there was a bubble. Why didn't you? I chose to rent for the past decade while selfish, greedy homeowners like you bragged about how much your home was rising in value.

    Let's say you sign a 5 yr lease on a unit (business, residential, or whatever) with a clause that says you must vacate and pay one year's rent penalty if you break the lease for any reason. Then the next month a neighbor moves into an identical unit (next door) with otherwise identical lease terms but their rent is half of yours. What do you do?

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  68. Anonymous said...
    "What do you do?"

    I'd be pissed, but I'd honor my end of the rental agreement. I have always honored my end of rental agreements. I have never broken a lease and I've never been late on my rent.

    (BTW, I'd never sign a 5 year lease.)

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  69. As someone who has the means to pay and is walking away I feel pretty good about it. I have a 400k note on a place worth 150k. Call me scum or whatever, but the banks caused the runup in prices. Unfortunately I wasn't smart enough to realize the bubble, but I'm not going to pay $1,000,000 over the next 40 years for my home. I'm also not saying that making the payment is easy. Paying 50% of your gross for housing is not ideal, but if you don't ever do anything it can be done.

    I've actually managed to save $50,000 during the foreclosure process which has already lasted a year. Gotta love living in a non-recourse state. I would be surprised if in a few years someone won't give me a loan on a 200k place when I have 100k to put down and my FICO is back in the upper 600s. I'm sure 90% of you hate me right now, but this puts my family in the best possible financial situation. I really don't care if Bank of America loses 250k on my loan... they shouldn't have bought CW. This all comes back to the down payment. If I had been required even a 10% down payment (40k) it would be hard to let go even being so far underwater. However I put nothing down and the seller paid closing costs... I literally have no skin in the game and I'm essentially gaining $800,000 if you consider what I would have to pay in interest by walking away.

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  70. Anonymous said: "This all comes back to the down payment. If I had been required even a 10% down payment (40k) it would be hard to let go even being so far underwater."

    I think this is the real crux of the issue. It was colossally stupid of lenders to lend vast sums of money for mortages without having borrowers pony up some of their own money. Now the government is doing it through FHA, VA, and USDA. Bend over taxpayers.

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  71. Mark said...
    That's a non sequitur.

    "1. The loan agreement stipulated that if my friend doesn't pay, I get the lawnmower. It wasn't something that came up later like a renegotiation of the agreement."

    Non sequitur means it doesn't logically follow. It does logically follow that a person could ask for a lawnmower as collateral. Plus your objection is easily countered if we just make it all part of the same deal (as banks do at closing).

    "2. The loan was for %100 of the lawnmower, with no money down, and no verification that my friend really had income to pay me back. I didn't care because lawnmower values were rising at astronomical rates. I believed I could *make a profit if my friend defaulted!!!*"

    You're reading into the situation things that weren't stated. This doesn't make it non sequitur either. Also, the collateral is worth more than the loan in my example... or at least was made out to be. Even if both parties believed the collateral to actually be worth enough to BE collateral, and then the borrower finds out its true value and defaults on it... that's not a business deal, it's fraud.

    "3. It wasn't between me and a friend, but a stranger, through a complicated investment vehicle designed to hide the kind of risks such as my friend not having a job. I didn't care because the investment vehicle was rated AAA and payed almost twice the interest of other AAA-rated securities. I didn't bother to figure out why. I just threw my money at it, digging those fantastic returns."

    THIS is off topic. I'm talking about the morality of defaulting on a loan intentionally when you find out the value of your collateral. Not the ethics of those buying the debt later.

    It boils down to this: Those who advocate allowing someone to walk away assume that you owe the bank a house, and therefore can just GIVE them a house.

    But you don't owe the bank a house, you owe the bank money. And the bank, trying to get that money back from you, has the legal right to sell your stuff in order to recoup it.

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  72. I think there is clearly a lot of scum here. Thank you for screwing over my generation. Go to hell.

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  73. Yes indeed...you can at least clearly point out the irresponsible douchebags on this thread quite easily...hiding behind the excuse that if others do it, I should too.

    Tell me...who put a gun to these stupid greedy bastard homeowners' heads and force them to take out loans they knew full well they couldn't repay or had no intention of repaying? Who's fault is that?

    Who exactly was shoving cocaine down their noses? 30 year loans were ALWAYS an option...so why didn't these fkers take those instead of NEGAMS and I/O and Pick a payments? HMMMM???

    Homeowners who walk away WHO CAN pay their mortgage should never be allowed to buy another piece of property ever again.

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