In economic terms, two wrongs can certainly make a right. In many cases, having these people move out would serve no purpose other than to destroy the houses' values as well as the values of the surrounding homes. People who stay in their homes prevent squatters from moving in and perform some maintenance. Banks often make economically foolish decisions regarding foreclosure for a whole host of reasons.
Wait, you're saying you came by your principles on this issue through a McSweeny's article about a couple who knowingly stated an income 12x their real income to buy a house that they could only hope to afford if the housing market continued to appreciate stratospherically, and who then blamed the economy when their completely untenable loan blew up?
You do realize that it's perfectly reasonable to be disgusted with the mortgage originators, the Wall Street financiers, the CDO managers, the CDO manager's clueless investors, and the feckless homeowners who got into bed with them, right?
The article I linked to is not fiction. Do you have reason to believe that the attorney who wrote it was lying?
And yes, I think the homeowners there pretty awful. But the banks didn't determine that they were awful before they acted in bad faith; they acted in bad faith from the get-go, for everyone, whether or not their actions merited such treatment.
And from where I sit, it seems like the banks and servicers are the ones who completely failed to do any due diligence and then blamed the economy when their unsustainable loans proved, well, unsustainable. The average person is functionally innumerate. They are going to make poor decisions regarding quantitative matters, especially quantitative matters couched in ways that are deliberately obfuscated. This is not true of the average bank. I expect better from them.
It's not fiction. But it's McSweeney's. It wasn't edited for accuracy or logic or fact-checking or bias; it was edited to make it read well. I like McSweeney's probably almost as much as you do, but would hesitate to cite it in an argument about economics!
Your other two grafs don't actually rebut anything I said. Yes. Banks bad. Very bad! Also: require Thomas to sit on hold to wait to talk to someone in Bangalore about mortgage. Ridiculous fees, too! Bad! Unfortunately: still not OK to defraud them. Contracts with bad evil banks? Still valid.
It wasn't edited for accuracy or logic or fact-checking or bias
In general, I do not expect main stream publications to be able to edit articles regarding economics. Journalists and editors are astonishingly ignorant of basic economics, to say nothing of statistics or law. There's a reason that economics professor Dean Baker keeps an entire blog devoted to correcting the idiocies and distortions found in traditional reporting (see http://www.cepr.net/index.php/beat-the-press/ ); it is the same reason that economics professor Brad Delong regularly lambastes major newspapers on his blog by chanting "why, oh why can't we have a better press corps?" (see http://delong.typepad.com/sdj/better_press_corps/ ). So the fact that this article didn't appear in the Washington Post (where I've read "fact-checked" articles which presumed that inflation does not exist) doesn't really trouble me. It is written by an attorney and officers of the court are generally subject to sanction if they misrepresent cases.
I like McSweeney's probably almost as much as you do
Um, I don't read McSweeny's; I read this article because it was linked from an economics/policy blog I respect.
Unfortunately: still not OK to defraud them.
I don't believe the behavior in question falls under fraud statutes.
This is surprising: generally we expect corporations to act in their best interest taking full advantage of their rights under the law, even if doing so violates the spirit of the law. How odd that we apply such different standards to individuals.
Your argument here seems to boil down to, "the Washington Post has inadequate editorial standards for business reporting, so we should be happy to cite outlets that have literally no editorial standards for business reporting." Sorry, I disagree.
But you should read McSweeney's. It often pretty excellent.
It is not just the WAPO. I've seen the same appalling ignorance in many publications. I've also talked to journalists and I feel very confident in saying that people in journalism generally don't have the skills needed to fact checking in this area. Beyond that, "fact checking" as traditionally done is a very narrow activity that allows all manner of deceptions to be published. Your childlike faith in the utility of traditional news organizations to ensure accuracy by fact-checking is charming, but also ridiculous.
And McSweeny's certainly does have editorial standards. Libel is still a crime, which both McSweeny's and the attorney who wrote the article are very much aware of.
There are different varieties of squatters. Drug addicted transients are not equivalent to small business owners with roots in the local community who happen to have an emotional attachment to that particular house. Given the choice of squatters, I'd prefer to have squatters with a non-zero income.
I'm taking issue with your language. It's not "their house", it's the bank's house. They are squatters themselves, so they don't keep squatters out.
If you said "people who squat in homes they used to own may perform maintenance and keep out a worse breed of squatters than themselves", I would have had no objection.
I don't know what the probability of "drug addicted transients" moving into a foreclosed suburban house is, but I do know that people aren't going to be strongly incentivized to keep up maintenance on a house they will be vacating soon.
Judging by http://www.theatlantic.com/magazine/print/2008/03/the-next-s... I'd say the probability is nonzero. And I'm pretty sure the owners described in the article will perform some critical maintenance like making sure vermin don't infest the house and fixing leaks because no one, not even a renter, wants to live in a place water rains down on them in their living room or where they have to dodge raccoons.
Again, there are degrees of maintenance. They won't be incentivized to put in a new deck or repaint the whole house, but a lot of the value destruction associated with foreclosure has to do with simpler things: animals taking residence, water damage, thieves stealing the wiring/plumbing and ruining the walls in the process, etc.
I forgot that many people on HN can't distinguish between normative and positive claims, so let me clarify: I don't think this behavior is terribly ethical, but I do think it can produce more efficient economic outcomes. There are many of unethical acts that improve economic efficiency.
I agree with you that the likely effect of them turning in the keys to their houses is that those houses will be vacant probably for the better part of a year, which will damage other good-faith occupants of neighboring houses and produce no economic good for either the lender or the buyer.
I think the only thing I could really wish for here is a system that captures some of the funds that these people are spending on trucks or business schemes and, in exchange for some long-term plan to keep them in their houses, get them to start paying back into their commitments. It is certainly true that the financial system shoulders some of the blame for this untenable situation.
a system that captures some of the funds that these people are spending on trucks or business schemes and, in exchange for some long-term plan to keep them in their houses, get them to start paying back into their commitments
There have been several proposals that would accomplish this, including Dean Baker's Own to Rent ( http://tpmcafe.talkingpointsmemo.com/2007/08/19/own_to_rent_... ); I believe all of these proposals have been vociferously opposed by the finance industry. One reason is that it would probably force banks to mark down the values of their assets to something more realistic. I believe these proposals would be very popular though with the general public....
What these people are doing is exactly equivalent to what tendentious tenants do to avoid eviction. We almost uniformly hold those tenants in contempt; they're perpetrating a fraud. The only difference here is that it's banks holding the loans, not independent landlords.
I see how you could sympathize with a ruthless defaulting homeowner; after all, what else are they going to do? Are we really asking them to vacate early solely to make the bank's job easier? On the other hand: what they're doing is morally indefensible, and any costs to the bank their behavior incurs is largely going to be borne by good-faith mortgageholders and new prospective good-faith home buyers.
Maybe they shouldn't be bragging about this. Here's to hoping it catches up with them sooner than later.
I find it interesting that debt is always couched in moral terms for individuals, but business terms for corporations. Somehow it's immoral for individuals to work a system for their advantage, but it's standard operating procedure for a business.
That's a straw man argument, isn't it? The fact that some pundit somewhere drew a line between Morgan Stanley's contracts and Joe Smith's contracts doesn't mean we have to be held to a different standard on Hacker News.
Or, more directly: it's immmoral for businesses to violate contracts too. What's the rest of your argument?
The fact that some pundit somewhere drew a line between...
As Felix Salmon points out ( http://blogs.reuters.com/felix-salmon/2009/11/30/the-worlds-... ), we're not talking about some random pundit. We're talking about the President of the United States, the Secretary of the Treasury, and a long list of authoritative figures in civil life.
Or, more directly: it's immmoral for businesses to violate contracts too. What's the rest of your argument?
Given finite resources for law enforcement, we should prioritize investigation and prosecutions so that a small number of random losers who made a bad moral choice that probably harmed no one get investigated/prosecuted after the rich and powerful people who decided to abandon their own underwriting standards and helped destroy the economy.
Substitute "President Barack Obama" for "some pundit somewhere" and I don't think my argument changes or loses any force. But, I agree: we shouldn't be creating a task force to go after these people.
This probably won't satisfy you because it's hard to quantify, but: In my experience, the general discourse treats individual debt as a moral responsibility and corporate debt as a contractual/legal responsibility. Which is interesting because people are pretty strongly moved by moral judgements about their actions.
I don't generally classify actions as morally indefensible or not; 1 bit of information seems awfully limiting. So while this seems somewhat immoral to me, it doesn't strike me as a major moral fault, which is what I think of when people bandy about the phrase "morally indefensible."
any costs to the bank their behavior incurs is largely going to be borne by good-faith mortgageholders and new prospective good-faith home buyers
I think we have to keep costs in perspective; there is no data to suggest that this is happening in significant numbers. So costs must be small. And since occupied homes retain more value (and vacant homes cause adjancent homes to lost value), economically, this might be better for everyone, including the banks.
Historically, real estate industry figures have often complained about strategic defaults with no real data to back them up. Furthermore, these costs pale in comparison to an industry simply abandoning its underwriting standards wholesale. When all the banks decide that they're not going to bother verifying income before loaning people hundreds of thousands of dollars, that's going to cause massive problems down the line, and those problems dwarf any caused by the defaulters described in this story.
Here's to hoping it catches up with them sooner than later.
Given that there are finite resources devoted to law enforcement, it seems bizarre to sic them on these people. Surely there are better targets for law enforcement attention? Like, maybe, every bank officer who decided to abandon their own underwriting standards?
A family member of mine is in the same position: they bought a house, and now they can't afford it. I'd love to feel as if the bank should be held accountable, but at the same time, I look at my family members, what he does, how they spend their money, and I can't feel sympathy. They dug their own hole.
And yet, the amount of entitlement coming from them is just insane. They feel as if it's not their fault; they point at everyone except for them. It's the governments fault they aren't getting money. Ignore the fact that they both dropped out of college, bought a house together before marriage, had a child before marriage, and are now on their way toward a second child, while basically unemployed.
I've tried to help. Bought them a computer for school, send them gift certificates so I know the money goes toward the kids. Bought them a washer for their clothes. But when they go out and spend $200 on a tattoo for a birthday gift (not to mention an iPod touch!), I can't help but wonder what they are thinking.
And still, the self-entitlement they reek of is horrible. My wife and I work hard, pay our bills, and still rent. We make more than enough to get a house, but we want to pay off the few outstanding debts we have, and save up money for a nice big down payment before we settle on a house. We look at them, and wonder how they were given a loan, how they could feel like they should get one, when we can't imagine getting one right now.
Maybe the lenders should be held accountable in some regards, but this doesn't excuse the borrowers. The worst part is the kids. With a second a month away, I just can't see how they'll be able to afford everything. I know they are using their credit cards right now, but spending it on stupid crap ($200 for carpeting for the new babies room.. seriously?)
Sorry. Long useless rant. Just had to get it out somewhere.
Hard to believe that 10 years ago you would often hear your average middle class white person say "those black people need to get a job!" -- when was the last time you heard that? An atmosphere of entitlements is overtaking the middle class in this country and it doesn't bode well for our future. The housing crisis will resolve itself in a few years-- the entitlement mentality lasts forever -- and destroys civilizations.
My wife helps out. She finds job postings online and sends them to him. She does this often, even though we are in different countries. She doesn't understand why he can't get a temporary job right now in the mean time.
To be fair, he did get back into school and seems to be doing well, but still, until he finds a full time job in his field, he could get anything anywhere and at least make a few dollars more for the family.
I agree with a lot of your comment, but this bit seemed very oddly out of place. What would be wrong with having a child before getting married? It's not something I chose to do, but most of the other things you mentioned have fairly predictable negative financial consequences, whereas I can't think of anything for this one.
Sorry, I should have said that they had an unplanned child that caused her to drop out of school. It also provided additional financial burden. A child before marriage isn't the issue; it's how they dealt with it. Consider that they didn't use any real birth control other than the hope and pray method. The second child was essentially for the same reason.
I completely, 100%, understand and sympathize. I've been in a similar situation for a while.
I love my parents. And not all of their current situation is entirely, directly, their fault, but a lot of it is. They recently had a windfall, of sorts, a few months back. I was hoping that, considering the foreclosure threats, the destroyed credit, the really tough situation they've been in, they would finally see to it that the money was put to effective use.
But, no. Instead, they settled a few bills, yes, but several thousands went to my brother, so that he could get a shiny new car that he couldn't afford. My brother works hard, and I love him too. But, he couldn't afford it. He didn't need exactly that one. There were lots of perfectly reliable options for $1,000 or less.
Predictably, he's already behind on paying them back. Then tax time came, and that windfall suddenly added up to a huge payment back to the government -- money they, again, didn't have. Now they're selling one of the vehicles they have a loan on, at a loss, because they can't afford the monthly payments anymore. They'll still have to pay the difference, probably for around a year, and they'll be out of a vehicle in the meantime.
None of this stopped my dad from picking up a really great deal on an antique car, though.
It's maddening. It's definitely starting to put a rift in our relationship. I've tried helping, a lot. I made their car payments for a while (and in return got to drive it while mine was broken down, yet again). I've been paying their cell phone bills for around a year now, at least.
Meanwhile, I've bootstrapped my own business, with no savings. I work on my truck constantly. My girlfriend and I live in a small place; we get by, but it's been very difficult sometimes. Gradually though, we're getting ahead, and without much in the way of help. Mostly, we work at it constantly, and try to make smart decisions money-wise.
But my parents, and now my brother, do seem to feel very entitled. They would probably object to that, but if you listen to them, you hear things like, "I've worked hard all my life, I deserve this." Well, no. They worked hard all their life, but they squandered everything they ever made. Now their time has run out and they don't have any options left -- but still, it's someone else's fault that they're being forced to give up all this stuff.
I think it's the Boomer Generation Problem: they were told, "work hard, and you can have whatever you want", and so many people believed it. It was supposed to encourage them to do something meaningful with themselves, but instead it encouraged them to compete with eachother over ever more extravagant displays of wealth -- all of which kept actually making them poorer.
It's very sad, and I fear that not enough of my generation has really begun to realize this yet.
Nice post, up until "I think it's the Boomer Generation Problem".
Boomer here who got his first credit card at age 27, never bought a house without at least 20% down, never had a car payment, and never failed to pay a bill on time. Just like most people I know, regardless of age.
This is not a matter of age or generation, but of character.
No need to ruin a great post with a silly conclusion.
You're probably right. I would expect there to be exceptions, but after doing a little digging, I'm not finding anything to support the belief that a specific age range of individuals is suffering statistically higher foreclosure rates.
I got to that conclusion after a couple too many anecdotes, but there're no numbers to back it up.
You know, as much as I hate to be a bigot (and, as a minority in this country, believe me, stereotypes _hurt_), I have to agree with your generational assessments. Furthermore, I think it's both the boomers and the "echo boomers" (born 1980 to 1995) that are perpetrating this easy money fallacy.
Though alot of people will say it started well before, I'll say it seriously accelerated starting with George W. Bush, and I'll tell you why. Even though W graduated from Yale and Harvard (and had a father who did the same and who was a paratrooper and CIA director then VP then Prez), he was still looked at as kind of the lovable fuck-up, the "guy you'd wanna have beers with", i.e., an everyman. Very little elitism in his manner or his folksy talk with put-on Southern accent (even though he was born and raised in Connecticut). Everything he did was done "by the gut," given little more than "hope and faith" before decisions were made. It seemed easy. The way he damned the terrorists before making a golf swing, the time he simply waved his hand and made stem cell research disappear in a fog of amoral haze, the way he magically made trillions "appear" for the Nation's tax cuts and stimulus checks, the way he funded wars without accounting for them in the general budget.
It seemed like magical, heady times. We didn't even understand it, but we loved it. Even though 9/11 came and went under his administration, we didn't feel the true weight of it, because it was all put on credit.
That's ALL we knew. Credit was the magic salve for all problems. Suze Orman even told everyone that the only way to build credit was to have credit cards (which, in hindsight is complete BS as evinced by tons of people like myself, who has a ~740 score having never had a credit card in my 35 years of life, and currently paying both a mortgage and a car loan, both at between 4-4.5% interest with 10% down).
Most of us just didn't care. We were asking increasingly crazier and crazier questions like "about to file bk [bankruptcy], lien on house... would I qualify for a lease on a Hummer H3?" (I kid you not, that was on a messageboard that I was forwarded the link by a friend; unbelievable). But alot of people had similar situations. Suddenly people were driving cars that cost more than 2x their annual salary, and buying a home that was more than 10x the same and not even noticing that it wasn't completely outrageous to do so.
When it all came CRASHING down on them and the banks came to collect after their drunken-sailor grace periods, everyone was already tapped out, rolling debt from credit cards and loans onto new cards and things like that that seem kinda commonplace now even though it's simply mindboggling if looked upon on an individual person-by-person basis.
I've seen this with the boomer generation, I've seen this with their kids (the echoes or Y generation), but it just mostly kinda skipped Generation X, the 30-somethings. Don't ask me why, I'm not a close study of generational attitudes, but I do know what may have triggered it. For the boomers, it was W's spending ways; for Gen-Y, it was watching their boomer parents as well as Paris Hilton, Lindsay Lohan, et al. spend like it would never end. And, they tried to keep up with their cultural peers.
Sorry. Long useless rant. Just had to get it out somewhere.
1. Don't apologize. No need.
2. Not useless.
3. I have similar stories. I imagine others here do too. But I was too chicken to share mine. Glad you had the guts to be honest and say what you're thinking. Please keep doing that.
“We could pay the mortgage company way more than the house is worth and starve to death,”
This implies that if the house was worth what they were paying that they would still starve to death and really they made a bad choice in buying the house in the first place.
"But the couple also refinanced at the height of the market, taking out cash to buy a truck..."
For every unwise borrower there is an unwise lender. My sympathies are more with the borrower, since the lender, as the side that supposedly hired people with financial acumen, bears a majority of the responsibility for assessing risk.
In this case the problem lies with the political pressure applied by both Bush and Clinton on Fannie Mae and Freddie Mac to continue giving out more mortgages.
A bigger problem is the homeowners mortgage interest deduction. In terms of its stated policy rational, it is a complete joke, but modification let alone elimination remains political suicide.
This simplification presumes that there are only two parties with stakes in a residential mortgage. That's not at all true. There are tens of millions of residential mortgages taken out in good faith and held in good standing, and they will absolutely pay in one way or another for the abuse of the system by either lenders or homeowners.
Let me see if I got this right... You borrowed money. Now you choose not to make the monthly payment that you have already agreed to pay. And spend that money on other stuff. And you call them the crooks?
And unfortunately, the real "victims" in this episode are people who act responsibly by paying their mortgages and taxes while receiving very little interest on their savings.
Even if banks and courts did have the manpower to evict these people faster, the deeper problem, as you pointed out, is this backwards logic and gross rationalizing.
To try to address this, I think a campaign of linking fiscal responsibility to patriotism might be helpful. I suspect that many of these people would identify with being patriotic. Each mortgage payment these people make or at least each step these people take to work with the bank is a step in the right direction for our country. The actions of these people will inevitably hurt the rest of us in the long run.
I think a campaign of linking fiscal responsibility to patriotism might be helpful.
Can you think of any cases where a campaign of linking something to patriotism has actually worked? I cannot.
My sense is that many people would respond to such a campaign with rage: they'd point out that financial institutions and their shareholders made out like bandits with the various emergency programs and that no one ever said anything about BoA or GS being "unpatriotic". The double standard would appall many people I think.
The actions of these people will inevitably hurt the rest of us in the long run.
Are you certain that's true? Maybe the only way to convince banks that they should not completely abandon their own underwriting standards would be for them to suffer some more agony by having a few borrowers dick them around. Certainly, if they just moved out today, the homes they lived in as well as their neighbors would lose value, which would in turn hurt "the rest of us in the long run".
In both World Wars the US had nationwide "rationing" and volunteer recycling programs. This was all done in the name of patriotism.
~
Those unoccupied homes would simply burn down sooner rather than later and the neighborhood would be better off. Remove the blight and re-use the land for something else.
If the former owners in question leave the houses they're occupying, then they'll go live somewhere else. Which wouldn't change the supply of available homes. It might lower prices, but I'm not sure why you would consider that a problem in and of itself: at the margin, that helps renters and hurts owners. Our society goes to great lengths to transfer cash from renters to owners, so a tiny change in the opposite direction doesn't strike me as a huge problem. Given current rent to own ratios, such reductions are needed to bring the system into balance anyway.
And leaving the current home they're in vacant will reduce its value. Specifically, vacant foreclosed properties suffer all sorts of problems that reduce their value: animals infest the properties, thieves steal the wiring and plumbing (which destroys the walls), leaks spring and since no one notices, water damage accumulates quickly, etc. Plus, neighboring homes will lose value as well: no one wants to live next to a vacant structure that has sustained major water damage or is being used as a base of operations by criminals or vagrants. Keeping people in those homes prevents most of these value-destroying problems from happening. When good assets are trashed, our whole society is made poorer.
If the former owner downsizes, moving from a large home to a small one, the supply of housing goes up. And I don't consider lowering prices to be a problem.
Leaving immediately would encourage the bank to sell the house as quickly as possible to a new owner. The new owners would be more likely engage in maintenance of the home (why fix the roof of a house you are going to be kicked out of) and the new owners will be people of better moral standing. Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet.
It's possible that the downsides to leaving outweigh the upsides, but it's by no means certain. There are both upsides and downsides, and it's very far from obvious which way the balance goes.
Leaving immediately would encourage the bank to sell the house as quickly as possible to a new owner.
In many parts of their country, there is a large excess of supply, so it is unlikely that a quick sale is possible. Which means that the house will likely sit on the market for 6-12 months.
In some areas, banks are walking away from properties they foreclosed upon, legally abandoning them. The responsibility for maintaining or demolishing the property then reverts back to the original mortgage holder, who often gets no notice and believed that they had nothing to do with the property since it was foreclosed. Under such circumstances, I think it can make sense for people to refuse to move out: if the house will continue to be an open ended obligation for you, you might as well at least get a place to live out of it. See this article for more information: http://www.cleveland.com/news/index.ssf/2009/07/bank_walkawa...
why fix the roof of a house you are going to be kicked out of
Two reasons. (1) Because you don't like rain water poring over your head while sleeping in bed. No one wants to live in a house where rain water is poring on them. No one wants to live in a house where mold and mildew have taken root from pooling water. And no one wants to share a house with raccoons. (2) Homeowners often develop irrational attachments to the home that they "own"; that is why many people buy homes when doing so makes no economic sense. These irrational attachments may incentivize people to maintain homes when rational calculation suggests they should not. Remember, being a "good" homeowner is a key concept of many people's self-image. Doing things like fixing leaks and tending the yard may continue to matter to them even after they've decided that they're not paying another cent.
Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet.
I don't believe this claim is true. Can you cite anything justifying it? In many areas, foreclosure takes a long time because servicers and courts are overwhelmed with volume; this state of affairs benefits banks who can postpone marking their assets properly.
I don't consider lowering prices to be a problem.
Sorry; I misread your comment. Given how little evidence we have that this phenomena affects a significant number of people, I don't find claims that this will materially change market prices to be credible.
Concerning bank abandonments, that's interesting. Obviously if the bank abandons the home, the homeowner can legitimately live there.
As for fixing the roof simply because it makes the home uninhabitable, I don't buy it. Unless the fix were cheap, I suspect most people would probably just leave. Why spend $5,000 fixing a home you will be kicked out of, rather than just move out? Or instead of moving out, you could just put a bucket under the leak and move your bed, on the theory that you'll probably be kicked out before the leak gets that much worse.
Regarding mark to market accounting, my understanding is that a mortgage is treated as a "held to maturity" asset, while a defaulted home is treated as an "available for sale" asset and must be marked to the market. Thus, the bank must mark the loss only when the home is foreclosed on (not sure when in the process this rule kicks in).
And yes, it benefits banks at the expense of investors. Personally, I see value in preventing this.
> If the former owners in question leave the houses they're occupying, then they'll go live somewhere else.
> And leaving the current home they're in vacant will reduce its value.
You're assuming that these houses will be left vacant.
In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so?
Yes, the "right price" is probably a lot less than what the bank is owed. They should take the loss for dumb lending.
You're assuming that these houses will be left vacant.
Many will be left vacant for some time. Foreclosure is a slow process, even when the mortgage holders are not fighting you every step of the way.
In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so?
According to the statistics compiled by CalculatedRisk, that seems unlikely [1]. Many housing markets (not just Detroit) are still very sluggish. There may be tons of buyers for properties in hip urban areas where most HNers live/work, but most foreclosures have been happening in suburban/exurban areas whose real estate markets are still in the toilet. The national housing market has a very large stock of uncleared inventory, so vacancy should be the default assumption until that inventory returns to normal.
This article [2] suggests that you're wrong regarding homes in Ohio. If there were really "plenty of people who would be willing to pay for those houses at the right price", then I don't we'd be seeing banks walk away from foreclosed properties and abandon them.
The CalculatedRisk stats say that houses aren't moving at current prices. That says nothing about what they'd do at lower prices.
Even if all that happens is "move up", things are better for the folks who got to move up. (And there's less net economic loss if we lose the inexpensive places than the more expensive ones.) More likely, you'll get smaller and more households, as the run-up to the burst had people living together for economic reasons.
Since I said that Detroit wasn't an exhaustive list, it's curious that another member of the list would be considered disproof.
Note that Ohio's proposal, forcing banks to offer for sale, does what I suggested - it puts things on the market.
Note that banks walk away because they let the real liabilities grow while they kept thinking that their book value mattered. Wipe out the liabilities and stop them from growing, as the Ohio proposal does, and there's something there. More to the point, there's more there the sooner that happens.
I'm sure that there are some places that won't get a bid even at 0 reserve and no liabilities. However, I see no reason to treat everything that way because most will get a bid. (I know folks who wanted to buy blocks of Detroit for the right price, but weren't willing to take the liabilities.)
The banks don't want to foreclose, because they do better with "extend and pretend" ... until the day before the foreclosure they can still carry the worthless loan as an asset at 100% of its original value (if I understand this part of the process correctly).
Who is the greater criminal?
Some old lady living in a crappy $125K house in Florida--or bank execs who in concert with corrupt regulators are hiding billions in bad loans and meanwhile paying themselves 100K bonuses or more?
If you remove the word "criminal", which doesn't apply, and replace it with "bad actor", I'm going to go with: "they are both bad actors". Squatting in a $125k house you promised to pay for but now refuse to pay for is still bad.
This is the same lazy argument that runs though any discussion of any abuse of any service anywhere. "Sure, I stole 10,000 credit card numbers --- but the credit card companies are evil organizations that prey on low-income people, and they're the ones that are going to end up paying!"
Imagine I decided to move into a foreclosed home and live there rent free until the banks could legally force me out? What is that called? It's stealing. Every month these people live in these houses they are stealing from the banks. Yes, the banks are at fault for creating the opportunity to get robbed but that doesn't justify the actions of these squatters.
Would you say that a rapist is justified in raping someone because they acted in a sexually lewd manner?
The "they had it coming" argument just doesn't hold water.
The Chinese sees the housing crisis from a different point of view: The US cheated China out of billions by selling them bonds backed up by inflated real estate, money saved up by hardworking Chinese. It's a completely different take on the situation.
Someone had to provide the money in the first place. That someone sure as hell wasn't the banks, the banks were intermediaries. Often times that someone was a Chinese or German institution chasing higher interest rates with no clear understanding of what was being sold to them.
Who benefited from the transaction? Whoever sold the home. A lot of foreign money came into the US and stayed in the US.
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[ 4.4 ms ] story [ 100 ms ] threadPlus, after reading articles like http://www.mcsweeneys.net/links/panoramaexcerpts/Ali.html regarding how mortgage servicers and banks deal with foreclosure, I'm disinclined to believe that they are ever acting in good faith.
You do realize that it's perfectly reasonable to be disgusted with the mortgage originators, the Wall Street financiers, the CDO managers, the CDO manager's clueless investors, and the feckless homeowners who got into bed with them, right?
And yes, I think the homeowners there pretty awful. But the banks didn't determine that they were awful before they acted in bad faith; they acted in bad faith from the get-go, for everyone, whether or not their actions merited such treatment.
And from where I sit, it seems like the banks and servicers are the ones who completely failed to do any due diligence and then blamed the economy when their unsustainable loans proved, well, unsustainable. The average person is functionally innumerate. They are going to make poor decisions regarding quantitative matters, especially quantitative matters couched in ways that are deliberately obfuscated. This is not true of the average bank. I expect better from them.
Your other two grafs don't actually rebut anything I said. Yes. Banks bad. Very bad! Also: require Thomas to sit on hold to wait to talk to someone in Bangalore about mortgage. Ridiculous fees, too! Bad! Unfortunately: still not OK to defraud them. Contracts with bad evil banks? Still valid.
In general, I do not expect main stream publications to be able to edit articles regarding economics. Journalists and editors are astonishingly ignorant of basic economics, to say nothing of statistics or law. There's a reason that economics professor Dean Baker keeps an entire blog devoted to correcting the idiocies and distortions found in traditional reporting (see http://www.cepr.net/index.php/beat-the-press/ ); it is the same reason that economics professor Brad Delong regularly lambastes major newspapers on his blog by chanting "why, oh why can't we have a better press corps?" (see http://delong.typepad.com/sdj/better_press_corps/ ). So the fact that this article didn't appear in the Washington Post (where I've read "fact-checked" articles which presumed that inflation does not exist) doesn't really trouble me. It is written by an attorney and officers of the court are generally subject to sanction if they misrepresent cases.
I like McSweeney's probably almost as much as you do
Um, I don't read McSweeny's; I read this article because it was linked from an economics/policy blog I respect.
Unfortunately: still not OK to defraud them.
I don't believe the behavior in question falls under fraud statutes.
This is surprising: generally we expect corporations to act in their best interest taking full advantage of their rights under the law, even if doing so violates the spirit of the law. How odd that we apply such different standards to individuals.
But you should read McSweeney's. It often pretty excellent.
And McSweeny's certainly does have editorial standards. Libel is still a crime, which both McSweeny's and the attorney who wrote the article are very much aware of.
Squatters living in a home owned by a bank prevent squatters from moving in?
If you said "people who squat in homes they used to own may perform maintenance and keep out a worse breed of squatters than themselves", I would have had no objection.
Again, there are degrees of maintenance. They won't be incentivized to put in a new deck or repaint the whole house, but a lot of the value destruction associated with foreclosure has to do with simpler things: animals taking residence, water damage, thieves stealing the wiring/plumbing and ruining the walls in the process, etc.
I think the only thing I could really wish for here is a system that captures some of the funds that these people are spending on trucks or business schemes and, in exchange for some long-term plan to keep them in their houses, get them to start paying back into their commitments. It is certainly true that the financial system shoulders some of the blame for this untenable situation.
A pox on all their houses, then.
There have been several proposals that would accomplish this, including Dean Baker's Own to Rent ( http://tpmcafe.talkingpointsmemo.com/2007/08/19/own_to_rent_... ); I believe all of these proposals have been vociferously opposed by the finance industry. One reason is that it would probably force banks to mark down the values of their assets to something more realistic. I believe these proposals would be very popular though with the general public....
I see how you could sympathize with a ruthless defaulting homeowner; after all, what else are they going to do? Are we really asking them to vacate early solely to make the bank's job easier? On the other hand: what they're doing is morally indefensible, and any costs to the bank their behavior incurs is largely going to be borne by good-faith mortgageholders and new prospective good-faith home buyers.
Maybe they shouldn't be bragging about this. Here's to hoping it catches up with them sooner than later.
Or, more directly: it's immmoral for businesses to violate contracts too. What's the rest of your argument?
As Felix Salmon points out ( http://blogs.reuters.com/felix-salmon/2009/11/30/the-worlds-... ), we're not talking about some random pundit. We're talking about the President of the United States, the Secretary of the Treasury, and a long list of authoritative figures in civil life.
Or, more directly: it's immmoral for businesses to violate contracts too. What's the rest of your argument?
Given finite resources for law enforcement, we should prioritize investigation and prosecutions so that a small number of random losers who made a bad moral choice that probably harmed no one get investigated/prosecuted after the rich and powerful people who decided to abandon their own underwriting standards and helped destroy the economy.
I applaud you for this statement, but GP is correct that many do not share this belief.
I don't generally classify actions as morally indefensible or not; 1 bit of information seems awfully limiting. So while this seems somewhat immoral to me, it doesn't strike me as a major moral fault, which is what I think of when people bandy about the phrase "morally indefensible."
any costs to the bank their behavior incurs is largely going to be borne by good-faith mortgageholders and new prospective good-faith home buyers
I think we have to keep costs in perspective; there is no data to suggest that this is happening in significant numbers. So costs must be small. And since occupied homes retain more value (and vacant homes cause adjancent homes to lost value), economically, this might be better for everyone, including the banks.
Historically, real estate industry figures have often complained about strategic defaults with no real data to back them up. Furthermore, these costs pale in comparison to an industry simply abandoning its underwriting standards wholesale. When all the banks decide that they're not going to bother verifying income before loaning people hundreds of thousands of dollars, that's going to cause massive problems down the line, and those problems dwarf any caused by the defaulters described in this story.
Here's to hoping it catches up with them sooner than later.
Given that there are finite resources devoted to law enforcement, it seems bizarre to sic them on these people. Surely there are better targets for law enforcement attention? Like, maybe, every bank officer who decided to abandon their own underwriting standards?
I pretty much boil down to: "stop bragging about exploiting the system." I'm guessing you agree with that too!
And yet, the amount of entitlement coming from them is just insane. They feel as if it's not their fault; they point at everyone except for them. It's the governments fault they aren't getting money. Ignore the fact that they both dropped out of college, bought a house together before marriage, had a child before marriage, and are now on their way toward a second child, while basically unemployed.
I've tried to help. Bought them a computer for school, send them gift certificates so I know the money goes toward the kids. Bought them a washer for their clothes. But when they go out and spend $200 on a tattoo for a birthday gift (not to mention an iPod touch!), I can't help but wonder what they are thinking.
And still, the self-entitlement they reek of is horrible. My wife and I work hard, pay our bills, and still rent. We make more than enough to get a house, but we want to pay off the few outstanding debts we have, and save up money for a nice big down payment before we settle on a house. We look at them, and wonder how they were given a loan, how they could feel like they should get one, when we can't imagine getting one right now.
Maybe the lenders should be held accountable in some regards, but this doesn't excuse the borrowers. The worst part is the kids. With a second a month away, I just can't see how they'll be able to afford everything. I know they are using their credit cards right now, but spending it on stupid crap ($200 for carpeting for the new babies room.. seriously?)
Sorry. Long useless rant. Just had to get it out somewhere.
To be fair, he did get back into school and seems to be doing well, but still, until he finds a full time job in his field, he could get anything anywhere and at least make a few dollars more for the family.
Meh... I could go on. But yeah. Same tired story.
I agree with a lot of your comment, but this bit seemed very oddly out of place. What would be wrong with having a child before getting married? It's not something I chose to do, but most of the other things you mentioned have fairly predictable negative financial consequences, whereas I can't think of anything for this one.
I love my parents. And not all of their current situation is entirely, directly, their fault, but a lot of it is. They recently had a windfall, of sorts, a few months back. I was hoping that, considering the foreclosure threats, the destroyed credit, the really tough situation they've been in, they would finally see to it that the money was put to effective use.
But, no. Instead, they settled a few bills, yes, but several thousands went to my brother, so that he could get a shiny new car that he couldn't afford. My brother works hard, and I love him too. But, he couldn't afford it. He didn't need exactly that one. There were lots of perfectly reliable options for $1,000 or less.
Predictably, he's already behind on paying them back. Then tax time came, and that windfall suddenly added up to a huge payment back to the government -- money they, again, didn't have. Now they're selling one of the vehicles they have a loan on, at a loss, because they can't afford the monthly payments anymore. They'll still have to pay the difference, probably for around a year, and they'll be out of a vehicle in the meantime.
None of this stopped my dad from picking up a really great deal on an antique car, though.
It's maddening. It's definitely starting to put a rift in our relationship. I've tried helping, a lot. I made their car payments for a while (and in return got to drive it while mine was broken down, yet again). I've been paying their cell phone bills for around a year now, at least.
Meanwhile, I've bootstrapped my own business, with no savings. I work on my truck constantly. My girlfriend and I live in a small place; we get by, but it's been very difficult sometimes. Gradually though, we're getting ahead, and without much in the way of help. Mostly, we work at it constantly, and try to make smart decisions money-wise.
But my parents, and now my brother, do seem to feel very entitled. They would probably object to that, but if you listen to them, you hear things like, "I've worked hard all my life, I deserve this." Well, no. They worked hard all their life, but they squandered everything they ever made. Now their time has run out and they don't have any options left -- but still, it's someone else's fault that they're being forced to give up all this stuff.
I think it's the Boomer Generation Problem: they were told, "work hard, and you can have whatever you want", and so many people believed it. It was supposed to encourage them to do something meaningful with themselves, but instead it encouraged them to compete with eachother over ever more extravagant displays of wealth -- all of which kept actually making them poorer.
It's very sad, and I fear that not enough of my generation has really begun to realize this yet.
Boomer here who got his first credit card at age 27, never bought a house without at least 20% down, never had a car payment, and never failed to pay a bill on time. Just like most people I know, regardless of age.
This is not a matter of age or generation, but of character.
No need to ruin a great post with a silly conclusion.
I got to that conclusion after a couple too many anecdotes, but there're no numbers to back it up.
Though alot of people will say it started well before, I'll say it seriously accelerated starting with George W. Bush, and I'll tell you why. Even though W graduated from Yale and Harvard (and had a father who did the same and who was a paratrooper and CIA director then VP then Prez), he was still looked at as kind of the lovable fuck-up, the "guy you'd wanna have beers with", i.e., an everyman. Very little elitism in his manner or his folksy talk with put-on Southern accent (even though he was born and raised in Connecticut). Everything he did was done "by the gut," given little more than "hope and faith" before decisions were made. It seemed easy. The way he damned the terrorists before making a golf swing, the time he simply waved his hand and made stem cell research disappear in a fog of amoral haze, the way he magically made trillions "appear" for the Nation's tax cuts and stimulus checks, the way he funded wars without accounting for them in the general budget.
It seemed like magical, heady times. We didn't even understand it, but we loved it. Even though 9/11 came and went under his administration, we didn't feel the true weight of it, because it was all put on credit.
That's ALL we knew. Credit was the magic salve for all problems. Suze Orman even told everyone that the only way to build credit was to have credit cards (which, in hindsight is complete BS as evinced by tons of people like myself, who has a ~740 score having never had a credit card in my 35 years of life, and currently paying both a mortgage and a car loan, both at between 4-4.5% interest with 10% down).
Most of us just didn't care. We were asking increasingly crazier and crazier questions like "about to file bk [bankruptcy], lien on house... would I qualify for a lease on a Hummer H3?" (I kid you not, that was on a messageboard that I was forwarded the link by a friend; unbelievable). But alot of people had similar situations. Suddenly people were driving cars that cost more than 2x their annual salary, and buying a home that was more than 10x the same and not even noticing that it wasn't completely outrageous to do so.
When it all came CRASHING down on them and the banks came to collect after their drunken-sailor grace periods, everyone was already tapped out, rolling debt from credit cards and loans onto new cards and things like that that seem kinda commonplace now even though it's simply mindboggling if looked upon on an individual person-by-person basis.
I've seen this with the boomer generation, I've seen this with their kids (the echoes or Y generation), but it just mostly kinda skipped Generation X, the 30-somethings. Don't ask me why, I'm not a close study of generational attitudes, but I do know what may have triggered it. For the boomers, it was W's spending ways; for Gen-Y, it was watching their boomer parents as well as Paris Hilton, Lindsay Lohan, et al. spend like it would never end. And, they tried to keep up with their cultural peers.
Hey, just a theory :D
1. Don't apologize. No need.
2. Not useless.
3. I have similar stories. I imagine others here do too. But I was too chicken to share mine. Glad you had the guts to be honest and say what you're thinking. Please keep doing that.
This implies that if the house was worth what they were paying that they would still starve to death and really they made a bad choice in buying the house in the first place.
"But the couple also refinanced at the height of the market, taking out cash to buy a truck..."
sigh...
Let me see if I got this right... You borrowed money. Now you choose not to make the monthly payment that you have already agreed to pay. And spend that money on other stuff. And you call them the crooks?
To try to address this, I think a campaign of linking fiscal responsibility to patriotism might be helpful. I suspect that many of these people would identify with being patriotic. Each mortgage payment these people make or at least each step these people take to work with the bank is a step in the right direction for our country. The actions of these people will inevitably hurt the rest of us in the long run.
Can you think of any cases where a campaign of linking something to patriotism has actually worked? I cannot.
My sense is that many people would respond to such a campaign with rage: they'd point out that financial institutions and their shareholders made out like bandits with the various emergency programs and that no one ever said anything about BoA or GS being "unpatriotic". The double standard would appall many people I think.
The actions of these people will inevitably hurt the rest of us in the long run.
Are you certain that's true? Maybe the only way to convince banks that they should not completely abandon their own underwriting standards would be for them to suffer some more agony by having a few borrowers dick them around. Certainly, if they just moved out today, the homes they lived in as well as their neighbors would lose value, which would in turn hurt "the rest of us in the long run".
~ Those unoccupied homes would simply burn down sooner rather than later and the neighborhood would be better off. Remove the blight and re-use the land for something else.
And leaving the current home they're in vacant will reduce its value. Specifically, vacant foreclosed properties suffer all sorts of problems that reduce their value: animals infest the properties, thieves steal the wiring and plumbing (which destroys the walls), leaks spring and since no one notices, water damage accumulates quickly, etc. Plus, neighboring homes will lose value as well: no one wants to live next to a vacant structure that has sustained major water damage or is being used as a base of operations by criminals or vagrants. Keeping people in those homes prevents most of these value-destroying problems from happening. When good assets are trashed, our whole society is made poorer.
Leaving immediately would encourage the bank to sell the house as quickly as possible to a new owner. The new owners would be more likely engage in maintenance of the home (why fix the roof of a house you are going to be kicked out of) and the new owners will be people of better moral standing. Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet.
It's possible that the downsides to leaving outweigh the upsides, but it's by no means certain. There are both upsides and downsides, and it's very far from obvious which way the balance goes.
In many parts of their country, there is a large excess of supply, so it is unlikely that a quick sale is possible. Which means that the house will likely sit on the market for 6-12 months.
In some areas, banks are walking away from properties they foreclosed upon, legally abandoning them. The responsibility for maintaining or demolishing the property then reverts back to the original mortgage holder, who often gets no notice and believed that they had nothing to do with the property since it was foreclosed. Under such circumstances, I think it can make sense for people to refuse to move out: if the house will continue to be an open ended obligation for you, you might as well at least get a place to live out of it. See this article for more information: http://www.cleveland.com/news/index.ssf/2009/07/bank_walkawa...
why fix the roof of a house you are going to be kicked out of
Two reasons. (1) Because you don't like rain water poring over your head while sleeping in bed. No one wants to live in a house where rain water is poring on them. No one wants to live in a house where mold and mildew have taken root from pooling water. And no one wants to share a house with raccoons. (2) Homeowners often develop irrational attachments to the home that they "own"; that is why many people buy homes when doing so makes no economic sense. These irrational attachments may incentivize people to maintain homes when rational calculation suggests they should not. Remember, being a "good" homeowner is a key concept of many people's self-image. Doing things like fixing leaks and tending the yard may continue to matter to them even after they've decided that they're not paying another cent.
Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet.
I don't believe this claim is true. Can you cite anything justifying it? In many areas, foreclosure takes a long time because servicers and courts are overwhelmed with volume; this state of affairs benefits banks who can postpone marking their assets properly.
I don't consider lowering prices to be a problem.
Sorry; I misread your comment. Given how little evidence we have that this phenomena affects a significant number of people, I don't find claims that this will materially change market prices to be credible.
As for fixing the roof simply because it makes the home uninhabitable, I don't buy it. Unless the fix were cheap, I suspect most people would probably just leave. Why spend $5,000 fixing a home you will be kicked out of, rather than just move out? Or instead of moving out, you could just put a bucket under the leak and move your bed, on the theory that you'll probably be kicked out before the leak gets that much worse.
Regarding mark to market accounting, my understanding is that a mortgage is treated as a "held to maturity" asset, while a defaulted home is treated as an "available for sale" asset and must be marked to the market. Thus, the bank must mark the loss only when the home is foreclosed on (not sure when in the process this rule kicks in).
And yes, it benefits banks at the expense of investors. Personally, I see value in preventing this.
> And leaving the current home they're in vacant will reduce its value.
You're assuming that these houses will be left vacant.
In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so?
Yes, the "right price" is probably a lot less than what the bank is owed. They should take the loss for dumb lending.
Many will be left vacant for some time. Foreclosure is a slow process, even when the mortgage holders are not fighting you every step of the way.
In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so?
According to the statistics compiled by CalculatedRisk, that seems unlikely [1]. Many housing markets (not just Detroit) are still very sluggish. There may be tons of buyers for properties in hip urban areas where most HNers live/work, but most foreclosures have been happening in suburban/exurban areas whose real estate markets are still in the toilet. The national housing market has a very large stock of uncleared inventory, so vacancy should be the default assumption until that inventory returns to normal.
This article [2] suggests that you're wrong regarding homes in Ohio. If there were really "plenty of people who would be willing to pay for those houses at the right price", then I don't we'd be seeing banks walk away from foreclosed properties and abandon them.
[1] http://www.calculatedriskblog.com/2010/05/existing-home-sale...
[2] http://www.cleveland.com/news/index.ssf/2009/07/bank_walkawa...
Even if all that happens is "move up", things are better for the folks who got to move up. (And there's less net economic loss if we lose the inexpensive places than the more expensive ones.) More likely, you'll get smaller and more households, as the run-up to the burst had people living together for economic reasons.
Since I said that Detroit wasn't an exhaustive list, it's curious that another member of the list would be considered disproof.
Note that Ohio's proposal, forcing banks to offer for sale, does what I suggested - it puts things on the market.
Note that banks walk away because they let the real liabilities grow while they kept thinking that their book value mattered. Wipe out the liabilities and stop them from growing, as the Ohio proposal does, and there's something there. More to the point, there's more there the sooner that happens.
I'm sure that there are some places that won't get a bid even at 0 reserve and no liabilities. However, I see no reason to treat everything that way because most will get a bid. (I know folks who wanted to buy blocks of Detroit for the right price, but weren't willing to take the liabilities.)
Who is the greater criminal?
Some old lady living in a crappy $125K house in Florida--or bank execs who in concert with corrupt regulators are hiding billions in bad loans and meanwhile paying themselves 100K bonuses or more?
This is the same lazy argument that runs though any discussion of any abuse of any service anywhere. "Sure, I stole 10,000 credit card numbers --- but the credit card companies are evil organizations that prey on low-income people, and they're the ones that are going to end up paying!"
Would you say that a rapist is justified in raping someone because they acted in a sexually lewd manner?
The "they had it coming" argument just doesn't hold water.
Someone had to provide the money in the first place. That someone sure as hell wasn't the banks, the banks were intermediaries. Often times that someone was a Chinese or German institution chasing higher interest rates with no clear understanding of what was being sold to them.
Who benefited from the transaction? Whoever sold the home. A lot of foreign money came into the US and stayed in the US.