patrick.net

elliemae says

Let’s not forget that they took money out of it to pay off credit cards - if they hadn’t jacked up the cc to begin with they’d have more equity and could have withstood the decrease in value. I’m sure whatever they blew the money on was worth it, because the bluebird of immediate gratification was on their shoulder telling them they needed it.

What if they went to a pawn shop, and pawned a necklace for $10000 to pay off their high interest credit card debt?

Would you say it's immoral to not go back to the pawn lender, pay them $10000 + interest, and get your necklace back? If the same necklace can now be bought for $5000, is it immoral to let the pawn shop eat the loss?

It's a different situation. I see that you disagree - and that you believe that purchasing a house is the same thing as pawning a necklace.

So be it.

elliemae says

It’s a different situation. I see that you disagree - and that you believe that purchasing a house is the same thing as pawning a necklace.
So be it.

When they took out a loan on their house to pay credit card debt, they essentially pawned their house. How is it different?

It's called morals. Obviously, we disagree.

elliemae says

It’s called morals. Obviously, we disagree.

Yes, but I don't understand why. You seem perfectly OK with sticking loses on a lender, though I'm not positive since you didn't answer my questions directly. I guess I just don't understand why morals come into play from your perspective if the collateral for the loan is a house, as opposed to a necklace.

Having one group play by business rules (crunch the numbers, what is the best step going forward..) vs morals is going to always put people at a disadvantage with those who use business rules.

If everyone used business rules, they wouldn't feel cheated at the end of the day.

The problem is, one side uses business rules to dictate how to proceed, and one side uses morals. Most likely because they're unaware of other possibilities for them.

Banks rely on people using morals to guide them and not business rules, and that is obvious in their lending techniques. They know people will go above and beyond what a business would do to repay a loan, even if it means destroying their lives. They count on that aspect, and one of the reasons people can dig themselves into a hole so easily.

Mark has a great example here of how you're willing to use business rules in one case, but morals in another. If the banks had more people treating them this way, they would spend more time figuring out if the loans they are making are safe or not. A win/win situation for all.

MarkInSF says

elliemae says

It’s called morals. Obviously, we disagree.

Yes, but I don’t understand why. You seem perfectly OK with sticking loses on a lender, though I’m not positive since you didn’t answer my questions directly. I guess I just don’t understand why morals come into play from your perspective if the collateral for the loan is a house, as opposed to a necklace.

I have answered your questions directly. I'm uncomfortable with the concept of strategic default. I think that these people are sleezy. I also think that corporations are sleezy. And I've never pawned anything. So it doesn't work for me. If it works for you and you can live with it, then do it. But don't ask for my blessing.

IMHO.

The moment of truth for me was shortly after Greenspan gave his approval for the ARM. My loan broker tried to push an Option ARM loan on me and did not disclose the pre-payment penalty until a couple of days before closing. (We had 750+ FICO)
What was the joke about a sheep and two hungry wolves discussing what to eat for dinner? I was the sheep.
The lesson is, don’t get caught in the middle of anything. Be rich or be poor. Buy early or buy late. Finance 100% or pay cash.

I had an 820 FICO, basically because I can't afford to buy a whole lot so I don't. Lived comfortably within my means. I refinanced to get a lower rate and clearly instructed the bank to provide a 30 year fixed with no prepayment.

Nothing else was ever discussed. But I read the paperwork to ensure that I wasn't getting screwed.

I turned down the loan also. But the point is the “trusted loan advisor” was getting $10K commission for pushing a sub-prime loan when we could get something much better. I am no dummy but I graduated from college without taking a single finance course. If you read the loan doc front to back and understood what it meant, good for you. You were not in the majority.
I could turn this around on you and say since you read the loan contract and no where in it said you are morally held for payments and in non-recourse states all the bank can do is take the house back. And you must’ve known that WaMu and CW were issuing NINJA/Liar loans to multiple flippers left and right. You should have foreseen this eventual outcome and got the hell out. Of course that is ludicrous, but it is equally ludicrous to use morality as a one-way street. Overwhelming advantage was on the side that can control who they lend to or the regulators who can apply the brakes before it all went off rail.
But almost everyone is getting trampled. The only things that sticks is ask is it legal?
Look at it another way, if there is a legal loophole for getting out of a losing stock, do you think anyone would hesitate to skip losing $1/4M?

kt says

I could turn this around on you and say since you read the loan contract and no where in it said you are morally held for payments and in non-recourse states all the bank can do is take the house back. And you must’ve known that WaMu and CW were issuing NINJA/Liar loans to multiple flippers left and right. You should have foreseen this eventual outcome and got the hell out.

Turn this back on me? I don't know what you're talking about. I still live in my house. I still make the payments. I feel okay about the situation. If I were to lose my job and had the inability to make the payments, I imagine that I would stop. But that's not the situation - I think that those people who can afford to honor their agreements and don't do so are sleezy. That's just my opinion.

Obviously, there are many people who disagree with me. If it works for them that's fine - but I'm sleeping just fine.

Strategic default: In the final analysis, it's probably beneficial in that it might actually help with the correction, but that's sometimes cold comfort.

Never mind the academic parsing of wrong/right/contractual obligations v moral obligations/blame apportioning, etc. The subjects highlighted in that story were as much a part of creating the problems we face today in housing as the lenders. And ignorance is not a defense. A transaction is a two-way street, and when you buy something as huge as a house, it is necessary to do a little research -- like maybe looking at historical sales data or some such crazy thing -- but it seems like people do more in-depth analysis when they're about to switch their underarm deodorant or buy a new microwave or something as small as a fucking guitar plectrum.

In some convoluted way, I'm certain that the fallout from this will snake back around to bite savers in the backside, just like everything else from the financial meltdown.

Also note that the preemptive defaulters were all baby boomers. eh.

And then there's this, from Patrick:

http://www.nytimes.com/2010/03/22/us/22foreclose.html?source=patrick.net

...so the gist is, overpay on a really *really* overpriced place, then default after the price dips and then buy it back for half the price you paid. Fan-fucking-tastic.

Austinhousingbubble says

The subjects highlighted in that story were as much a part of creating the problems we face today in housing as the lenders....when you buy something as huge as a house, it is necessary to do a little research

What an astonishing claim.

So, the lenders with their degrees in fiance and other real estate and wall street professionals, who's   f*cking job   it is to determine lending risk, and the value of collateral do not bear a disproportionate blame?

If you contract a life threatening illness, I do expect you to do a little research on different treatment options. I would however put the blame squarely on the advising physician if a poor choice was made, particularly if that poor choice happened to be more profitable for the physician.

MarkInSF says

If you contract a life threatening illness, I do expect you to do a little research on different treatment options. I would however put the blame squarely on the advising physician if a poor choice was made, particularly if that poor choice happened to be more profitable for the physician.

Wow. So many places to go with this one. But, just for kicks & giggles, a doc advises you to have surgery to remove cancerous tissue followed by a conservative course of radiation/chemotherapy. This doc practices at a hospital that has a stellar reputation. But you delay it for several months while you do your research and get second, third & fourth opinons.

You're starting to feel panicked, because all of the sudden there's a glut of cancer in your geographic area and everyone is going for surgery. (I can identify because so many of the people who lived here in the 50's & 60's are full of all sorts of cancers and dying some awful deaths.) But now everyone has cancer - and the surgeries are backed up at the prestigious hospital.

Please note this isn't Seattle Grace hospital, where all the docs are busy having sex in the on-call room and there's no script supervisor to tell them just what to say. The orchestra providing the sound track doesn't fit into the narrow hallways, and no one is as pretty (male & female) as they are on teevee. But I digress. Drug addicted Nurse Jackie is nowhere to be found, because she simply doesn't exist.

So you go to a surgery center that's owned by a physician's group, of which your doc is part-owner, and go under the knife rather than wait for the hospital to work you in. Unfortunately, you waited too long and are so full of cancer that he simply closes you up and that's that. However, you still get charged for the surgery even though it was a poor choice to delay all that time and there was nothing he could do for you. The poor choice was profitable for the physician, in that he has an interest in the surgery center. Shall we blame him?

Come to think of it, using that train of thought, every doc has a vested interest because he/she gets paid when the patient receives treatment. Does that mean that there's an incentive for every doc to have the patients return as many times as possible? Nah.

You say that the lenders should have determined lending risk & collateral value when they loaned money - and in many cases they did so. People with excellent credit with houses that were valued substantially above loan amounts. Is it the bank's fault that the people now feel gypped 'cause they owe more than the value of the house, so they're waltzing away?

I believe that the banks and the financial system have some culpability here. But the borrowers who are "strategically defaulting" are as much to blame, because they can afford to pay but don't want to. Now there are articles screaming about how credit ratings have tanked due to housing issues. It's only right that happens - their lending risk is substantially greater if they'll just walk out on their financial obligations.

Austinhousingbubble says

A transaction is a two-way street, and when you buy something as huge as a house, it is necessary to do a little research — like maybe looking at historical sales data or some such crazy thing — but it seems like people do more in-depth analysis when they’re about to switch their underarm deodorant or buy a new microwave or something as small as a fucking guitar plectrum.

Amen.

elliemae says

People with excellent credit with houses that were valued substantially above loan amounts. Is it the bank’s fault that the people now feel gypped ’cause they owe more than the value of the house, so they’re waltzing away?

Yes, it is the banks fault.

Homes valued substantially above loan amounts? Valued by who? Lenders send their own appraiser before approving a loan. If they valued it wrong, and they did because they had financial incentive to do so, it is 100% their fault. Not 90%. Not 10%. 100%.

The blame rests squarely on the professionals for overvaluing the home.

Your example is also flawed, and I think once you turn it around to an example that is apples to apples, it supports Marks case.

The doctor went through his process and told you what to do. He gave you sound advice and you ignored it. The doctor error-ed on the side of caution. Had your example been, the doctor said "I'm busy right now, but in 6 months I'll have a spot open for you, ..." that would have been his fault. He should have done a better job at estimating the severity and said "I want the job, but can't perform it, therefore I will need to recommend you go elsewhere and have it done." Not I want the job, I'm going to risk your health to get that job. That is what the banks did. They took on unnecessary risk, even though they had far more people analyzing the entire sector and estimating possible risks, they chose to risk your financial health, based on the fact that most people won't walk away from a loan, even when underwater, even if they find out they were given bad advice.

People DID do research, they went to a bank, which deals in securing loans. They went to a realtor that deals in evaluating housing prices. They had inspectors and appraisers come by. They did their research.

An example of doing NO research, is if you went to a FSBO, and plunked down 100% cash (avoiding the bank altogether), didn't talk to a realtor, didn't do an inspection, and didn't have an appraiser come in. That is the worst possible case. I say most people used the best information they had available, and every party involved in this whole mess said do it, you're safe and good. When everyone in the industry states that you're good, when they've got 10, 20, 30 years experience, and often backed by people with phd's and other masters degrees doing risk calculations, your limited research simply can't compete with them.

not everyone who strategically defaults used their home as an ATM or had an exotic loan. our home has lost 50% of it's value in 4 short years. It will likely take us 20 years worth of overinflated payments to break even. Sorry but my credit score is not worth all that. In a few years it will recover and I will be able to send my child to college instead of handcuffing myself to a mortgage that was inflated as a result of speculative investors, which i am not.

homes are not cars, not jewelry, and all the examples that people love to throw around are completely irrelevant. mortgage contracts are not moral obligations - they are business contracts. businesses cut huge losses all the time, why should individual homeowners be responsible to shoulder the weight of the housing crisis alone?

If you contract a life threatening illness, I do expect you to do a little research on different treatment options. I would however put the blame squarely on the advising physician if a poor choice was made, particularly if that poor choice happened to be more profitable for the physician

That's a highly imperfect analogy. For starters, a house is a discretionary consumer purchase, whereas treatment for a life threatening illness is not.

Listen, I heard the claptrap during the bubble years, too. I was on the receiving end of many an incredulous browbeating from friends and neighbors when I insisted that housing was breathtakingly, stupidly overpriced and no way was I going to square a circle so as not to be "priced out forever." Outside of apparently possessing preternatural olfactories for BS, I am no whiz when it comes to the markets...and yes, I had money saved, no debt, and low overhead (still do) was right at the buying age, and had no burning desire to remain renting my cramped little hovel any longer. So what's my excuse for not being a victim?

The onus is and has always been on the buyer to do their research. I don't and have never bought the case that most bubble buyers weren't responding to some larcenist, impulsive reflex, lured away from their better intentions by some dark fuck in a suit. They bought homes (particularly during the boom) to either flip them or because they thought they were buying a bottomless ATM machine with shingles and a tow path.

not everyone who strategically defaults used their home as an ATM or had an exotic loan. our home has lost 50% of it’s value in 4 short years.

But if you had done even a modicum of research, or at the very least, been a little skeptical to begin with, you would not have purchased a lead balloon at the height of the bubble ('06). The verdict was in long before '06 that we were witnessing a major asset bubble.

It will likely take us 20 years worth of overinflated payments to break even. Sorry but my credit score is not worth all that. In a few years it will recover and I will be able to send my child to college instead of handcuffing myself to a mortgage that was inflated as a result of speculative investors, which i am not.

Did you think the price was inflated when you bought it? If not, you must have considered your house purchase as an asset (rather than a liability, which is what it is) that would go up in value in perpetuity. This is something like speculation, to be fair.

homes are not cars, not jewelry, and all the examples that people love to throw around are completely irrelevant.

No -- but like those things, houses are discretionary purchases, and what's strange is that people take more time to educate themselves on those other types of purchases than they do when buying a house, as history clearly shows us.

mortgage contracts are not moral obligations - they are business contracts. businesses cut huge losses all the time, why should individual homeowners be responsible to shoulder the weight of the housing crisis alone?

I don't think they should, and I vote strategic default before principal forgiveness any day. I just don't buy the argument that house buyers are the victims in all this. They are not. They were willing bedfellows on some level, and did their part to screw up the system for people like me.

Austinhousingbubble says

The onus is and has always been on the buyer to do their research.

What you and elliemae are not realizing is that that a bank is in fact a buyer. They purchase notes, and the onus is on them to do their research right.

When a bank makes a loan, what they actually are doing is buying a note. You write a note - an agreement with conditions and legal rights and limitations - and they buy it.

If the note has a put option in it - that is the mortgagor has the legal right to "put" back the home on the lender and stop payments, it is the fault of the purchaser of the note to not take that into account.

If you pay cash for a house, a discretionary consumer good as you say, and the price falls in half after you buy it, tough luck.

If you sell a note to a bank that lets you put your home on them, and you do, causing them to lose 1/2 their investment, same thing: Tough luck.

Mark - you are correct. I'm not defending the lenders over the mortgagees, but let's be clear -- they're both having a nice big piss in the lake that we all have to swim in. No one's debating that the bank and the real estate industry and their respective lobbies have the bigger, fuller bladders, but most of these buyers (and certainly the ones in the article above) are not the hapless victims that the media seems so eager to frame them as.

Austinhousingbubble says

are not the hapless victims that the media seems so eager to frame them as.

Agreed. Every time I read a sob story about someone "losing their home", when in fact they haven't lost much if anything, I have to roll my eyes. I sometimes even write the authors of those articles.