Is the US Reaching a Strategic Default Tipping Point? « naked capitalism

Wednesday, February 3, 2010

Is the US Reaching a Strategic Default Tipping Point?

The New York Times writes tonight about strategic defaults on mortgages, and argues that enough mortgages are deeply enough under water to induce solvent borrowers to think about walking away:

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying….

by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

Although the Times doesn’t say where this “research” comes from, it is presumably survey research of some sort. The problem is that any survey or focus group research around money decisions is notoriously unreliable. And the story illustrates that data is limited:

Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation….

In the current bust, lenders first noticed something strange after real estate prices had fallen about 10 percent.

An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.”

Yves here. Clearly, elective defaults are rising, even if no one can say with confidence by how much. Moreover, one of the elements keeping it at bay is a sense of morality. Both the egregious misbehavior of banksters, and fact that it is starting to be seen as rational, as opposed to shameful, are lowering those inhibitions. Yet the Treasury remains in denial:

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

Yves here. The longer the real estate bust continues, the more deeply underwater borrowers will think hard about the costs of upholding their side of a deal…with a merciless servicer and anonymous investors.

And the Treasury may not be as naive as it sounds. After all, it has a vested interest in preserving the idea that only a (presumably amoral) small minority abandons their mortgages by choice. But this sort of cold-blooded detachment is the logical result of encouraging borrowers to treat their house as an investment, a financial asset, rather than a home.

More on this topic (What's this?)

Housing Prices: The Slide Continues (Contrarian Profits, 12/31/09)

The Coming Debt Default in America (Expected Returns, 1/18/10)

Guest Post: Why Do The Rich Default on Their Mortgages? Because In California and Arizona, They Can (Phil’s Stock World - Members S..., 7/16/10)

Read more on Default, Mortgage at Wikinvest

54 Comments:

albrt says:

February 3, 2010 at 3:01 am

Change happens on the margin, so it doesn’t matter all that much that the “overwhelming bulk” keeps writing mortgage checks and watching American Idol.

I have already seen several acquaintances make the shift from honor bound to freedom bound.

It only takes a couple of percentage points of extra defaults to wipe out the entire margin Ben Bernanke is giving the banks to help them earn their way out of the hole. Then we go back to TARP-like bailouts, and then the flood that finally moves the “overwhelming bulk.”

nowhereman says:

February 3, 2010 at 3:08 am

Sounds somewhat like a laxative. No?
- nowhereman says:
  
  February 3, 2010 at 3:10 am
  
  “then the flood that finally moves the “overwhelming bulk.” Part.

killben says:

February 3, 2010 at 3:21 am

My pet theme!!

“WALK AWAY IF YOU CAN! WALK AWAY WHILE YOU CAN!!”

Take care of the legal side!!!

You made a wrong business decision, so take the loss (house gone, credit score hit etc.) and start afresh!!

Don’t bring any morality into the decision.

Just remember each day you stay in an underwater house the more underwater you get!!

superduperdave says:

February 3, 2010 at 4:16 am

here’s the origin of the research:

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Yves Smith says:

February 3, 2010 at 4:26 am

The article did not cite a specific American CoreLogic study. And I’ve seen their research product. They do very detailed analysis of mortgage databases. I’ve never seen them conduct behavioral research. They are the type of shop that can tell you what % of mortgages have X% negative equity, and break that down in granular detail, but I’ve never seen them do behavioral research (the article spoke about attitudes towards default, which has to be some sort of qualitative research, not the database analysis that is American CoreLogic’s calling card).

attempter says:

February 3, 2010 at 4:53 am

If there is new research showing that significantly more people declare an intent to default at values 75% of the mortgage, that would be an advance from the data in the Guiso/Sapienza/Zingales study, where respondents weren’t likely to express such intent until confronting much worse negative equity.

The government’s attitude here is certainly to try to foster fear and guilt to discourage stratgic defaults. As Brent White’s paper demonstrated, this is a systematic propaganda theme.

In addition to fear and guilt, the Treasury quote here wants to instill the sense of isolation and atomization discussed in previous Naked Cap posts.

(And it’s true, the Guiso/Sapienza/Zingales study found that, along with believing walking away is “immoral”, the most correlated indicator with declared willingness to walk away is seeing others in one’s neighborhood doing so.)

I recently completed a 5-part review of White’s paper, starting here:

http://attempter.wordpress.com/2010/01/19/analysis-of-strategic-defaults-1-of-5/

tim says:

February 3, 2010 at 5:59 am

I do not believe there is a morality issue for homeowners not to walk away from their under water mortgages.

The main reason is that majority homeowners do not like renting and they do not have the 100% cash to buy another house immediately. If they strategically default, majority of them have to rent an apartment or house, and they can not buy another house with those bad credit scores and they do not have the money to pay 100% cash. People just do not like renting after owning their own places.

Let me tell you, if those homeowners have the CASH to buy another similar house nearby immediately at a lower price (for example, at 300k) while abandoning their under water mortgages at 400k, I bet more than 90% of the under water mortgage owners would do this in a second. After all, their life style does not change a bit while their net assets increase dramatically by 100k!

cougar_w says:

February 3, 2010 at 3:38 pm

… except that many expect the market to continue down for another year at least.

Those that can jump in the way you describe will likely wait until their dollar gets them the most house, and until it is more clear which communities/cities survive the expect round of BK looming for corporations, cities and states. My guesstimate these days is sometime in the 2011-12 time frame.

Just my opinion, I have nothing.

cougar

killben says:

February 3, 2010 at 6:30 am

Tim,

Renting is a better option even if you have cash. When home prices are going down, it is always cheaper to buy later!! Who know you may be able to buy 2 homes with the same cash in 2 years!!

Michael Fiorillo says:

February 3, 2010 at 6:32 am

Bankers and their apologists bemoaning the “amorality” of walking away from an underwater mortgage (or anything else)?

That’s a hot one!

fresno dan says:

February 3, 2010 at 6:45 am

from the NYT:
In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

Benjamin Koellmann paid $215,000 for his apartment in Miami Beach in 2006, but now units are selling in foreclosure for $90,000. “There is no financial sense in staying,” he said.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

Exactly. NO FINANCIAL SENSE.
“But this sort of cold-blooded detachment is the logical result of encouraging borrowers to treat their house as an investment, a financial asset, rather than a home.”

I would say the problem is just the opposite – people not thinking rationally about buying a house – people believing their realitor is looking out for them, that a structure is anything more than a pile of wood and bricks, that the cost should be compared to renting, that a mortgage is simply a financial contract and has no more moral import than deciding whether to keep paying your cable TV bill. And these “homeowners” are anything but. They are paying a “rent” (interest on the loan) and they do not in fact own the house. Staying in your house makes the same sense as paying 2K for an apartment when a better apartment across the street rents for 1K. It is simply illogical. And, finally, it is just another nail in the coffin of the economic premise that all humans are economic maximisers. If homeowners start acting like bankers, watch out!

DownSouth says:

February 3, 2010 at 10:39 am

fresno dan,

You say: “And, finally, it is just another nail in the coffin of the economic premise that all humans are economic maximisers. If homeowners start acting like bankers, watch out!”

If the prodigal bankers, as well as the homeowners that have been most abusive of the system, go unpunished, then that is exactly what will happen. All those people who are conditional cooperators, which studies show make up the majority of the population, will grow tired of being made chumps, and will withdraw their support from the system. Then you have economic and social mayhem, such as we are now experiencing in Mexico now.

Oh well, welcome to the banana republic club, United States.

Sechel says:

February 3, 2010 at 6:58 am

Firs strategic default makes the most sense. Anything else is bound to fail. The loan mod proponents miss a big point. The anecdotal evidence continues to come in on this, the problem borrowers were those that refinanced with an equity take out(problem borrowers who can’t manage credit), I don’t see the majority of these as borrowers to bought at the top and are on their first mortgage. Now let’s look at what some of the modifications aim to do. In one securitIzation HEAT 07-2, principal that equaled 72% on average was deferred 30 years and the remaining balance was converted to an IO balloon as well. It’s fairly obvious what will occur….We converted a class of owners to renters, who will not maintain their property and will eventually default if not outright abandon their property if they need to move. It’s also quite possible that they leverage up on Credit Card debt.

DoctoRx says:

February 3, 2010 at 7:26 am

The post’s title could also refer to the Federal Government. When does it just strategically walk away from its debt obligations?

Vinny G. says:

February 3, 2010 at 12:03 pm

Indeed. That would have made an even more interesting topic…

Vinny

Dork says:

February 3, 2010 at 7:54 am

Hey Yves…i just put my house up for short sale because I tried to sell for 4 months conventionally and couldnt(had almost no showings). the analysis:
- I live in a state (NC) where there is no deficiency judgement on Purchase money mortgages.
- the lender has PMI which I paid for, and is protected to 20% of original purchase price, which BTW, 18 mo later, is 30k less than what I paid .the PMI vendor will take the hit.
- if the lender/PMI vendor doesnt take the short sale, once the price reductions(done twice a month) reach FMV, they can foreclose, leaving them to sell it for even less than the short sale price, compounding the loss to them.
- if the lender reject the shortsale, ill just stop paying the HOA fees and let them foreclose-then the lender will have to take it.

Im saving $500/mo renting, a nicer place than my house. I owned the majority of my life(Not this house)…and have no plans to own again in the foreseeable future..renting IS much cheaper than owning. no maintenance or improvement costs, keeping Lowes in business.

of course I lost money buying the house…

joebek says:

February 3, 2010 at 8:16 am

People worry about what it means for their credit rating. However, one would think that strategically defaulting would be good for ones credit rating. Especially in non-recourse states where mailing in the keys concludes the financial obligation, it should be legally enforceable upon credit ratings agencies that strategic default be considered positive.

Jonathan W. says:

February 3, 2010 at 9:14 am

“it should be legally enforceable upon credit ratings agencies that strategic default be considered positive.”

That is the most interesting spin of this entire thread.
So.. if I go to Las Vegas and bet everything I own upon the flop of a card and lose, it should be enforceable upon the casino to take into consideration my bad judgment and refund to me the assets which I willingly gambled away. And, of course, if I win, the casino has to pay.

Of course it is always best to have it both ways, but in the real world, what would be the utility of a credit rating agency that reward fraud (i.e. “strategic default”) ?

joebek says:

February 3, 2010 at 9:35 am

Check out the following over at TBP

http://www.ritholtz.com/blog/2010/02/did-you-pay-for-the-right-to-default/
Anonymous Jones says:

February 3, 2010 at 1:23 pm

And that was the most inappropriate metaphor on the thread!

Where did you get the ‘refund’ part? Hilarious.

I’m not actually with joebek. the credit agencies should accumulate the data and let the lenders use the data in making lending decisions. In my opinion, there should be no mandatory rules about how the lenders use the data (even about redlining).

Of course, this is also not ‘fraud.’ You are obviously not a contract lawyer. Covenants are broken a million times a second around the world. The price of default is usually part of the contract, part of the common or civil law, or part of social custom. ‘Fraud’ is a different concept. Look it up. Then use words according to their definitions.

killben says:

February 3, 2010 at 10:26 am

When will Americans wake up to the fact that the government’s only intention in Home Mod is to ensure that banks are kept safe..

Any propaganda which tries to play on your emotions is another stick to beat you up with. Don’t get sucked into it.
Remember each day more in an underwater home increases your burden…

gruntled says:

February 3, 2010 at 10:50 am

“The United States Treasury falls into the skeptical camp.” –Yves

The officialdom has to take that view, lest this problem of strategic defaults grow even faster. They have to try and manage perceptions, since people’s perceptions of the economy are part of both the problem and possible solutions.

bena gyerek says:

February 3, 2010 at 10:55 am

there is surely a strong cultural element to this. i.e. people will become much more likely to strategically default if they already see other people doing it, because (a) they will learn how it works and see the benefits, and (b) they won’t feel bad about doing it if “everyone is doing it”. and of course, the more people do it, the stronger the rational incentive becomes as house prices plummet further. yet another example of dynamic disequilibrium..

Wednesday Morning « the news links says:

February 3, 2010 at 10:55 am

[...] Is the US reaching a Strategic Default tipping point – naked capitalism [...]

Vinny G. says:

February 3, 2010 at 11:08 am

Is strategic default the New American Dream?…lol

Seriously, psychologically speaking, underwater owners must feel so trapped, so angry, so humiliated, so cheated and so betrayed by a predatory system and government, strategic default can only bring them the freedom, the peace, and the sense of vengeance against an evil banking system, all being positive emotions in the current context.

After the hell that they must have been through these past 2 years, renting is likely to give them precisely the peace of mind they need.

Vinny

DownSouth says:

February 3, 2010 at 12:39 pm

Vinny G.,

Speaking of the psychological dynamics involved, you might find this of interest:

We propose that social norms of sharing reflect the relative strengths of two opposing forces: gains from cooperation and possibilities for free-riding. Socioecological variation in potential benefits of cooperation and possibilities and possibilities to free-ride on cooperative behavior determine cultural variability in norms of sharing and cooperative behavior.

We also propose that in the course of our evolutionary history, natural selection has shaped our psychology to posses certain traits.

1) Perceptual sensitivity to potential gains from cooperation
2) motivation to take advantage of those gains
3) perceptional sensitivity to opportunities for free-riding
4) Motivation to avoid being a victim of free-riding
5) Motivation to take advantage of opportunities for free-riding
6) Perceptual sensitivity to the short- and long-term personal costs and benefits of social norms regarding cooperative behavior (from the perspectives of both the self and others)
7) Motivation to negotiate social norms so that one’s own personal benefits from cooperation and free-riding are maximized
8) Motivation to obey and enforce social norms so that punishment is avoided, and those who disobey norms or fail to enforce them are punished
Our proposal is that this psychology, the complex analytical brain, and the extended life history coevolved in the hominid line—all because of the dietary shift towards large, high-quality food packages and hunting. It is this feeding adaptation that generates the gains from group cooperation. The large size of the packages and the difficulty of their acquisition through hunting

a) facilitate sharing (imagine sharing blades of grass back and forth)
b) Increase short-term variation in acquisition luck, since large packages are not abundant
c) Require significant learning and experience
d) Increase the disparity between production and consumption at the individual and family levels over the medium and long term
e) Increase the benefits of collective action and cooperation pursuits, especially in hunting
f) Generate economies of scale, since foods are often distributed in larges patches distant from residential locations.

These qualities generate large gains from intertemporal substitution in consumption and production over the short, medium, and long term; gains from specialization by age, sex, and perhaps individual qualities; gains from joint production and cooperative acquisition; and gains from turn-taking in acquisition of patchily distributed foods. The distribution and relative importance of each of those gains is likely to vary with local distribution and relative importance of each of those gains is likely to vary with local ecology and the foods exploited.

Possibilities for, and gains from, free-riding act against cooperation…. As the number of free-riders increases, costs of punishment increase and the incentive to cooperate decreases.
–Herbert Gintis et al, Moral Sentiments and Material Interests
- Anonymous Jones says:
  
  February 3, 2010 at 1:34 pm
  
  You keep meting out these quotes from Gintis et al. They are great.
  
  I guess this is off topic (yet again), but the list made wonder whether you might test if societies that revered experience and seniority (i.e., those who presumably gained the knowledge of how sharing in society works over decades) actually perform better in certain areas (like accepted measures of ‘happiness,’ whatever that is, and cooperative efforts). I don’t know. It seems to me that I would not have appreciated this list 20 years ago, but that may be anecdotal and not a common experience.
  - DownSouth says:
    
    February 3, 2010 at 2:51 pm
    
    Anonymous Jones,
    
    I don’t recall too much on that.
    
    In studies of contemporary hunter-gatherer societies, those below the age of 18 and over the age of about 62 consume more calories than they produce. There is no indication, however, that there is any resentment to that.
    
    There was this:
    
    In addition to specialization among men and women, specialization in productive activities by age is equally important. Foragers and forager-horticulturalists typically assign low skill/low strength activities (such as collecting fruits or fetching water) to children, high strength/ skill activities (such as hunting and extractive foraging) to prime-aged adults, and low strength/high skill activities (such as child care and craft manufacturing) to elderly people.
    
    What these primitive societies really revere is performance. The highest prime-aged adult producers have been found to produce about five times what the lowest producers produce. The rewards are substantial, but they are of course not material—after all, a person can only eat so much! The rewards come in the form of admiration and esteem, leadership positions and mating opportunities. They cite this quote by Martin Luther King:
    
    There is, deep down within all of us, an instinct. It’s kind of drum major instinct—a desire to be first… We all want to be important, to surpass others, to achieve distinction, to lead the parade… Don’t give it up. Keep feeling the need for being first. But I want you to be first in love. I want you to be first in moral excellence. I want you to be first in generosity.
    
    The authors then launch into a discussion of the various sorts of non-selfish economic behaviors, which they call social preferences:
    
    The last fifteen years have seen a large number of studies indicating that—in addition to economic self-interest—social preference shape the decisions of a substantial fraction of people. A person exhibits social preferences if the person does not only care about the economic resources allocated to her but also cares about the economic resources allocated to relevant reference agents….
    
    A particularly important type of social preference is the preference for strong reciprocity. A strongly reciprocal individual responds kindly toward actions that are perceived to be kind and hostily toward actions that are perceived to be hostile. Whether an action is perceived to be kind or hostile depends on the fairness or unfairness of the intention underlying the action. The fairness of the intention, in turn, is determined by the equitability of the payoff distribution (relative to the set of feasible payoff distributions) caused by the action. It is important to emphasize that strong reciprocity is not driven by the expectation of future economic benefit. It is, therefore, fundamentally different from “cooperative” or “retaliatory” behavior in repeated interactions. These behaviors arise because actors expect future economic benefits from their actions. In the case of reciprocity, the actor is responding to friendly or hostile actions even if no economic gains can be expected…
    
    A second type of social preference is inequity aversion… [I]nequity-averse persons want to achieve an equitable distribution of economic resources. This means that they are altruistic towards other persons—that is, they want to increase other persons’ economic payoff if the other persons’ economic payoffs are below an equitable benchmark. However, inequity-averse persons also feel envy—that is, they want to decrease the other persons’ payoffs when these payoffs exceed the equitable level…
    
    Strong reciprocity and inequity aversion are very different from unconditional altruism, which constitutes a third type of social preference. Unconditional altruists do not condition their behavior on the actions of others—that is, altruism given does not emerge as a response to altruism received…
    
    Finally, research has also shown that a fraction of the people exhibits spiteful or envious preferences. A spiteful or envious person always values the economic payoff of relevant reference agents negatively. The person is, therefore, willing to decrease the economic payoff of a reference agent at a personal cost to himself…
    
    Although previous research clearly indicates many people exhibit social preferences it is important to keep in mind that not everybody exhibits social preferences. In fact, most studies indicate that there is also a substantial number of people who behave in a purely selfish manner. A key question, therefore, is how the heterogeneity of motives at the individual level can be captured by parsimonious models and how the different individual motivations interact…
    
    Theory as well as empirical evidence suggest that the interaction between strongly reciprocal and selfish types is of first-order importance for many economic questions. The reason for this is that the presence of reciprocal types often changes the economic incentives for the selfish types, which induces the selfish types to make “nonselfish” choices. For example, a selfish person is deterred from behaving opportunistically if the person expects to be punished by the reciprocators. Likewise, a selfish person may be induced to behave in a cooperative and helpful manner because she expects the reciprocators to return the favor. Since the presence of strongly reciprocal types changes the pecuniary incentives for the selfish types, the strongly reciprocal types often have a significant impact on the aggregate outcome in markets and organizations.
    - Doug Terpstra says:
      
      February 3, 2010 at 7:15 pm
      
      “…a selfish person is deterred from behaving opportunistically if the person expects to be punished by the reciprocators.”
      
      It’s high time, past high time, for some serious punishment. However laudable in exceptional cases, it is a serious mistake for Obama, in the interest of looking forward, to give blanket amnesty to financial malefactors and war criminals who exhibit not a hint of repentance for their avarice and cruelty.
      
      LeeAnne says much the same, below:
      
      “In a system where government and the governed can be trusted to work for their mutual benefit, people and their chosen professionals censor each other and reputation is important. … We’ve had a breakdown in that dynamic led by the most privileged among us. Morality has been wrung out of the system. First, of course, community had been wrung out of the system.
      
      Hopefully decent people will walk away from usury, say no to a life of indebtedness to a lawless system and let the revolution begin.”
      
      In a sense, it is to the betterment of society that underwater mortgagees walk—performing their proper moral role as “reciprocators” and helping to collapse an utterly dysfunctional system.
      
      And hopefully, the vaunted trickle down theory will continue to work imperfectly, so that the rank immorality of elite free-riders and predators will not completely infect society’s honorable producers.

EricK says:

February 3, 2010 at 11:17 am

Oh, come off it, Yves: “a deal…with a merciless servicer and anonymous investors”? The lending side of these transactions are pretty much discharged when they show up at the closing with a check of the agreed amount. Ruthless would have been to have shown up with a check 20% less than the agreed amount and say that they would feel better if the borrower had more skin in the game. After that, the plain facts of the case are that the borrower has the lender’s money, regardless or how anonymous that lender might be. A contract is a contract, so if the borrower wants to default in exchange for giving up ownership interest in a property, so be it, but let’s can the absurd characterizations, please.

bobh says:

February 3, 2010 at 1:40 pm

There is nothing about this characterization? The servicers are merciless because introducing mercy into the process would be a betrayal of the anonymous investors who pay their salaries. Strategic (and merciless) decisions to restructure mortgage loans are a different story. These are made after a cold-blooded calculation of what will put the anonymous investors in the best financial position going forward. Underwater homeowners should be (and are) free to make similar calculations.

Anne says:

February 3, 2010 at 11:42 am

In the article “some experts” disbelieve the rate of strategic default because “People hate moving; their children attend the neighborhood school; they do not want to think of themselves as skipping out on a debt.”

Can’t argue against “people hate moving,” but if you’ve got kids, you’ve got an even bigger reason to default and squirrel that extra money away for the future. As for how people think of themselves? I’m betting thinking of yourself as a patsy being sucked dry by an uncooperative bank with fat bonuses will trump thinking of yourself as “skipping out on a debt.”

Vinny G. says:

February 3, 2010 at 12:10 pm

Strategic default on one’s mortgage, plus maxing out all credit cards before declaring bankrupcy will also offer the kids a valuable lesson they too could later apply in their own lives in this “New Economy”. :)

Vinny
- Jonathan W. says:
  
  February 3, 2010 at 1:06 pm
  
  Your comment was likely heavy on the irony, but I think you are actually on to something.
  
  Strategic default would only be successful if the strategy is to maximize profit by incurring the least amount of damage to oneself at the expense of any insitution that deemed the borrower trustworthy.
  
  I’ve already noted in a recent job search that potential employers were unusually interested in my credit score. In fact, a few employers seemed far less interested in my qualifications and more interested in my FICO score.
  It doesn’t hurt that it is 785, but would it be a form of discrimination if an employer denied employment to an individual who had a score of 620? I’m not a lawyer so I don’t know the answer. The strategy of default may ultimately backfire on the many who see themselves as underwater, try imagining yourselves as an unmarketable commodity on the job market for 7-10 years.

LeeAnne says:

February 3, 2010 at 11:52 am

The first time I heard a sales pitch for a home advertised as an investment with the promise of increased prices was in Aspen in the 1970s, believing that selling an ‘investment’ required a securities sales license and prospectus, I was shocked.

This advertising was being done by a woman who had reportedly been working as a maid, had a RE brokerage license and was destined for big things, so I assumed she just didn’t understand the law.

To this day I do not know the specific laws surrounding this tale but I realize I never did know. No one had to know the technicalities; we understood the broad principles of the law. In any given circumstance it could be easily explained; it was efficient.

I do know that good government involves decent people making and enforcing good laws based upon mutual protection and open enforcement; people then self-regulate and only in the exceptional case find it necessary to consult a lawyer.

In a system where government and the governed can be trusted to work for their mutual benefit, people and their chosen professionals censor each other and reputation is important. If you’re known as shady, even if you can get away with it legally your prospects are limited to other shady characters in a race to the bottom personally and professionally.

We’ve had a breakdown in that dynamic led by the most privileged among us. Morality has been wrung out of the system. First, of course, community had been wrung out of the system.

Hopefully decent people will walk away from usury, say no to a life of indebtedness to a lawless system and let the revolution begin.

Patrick says:

February 3, 2010 at 12:20 pm

Look at what Google Trends has to say about this

http://www.google.com/trends?q=mortgage+walk+away&ctab=0&geo=all&date=all&sort=0

Tipping point or not, the concept is clearly becoming part of the vernacular.

Wednesday links: low yield conundrum Abnormal Returns says:

February 3, 2010 at 12:50 pm

[...] The chances of homeowners walking away from their mortgages increases as negative equity rises. (Calculated Risk, naked capitalism) [...]

sunny129 says:

February 3, 2010 at 12:52 pm

As long as managers of PERCEPTION succeed in convincing the ’silent’ majority whose information outlets are quite limited compared to readers here,the CHARADE will continue!

LeeAnne says:

February 3, 2010 at 1:18 pm

Agreed. The lying liars have the likes of Frank Luntz teaching talking points to the faithful using Orwellian language manipulation and posing as hero for the republican radical right wing through the megaphone of a right wing media monopoly.

In a decent society with decent government and media, Luntz would be unemployable and shunned for his and his employer’s criminal behavior, modeled on the scale of Joseph Goebbels, the Reichsminister of Propaganda in Nazi Germany. He even looks the part.

Bob says:

February 3, 2010 at 2:08 pm

I love how bankers are evil for wanting to be repaid. A mortgage is a contract that usually begins with, “I promise to pay..” A mortgage is not an equity contract. A mortage is a promise to pay, a debt contract. Failure to pay results in stress in the banking system which thereby creates a unwillingness to lend again in the future. Wall Street create the vehicle, the Fed fueled it, and Main street crashed it. Accidently crashing is a learning experience, intentionally crashing is a movement.

Ben says:

February 3, 2010 at 2:52 pm

If owners had more stake in their properties, such as a 20% down payment, they would be less inclined to walk away.

Handing out no-doc, zero down loans for several years running is a BAD business model, and lenders who did so deserve what they get, as do the investors who bought the derivatives.

Not many people talk about the damage done by these lenders to home buyers, who didn’t buy a house because they knew that houses were inflated beyond reason. These responsible people got priced out on the way up, and now are being forced to pay for the transgressions of reckless lenders through dollar devaluation and bailouts.

Gavshire Hathaway says:

February 3, 2010 at 3:11 pm

Bob,

With all due respect, I don’t care about the banking system. Central banking is a fraud, and banks are the oppressors trying to put all of us into debt serfdom.

A mortgage is SECURED by the underlying asset. If the bank wants to get repaid, then shouldn’t write a loan for more than the property is worth. What part of that don’t you understand, Bob? The culpability is arguably higher on the part of the banks, as it is their job to make sure that they have sufficient collateral to avoid loss. They’ve committed three sins: 1) Forcing me to overpay for housing, 2) Forcing me to pay a second time via inflation for everything else, and 3) Forcing me to pay a third time for their bailouts because THEY SCREWED UP.

Bankers are evil because they create nothing of value, leach off the productivity of others, print money out of thin air, and pay themselves outrageous bonuses while screwing everybody else.

Your arguments are feeble, and it is obvious that you have a conflict of interest which prevents you from thinking rationally about this topic.

And if you want to create an analogy (yours is stupid, by the way), Wall Street is a stagecoach being pulled by the mainstreet slaves. The bankers are sitting in their cab enjoying champagne and caviar, wondering why the coach is going so slowly, instructing driver Bernanke to lash the slaves to go faster. They don’t seem to realize that the slaves are sick and starving, and don’t have the capacity to speed up since Wall Street harvested their vital organs for supper last week.

Tertium Squid says:

February 3, 2010 at 7:23 pm

I am not lending you my lawnmower.

Market Talk » Blog Archive » Links 2/3/2010 says:

February 3, 2010 at 5:35 pm

[...] – Strategic defaults on mortgages gaining steam. “The longer the real estate bust continues, the more deeply underwater borrowers will think hard about the costs of upholding their side of a deal,” Yves Smith notes. [...]

Sam says:

February 3, 2010 at 6:11 pm

I think we just reached the tipping point in Las Vegas. Evidence??? Four of my coworkers moved into new houses in the last two months and bailing out thier old houses. They all saying it openly that it takes their life time to recoup the loses on their old homes and it does not make sense to stay in. There is no ounce of moral sense to their actions. The other guys who heard and pissed of with these four guys actions thinking of doing same. I am one of them. So we reached a tipping point.

NW says:

February 3, 2010 at 7:25 pm

A little rough math, worst case:
20 million walk-aways times $50,000 per walk
equals one trillion dollars.

Cog says:

February 3, 2010 at 7:37 pm

+1 with the choir, here. At a Mark Zandi presentation a few months ago, where he was careful to point out how loan performance improved signifincantly when principal was voluntarily adjusted down by banks. The Securitized system is haplessly standing by as a lightswitch of cascading default might throw. Even if the principal were written down, the banks have already become notorious for chasing borowers after short sales. It takes 2 for a credit transaction and it takes 2 to save it.

Benedict@Large says:

February 3, 2010 at 11:27 pm

This is curious. Even Dean Baker penned a “walk away” article for the Guardian on Monday, and as liberal as he is, he usually doesn’t offer advice like this.
http://www.guardian.co.uk/commentisfree/cifamerica/2010/feb/01/goldman-sachs-negative-equity

I’m wondering if there might be a push by some set of economists (and/or others) to force the hand of the Obama administration on banking reform, in this instance by FORCING banks to write down assets that they’ve been keeping on the books at inflated values. I don’t imagine they would need to pick the walk aways up by much before a few banks went down because of it, and I have toimagine that the message would not go unnoticed by those it was aimed at.

Doc Holiday says:

February 4, 2010 at 2:06 am

An Empire at Risk
We won the cold war and weathered 9/11. But now economic weakness is endangering our global power.

http://www.newsweek.com/id/224694/page/1

Lyle says:

February 4, 2010 at 2:51 am

The banks will lean on the state legislatures to make all mortgages recourse (state by state battle in 20 states) In 30 states mortgages even for purchase money are recourse. Note that anyone using their house as an ATM lost the non recourse protection in a number of non recourse states. Recently there was a article on Yahoo, where a poor sucker sold the house short and the bank got a deficency judgement against her for the difference. I see banks deciding to sell or contract for recovery to the bill collectors changing from the old why bother model. The bank has 4-5 years depending on the state to file the judgment. Bankruptcy is the only way out of this.
So we end up with all mortgages being recourse at 2% higher average interest rates or more with 20% down being the new minimums for purchase in a couple of years after the GSE’s are euthanized .
This is unless the government decides that social stability requires a bailout of the borrowers (better a bail out than nationwide riots and civil commotions as we had in the 1900 period. The International Workers of the World could make a comeback.

pjwrites says:

February 5, 2010 at 2:32 pm

“A mortgage is a contract that usually begins with, “I promise to pay..” A mortgage is not an equity contract. A mortage is a promise to pay, a debt contract.”

And I think that’s my problem with it. I put 20% down and make payments for 4 years, at the end of which, my home is upside down and I’m paying about $700 a month more than I could rent it out for.

Meanwhile, the bank hasn’t lost a dime, and in fact, their interest rate on my house will be earning them more in about a year, while I’m not only out my 20% and paid far too much for shelter for 4 years – but it looks like I will be for the next 26 years in all likelihood!

Why should the banksters get all of the benefits and none of the pain? Especially when the banksters caused the pain to begin with? Give me back my 20% and I’ll give you back the house and we’ll call it even. And you’ll still be ahead of the game.

And why is it okay for Tishman Speyer to walk owing billions, but you want to bust chops of any homeowner doing the same?

Double standards have been a huge part of the problem – and quite possibly, the only real problem we have here.

Wednesday links: low yield conundrum | Financial engineering resource center says:

February 8, 2010 at 7:05 am

[...] The chances of homeowners walking away from their mortgages increases as negative equity rises. (Calculated Risk, naked capitalism) [...]

NWW says:

February 9, 2010 at 11:52 am

People who lived during the Vietnam era will remember how morality changed as things got worse. In the beginning, it was shocking to hear of people moving to Canada, paying off draft boards to get exemptions, faking medical problems, getting married or having children to avoid military service. At the end, it was commonplace, accepted, rationlized.
Walking away could be history repeating itself.

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