Are banks to blame for people signing the Note for the loan they sought? Businesses (and Banks) are only as ethical as the leadership running the ship. This is a very complicated issue with many moving parts.
Strategic Default Homeowner of 2004-2007:
“I hate the bank for forcing me to sign the Promissory Note for the loan (I mean the monthly payment) after I have considered my purchase for the 30-45 days it took to close and after my inspection contingency of said property. I could probably keep making the payments that I knew I signed my loan paperwork for but I just never thought the market would turn down so much. My value has dropped by 30% from when I purchased it. I know that I refinanced since I purchased. I’m aware of neighbors walking and have read that many are doing the very same. I’m considering walking too.”
Homeowner of 1988-1990:
“I hate the fact that the market turned shortly after my purchase. I can make the payments and ride this out even though it may be tough. It might take several years for the values to go back up but if I live within my means I should be ok. I love my house, my neighborhood and am part of this community”
My mother living on Capitol Hill (23rd and Prospect) in 1979-1980:
“Since the economy soured it has been tough. My husband lost his job and has been out of work for over a year now. It’s stressing us to be sure. We’ve saved and been frugal. Some of the improvements to our home will not take place. We’ll have to forego some of the things we’d like to do and we’ll take the bus to get around or ride our bikes. To get to soccer practice our kids will have to ride their bike, take the bus or walk. Our kids will work after school to help defray tuition. I’ll take on any additional work, tutor kids and earn extra money by holding swimming lessons downtown at the YWCA and YMCA in the Central District.
Christmas? Well, we will make wreaths and Yule logs and should be able to sell quite a few. We should make enough so that we can get a Christmas Tree on Christmas eve when the prices drop. Although gifts will probably be few, I’ll probably make some gifts and knit some hats to keep you kids warm during our cold days.
Today (2011) times are different. I think back to my mother and father (Dr. Claude Fly) who got us through the great depression in Oklahoma. This is nothing compared to that. People of today seem to have lost the work ethic. With my arthritis and back problems I try to hire kids to help me around our current home. It’s hard to get them to work for an hour straight around the yard. “
Wow – I cannot believe how biased this is against different generations. I can’t wait until I am older so I can trash talk everybody younger than me!
Economic conditions, both micro and macro, were drastically different in the time periods that you mention. 30 years ago the banks + government were not encouraging people to spend 6x income on housing in the middle of a giant bubble, while denying that the bubble existed.
Plenty of people during the late 80s and the great depression walked away from their houses too. Trying to whitewash history like that means that nobody will learn anything from it.
I think that the media today is totally overplaying the “strategic default” case and ignoring the “got no money” case which is far more common.
And I don’t see the moral dilema with stategic default anyway. The only party hurt by this is the banks, and they have sucked trillions of our tax dollars away in the biggest financial turpitude event to happen in 100 years. At this point complaining about hurting banks is like worrying about a guy who trips over while robbing your house and stubs his toe.
Thanks for the comment and perspective Ben. It raises a lot of questions:
Have we lost the ideal of personal responsibility? Is that no longer a value or moray that is practiced? Is that then not part of the equation? Are we moving more towards arguing that the government and banking officials, while many are morally and ethically corrupt, are to blame for all the consumer debt rolled into housing through refinancing? Personally, I’m not a fan of what the banks are/were engaged in as well as Wall Street. But again, should I just walk away from my obligations because my “return on investment” is not working out the way I’d like? My home lost value on paper. My stocks and mutual funds took a beating too. Lost a lot of value. On the other hand, some of my investments are up substantially over the last year or so.
In my opinion, yes we as a nation have lost all sense of personal responsibility. This is part of the reason the country is going to hell. There is always someone there to tell you it isn’t your fault and hand you a check.
People need to suck it up, and take responsibility for the decisions they have made. Not that I think this country can do that any more.
We have a trillion, multi trillion, dollar problem with “just suck it up.” Home owners owe hundreds of thousands of dollars more than the property is worth. We still have billions of dollars in personal debt to pay for. It now take a $100K a year to have a middle class life style, but hey, that’s just the way it is, even though $60K is more the norm.
Now these petty little scum bag scam artists are making money in the commodities market without skipping a beat. They are driving up the price of food, oil and gold to make a few more nickles, and dimes for themselves while people literally starve to death. Should the people in North Africa suck it up? Or should they fight.
We can stop this. We have the rights, and responsibility to fight this. If we don’t litigate the heck out of the banks and hedge fund managers we are just as guilty as they are.
In my opinion, matters of personal responsibility and honour come down to who you are dealing with. If I borrow some money from a friend, then I would never walk away from that debt. I would figure out how to pay it back every day.
However, when I make a contract with a bank, and the bank and the system that it is in shows that they have no honour, then I will take that into consideration and look into what the specifics of the agreement are and see what that tells me. If the agreement says that I give them a payment or the house, I can choose to give them the house. The bank needs to have responsibility too, and they, just like many homeowners, made childish bets that hurt them. Considering the trillions of dollars given to them by the government, they are more in a position to take that hurt than any homeowner is.
So while I think that personal responsibility is definitely a value that should be practiced, it is not practiced by any bank I have ever seen. Some credit unions are far more deserving of this, but banks hide behind arcane rules and suck money from productive society through bailouts and the discount window. When was the last time you heard about a bank giving somebody a break? All I see is people (mainly poor people) getting stung for $30 overdraft fees because of silly paperwork screwups, and banks hiding behind the language of their small print on a contract somewhere. When you live by the sword, you die by the sword.
I had a home that I sold a couple of months ago. I walked away with money (despite buying it in 2003) after selling it. I paid every mortgage payment that I owed. And selling the house was hard, because I had other shit going on in my life that made moving my stuff and cleaning and repairing a condo a burden in my life. But I stuck to it, paid my debts in full and moved. A big part of why I was able to do this was because I never refinanced.
Now, somebody refinanced to a value in the peak, or bought at the peak, and 3 years later they want to move to another state. What should they do now that they are $100k underwater?
Should they do a short sale and have $30k more taxes to pay? This seems like a bad move to me. It is obvious that the banks and their government buddies have made a huge disincentive to do a short sale, so let them take responsibility for that and ignore the option.
Should they take money from their 401k and live in poverty for the next 5 years until they manage to find a situation to unload the home, while they risk even more money by being a reluctant landlord? This seems almost like indentured inservitude to a bank to me. Nobody who has a family to look after should have to do this.
Walking away is not free for them. They will hit their credit hard, reducing choices in the future. This is the price they pay for taking an option which is clearly spelled out in their contract and in the law. The bank takes a loss on their books, but it is a loss that everybody has already compensated them for through TARP. And the bank deserves to lose something, because ignoring the bubble and financing dodgy loans anyway was stupid.
How about an analogy? When you get married you promise to be with somebody for the rest of your life. This is a promise that I believe you should take seriously – I personally think that a lot of divorce comes from people who did not take the concept of marriage seriously in the first place, and I think that cheapens marriage. But if your spouse cheats on you or otherwise does something seriously dishonorable, then that is another matter. Get a divorce and walk away – the promise had two sides, and one of them broke.
Very well said Ben.
There is nothing personal about dealing with a bank. An inanimate object does not get its feelings hurt by my ethics. If someone writes to their bank describing how they had to pay some medical bill and can not make the full mortgage payment for that month, most likely the bank is not going to stop and think about ethics. It will just say tough luck, this is business, and this is the contracted payment.
Banks make bets all the time and usually luck out with big gains. Sometimes their bets don’t pay off. They are the ones who even write the contract, so they are full aware of what they get if someone defaults.
We can talk about ethics of defaulting when the top execs of banks start handing out portions of their mega-bonuses to the people paying mortgages to that bank.
The primary issue is that the banks took the loss because they made a business decision to be self insured on conventional loans. This is not the first time in history that homes are selling for less than an owner paid. It is just the first time in history that banks aren’t covered up to 80% of the original value by mortgage insurance.
Today, and for most of history, if a buyer doesn’t put 20% down they have to pay a mortgage insurance premium. The bank is only financing 80% of the value on an uninsured basis.
In recent history, and for the first time, the banks decided to keep the insurance premium by charging risk based pricing, sometimes as high as 11% on the top 20% of value. They kept the extra 4% to 6% of interest on the 2nd mortgage, instead of requiring that the buyer pay for mortgage insurance with those additional funds.
The crisis created by the banks being uninsured (by their own making) likely created a much larger drop in prices than there would have been had the banks been covered by insurance vs needing a bailout. Now that we are back to borrowers getting PMI to cover any amounts borrowed over 80% LTV on conventional loans, we will not likely see a crisis like this again. I guess the insurance companies could have needed a bailout, but for some reason that doesn’t throw the Country into a panic as much as Banks needing a bailout.
Banks never needed a bail out, and it was AIG that faced collapse.
There has never been a time in history when Real Property prices declined as radically as they are now. The Notes have never seen such a large disparity of asset value, and the price of the Notes that were sold.
Even though it sounds nice that insurance would have covered it, insurance would be litigating today, as AllState Insurance is about the value of the MBAs.
In my opinion the decision to do 80/20 loans was a deliberate avoidance of involving an insurance company, in what may, or may not prove to be fraud.
I remembered a story from the past when reading this post. A man I knew knocked on the door of a top floor apartment in a high rise building. He pretended he was a workman come to fix something. He walked out on to the balcony and jumped off.
His back was against the wall. His family wished he had walked away, and they would have gladly walked away with him.
People think “walking away” is the “easy” way out. There is no “easy” way out when your back is against the wall. Your parents did it one way. The man who jumped off the balcony did it another way. There are many ways to deal with adversity and we need to respect that each person must find their own “right” way for them…and their families.
I certainly agree there is no easy way. What I’m trying to convey is that there is a difference between strategic walkaway and losing your home due to job loss or other catastrophic event that results in losing a home.
In addition, people tend to gloss over the underlying issue in many cases: Total consumer debt load outside of the housing obligation.
Ardell (and I) know that “There are many ways to deal with adversity and we need to respect that each person must find their own “right
There is only one ” right way” . The right way is to do whats in the BEST financial interest of your family.
The consumer should not be left holding the bag from the corruption of Wall Street. Nor should the consumer continue to cause hardship to him/herself due to the collapse of the housing market.
Being from Reno Nevada (homes down 80%) and watching EVERYONE walk, I assure anyone reading RCG life will go and and you will find it was the BEST financial decision you made in your life in contrast to the worst..(buying the home in the first place)
Stop hurting yourself and your family and save like you never have before. When the time comes to leave your home you should have saved up ALOT of money and I assure you that you will be VERY happy to walkaway. Many more opportunities present themselves when you have cash in your pocket …YES , even with bad credit!!!!! You will join millions of Americans with the same credit report.
As long as you have cash you will be able to buy again and I urge everyone in this situation to develop their exit strategy NOW, and begin to live their lives again.
Ray,
I always enjoy your perspective and conversation. Being that you see so many cases of people walking away for various reasons, will you be counseling your clients in the future that if they don’t experience home appreciation that they should just walk away? Are most of the cases you see due to extended job loss or catastrophic financial stress due to health issues for example?
I’m wondering if it is possible we could overshoot value to the downside?
Tim, people I know have walked for a variety of reasons but I would contribute most of the reasons to our mobile society. Job, divorce, illness, family, etc. They attempted short sale, looked at Deed in Lieu, and in the end walked. The smart ones lived in the home until the bitter end, saved, and even got “cash for keys.”
They all expressed to me the same thing over and over and over…Ray, it was the BEST decision they EVER made. They only wish they did it sooner instead of having to deal with all the stress.
Tim they are all coming back. If they do NOT give them back this year it will be a short sale or a walk in 3-10 years. The banks know this. Loan Mod is an utter SHAM and delays the inevitable UNLESS they cramdown principle. A friend just had 600k written off his Sterling Home (STSA) in Renton. He owed 1,500,000 and they crammed it down to 900k. He took it. I advised him not to since he is still upside down 200k…In the end, he will most likely give his back as well when he realizes his error.
Now here’s a Post that will
have a record number of
Replies. JG
Tim, what you didn’t say in this piece was that the third leg of this transactional stool was government. Government forced many banks to play ball and write loans that stunk because otherwise Dodd and Frank would have drug them up to a hearing on Capitol Hill or prosecuted them for unfair lending practices. Back in the mid-nineties the DOJ was leaning HARD on lenders to help everyone ‘achieve the dream’ of home ownership whether they were credit-worthy or not. Some banks were bad and didn’t care but many others hated having to write loans that didn’t make good business sense.
This is yet another example of how government screws up nearly everything it touches.
Thanks for the comment Dave.
The Gov can force the banks through regulation to enact programs and compliance. What the Gov cannot do if force someone to sign their loan documents.
Tim — I gotta agree with Ben on this one. Your post is divorced from reality. You simply can’t — well, shouldn’t — attempt to chart changing societal mores on nothing more than your own perceptions. Personal observations, and nothing more, are heavily influenced by your own biases, and every human has ’em. In the end, you come across as a cranky old man tilting at your self-created windmills. I thought you were joking at the end, complaining about those darn neighborhood kids — I tell ya’ kids today don’t know the value of a hard day’s work! 😉
That said, as to the meat of the matter…
This question in part turns on (a) the degree of hardship faced by the owner, and (b) the degree of improvement to be realized by the default. Certainly in my experience — I have about 30 of these files on my desk right now — the vast majority of people considering a default are facing some sort of life challenge that would be addressed by moving (e.g. kids en route) or defaulting (lost job and cannot afford difference between mortgage and comparable rent) or both. So its inflammatory to focus ONLY on the pure strategic default (owner can afford continued payments without hardship but simply does not want to spend the money any more).
In that regard, you compare apples to oranges. Your “modern” defaulter is an air-head who apparently is facing no hardship at all; your parents in contrast are diligent hardworkers in a very difficult situation. And what benefit COULD have been realized by your parents? Back then, when that market tanked — another distinction, no market has tanked like this one — was there a HUGE difference between your mortgage payments and what you could have rented?
As you know, my take — anyone hear me on KUOW yesterday on this very topic?? — I’m not willing to condemn anyone from “walking away” if it is in their overall financial interests to do so, i.e., the same standard that would be applied to the bank, the other party to the contract. But if we are going scold borrowers for defaulting, I think its important to recognize the many shades of gray. The pure, true “strategic defaulters” — again, people who can afford the property but who default as a financial decision — are only at the far end of the spectrum. And if we’re going to look at ownership over time, we should compare people who fall roughly on the same point on that spectrum.
Great conversation Craig. I heard your comment on the radio and tried to call in but was too late.
I guess I wouldn’t be a very good candidate to be on a Jury on this issue. I don’t believe my take is divorced from reality because I see these cases too. It includes neighbors, colleagues, and immediate family.
I don’t place shame or guilt on someone who does what they think is in their best interest. But I also don’t have to agree that it was the right thing to do. Others would argue that I should have no concern or keep my biases to myself. Certainly my biases are shaped from my ethical stance and what I hold as being accountable for my actions.
Personal accountablity is not at the forefront as it should be. Banks made stupid lending guidelines/decisions and I don’t hold them in a different light.
There is a clear line between losing a home due to loss of income or other catastrophic loss and strategically defaulting becuase it is more convenient to grab the life ring the law has afforded us or the default clause in a Deed of Trust.
Great post Tim.
It really illustrates the fallacy of the “in my generation
Can’t agree more on the inability to really compare generations in this context.
It was way before my time but I believe there was an old black and white movie that took place around Christmas in which the main charecter was a banker who was going to go find a high balcony to jump from (see Ardell’s post above) and then through a wonderful story of redemption realizes all the people he’s helped. When we have a culture again where you can make a feel good movie about a banker (and have people actually watch it without laughing) then maybe people will think twice about walking away, but I don’t think that has existed in my lifetime. Gordon Gekko does not equal George Bailey.
I thought of this last night.
Banks know the value of property. It’s the job of the bank to know the value of property, and make loans according to risk. Banks ignored both the value of the property, and the risk of making the loan because they could sell the inflated price of the Note to be bundled as a Mortgage Backed Security. Pension funds, and hedge fund managers were buying, and reselling these instrument as fast as the instruments were created.
How was a home buyer supposed to know that the banking system had gotten so out of control?
A home owner had the right to expect the bank to be acting in good faith. There is a long history showing banks had worked in a conservative financial manner. Banks enjoyed a position of trust.
Home buyers had a right to a resonable expectation that banks knew the business climate.
Dave Kinkade,
Blaming the meltdown on the Community Reinvestment Act is a red herring. CRA has been around since the 1970s. This myth has already been de-bunked and that zombie needs to be given a good kill shot to the head once and for all.
http://www.jchs.harvard.edu/publications/governmentprograms/n08-2_park.pdf
Banks didn’t need CRA to “force” them to make bad loans…..they did it all on their own.
If you really want to read something that will make you want to scream, read some Bill Black.
http://www.huffingtonpost.com/william-k-black/why-cash-incentives-for-w_b_801558.html
Regarding walk-aways,
I am hearing about people who COULD pay their mortgage. Example given:
They have a primary residence, or a second home or a rental, etc…..They HAVE THE MONEY to pay their mortgage but the home is seriously over-mortgaged. They HAVE THE MONEY to pay back the difference if they tried to do a short sale.
But they don’t want to part with the money and don’t care about trashing their credit score.
So they walk.
THIS is an interesting trend worth some serious journalism.
Or not. Maybe this is more along the lines of what Ray is saying: people will choose to put their own interests above all else.
Jillayne:
I agree that this conversation would probably benefit from splitting out the true “strategic defaulters” — those who could otherwise afford to pay the debt, notwithstanding the fact that it will incur a substantial loss — from the larger group of people who default and walk. In my experience (30 files on my desk) the true strategic defaulters represent maybe 10% of the universe of people who are considering default. I think any consideration of the ethics involved must take into account the condition/situation of the debtor. Certainly what is “ethical” must turn at least in part on the circumstances of the person facing the ethical dilemma.
“people will choose to put their own interests above all else.”
Come on Craig and Jillayne. You would walk to ( if you haven’t done so already) on a property you cannot rent, is too upside down to cover the payment, cannot sell, do not qualify for a loan Mod, remain a % upside down, etc.. These bleeding properties become arterial wounds as time continues to march on…
Stategic defaulters, Short salers, Deed in Lieu’s, Walkaways, call them all what you like. There will be millions more that will do this for a decade when they FINALLY realize their value is not coming back. At the first sign of ANY financial disturbance in the coming decade the family who resists NOW will surely UNLOAD at a later date. The Fed knows this and the banks know this. They are DELAYING the INEVITABLE.
What you need to watch is what the Fed is going to bring to the table. Its gonna be a WHOPPER that will ANGER millions yet be sold to America as being the best for us all.
I can hardly wait!
Ray — I’m sorry, did I say I would NOT “strategically default”?? While I am not in that situation and do not anticipate being so, I would not rule out any possible resolution, and certainly the resolution that is best for me and my family will have a “leg up” on all other resolutions. So unless I say it in a post, please don’t assume you know what I would do in any given situation.
It is my opinion YOU would walk in one form or another when faced with the situations that millions are. It is my opinion and I will stick with it. Family or not.
I’m free to assume PUBLICLY what anybody would do? Am I not? I feel Tim would walk to, and Jillayne, and most everyone on this blog but I cannot speculate on when you or the others would reach your breaking point. That depends on your income, family, children, health, etc…
Just a matter of time Craig for everyone…Time…….. They are all coming back..One way or another. With or without Fed stimulus.
People only remain stupid for so long………….
That would probably be a better article; people who are, or will default on the mortgage even if they can afford it.
Number one I don’t think any one should be involved in a short sale. If you have a medical condition, or are in financial dire straight, you should consider bankruptcy anyway. You should just ride out the foreclosure storm, then declare, or wait until every other option is exhausted.
I’m not an attorney, that was just my opinion.
Second is we have a client who is a fund manager. He invests other people’s money, very well, and is getting ready for retirement. They own a very nice condo that they paid too much for. They will be moving out of the country, and I asked if they were going to rent the condo. She said they would just walk away. It was so matter of fact, like it was nothing.
I mean, how else would you do it? Are you going to bring money to closing if you are never going to return? And what about that almighty FICO score? Is that a crock of horse dooey or what? You clear your debt, start over, and the FICO is going to determine everybody a bad credit risk who didn’t play a stupid game with the bank? I don’t think so.
As far as the government doing anything, they won’t. Republicans were elected to ensure nothing else gets done. To many people are afraid of losing the benefits a corporate job can give them. Nothing will be done for another two years.
If you are a bank and you lend money with 5% down then the downside risk you face is enormous. That is why subprime is less about the credit score and more about the downpayment.
If the rich folks that you describe had put down 50% on that condo, then they will likely be losing money if they walk away and the bank might recover money from it. What is wrong with that?
If they put down 20% and they lose that 20% and the bank loses some more money, then both parties have lost money due to a bad market bet. People all over were yelling from mountaintops how there was a property bubble, and yet banks lent money that anybody could see they were going to lose. Some rich people and a silly bank both lose money. What is wrong with that?
If they put down 5% then whoever signed off on that loan is a fool. When property prices are obviously way above historical levels you should increase downpayment requirements, not increase them. The fact that the bank exposed itself in this way means that they should go under.
What people fail to understand is that in a truly free market nobody would be able to walk away from anything. Because in a free market with no government backstop on banks, banks would very efficiently figure out what downpayment ratios and interest rates would cause them to have minimal losses and disincentivise strategic default.
If you want to wonder why people are able to default, look at the percentage of home loans that are backstopped by Freddy and Fannie. The banks did nothing but skim off the stupidity of the government, and now all taxpayers in the US are paying for the mistake.
This whole thing is a classic tragedy of the commons problem.
Thank you Ben. Good comment.
Millions of people lost money.
The banks, and lenders lost nothing, they made money, and continue to make huge profits.
The tax payers lost money, as did those pension funds, as did many investors. Trillions of dollars moved from smaller investors to those large enough to direct the market place.
Banks didn’t want to increase down payments because the Note was what they generated to be bought, sold, and traded. You’re talking like the mortgage was a source of some business, when it was simply an instrument.
The system went far out of whack. Most people got caught up in what was an orchestrated swindle by device. So today saying that every one should pretend that this was a level playing field is wrong.
Jillaynne has a point that we could really seperate out the people who got caught up to the last dime, and those who recognize that it’s just time to walk away.