Strategic walkaways gets the NYT treatment today. The data is fairly impressive:

-Foreclosure procedures have been initiated against 1.7 million households.
-Average borrower in foreclosure has been delinquent for 438 days before eviction;
-This is up from 251 days in January 2008.
-More than 650,000 households had not paid in 18 months.
-19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate a year earlier.

I find the rationalizations by the people who engage in the process rather interesting. The excuses — and they are simply excuses — consist of a long list of reasons that only hint at the simple truth of non-payment:

-The bank wouldn’t help
-“They’re all crooks.”
- “free rent”
- we have little to lose
- its self-preservation

A few people hint at it, but no one actually makes the rational claim as to the math of strategic (rather than emotional) default.

I would like to read one person make the honest statement:

“I’ve done the math, and it doesn’t make sense to pay the mortgage. I can rent the same house a block over for half of what I am paying. I am so far underwater that if I stay here, struggle,  and make all the payments, in 10 years, I will merely be back to break even. Why bother?

Like all the big banks have all done, I’ve made the calculation that it is financially beneficial to default on the loan — so that is what I am doing. As Sonny was told in the Godfather, “This is business, not personal…”

>

I suspect this will be an ongoing story for the next 5 years . . .

>

>

Source:
Owners Stop Paying Mortgages, and Stop Fretting
DAVID STREITFELD
NYT, May 31, 2010 
http://www.nytimes.com/2010/06/01/business/01nopay.html

Category: Consumer Spending, Credit, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

53 Responses to “Walk Aways, NYT Version”

  1. hammerandtong2001 says:

    Well, sure. Just a matter of time before industrious homeowners went to school by observing the AIG bailout and plenty more, too.

    Why does “Main Street Mom & Dad” get stuck paying down an asset worth only half what it was just 5 years ago? When big bank, big insurer, big auto and big everybody else gets to buy time on the asset by screaming: “I’m broke and can’t pay — HELP ME, Uncle Sam!” And then, of course, these big bankers, big insurers, get a mountain of money — ironically it’s “Main Street Mom & Dad’s” money — and save themselves — but also find ways to pay themselves perverse bonuses.

    There’s something fundamentally wrong with that.

    So where does that perjorative “emotional default” come in? I don’t see it that way — at all.

    It’s quite far better to let Mom & Dad just walk away — and tell the holder to eat it. After all, “Main Street Mom & Dad” did truly contribute in some small way to saving the banking system, and it’s whole lot better than Mom & Dad pulling Grandpa’s old Winchester out of the basement and oiling that thing up.

    In part, I think this is the wisdom unfolding in the SEC’s suit against Goldman. Tha MBS mess got us here, and if American families are walking away from their homes en masse, somebody’s gonna be holding that final mortgage bill —

    .

  2. beaufou says:

    After they do the math, they get emotional and walk away.

  3. call me ahab says:

    BR-

    exactly-

    as I have been saying for a year now

  4. Wow, it is incredible how shocking this is. Even when we know a lot about the repercussion caused by the past years’ recession, we are still surprised to see the numbers and charts showing the damage and how many people and families lost far more than their jobs. I honestly hope this gets better so we read some posts on how good things are going. Thank you for sharing.

  5. be the ball says:

    Barry,

    You keep harping on this topic in a slightly derogatory way and I finally had to register and comment.

    Here’s your honest statement:

    “I’ve done the math, and it doesn’t make sense to pay the mortgage. Like all the big banks have all done, I’ve made the calculation that it is financially beneficial to default on the loan — so that is what I did.”

    This is exactly what my family and I decided to do last July, the short sale with no contribution from me closed this March. My 2nd ate $110,000 and my 1st ate about $30,000 on an original purchase price of $675,000 in Los Angeles (2006).

    Let me take it one step further for you. I assumed that this was a distinct possibility the day I purchased the house. And for that SPECIFIC reason, I opted for 100% financing 10 yr interest only ARM at the time of purchase. I even had the sellers pay 100% of the closing costs and fees. It literally cost me $36 to move in to a $675,000 house in 2006. The banks were willing to take on 100% of the risk of my home ownership. Either things continue to appreciate and my family and I can eventually refi down to just a first mortgage, or things go to hell and the bank can have the house back…..I effectively paid a glorified rent payment, with an upside of potential appreciation.

    You tend to paint everyone who took on a “risky” loan as a jackass who was being a fool with no clue as to what he/she was doing.

    My personal opinion of why you “never” hear the honest statements about walkaways that you are looking for, is that those of us who have done so have moved on and have better things to do than to advertise our business decisions….

    Just thought I would share.

  6. rktbrkr says:

    How about the old adage “good money after bad”? The banks are providing an added incentive with the slow evictions. Somebody with little or nothing down, negative amort mort who then has an opportunity to live rent free for 15 mos has terrific incentive to default. They’d actually be crazy to continue paying. On the other hand the banks are equally crazy refusing to negotiate with these people because thet would reduce their losses, I suspect the flexible accounting for recognizing losses is contributing to the banks pigheadedness. A pox on both their houses.

    Just waiting for the next round of handouts from Turbo Tim rewarding the banks for getting into this mess.

  7. Low Budget Dave says:

    What I am hearing:

    “My bank is lending to new borrowers at 5%. If they would lower my rate to 5%, I could keep paying.”

  8. Jim67545 says:

    One contributor to the length of time to foreclose is the legal process once the lender decides to pull the trigger. The notification, sheriff’s appraisal, public auction, confirm sale, get deed from the sheriff, etc. process in Ohio takes 9 months in many jurisdictions. The problem is the number cramming through the system and the public entities being loath to staff up for a “temporary” situation. So, it is easy to see it taking a year or more, especially if a degree of delinquency is tolerated and hovers around, say, 60 days past due for awhile before payments stop altogether. Of course, add BK and you add another 6 months.

    I am uncomfortable with the glorification of the walk aways. It is similar to glorifying someone who gets free (charity) medical care at the emergency ward. I think we all understand that we, as a group, pay for that “free” care. I, for one, dislike paying more so that someone else can exploit the system.

    We also pay for the walk aways in the form of lower interest paid on deposits, government debt (FDIC), and the not-yet-realized increased cost for mortgages for those of us who are credit worthy when the government finally decides it cannot be the financing source for the mortgage industry (because the loss of principal caused by walk aways makes MBS unappealing to the world’s investors.)

    I also regret seemingly this final nail in the coffin of standing by one’s commitments. We seem to have almost lost our moral compass. So, morals are now situational, to be followed until times get tough. Sad. We will all pay.

  9. By
    Matt Taibbi

    “It’s early May in Washington, and something very weird is in the air. As Chris Dodd,
    Harry Reid and the rest of the compulsive dealmakers in the Senate
    barrel toward the finish line of the Restoring American Financial
    Stability Act – the massive, year-in-the-making effort to clean up the
    Wall Street crime swamp – word starts to spread on Capitol Hill that
    somebody forgot to kill the important reforms in the bill. As of the
    first week in May, the legislation still contains aggressive measures
    that could cost once-
    indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has
    escaped the usual Senate-whorehouse orgy of mutual back-scratching,
    fine-print compromises and freeway-wide loopholes that screw any chance
    of meaningful change.

    The real shocker is a thing known among Senate insiders as “716.” This section of an amendment would force America’s banking giants to either forgo their access to the public teat they receive through the
    Federal Reserve’s discount window, or give up the insanely risky,
    casino-style bets they’ve been making on derivatives. That means no
    more pawning off predatory interest-rate swaps on suckers in Greece, no
    more gathering balls of subprime shit into incomprehensible debt deals,
    no more getting idiot bookies like AIG to wrap the crappy mortgages in
    phony insurance. In short, 716 would take a chain saw to one of Wall
    Street’s most lucrative profit centers: Five of America’s biggest banks
    (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup)
    raked in some $30 billion in over-the-counter derivatives last year. By
    some estimates, more than half of JP Morgan’s trading revenue
    between 2006 and 2008 came from such derivatives. If 716 goes through,
    it would be a veritable Hiroshima to the era of greed….”
    http://snardfarker.ning.com/forum/topics/wall-streets-war-by-matt?xg_source=msg_forum_disc

    then again, maybe others have different motivations for their ‘actions’..

  10. cewing says:

    @Jim6745:

    I don’t think anyone’s “glorifying” people who walk away from their mortgages. To me, it’s a symptom of just how bad the overall borrowing scheme has gotten that people who would normally never miss a credit card payment have made a completely rational decision to stop making payments on a house that’s worth less than they paid. These aren’t deadbeats who skip out on loans for a living.

    And it’s been mentioned before, but I’ll say it again. The “walk away” process isn’t new, it’s just that corporations have been doing most of the walking until now. Capitalism doesn’t have a moral compass.

  11. subscriptionblocker says:

    Ain’t over…..

    Law of equal/opposite reaction tells me these are deficiency judgement candidates – to be hounded till their end of days. Does anyone really believe debts could be settled like this if not for government?

    Defaulter will still be screaming about his “rights” just before the “accident”….. Accident arrangers=growth business. Well fed smirky ones will be first.

    Obligations can be sold ya know ……

    You are now entering the twilight zone.

  12. call me ahab says:

    subscriptionblocker-

    deficiency judgment’s are a non-issue in a non-recourse state- where the bank can only take back its collateral and has zero recourse to secure a deficiency judgment-

    the bank is indeed left holding the bag-

    heartbreaking I know . . .well not really

  13. be the ball says:

    @cewing- well put, amigo, I am exactly that type of person, credit score through the roof before the walk-away

    @ahab – you are right to an extent, but in California, for example, my 2nd, a HELOC, is not non-recourse. They retain the right to torture me.

  14. Marcus Aurelius says:

    There’s also outright bankruptcy after foreclosure, if need be. Sure, the law was changed to benefit the banks, but the sheer weight of all of this litigation will force either a return to the old law, or for the courts to ram-rod through as many cases as possible to ease the burden on the system. Regardless of any law, the banks lent to turnips, and, as everybody knows, you can’t get blood from a turnip.

  15. comet52 says:

    There is no privileged class that steals with impunity at the highest levels while the little guy must live an upright life or be castigated–Sorry! What’s good for the goose, etc.

  16. subscriptionblocker says:

    Call me ahab-

    Mangling a quote from Jurassic park (oddly appropriate): “markets find a way.”

    Our traditions require a judge to formally seal bankruptcy – after which, subject is no longer “prey”.

    Until that time – anything goes.

  17. bdg123 says:

    Excuses for walking away? Wait till your mortgage implodes. New York is the epicenter of the real estate bubble and has only maintained some semblance of sanity because taxpayers are bailing out NY real estate. Every mortgage contract is impacted by Wall Street’s fraud. Even if your contract in particular was in good faith and all of the t’s are crossed, the entire U.S. housing market pricing structure is based on fraud. People bought houses based on inflated values perpetuated only through fraud. Why should I honor any contract based in fraud when the government has done nothing to prosecute or stop the fraud through the rule of law? Wall Street is walking away from investments left and right. That includes real estate and other investments.

    If I were substantially under water and had bought a house in the last five years or so, I would walk.

  18. What abut the ethics of the situation? I’m referring to strategic defaults, and this does not apply to those who simply cannot afford to pay.

    I believe it’s perfectly ok to default on a mortgage.

    The part that I don’t believe is ethical is staying in the house, making no payments, and getting what others call ‘free rent.’ If you want to default, then do so, send the keys to the company to whom you are paying the mortgage, and vacate.

    Remaining is unethical and dishonest.

  19. seanpj says:

    Barry , you got me thinking about other reasons for strategic defaults. The economic calculation is clear, but (IMO) there are other reasons that increase the walk away probability lately. Compared to a few years ago, here are some parameters that changed:

    - no 1099 from the lender
    - no peer pressure, it became socially acceptable
    - general contempt for the lenders, feeling that they are advantaged by the GOV
    - … there may be many more I can’t recall now.

    And since homeowners, unlike banks, are human beings, these additional factors surely have some influence on the final decision.

  20. Kort says:

    I know we are back on the “the plural of anecdotes is not Data” but opening paragraph of the article..rather than pay mortgages, what do they do? Casinos? a gas guzzling airboat (what is this thing? I do not have one…) and Outback (ok, ok, people should still eat…but not sure about casinos and airboats)

    And the key for me is that 19% of the homes haven’t even had action yet to repossess…the banks are so underreporting the losses here, that you won’t get “data” for about 5 years once the (nuclear) dust settles.

  21. rktbrkr says:

    There is a big wave of option ARMs coming to reset over the next 18 mos, most of these will come nowhere close to qualifying. When it rains it pours.

  22. Julia Chestnut says:

    If I read the same article, the two anecdotal cases in the article were not strategic defaults. One woman got lung cancer and tried to work with her bank; they refused, so she had no real choice but to quit paying. Another couple, her son and his wife, quit because they could either invest in their business or keep making their payments. These are not people deciding that it is in their best interest to quit paying because they are underwater – which is the “strategic default” meme. But that wasn’t what the person writing the article wanted to talk about, so the bit about the woman having lung cancer is a single line in the article.

    Honestly, I don’t believe that the “strategic default” as it is being described on the internet is happening. I do genuinely believe that the time between default and foreclosure is lengthening in mandatory court process states. The banks are probably having incredible trouble getting the paperwork in order, and almost certainly are faking it in half the cases that they bring. Courts are very difficult to rush. But that isn’t because ordinary people are being strategic. It is because the process is purposefully somewhat inefficient in order to protect rights that definitely need protection.

    Again, this is not “strategic default.” This is default, and then the banks take forever to actually assert their right to evict the mortgagor. My question is whether the banks’ failure to do so is strategic: until they take possession, they don’t owe taxes etc. on the property, the “owner” does. The mortgagor has to keep the property up to keep the homeowners’ association happy. The house is less likely to be stripped of all plumbing and fixtures if it is occupied. The market sucks. Hmm . . . . . .yeah, I’m sure that it is just slow-moving courts that are keeping the foreclosures from going through quickly.

  23. Hit the Reset button says:

    Your right BR on the logic behind the defaults, and modifying the payment or even the principal balance won’t make much of a difference when everything else is factored in.

    There is a behavioral shift taking place with regards to borrowing money.

  24. bmoseley says:

    businesses walk away from bad investments all the time. why does the press keep bad mouthing people who do the same thing. in finance classes this is a basic concept.

  25. Marcus Aurelius says:

    Julia Chestnut:

    Thanks for a very clear assessment of the reality of the situation.

  26. MinnItMan says:

    My daliance with libertarianism, at least the radical contractarian variety, started fading my first year of law school in my contracts class. Most of what I thought I knew about contracts turned out to be false, but more importantly, I concluded that, for the most part contracts don’t work.

    In particular, the notion of “sanctity of contract,” however, deserves the most derision. First, for the espousers, it’s clear that this is the only thing they would ever consider sacred. And second, literal belief in the notion requires that you not believe in contracts, per se, but an extrinsic system of coercion that goes far beyond monetizing the consequences of breach of contract. Assuming clean hands for the non-breaching party, all it is entitled to is the risk-adjusted (e.g. for bankruptcy) means of collecting upon the monetization (or quasi-monetized return of security) of the breach. That’s it.

    Contractarians do Flounder and the boys at Delta House one better: “Hey, you [never trusted] us, you gave use the car. You f… up.”

  27. CPJ13 says:

    Interesting anecdote:

    In Massachusetts the 2nd lienholder can’t foreclose without the 1st joining it in the suit. About two years ago I told a family member who was struggling to stop paying on his second mortgage, and keep the first current at all costs. About 9 months into his default, he offered the 2nd lienholder a settlement of 25% of the principal balance of their lein. They kept threatening with foreclosure, saying they were offended at the offer, and generally beating their chest – all the while he continued to keep the 1st current and let the 2nd languish. After about two years of threats and phone calls, he received a message from a senior manager indicating that they would be happy to settle for his most recent offer – 5% of the face value of the note. The payoff will close before the end of the quarter, no deficiency judgement, no recourse.

    This 2nd lienholder was a TBTF, TARP recipient, one who had made headlines for their egregious bonuses. I suppose you could analyze this default from many different angles, but I can tell you it was a combination of a) extremely difficult times, which have since passed; b) infuriation over the bail-outs happening at the government and corporate level; and c) an understanding of the laws of Massachusetts which would ensure that his house was never actually taken by the 2nd lienholder.

    Just wanted to share. There is no “box” you can put people in – everyone’s got their own motivations, reasons and incentives. It’s rarely just one.

  28. freitagfan says:

    When you walk away from your mortgage and society picks up the tab for the loss, that’s called being on welfare. When we stopped being ashamed that we were on welfare, we were officially financially and morally bankrupt. It’s only a matter of time until these people are arguing that it’s better for the US Government to just walk away from it’s debt than it is to pay it all off. Until that day of reckoning, let’s live as high on the hog as possible by tapping that debt and spending it on junk we don’t really need but feel like having.

    In the 1990′s we reduced our savings rate to zero and shifted our consumer debt to our mortgages. It was just being financially savvy.
    In the early 2000′s we tapped our equity lines and spent on a lifestyle that was far beyond our means. New cars, vacations, second homes, boat – it didn’t matter, it was just being financially savvy because people were willing to lend us the money.
    In 2007 people figured out it was just easier to not pay the bills than pay for everything you accrued over the years. It was just being financially savvy. Is there any wonder Washington is being run the exact same way?

  29. CPJ13 says:

    I will add: he had never deliberately missed a payment in his life. If any one of those conditions hadn’t been present, he would not have allowed his loan to default. It was a “perfect storm” of emotion, and intentional, pragmatic default.

  30. hammerandtong2001 says:

    When it comes to strategic defaults, perhaps then it depends on how one might define the word “strategic.”

    East Hampton, of course, known as summer playpen for rich and famous. Yet, as anybody who has driven off Main Street north of Rte 27 can tell you, there are alot of just regular folks mowing lawns in front of the 2 bedroom houses back there. So, 566 filings in 2009 wold certainly include a few of these folks — but then there others too.

    _________________________________

    From the NY POST, January, 2010

    “Hamptons homeowners are facing foreclosure at a staggering rate, a new report has found.

    The number of property owners on the East End of Long Island missing three mortgage payments skyrocketed 230 percent in the last quarter of 2009, compared with the same period a year before, according to court filings compiled by PropertyShark.com

    Overall in 2009, there were 566 such first-time filings — called lis pendens, or suits pending. That’s an 84 percent uptick over the year before.

    The priciest of the bunch is 80 Further Lane in East Hampton, a tony beachfront home with an $8.5 million mortgage, said PropertyShark.com CEO Bill Staniford…”

    http://www.nypost.com/p/news/local/foreclose_threat_hits_hamptons_big_93XlocoNSOklqS04gMhfwM
    _____________________________________

    So is the $8.5 million mortgagee being “strategic” in this case? I guess we don’t really know. But I think the definition of “strategic” has nothing to do with whether you have a $8.5 million mortgage, or an $85 Thousand mortgage.

    It’s equally strategic to both, methinks.

  31. DeDude says:

    I recently signed up for automatic payments of my credit card balance with US Bank. It was obviously something that would save both parties time and money, since I always pay the full balance. To my surprise it turns out that they charge the balance to my account 5 days before the bill is due. Nowhere in the process were I told that they would cut the grace period from 25 days down to 20 days if I signed up for automatic payments. However, I am sure that they somewhere in the dozens of small print pages they send you, have ensured the legal “right” to do what they do (just as I have the legal right to use one of my other credit cards that didn’t pull something like that on me).

    Just one of many examples of how the banksters have been very good at making sure that our relationship is strictly business and that most of us will have a little smile on our lips if we can pull a legal and fock those bastards. It’s all business and about “legal” nothing personal or about “ethics”.

    PS: Julia, you are correct these were not the mythical “strategic defaulters”. It is amazing that a journalist wanting to write about strategic default cannot come up with an actual real case of it. Maybe “strategic default is like “Nessie” we all know she is out there but nobody can prove it ;-)

  32. The Curmudgeon says:

    @MinnItMan:

    I don’t get how you at one time “believed” in the sanctity of contracts and now don’t. There is no need to believe in the sanctity of contracts. A contract is simply an agreement, a meeting of the minds if you will, of two or more people. If it meets certain criteria, it can be enforced by the judicial infrastructure, much of which is there for specifically that purpose. The failure to perform according to a legally enforcable contract yields the potential for legal liability for the breach. Each party has to decide whether performance or non-performance carries the greatest potential excess of benefit over cost. In the case of these strategic defaulters, they’ve done the calculus and decided not to perform, a perfectly legitimate and rational strategy. The decision of what’s best to do carries no implications for morality. Everyone enters a contract knowing full well that they can’t make the other party perform, and should also know the liklihood of performance and the viability of the available remedies in the event of a default. Morality, except perhaps in the case of informal verbal contracts that don’t carry the force of law, is not relevant to the calculus of breach.

  33. Transor Z says:

    This is not a solicitation for business or legal advice. I will not answer any questions or attempts to contact me.

    A lot of our work is in bankruptcy. In my view, if you’re already willing to take the hit caused by defaulting on your mortgage, you might want to learn more about filing for Chapter 7 or 13. Many or most of Barry’s readers will probably have a hard time qualifying for Chapter 7 due to means testing, however (i.e., you make too much). But Chapter 13 may still be an option.

    If you get a significant deficiency judgment against you or have a HELOC/2nd mortgage on top of a first mortgage you’re already underwater on, you might have some options. You should talk to a bk lawyer who knows the law in your jurisdiction. Be aware that bk law is definitely not uniform in this regard around the country.

  34. 4horsemen says:

    I think people are forgetting that there are many people/firms/Govt entities complicit in creating, inflating, and exploding the housing bubble. Anger at the banks for “causing the problem and getting bailed out” seems justified, thereby making strategic defaults more justifiable. But consider the fact that many people willingly “played the game” – speculating right along with the banks via home ownership, refinancing, heloc-induced spending, etc. These were not all half-wits that were duped by the banks. They were intelligent people who wanted “more” (read: greed, like the banks) and, temporarily, reaped the rewards. When the scheme collapsed, the rewards were gone, and the punishment ensued. And that is not fair? Yes, the banks got “bailed out” (although considering the loss of market value, this is semi-debatable), but so did the consumer – through massive stimulus programs, extended employment benefits, cash for clunkers, etc etc. Frankly, consumers have been getting goosed up for years with ultra-low rates. And when the time comes to pay, leave to to these uber-entitled fuckers to whine about “business decisions.”

    If you argue that this didn’t happen, I refer you to “@be the ball” above – a textbook example of a totally informed speculator that want rewards without consequences.

    I truly hope you and others like you feel the wrath of Karma.

  35. destor23 says:

    Atrios says it well. The banks act without regard for any sort of morality here, so why do we expect more of the borrowers?

    http://www.eschatonblog.com/2010/06/on-walking-away.html

  36. Mannwich says:

    We the Sheeple are often slow on the uptake, but can only take so many kicks to the groin before following the lead of our “brilliant” elite masters. A slow motion breakdown of trust and confidence in each other is happening right before our very eyes. Until that is stopped and truly fixed, then there can be no true “recovery”. I’ve been banging that drum since this mess started and don’t see anything to change my mind on this one.

  37. [...] walk-away trend continues.  (NYTimes also Kid Dynamite, Big Picture, Felix [...]

  38. Bruman says:

    On the general issue of strategic defaults, my opinion has evolved over time. Note that I haven’t read the full article, and one post here says that at least two cases in the article aren’t truly strategic defaults.

    Generally, I think one should stick to ones agreements and make payments as understood in the spirit of the contract, which is that you make payments as long as it is financially possible to do so. Deliberately defaulting on a loan just because it is financially convenient to do is really not something that someone with integrity does.

    However, there’s also a sense of sharing the pain. If banks are getting bailouts when you default on your loans, but you aren’t getting any bailout by having to pay it, and your present and future taxes and inflation costs are going to line bankers’ pockets, it seems that part of the social contract is broken. So, while I generally think that strategic default is a dishonorable thing to do, it’s also true that the people we pay the mortgage to haven’t exactly been straight up with us either about what we are getting ourselves into, and there is more wiggle room in these times.

    Unfortunately, the end result is that mortgage rates are going to go higher than they would have otherwise gone in the future, because now banks will be demanding extra return to compensate for the risk of strategic default. So it’s a suboptimal situation for everyone.

  39. [...] at least agree that those taking advantage of the system are low-lifes.   See, for example, Barry Ritholtz, Brad Tuttle, Daniel Foster,  and [...]

  40. dss says:

    Journalists want a angle to fit their perceived story line. There are very few “journalists” who tell the truth anymore, everything is shaded to fit an agenda or to push a certain point of view.

  41. Cynic_FA says:

    @Legal Stealing @Mark Wolfinger 9:11 am

    “What about the ethics of the situation? I’m referring to strategic defaults, and this does not apply to those who simply cannot afford to pay.”

    Sorry, I missed the connection to the topic. We are talking about non-recourse mortgage contracts with banks. what does ethics have to do with it?

    Is it ethical for Merrill Lynch to take $10 Billion in TARP money and use $3 billion for bonuses? Is it ethical for the Federal Reserve to hold short rates at zero, which cuts the income of millions of CD buyers (mostly elderly or middle class) in order to boost profits for banks? Is it ethical for banks to put a million small businesses into bankruptcy by calling their loans at the bottom of a business cycle? Is it ethical for banks to issue five or more credit cards to every American knowing that many of them are not disciplined enough to handle the debt? Please try not to use “Bank” and “Ethics” in the same sentence, it makes me vomit.

    Be The Ball at 7:46 AM made the statement of fact that Barry was asking for. He explains the cold calculation of buying a $675,000 house with $36 total move in costs. His explanation shows that he is cold, thorough, calculating, self serving, plays the system, and looks for the potential for maximum profit with minimum risk. These are all qualities that Blankfein, Prince, and O’Neal would seek out in an employee for their banks.

    I think you are wrong if you measure the strategic walk away on a moral and ethical scale. this is business. The corporate borrower / commercial real estate borrower would have five MBA’s calculating the angles on the loan and would default in a heartbeat, or threaten default to renegotiate, if that was profit maximizing.

  42. Transor Z says:

    @dss:

    There are very few “journalists” who tell the truth anymore, everything is shaded to fit an agenda or to push a certain point of view.

    I’ve got two newspaper movies for you: “His Girl Friday” (1940) and, if you’ve never seen it “Citizen Kane” (1941). “His Girl Friday” is delightful and you’ll be pleasantly surprised at how well the rapid-fire chemistry between Cary Grant and Rosalind Russell holds up 70 years later.

    ————————
    @Cynic_FA: Please frame that paragraph beginning “Is it ethical for Merrill Lynch…”

    To add:
    Gaming the system is a way of life for a significant segment of the population. And I’m talking in many cases hard-working people — small contractors, restaurateurs, etc., etc.

    In my neck of the woods (Boston), if some banker/financier/academic type lectured one of these people about business ethics — if he/she were really that moronic — they would encounter a look on the other side of the desk that anyone who “gets it” would read as clearly as a ticker scrawl:

    What a fucking asshole… What a fucking asshole… What a fucking asshole…

    But there would be no argument or confrontation. Just polite silence and an amused gleam in the eye that “the Preacher” would almost certainly be too stupid to catch. Not worth the effort to educate a dope.

  43. louis says:

    Most people I know are walking because they feel like they are a victim of a massive criminal fraud and that no help is on the way. Unlike the ringleaders who get to start over.

    If others can bail and receive taxpayer funds because of a housing collapse, why can’t a homeower receive a principal reduction? Why not roll out SAM loans?

    And if no principal reduction is forthcoming why can’t said homeower execute the clause in his contract that gives the bank back the property?

    All firms that bet on housing were not liquidated and dissolved. Since you did not take to the streets when that was not allowed to happen, you get to watch your neighbors exercise their free-will. What do you want the guy to do that is underwater with a loan that will reset? Calling him a deadbeat does not solve the problem. We need solutions at this point in the game that will reach all bad loans.

    As Barry has said before, stocks will usually go higher and recover but only if you have the time (decades) most homeowers with their present terms do not have that luxury.

    Homeower is a trademark of Mr.Ritholtz.

  44. MinnItMan says:

    No, I never did believe in the sanctity of contract. I believe in its “contract-iness,” that is, a written contract is essentially (should be) a hedge on a business decision not working out. My point was directed at those who think strategic default is stealing, or those that do it are “lowlives.” In most cases, the lender is entitled to the security only, but only after after foreclosure, and then eviction. Once the borrower decides to default, in most states she doesn’t owe the lender anything except to allow it to its security back. If the lender wants it sooner than eviction, money talks.

    This is straight Chicago School efficient breach theory, oddly enough.

  45. snapshot says:

    http://market-ticker.org/archives/2363-Consumers-Learning-From-Banksters.html

    From Karl Denninger: Consumers Learning From Banksters

  46. Jim67545 says:

    This makes me sick. I am a “bankster” from one of the 7,500 small community banks in this country, not to mention credit unions and savings banks. True, a few dozen large banks were bailed out. The 7,800+ others out there were not. True, some banks (and here we get into quite a few non-banks like Countrywide, Lehman and the captive mortgage companies of the home builders) may have made loans people could not afford and may have employed deceptive practices. But the VAST majority of banks did not. True, some banks dumped small businesses or charge usurous overdraft fees. But the VAST majority of the banks, noteably the smaller community banks, do not and did not do these things.

    We take the effort to personally contact every mortgage customer who is having problems – and I don’t mean just a collector calling. I mean the nearest branch manager, to see what the problem is and if there is something to be done. Have we had to foreclose anyway? Yes. We did not dump a single small business customer or cut off their working capital lines, although we definitely had problems and charge-offs. All the small banks I know behaved in a similar manner.

    This theme of taking solace in the fact that “banks” (at least some of which were not banks or only became a bank later) got bailed out so stick it to them, is little more than a pathetic excuse to legitimize antisocial and bad behavior. Can they get away with it? Probably. But it does not make it right.

    Ultimately, who do the walk-aways hurt? Do they stick it to the banks? Maybe a little but mostly the banks are servicing the loans which are owned by others – pension funds, Swedish municipalities, and yes some banks, even overseas. So, should the walk-away feel noble that he/she stuck it to the unpopular bankster? Grow up.

  47. C172ch says:

    “But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

    “I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ” ”

    So for all those discussing contracts and moral responsibility etc, what if I’m a tenant of Mr. Tsiogas and I know he’s doing this? Do I still owe him rent? Legally? Morally? No real informed opinion here, just curious. I’m also a little curious as to what Mr. Tsiogas would think if his tenants (assuming he has any) stop paying rent.

  48. Jim67545 says:

    Or, C172ch you take your newish BMW in because the trany failed but the dealer says, “Sorry but BMW cancelled all warrantees.” What? “Yes, it’s nothing personal, it’s just business. The warrantee thing got too expensive so they cancelled it.”

    But I bought the car partly because I thought the warrantee would be there to pay to fix defects. “I’m sorry but they decided that it made more business sense to cancel them even though they sold it to you and you bought the car with that understanding.”

    What made them do it? “Well, it’s something about how the American Government subsidized BMW’s competitors and prevented them from going out of business. So, BMW thinks that they are justified.”
    - – – -
    So… what happens longer term when we have such widespread unilateral setting aside of contracts? What will that mean for future credit availability (it has already caused unsecured, commercial and sub-prime to tighten) or cost? Will it make this country one in which the world will invest?

    Incidentally, I do not understand why nobody is using a no-payment 10 year balloon second mortgage as a method of modifying. So, let us say that someone has a $300k mortgage but now can only afford $220k. Make a $80k, zero interest, no payment 2nd and reduce the balance and payment on the 1st. Then, if the market rebounds the 2nd comes back into the money and in any event will need to be recognized and dealt with if/when the home is sold. Not forgiveness.

  49. number2son says:

    And as for the rest of us, Barry? Those of us who continue to slog on, even as our neighbors walk away, leaving homes empty and weakening the fragile connective tissue of community? There is no virtue in owning up to your obligations in this day in age. None at all.

  50. number2son says:

    From Karl Denninger: Consumers Learning From Banksters

    Snapshot, Denninger is a fool.

  51. louis says:

    http://www.cnbc.com/id/37471499

    The slow dance continues.

  52. kaleberg says:

    I think the sanctity of the contract took a big hit in the 80s when the corporate world decided to do something about their labor costs. Down went wages and benefits, first for new hires, then for everyone else, away went pensions, converted to executive bonuses and so on. Nowadays, a contract for labor is barely considered a contract at all. Look at the auto company bankruptcies in which contractual obligations to former workers were assumed to be dismissable without discussion, so that stupid lenders who knew perfectly well about those contracts, could get repaid a bit more on the dollar. This has been the reality of an economically rational society for most Americans, and that includes almost every baby boomer for his or her entire working life.

    (The other contracts consist of those pages of fine print associated with every interaction with a major company, and they always contain a clause saying that they can be changed unilaterally by the corporation at any time merely by changing the fine print in a massive PDF file somewhere and that the customer’s only recourse is to try and terminate the relationship, assuming this is possible, and pray for the best.)

    Most people have never seen a major financial actor acting in anything other than an economically rational manner. Why should a home ower suddenly decide to behave according to some mystic code. It’s not as if they’re enfeoffed or something.