Moral bankruptcy

I’m sick of reading/discussing Bobo, and this is more Felix Salmon’s and Atrios’s territory but this is quite a comparison:

Financiers send the world into recession and don’t seem to suffer. Neighbors take on huge mortgages and then just walk away when they go underwater.

I don’t see what’s immoral about walking away from a house that you’ve made payments on but is now worth a lot less than when you bought it.

But by all means, let’s blame the middle class. They need to start sacrificing, right?






69 replies
  1. 1
    daveNYC says:

    They also take a big hit to their credit score, and if there’s a second mortgage of any sort, the bank can come after them if the house doesn’t cover the bill.

    But sure, yeah, the middle class just are having it sooo easy. I have no idea how Krugman stops himself from walking over to Bobo’s cube and smacking him upside the head.

  2. 2

    The thing that is really galling is that it’s just a throwaway line–a temporizing equalizer that sticks out like a sore thumb. “All these things are equally bad”, says he. “Fuck you,” says I. We might as well all start to do whatever the fuck we want, no matter how egregious, if our misdemeanors are going to be judged felonies, anyway.

    Note to self: DO NOT get out of the boat, no matter how tempted (wish I hadn’t this time). It only increases the helpless rage and the heart rate.

  3. 3
    andy says:

    @daveNYC: That would be funny! I suspect though, that they both file their stuff from home. From the way Brooks writes, I wonder if he interacts with humans at all…

  4. 4
    Nick says:

    Is anyone ACTUALLY walking away from their mortgages? Or is this like flag burning where it’s a crisis of fiction?

  5. 5
    MoeLarryAndJesus says:

    For Repiglican apologists the gamble of a mortgage is only supposed to go one way. Just like their shabby version of morality.

    Fuck them all.

  6. 6
    MoeLarryAndJesus says:

    Nick asks: “Is anyone ACTUALLY walking away from their mortgages? Or is this like flag burning where it’s a crisis of fiction? ”

    It’s happening. It has always happened in down housing markets.

    The theory of the 20% down rule (with mortgage insurance required if you were putting less than that down) was that people would naturally consider walking away once their house was worth less than their mortgage if they hadn’t sunk a big investment into it in the first place.

  7. 7
    Nick says:

    How could anyone read this and not be hysterical?

    What’s needed, Howard argues, is a great streamlining. He’s not calling for deregulation. It’s about giving teachers, doctors and officials the power to actually make decisions and then holding them accountable. Some of their choices will be wrong, Howard acknowledges, but it is better to live in an imperfect world of individual responsibility than it is to live within a dehumanizing legal thicket that seeks to eliminate risk through a tangle of micromanaging statutes.

    Translation: Fucking people over is more important than actually preventing it, because…shut up!

    Fuck the people for freedom!

  8. 8
    RalfW says:

    Bobo has completely lost it. He knows that the Tea Party is destroying the moderate conservative party he’s loved like a brother all these years. But he also knows the Tea Party will break his kneecaps if he writes about them.

    So he’s on some sort of weird, multi-column jag about things no one cares about, like whether Franzen’s novel reflects too much literary-class anomie.

    He can’t scream in the agony of grief, so he blubbers about meaningless crap.

  9. 9
    Nick says:

    @MoeLarryAndJesus:

    The theory of the 20% down rule (with mortgage insurance required if you were putting less than that down) was that people would naturally consider walking away once their house was worth less than their mortgage if they hadn’t sunk a big investment into it in the first place.

    yeah, well, I knew that, but I thought people weren’t walking away, but rather riding it out, or hoping to.

  10. 10
    Moses2317 says:

    A little late, but here is my blog post on what a joke Orange Julius’ Republican pledge was today

    Winning Progressive

  11. 11
    wilfred says:

    Cultural hegemony; here, the ‘working people are good, honest folks who pay their bills’ construct: “Decent people would never walk away from an obligation like a mortgage”, etc., etc., etc.

    Only scumbag bankers and brokers do things like that. But we go to heaven!

    People should walk away from their mortgages but stay in the house. That would be real progress.

  12. 12
    roshan says:

    Programmer’s testimony in court: I wrote code which would flip the vote 51-49 and can only be found if you looked at the source code.
    Guess which election he is talking about?
    Heh!

  13. 13
    Jim, Foolish Literalist says:

    and then holding them accountable. Some of their choices will be wrong, Howard acknowledges, but it is better to live in an imperfect world of individual responsibility

    That’s Brooks?
    David Brooks, spring of 2003 (paraphrased)- Democrats opposing regime change in Iraq are preventing the flowering of Democracy in that country.
    So he’s gonna shut up and go sell Oldsmobiles back in Bucks County, eh?

  14. 14
    r€nato says:

    @daveNYC:

    if there’s a second mortgage of any sort, the bank can come after them if the house doesn’t cover the bill.

    depends entirely on the state you live in and whether you refi’d.

    In some states and under some circumstances, the 2nd mortgage is non-recourse. The 2nd mortgagee gets left holding the bag.

  15. 15

    @Nick: Well, there was that article in the NYT (and no, I’m not gonna Google it) about how the wealthy are doing just this. Somehow, I don’t think Brooks is talking about them as they are his peers.

    @Moses2317: May I just say that I enjoy reading your blog posts? I find your combination of progressive and pragmatic very refreshing.

  16. 16
    r€nato says:

    @Nick: I know of three couples who are doing so. Just an anecdote, not data of course.

    Fact is, this economy will not recover until average Americans are freed of the mortgage debt ball-and-chain which Wall Street attached to them. How is anyone supposed to have disposable income when they are throwing every spare cent they have at a mortgage on an overpriced asset?

    Obama should have permitted bankruptcy judges to do cramdowns on primary residences. It can be done on 2nd homes, but not on a primary residence. That’s bullshit.

    If Obama turns out to be a 1-term president, it will be because he tried too hard to make both sides happy. I wish we could excise a bit of GW Bush’s ‘fuck you, buddy, we’re doing it my way’ attitude and transplant it into Obama’s spine.

  17. 17
    Sly says:

    I don’t see what’s immoral about walking away from a house that you’ve made payments on but is now worth a lot less than when you bought it.

    Unrecognized negative externalities. A fancy way of saying that what’s good for the individual is not always good for the group. If lots of people walk away from their mortgages in one community then property values across the board decline, the tax base goes into the shitter, and everyone ends up suffering.

    Mind you, this is a probably a different argument than what Bobo has twirling around in his head, because I seriously doubt that he gives a shit about a school district facing a budget shortfall. Regardless, at the end of the day he simply doesn’t realize that the folks who “fit in” at the “Applebee’s salad bar” are too busy watching half their home equity disappear to give a baboon’s red ass about what David Brooks thinks about their moral choices

  18. 18
    Comrade Luke says:

    Fact is, this economy will not recover until average Americans are freed of the mortgage debt ball-and-chain which Wall Street attached to them.

    So people just walked into a bank and had a ball and chain attached to them? Man, that sounds brutal.

    I sympathize with these folks, but don’t you think many of them knew what they were getting into when they signed their mortgage?

    There’s plenty of fault to go around.

  19. 19
    sven says:

    How about this one:

    When individuals purchase a house they are making a long-term agreement they are morally, if not legally, obligated to fulfill…

    When large organizations, like corporations and state governments, negotiate retirement agreements with their workers events may require them to renege on their promises. Sure, these agreements are legally binding, but workers will just have to accept the new reality of a smaller retirement!

  20. 20
    r€nato says:

    @Comrade Luke:

    I sympathize with these folks, but don’t you think many of them knew what they were getting into when they signed their mortgage?

    No, I don’t think that *many* of them realized how toxic their loan was, or that they really wouldn’t be able to refi into a safe, fixed rate mortgage like the nice mortgage broker said they could, or that if you re-fi a 2nd mortgage used as purchase money it becomes a recourse loan rather than a non-recourse loan, or that they could have gotten a safe, prime-rate loan but their mortgage broker got paid much better to steer creditworthy clients into toxic mortgages, or that there was a massive speculative bubble going on which would sink them even if they had a safe 30 year fixed-rate mortgage.

    Some were irresponsible; many were flim-flammed. And lots of Serious People like Alan fucking Greenspan aided and abetted this massive fraud.

  21. 21
    morzer says:

    I agree that we need to start sacrificing. Les dieux ont soif, after all. The only question is who we sacrifice first. I vote for Bobo, simply because his unctuous pseudo-ecclesiastical pretensions irk me most. Obsidian knives and Tenochtitlan at dawn, anyone?

  22. 22
    Ruckus says:

    @Comrade Luke:
    I’m pretty sure they didn’t all know. My last place the mortgage lender worked on me pretty good trying to sell me an ARM. And not just a 5yr with nominal rate step up but a 3 yr with balloon payment. I said screw that fixed rate that I can afford, not something that bites me in the ass in a short while. If that’s all they showed people, how would they know any different, at least first time buyers? Or they try to talk you into a bigger house, use an ARM to get payments where they need to be and 3, 5 or 7 yrs later the fan is brown.
    The point is the mortgage lenders didn’t care if it was a good deal for the customer. They got their cut up front, unloaded the piece of crap loan and looked for the next victim.
    If it had been a small percent of the loans, they had insurance and it would only be a little money. Foreclose and sell off the house, getting a cut for the loan once again. Assholes hit the mother lode of crappy loans, foreclosures and walkaways.
    You’re right though, people should know what they are getting into. But they keep voting rethug so that should tell you something.

  23. 23
    jnfr says:

    I think most of us ordinary home buyers count on the bank to explain how much home we can afford to buy. At best it’s a mutual decision. Banks are supposedly careful to be sure people can pay back their mortgages. Banks have tons more experience in this arena than any given person, since they do many, many mortgages and people do only a few.

    Both banks and people were, perhaps, overly optimistic about housing prices going up. But there’s plenty of evidence that banks gave out many mortgages that should never have been made. I don’t fault people from walking away when any business would do the same.

  24. 24

    @Comrade Luke: I’m sure there are some people who knowingly bought more house than they could afford. However, banks were pushing pretty hard. My best friend’s banker was urging her to buy twice the house she wanted to buy. He was saying the usual, “It’s an investment; it can only go up; you’d be a fool not to” bullshit. She pretty much had her mind set up that she wanted only as much house as one income could afford (she is in a dual-income family) and stuck to her guns. It’s a good thing she did, too. I would say a majority of the people with these loans didn’t know exactly how horrible it would get.

  25. 25
    KG says:

    @Nick: There are some people who are walking away, but not what I would call a significant number. Most people want to keep their houses, which is why they have been so desperate for loan modifications. I’ve been dealing with real estate law for most of the last four years. I’ve seen all aspects of it – litigation, loan modifications, short sales, deeds in lieu of foreclosure, and the short refinances that are likely going to be the next big thing.

    Part of the problem is that the investors who actually own the loans have been somewhat stubborn, trying to recoup as much as they can, because they got hosed by the banks too. The only party that has really made out in this mess have been the “servicers.”

    (For those that don’t know, servicers are the banks that you pay your mortgage to. They are glorified collection companies. All they have is the right to collect payments and foreclose in the event of a default. They don’t actually own the loan. They get paid a percentage on each monthly payment, on any loan modification, and on a foreclosure. Basically, they can’t lose and everyone else gets screwed. This actually explains it pretty well.

  26. 26
    Jim Newell says:

    I’ve been staring at that blockquote for like 10 minutes. There’s a real artistry to the way he puts those two sentences right next to each other, just nonchalantly making this equivalence.

    Financiers send the world into recession and don’t seem to suffer. Neighbors take on huge mortgages and then just walk away when they go underwater.

    I mean really. There’s this:

    Financiers send the world into recession and don’t seem to suffer.

    And then this:

    Neighbors take on huge mortgages and then just walk away when they go underwater.

    Right next to each other, just like that. How about a paraphrase for these two equally morally wrong real world phenomena? There’s this:

    Financiers invented bullshit nonsense to make hundreds of billions of dollars a year on houses, ultimately destroyed the global economy and happiness and sanity and hope, permanently, on a lark, had the government pay off their losses, and then made more money than ever.

    Which is much like this:

    Some middle-class people made bad purchases (that banks were throwing in their faces at the time) years ago, and have now made the difficult decision to spend five years in credit-rating hell, going back to renting, in order to rebuild their shattered financial lives, while their neighbors and banks and the highest government officials and BoboPundit publicly condemn them as satanists.

    David Brooks should be fired.

  27. 27
    Martin says:

    @sven: This. Corporate America is allowed us to rape us without consequence, but if we ask them to put on a condom first “Oh, but what about the unrecognized negative externalities! You have a moral obligation to act like you enjoy it!”

    Yeah, fuck that.

    Remember 400 people = $1,370,000,000,000 in accumulated wealth. That’s the gross domestic product of Canada.

    Four hundred people.

    And they’re seriously suggesting that some poor fucker walking away from a $70,000 home that they owe $150,000 on, and will become a credit pariah for 7 years, is being amoral.

  28. 28
    wasabi gasp says:

    The flow of that quote is very soothing. It’s like an overleveraged haiku.

  29. 29

    @wasabi gasp:

    Bobo speaks nonsense
    Out of both sides of his mouth;
    Shut the fuck up, Brooks.

  30. 30
    Martin says:

    Damn, it’s going to be in the high 90s this weekend. Welcome to autumn.

  31. 31
    wasabi gasp says:

    @asiangrrlMN: Ah, the sweet vengeful sounds of the fakiu haiku.

  32. 32

    @wasabi gasp: Had to look that up. Yep. Pretty much. I would have worked in my rusty pitchfork, but my brain is too tired for that right now.

  33. 33
    Odie Hugh Manatee says:

    Jim Newell:

    David Brooks should be fired out of a cannon into the black hole that is farthest from us.

    Fix’t.

  34. 34
    Murc says:

    You know, I’m not sure how walking away from a mortgage is in any way immoral, nor should it be.

    You take out a loan, from a bank, to buy a piece of property + house, which is simultaneously the collateral for that loan. If you develop a crack habit and a gambling problem and lose your job, wife, kids, and pets, and can no longer pay off that loan, the bank will come and take that land and house away and consider your debt to them fully paid.

    Why can’t this work the other way around? Sure, the market says that the home and land you paid three hundred grand for and still owe two hundred and fifty on is now only worth a hundred and fifty. But the BANK thinks its still worth three hundred grand. Want to know how? Because it has a note in hand that says that house and land was acceptable collateral for a three hundred grand loan. If I hand it over to them and say ‘enjoy,’ haven’t I paid off my debt to them in full, under terms they 100% agreed to and, in fact, have spent years zealously asserting their right to do business under?

    That’s how it seems to me anyway.

  35. 35
    sherifffruitfly says:

    It’s immoral because it hurts bankers.

    Durr.

  36. 36
    Prospero says:

    @Jim Newell:

    David Brooks should be fired fried.

    Fixed.

  37. 37
    wengler says:

    Isn’t walking away part of that innovative free market system that made America great? I mean if the housing market is suddenly full of empty houses owned by banks that can’t be sold won’t banks come to the table and start adjusting the loan terms with the borrower?

    Or will the banks in cahoots with the federal government design an ineffective program to deal with this(HAMP), all the while sitting on a great number of empty properties and not putting them up for sale? And in the meantime the banks are appraising them all at peak market values on their ledgers in order to make their stock prices soar.

    So in effect all normal processes are hampered by a massive dose of fraud with the takeaway being that large media outlets controlled by the same people that control all the banks are pushing a message that morality is paying off your mortgage. These old Calvinists still equate monetary prosperity with heavenly approval after all. Maybe they can wiki what happened to Crassus.

  38. 38
    wengler says:

    I think we owe David Brooks and company our very heartfelt sympathy though. They have had the very difficult task over the past 30 years- but especially in the last 3- of coming up with explanations of how giving the rich all the money in our society is going to make an economy that works(likes slaves).

    Instead of giving people that desperately need the money and thus would spend it immediately into the industries that comprise fundamental services, we instead get convoluted explanations of how everyone’s money needs instead be funneled through the pyramid of wealth until a couple of pennies are dropped on the head of the most needy. And that’s you get something as truly boneheaded as a “new employee tax credit” instead of a payroll tax holiday.

    Hoover used to call the business tax cut parade “priming the pump”. But if the pump is dry that water isn’t going to flow.

    It’s kind of hard to believe at this point that we are stuck between the ‘Hoover Lite’ of Obama and the ‘Hoover was a commie’ Republicans. Historians like to point to lead pipes as one factor that made the Romans crazy. What do we get to point to?

  39. 39
    MikeTheZ says:

    @wengler: I wanted to blame fast food, but if it was the root cause, I probably should be a massive teabagger, so that’s not it.

  40. 40
    Mark C says:

    “I don’t see what’s immoral about walking away from a house that you’ve made payments on but is now worth a lot less than when you bought it.” It’s really not that hard to figure out; you bought the house and took on the risk of ownership, you signed a binding legal contract to pay your lender back. These types of strategic defaults have cost all of us who didn’t get caught up in the greed of the housing bubble. This doesn’t excuse predatory lending but absent any special circumstances everyone has a moral obligation to meet the obligations they freely entered into if they have the means.

  41. 41
    kay says:

    I’m not the business and economics editor of Balloon Juice, but I’ve been listening to conservative dogma on economics my entire adult life, so maybe that’s why I’m confused.
    David Brooks should be thrilled with these resourceful (former) homeowners.
    Paying down a loan on a ridiculously over-valued piece of property for the next twenty years is a stupid allocation of their individual income. That money is more efficiently allocated elsewhere. Unlike David Brooks, who is timeless, most of us have only X amount of working years. It’s silly for them to chase that mortgage, in the vain hope the value of the asset will rise to the level the bankers assigned when they wrote the loan.
    They’re also assigning a (new) realistic value to the property by walking away, because then the bank has to sell it at a rational price. That’s actually happening here, and (weirdly) the houses that were worth 70k in 2002 and then valued (by bankers) and “refinanced” for 90k are again worth…..70K.
    Bankers refused to revalue, when they spent millions lobbying against cram-down, and pissed and moaned and dragged their feet for three years instead of rewriting the terms of these loans, because bankers didn’t want to put the new lower value of the asset on their books against the loans they made.
    Borrowers are helpfully doing that for them!
    The market is working.

  42. 42
    The humanity says:

    @wengler:

    Historians like to point to lead pipes as one factor that made the Romans crazy. What do we get to point to?

    Decades of massive, pervasive and unrelenting propaganda, like the sewage Brooks spews.

  43. 43
    Powdermonkey says:

    Under the dogma of “Corporate Personhood” does the moral obligation to pay all debts at face value also apply to corporations as well?

    Nah… That only applies to rights that profit the corporation.

  44. 44
  45. 45
    DougJ is the business and economics editor for Balloon Juice. says:

    @Jim Newell:

    Some middle-class people made bad purchases (that banks were throwing in their faces at the time) years ago, and have now made the difficult decision to spend five years in credit-rating hell, going back to renting, in order to rebuild their shattered financial lives, while their neighbors and banks and the highest government officials and BoboPundit publicly condemn them as satanists.

    Yes, that’s about right.

  46. 46
    El Cid says:

    Wasn’t it just a month or so ago that the New York Times had that big article on how walk-aways were so much more prominent among David Brooks’ peer group on their investment and summer homes?

    Why won’t these multimillionaires learn to honor their moral contract obligations?

  47. 47
    liberal says:

    @Nick:
    The thing that makes that douchebag Howard full of shit is that he doesn’t make any noise about businesses suing other businesses, or businesses suing individuals.

    Take the suggestion of tort reform for doctors. Fine, I think it’s a horrible idea, but fair’s fair: give the docs that only in exchange for forbidding them for suing their patients for defamation.

  48. 48
    liberal says:

    @Comrade Luke:

    There’s plenty of fault to go around.

    I myself am less sympathetic to the homeowners than other people commenting here.

    On the other hand, in terms of the buyer’s knowledge at the time they got themselves into the mess, there’s an obvious informational asymmetry. Meaning, in this case, the banks should have known better to a far greater extent than the homeowners.

    Other than that, I could care less. The only thing is that I don’t want to pay the bill (as a taxpayer, through Treasury, or as a citizen, through the Fed); nor do I think it’s equitable for other people who through luck or insight didn’t get involved in this mess to pay the bill.

  49. 49
    ornery curmudgeon says:

    @wengler: “Historians like to point to lead pipes as one factor that made the Romans crazy. What do we get to point to?”

    Teh teevee.

  50. 50
    Bill H says:

    I don’t see what’s immoral about walking away from a house that you’ve made payments on but is now worth a lot less than when you bought it.

    On those terms, I don’t think I do either, but how about this one?

    She bought the houss for $210,000 in 1998, and then refinanced for an additional $589,000 in order to finance a divorce and pay off debts, so she now owes $795,000 on a house that is only worth $400,000.

    Can she morally walk away from this one, when almost $600,000 in cash was handed to her?

  51. 51
    Lurking Canadian says:

    @Murc: This is exactly how I see the matter. The homeowner and the bank made a deal. The homeowner said, “I promise to pay you $X per month for Y years, at which time I own the house. If at any time, I don’t make my payments, you get the house”. And the bank said, “Done.”

    So now, the homeowners are saying, “OK, here’s the house, as agreed”. The bank doesn’t get to cry foul at that point. The contract has been fulfilled according to the terms they agreed with.

    That the asset they accepted as collateral isn’t worth what they thought it’d be worth is the bank’s fault for poorly appraising it. If the house had appreciated as they expected it to do, they would just say, “Thanks!” and sell it to somebody else. Brooks would not then write an article about how awful the bank was to foreclose on the family unable to pay the mortgage.

    The bank took a risk, expecting to make a profit. If the risk didn’t pay off, the bank takes a loss. That’s how the free market is supposed to work.

  52. 52

    […] Always Wrong Too: Why Does Brooks (And The Republicans) Hate Contracts So Much? DougJ over at Balloon Juice highlights this latest bit of sleight of hand from that genial con, David Brooks: Financiers send […]

  53. 53
    rickles says:

    I’m not as sympathetic to most of the homeowners as are most of the commenters here.

    If you were greedy and either purchased a house that was over-priced or took a large sum out equity in your current house based on the inflated market, then you should pay your mortgage as long as nothing has substantially changed, e.g. lost job, bankruptcy, etc.

    If you walk away from your mortgage, then those of us who didn’t get greedy will be the ones paying the price. You may spend 5-7 years in bad-credit-rating-hell, but it will cost us real $$$.

  54. 54
    Stefan says:

    What’s needed, Howard argues, is a great streamlining. He’s not calling for deregulation. It’s about giving teachers, doctors and officials the power to actually make decisions and then holding them accountable. Some of their choices will be wrong, Howard acknowledges, but it is better to live in an imperfect world of individual responsibility than it is to live within a dehumanizing legal thicket that seeks to eliminate risk through a tangle of micromanaging statutes.

    Quick, which place is better to live in for your family: the imperfect world of individual responsibility that is Somalia, or the dehumanizing legal thicket that seeks to eliminate risk through a tangle of micromanaging statutes that is Sweden?

  55. 55
    Powdermonkey says:

    @ Bill H

    Damn Straight! There is no morality involved. It’s a cold business decision, you know like offshoring jobs to countries with lower labor rates, or hiring only part time people and making sure you keep them below the threshold for full time no matter what.

    The bank gave her the money in the expectation that either she would pay them back with interest, or they would foreclose on the house and sell it for a profit.

    If they can’t that’s not the “owner’s” problem. It’s the bank’s.

    Perhaps the market will learn that a house probably shouldn’t more than double in value in less than 10 years.

  56. 56
    Jamie says:

    Beware of billionaires asking for public sacrifice.

  57. 57
    Stefan says:

    Unrecognized negative externalities. A fancy way of saying that what’s good for the individual is not always good for the group. If lots of people walk away from their mortgages in one community then property values across the board decline, the tax base goes into the shitter, and everyone ends up suffering.

    Well, yes, but too bad. Ethics does not require any single individual to beggar himself and his family for the sake of the community.

    Or, as expressed in Joseph Heller’s Catch-22, in this dialogue between Major Major and Lt. Yossarian:

    “Colonel Cathcart is our commanding officer and we must obey him. Why don’t you fly four more missions and see what happens?”

    “I don’t want to.”

    “Suppose we let you pick your missions and fly milk runs?” Major Major said. “That way you can fly the four missions and not run any risks.”

    “I don’t want to fly milk runs. I don’t want to be in the war anymore.”

    “Would you like to see our country lose?” Major Major asked.

    “We won’t lose. We’ve got more men, more money, and more material. There are ten million men in uniform who could replace me. Some people are getting killed and a lot more are making money and having fun. Let somebody else get killed.”

    “But suppose everybody on our side felt that way?”

    “Then I’d certainly be a damned fool to feel any other way. Wouldn’t I?”

  58. 58
    MarkJ says:

    They really should be able to walk away without any penalty or hurting their credit score. The banks (i.e. those “financiers” who never get hurt) have all the tools they need to make a good bet on a mortgage. They can ask for your proof of income, credit history, etc. and from there figure out how much you can put down and how large a monthly payment you can swing. They also should have better information than the buyer (who is just some schmoe, not a sophisticated financier with complex, data driven models on real estate markets) on what a house is truly worth.

    When they give you a mortgage with no money down, they are betting that the house is worth the selling price, and that that worth will not decline. The house is the collateral on the loan – the implication being that if they get the house in the event of a default they are fully recompensed – you’ve just signed over an asset to them worth the value of the loan. Plus if you made a few years worth of payments they come out ahead.

    So they have fuller info than the buyer on the market and on the risk of a decline in the value of the house, and yet it’s the BUYER’S fault when the BANKSTERS lose their bet that the house’s value won’t decline? Please. Those debts are paid in full when they get the house – the defaulter should suffer no impact to their credit rating, much less be viewed as some sort of scofflaw.

  59. 59
    MarkJ says:

    @Bill H:

    I say yes – the bank shouldn’t have loaned her that $600K if the house hadn’t appreciated sufficiently to cover the loan. It’s their money and they have (or should have) the financial tools to determine what the house is likely to be worth, and the obligation to make good investments. If they’re to dumb or lazy to use those tools to take good risks then they deserve to lose their money.

  60. 60
    Stefan says:

    Can she morally walk away from this one, when almost $600,000 in cash was handed to her?

    What the fuck does morality have to do with it? It’s a business deal. Do you think the lender banks give a fuck about morality? Do you think that when they sit down every week to decide whether to foreclose on a bad mortage, or to walk away from a property that’s lost value, that they sit around and engage in a discussion about whether it would be the moral thing to do? Bullshit.

    This whole “morality” angle is just a con designed to guilt and shame the weaker party in a contract into willingly acquiesing to getting screwed.

    Face it, it’s a business transaction — the banks went into this with their eyes wide open. If they had wanted to do the deal on the basis of morality, then fine — let’s just seal the deal on a handshake, they can give me hundreds of thousands of dollars and I can give them my word of honor that I’ll repay them. But somehow I don’t think invoking my sense of morality will be enough for them — I suspect they’ll want a contract, and when that happens then they have to be willing to abide by the terms of the contract, which allows the borrower to walk if they surrender the collateral.

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  62. 62
    Binzinerator says:

    @Comrade Luke:

    I sympathize with these folks, but don’t you think many of them knew what they were getting into when they signed their mortgage?

    Short answer: No.

    Long answer: Speaking as someone who almost got one of those ball and chains, I wasn’t an idiot but it was my first home and I wasn’t experienced either. I got a lot of stories and not a little pressure sales bs from the bank people, a lot of confusing numbers, a lot of urging to take more debt, and at least a couple of significant lies. (Don’t worry, home values always increase. Don’t worry, if your ARM rate increase kicks in you can always refinance.)

    They didn’t explain how refinancing would solve the problem of not affording the ballooning payment, or that refinancing isn’t guaranteed and may be impossible in a market that causes an ARM rate to balloon, or that doing so would still likely not result in a fixed rate mortgage at monthly payment I could afford. (I learned all this much later. I had no idea to even think to ask about these things then.)

    They used a lot of finance-speak, what I would now call McArgle-Bargle, after McMegan’s style of finance-speak word salad. At the time I thought they were the experts and I was slow on the uptake. But they kept reassuring me the smart move was to get the most house I could get. Just go for the max.

    I ended up OK because I liked the simplicity of a 30 fixed. I sign it and that’s that. I could wrap my head around that. Just like a train on its tracks I know where it goes. And no more ‘high finance’ jargon or dealing with banker salespitches. It turned out the only fixed 30 year I was eligible for meant a decent interest rate and a monthly payment reasonably under what I was pretty sure I could afford. So ‘most house you can get’ didn’t happen. And I kept thinking I was probably missing a big opportunity, a chance to get ahead. Because that’s what I was told.

    In other words, I got a mortgage I could afford in spite of the best efforts of the bank mortgage people to push me into one that I couldn’t, and it wasn’t because I was hip to what was going on. Remember, these people were setting themselves up as the experts. They exploited people mistaking them for advisers when they really were salespeople operating with no responsibility or obligations to anyones financial position, not even to the institution they worked for. And if they happen to be with the bank where you keep your money or life savings, there was already a built-in level of trust they were exploiting.

    I can easily see how it could turn out differently for lots of other folks.

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    The value of the house is not the issue. When you ask a lender to give you money, and you sign a “promissory” note to repay that money (whether or not you give any collateral), and you don’t repay, you broke your promise. If it becomes impossible for you to make the payments because of personal circumstances, you accept the consequences in a stand-up fashion. If you could make the payments and decided to stick the lender with the consequences of your imprudent decision to ask for the money in the first place, that is immoral. I don’t understand how there could be any argument about that.

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    DFH no.6 says:

    @Todd Pearson:

    Todd, you are arguing the “moral angle” here in such an abstract and one-sided way that it is absurd.

    You parenthetically mention “whether or not you give any collateral” as if this is not that significant, kinda neither here nor there.

    Nonsense. In concrete reality it’s pretty damn important that there is, in fact, collateral involved – it’s called the real property. It’s the contracted thing-of-value that the lender gets when the borrower defaults (a lump-sum re-payment, as it were).

    You further speak of the “need to accept the consequences”, as if there are none for someone who can’t, or won’t, make the promised payments.

    Further nonsense. Of course there are consequences for the one in default; severe ones, in fact. The mortgagor loses everything – any down payment, any improvements made to the property, any additional equity (in the case of those “underwater” there is, obviously, no equity to lose). The mortgagor also enters “credit hell”, as others here have pointed out, making any future credit more difficult to obtain, and certainly more costly (and, in actuality, also typically for much longer than the next five years).

    I live in the Phoenix area, and not surprisingly, know a few people in such straits. It ain’t pretty for them, and in no way have they acted “immorally”.

    You also mention the “imprudence” of the borrower, with no mention of the (greater, I would argue) imprudence of the lender.

    If you can read the many comments here explaining why this is not a moral issue for people making the wrenching financial decision to default on their mortgages, yet come away still believing it is, I have no more understanding of what makes your noggin tick than I do of the many crazy things rightwingers espouse. I literally don’t get how someone can think that way or come to such conclusions and beliefs.

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    El Cid says:

    Any business which doesn’t have the money to pay its workers to maintain desired profit levels needs to cut the slack immediately, and those workers need to suck it up and understand market realities, because businesses have to follow their own interest.

    A homeowner who doesn’t have the resources to pay for a home valued at levels far less than would be required for use value to compete with exchange value has a moral obligation to keep that investment for the good of the system and the community.

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    Comrade Luke says:

    @Binzinerator: Glad to hear you got ok of it ok, and thanks for everyone taking a measured response to my comment :) I didn’t have a chance to come back until now and I was expecting to get eviscerated.

    I signed a 30yr fixed too, but that was a combination of being raised to be very conservative (in the risk-taking sense, not the political sense). I also only have two credit cards: one I pay in full every month and one as a backup on trips. I realize I’m in the extreme minority on that though.

    I just get tired of listening to each side blame one group and only one group for this:
    Dems: It’s all Wall Street’s fault! Republicans love Wall Street, vote for us!

    Rep: It’s all the fault of the homeowners! Democrats are picking on poor little old Wall Street! They hate business, vote for us!

    This election season is already driving me nuts and it’s not even October yet.

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    Tehanu says:

    @morzer:

    Works for me!

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    Acharn says:

    @Nick:
    There was an article a while back that claimed most of the walk-aways were in the higher brackets. In other words, if the house had a mortgage of more than $1 million, the owner was more likely to walk away than to stick with it. Of course, most of those were from refinancing deals where the owner was “withdrawing equity that had accrued.”

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    Acharn says:

    @Mark C:
    Wait a minute. In at least some cases, and I think it’s most, a first mortgage is basically a loan which is secured by the property. Supposedly, at the time the property is purchased, the bank calculates that it will be able to sell the property for at least as much as the remaining face value of the loan. In most first mortgages, the agreement is, “Either pay the full amount or give us the property.” In most states there is no further recourse. Usually in the case of second mortgages there is further recourse, and if the sale of the property isn’t enough to pay of both the first mortgage (they get dibs) AND the second mortgage, the bank can force you to pay up the rest of it. So no, walking away is perfectly in line with the agreement and is the rational thing to do. Businesses do it all the time in commercial real estate. The banks are only complaining now because they were abetting fraud and now they’re paying the cost of doing business that way.

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