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Rich Defaulting on Mortgages At Highest Rate

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One has to be cautious in invoking cultural stereotypes. However, when the subject of defaults or mortgage mods comes up here and in other forums, almost inevitably some readers will start off on a bit of a rant: “I pay my mortgage/rent, why should these people get a break?” And these discussions often take a personal tone, as in they resent neighbors getting a break, or they claim to know someone who went hog wild spending on their home ATM and have now had their comeuppance (having never met anyone like that, I cannot verify if this pattern is anywhere near as prevalent as it is alleged to be). The problem is that their willingness to see their neighbors suffer, when it really is their neighbors, is cutting off their nose to spite their face, since foreclosures, particularly when homes sit vacant, drag all property values nearby down.

The perverse part is a New York Times article today indicates that the affluent are far less burdened by consideration of morality in their financial decisions, including their mortgages: “’The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”

Default rates are highest among plus million dollar properties. The problem with the NYT account is that it discussion of defaults at the high end mixes apples and oranges. Defaults on second homes are mingled with defaults on primary residences. Second homes are the first to go when financial stresses become acute. And because a lot of borrowers claimed that vacation digs were primary residences to borrow on better terms, there isn’t an easy and obvious way to construct clean data sets (as in defaults on primary residences by income level or home price v. those on second homes).

But another factor is at work during the cycle is that the rich both borrowed more than in past cycles and took on more risk to boot. From a March 2007 article by Robert Frank:

Today’s rich have expanded their fortunes and lifestyles in large part by turning to highly risky investments. In the search for ever-higher returns, they’ve doubled their holdings in hedge funds and other “alternative investments,” and poured their money into stocks while draining down cash. At the same time, they’ve dramatically increased their debt.

“The wealthy have taken on much more risk than they had 10 or 20 years ago,” says Steve Henningsen, a partner at Wealth Conservancy, a Colorado wealth-management firm. “They’re probably more exposed to more risk than the average investor because they’ve been the ones buying all these fancy debt products, hedge funds and other investments that their advisers told them to buy.”….

Today’s wealthy also rely more on borrowed money. The nation’s richest 5% held $1.67 trillion in debt, up fourfold from 1989. A large part of that is mortgage debt, but wealth experts say some of the funds have also gone into risky and higher-yielding investments, such as hedge funds. Since hedge-funds themselves are highly leveraged, the double-borrowing could make for a rapid fall should hedge funds start to implode.

While the rich employ sophisticated advisers, sometimes they don’t steer their clients to the safest investments. “A lot of the wealthy have leveraged up their house to put money into hedge funds or do the Japan carry-trade because they could make more than their costs of borrowing,” Mr. Henningsen said. “That desire for yield could come back to haunt them.”

Looks like it did. From the New York Times:

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent…

“I’ve never seen the wealthy hit like this before,” Mr. [Ken] Lowman [a real estate agent in Las Vegas] said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”….

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default….

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.

Yves here. Another message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously. Recall that the latest threat was that they would pursue deficiency judgments, as in sue borrowers who defaulted where the proceeds from the sale of the home, net of expenses, did not cover the mortgage debt. Now in some states that is not permitted (purchase money mortgages in many states are non-recourse, but refis never are). But independent of that, it is expensive to pursue defaulting borrowers, and if the borrower really is broke (say he had medical emergency, a business failure, or a costly divorce) litigation is just a costly wild goose chase. The most obvious group to pursue, nevertheless, would be defaulted owners of big ticket homes in affluent areas. They clearly regard the odds of legal action as low.

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93 comments

  1. albrt

    “but refis never are”

    Fifty states, fifty systems. This statement is probably true in California, but probably not true in Arizona. Unless you truly have no assets and are moving from your foreclosed house into a refrigerator box, you should probably talk to a lawyer.

    1. Yves Smith Post author

      Please reread. The post says that refis are not non recourse, so the bank can go after you for a deficiency. You appear to have misread the remark.

      1. Diogenes

        Actually, the AZ Court of Appeals held that refis are equivalent to purchase money mortgages (except for the removal of additional equity). The case is Bank One, Arizona, N.A. v. Beauvais (1997), and the court held that the legislature did not intend for the purchase money loan to “lose its character” when refinanced. This has not been tested at the AZ Supreme Court.

        1. azloser

          Cash-out Refis in AZ are only non-recourse if you can prove the money went directly into upgrading or repairing the home, I believe. If it went into an F350 with lift kit, or a set of matched quads, or anything else, no.

  2. Richard Kline

    Regarding Fannie/Freddie frownery, those shops only bought conforming mortgages, which topped out at less than half the value of a $1M home. Those wealthy borrowers went through fat profit agents and were steered to Let’s Do a Deal brokers. I suspect that many of those wealthy defaulters knew, more or less, that the terms were garbage heavily tilted to the lender, but they themselves expected to re-fi or flip and so never have to swim with the sharks at the date on the papers. So that’s one reason why they may be more ruthless: they may have known full well that they other side of the deal was out to get them, so in a ‘just business’ way they walkaway.

    But regardless, the good news is that when the rinse cycle finishes, many of the putatively rich will be substantively less so. It’s interesting to recall that the prototypal ‘master of the universe’ in Tom Wolfe’s formulation was suffocating under mortgage debt . . . . Let’s get _on_ with this.

  3. a

    “More than one in seven homeowners with loans in excess of a million dollars..”

    Yes, but, how many of these homeowners were self-employed people with income of 50k a year taking out a liar’s loan of 2 million where there was no interest due for the first 3 years? I’m all for whacking the rich every chance we get, but I’m not sure that holding a loan for > 1 million is a proper definition of “rich”.

    1. Robespierre

      I agree. I know people who “bought” homes of $1M or more that I knew they could not afford. But here in America we go by “looks” on everything so if their house is expensive they must for sure be “rich”. We should add the “stretch” and “pretend” to the current expressions.

  4. attempter

    Once again we see how the stereotype among teabagger types is of lower income people acting this way, and it’s 100% wrong, as we’ve long known. Yet they’re both blind to all the real evidence around them while they hallucinate their way into thinking they “see” lots of the petty bourgeois and even the poor doing it. (I’ll grant that the MSM systematically propagates this lie by always playing up dubious anecdotes as representative of trends, even though they’re suspiciously vague on numbers until the rare article like this one which tells the real story.)

    It’s like the all too many commenters here who never have a word to say about the fact that we currently live under a kleptocratic, increasingly tyrannical command economy and police state, all of it dedicated to nothing but funnelling ALL wealth into the hands of a few gangsters.

    But let anyone say a word about trying to use good government practices to do anything about this, and they’re suddenly howling about, you got it, “command economics”, even though the only “command” even suggested is a mild request for those who stole billions to give back a few hundreds.

    That type would be the right target audience for a piece like this, if it were possible they could learn from evidence.

    1. traderjoe

      Where has anyone mentioned being a tea-partier (tea-bagger just demonstrates your reverse-offensiveness), you are the only one that has used the term on this page. Where has anyone said that the ‘rich’ can default but the poor cannot? Where has the tea-party ever suggested that they supported the bailouts, the banksters? Do you see the irony in suggesting good government action but then acknowledging the fallacy of our current government, and further by denouncing a movement that hopes to ‘throw the bums out’?

      I’m NOT a tea-partier, but you seem to find implications in posts that simply aren’t there. And while I don’t think the tea-party has it right all the time, it does seem – at the very least – to be a grass-roots effort to reform government. Whether you agree with the party plank or not, you consider the movement as an opportunity to start a dialogue in this country about governance. Personally, I don’t find that much different between the Democrats and the Republicans. They all just represent the Mega-Corporations and the Big Banks. I’m anticipating some sort of flame – please proceed.

      1. attempter

        Actually, I just referred to the tea types as a catch-all term for those who, whatever their proclaimed positions in the abstract (“throw the bums out”, “I’m against the bailout”, since 1/09 at any rate), at every particular point support the gangsters against the people.

        “Throw the bums out”? Then why are they all voting for Republicans? Didn’t that big convention declare they weren’t going to run any independent candidates? The likes of Rand Paul who almost broke his leg rushing to the podium to declare “I’m in the bag for BP!” as soon as the primary was over?

        And needless to say Sarah Palin’s as corporate elitist as they come. The tea people I’ve talked to all love her.

        Where has anyone said that the ‘rich’ can default but the poor cannot?

        I’ve seen that endlessly, everywhere. If I recall correctly, on the very day Morgan Stanley walked away from five buildings Megan McCardle launched another of her absurd sermons on why “morality” says (non-rich) people shouldn’t walk away. That’s just one typical example among legions. Does Mr. “strategic defaulters are immoral speculators” Hank Paulson think Morgan Stanley is wicked for walking away?

        Really, anyone who had a shred of morality could spend a thousand years attacking the banks, the corporations, the rich, the politicians, and their whole vile kleptocracy, and never once find ample time to kick down on one of the little dogs. So I reiterate that it’s a lie to claim to be against crime and yet somehow, every issue, it’s always an attack on the non-powerful.

        Do you see the irony in suggesting good government action but then acknowledging the fallacy of our current government, and further by denouncing a movement that hopes to ‘throw the bums out’?

        I never said I think anything done through this government can ever accomplish any good. On the contrary I’ve consistently said anything this government does will always hurt the people – because it’ll be done only to further loot us on behalf of the rackets.

        Nevertheless, given well-meant discussions, I can still see the way it’s always attacked on the same kick-down grounds, that it’s somehow going to benefit an alleged pickpocket, while that same speaker doesn’t have a word to say about the mafia gang who really runs it all.

        But attacking UP should always be the perspective and the argument.

        Whether you agree with the party plank or not, you consider the movement as an opportunity to start a dialogue in this country about governance.

        I’d love to engage in dialogue with anyone who wants to redeem American sovereignty, which can only mean smashing corporate tyranny.

        1. traderjoe

          Fair enough. Perhaps I misunderstood – I thought you were referring to the tea-partiers on this site. Perhaps you were just riffin’. I think most people on this site would agree with much of your comment above – though I am not at all putting words in their mouth. But this is a progressive, non-MSM blog that regularly rails against the banksters.

          Part of me sort of likes the tea-party idea, but too thinks it inconsistent – “bad government, but don’t touch my Medicare”. And I really do not like Palin at all. First, I think she’s a quitter, not all that articulate (being generous), and very opportunistic.

          Totally off topic, but I was actually sort of hopeful about Obama (didn’t get my vote but was hopeful), that perhaps he could have been post-partisan. I would have gone for a single-payer system if it was simple and well-articulated. But the whole system is corrupt and constipated. Republicans have become a little tent party of “no”. With the result these 2000+ page bills that have one paragraph on page 1345 (whatever it is) that requires ALL businesses to report ANY payment over $600. Hardly creating an environment for small business and enterprise.

        2. M. Smith

          My comment is not a gripe, but a solution to a part of what we are so desperately seeking and that is sustainability.

          Maintaining ones-life style may be a spread sheet and a means chart. Imagine living wit-in our means, controlling our impulsive behaviour and look before we leap. What a concept.

          I urge our great country to work together on spending, and gear towards wise investing.

          What I mean by wise investment. Start by investing in your back-yard, second invest in your country. Furthermore, let us remind ourselves of the basics, and that is food, water and shelter. I have been preaching this since I was in my early teens. I took a hard look at what dreams were, had a vision where I was going and now where I am today.

          Our mission is to integrate our philosophy with community and individuals on the basic necessities of food, water and shelter. If we can learn from our mistakes and achievements, we can rebuild our Nation once again, thus prosper from our talent and the means to carry it through.

  5. bob goodwin

    A million dollar home does not mean rich. I know a couple without an education get a 2M home based on her closing mortgages, and he selling benzes. He is now unemployed, and her income is very low and the house is gone. In other words ‘larger debt’ may mean ‘broker’ not ‘richer’ in many cases.

    Also, the freddy/fannie threats don’t apply to 1M+ homes. They are non comforming, and freddy does not cover them.

    Lastly, 1M homes are more prevalent in the ‘bubble’ states, which have seen larger falls and are mostly non-recourse states. So there may be selection bias.

    1. alex

      “1M homes are more prevalent in the ‘bubble’ states, which have seen larger falls and are mostly non-recourse states. So there may be selection bias.”

      Excellent point. Unfortunately the NYT, like most MSM, doesn’t do statistical analysis, it just regurgitates sound bite statistics to support its editorials masquerading as news items.

      I’m a populist, and _I_ consider that article a terrible and (to put it kindly) weakly supported editorial. The “rich” are more ruthless? Gimme a break. One quote does not information make. You can walk down the street and get a quote to support any position you want. All the fault of the UN world government black helicopters? No problem, I’ll get you two quotes to support it.

    2. Yves Smith Post author

      With a $1 million home, you don’t know the amount of a first vs. any second or HELOC. You can also have someone over their head on a $1 million home with even $500 K of debt if their income fell. $1 million home does not mean $1 million first mortgage.

  6. Neil D

    Count me as in the camp that thinks defaults are a good thing. We’ve invested a lot of capital in residential real estate. I suspect too much but if someone disagrees I would love to hear that argument.

    Unless prices recover most of these people are going take real losses and the banks and MBS investors are going to have to finally recognize their losses. The sooner the better.

    Mortgage deadbeats are not productive members of this society anymore and we’re better off if they get out of their homes so the next generatation can have affordable housing. It is far worse for the economy, I think, to have squatters not paying either rent or mortgage payments.

    I’m sure they have reasons and excuses for their plight – we all do. It’s time to move on.

  7. Sechel

    Yves,
    I think you’ve let the NY Times story color your views on this. What the housing crisis tells us is that many people bought homes they cant afford. These may be over-leveraged home owners who bought more house(s) than they can afford and never really had much equity. I would wait to see the incomes of this group before assuming they are indeed rich. A fair number may have been no down payment borrowers with good FICO scores looking to roll the dice in Real Estate.
    The mention of second homes suggests also points to this.

    1. Neil D

      I think we risk urban legend territory to assume that a large % of people with $1 million plus homes were, in fact, not very wealthy. It makes the morality play more interesting if the defaulters were dupes or scoundrels as opposed to people just dumping an asset at a loss.

  8. Sechel

    10% down on a million dollar property is 100k. Big mistake to look at the purchase price when calling these people wealthy.

    1. Neil D

      100K? I don’t have that kind of money laying around so what does that make me? Median household income in 2008 was about $52,000. Do you honestly think anyone in the lower 50% have $100,000 to invest on a house? Really?

      1. Sechel

        The current starting salary of a Sanitation Worker is $31,200 per year. The current labor agreement provides for periodic increases to a maximum of $67,141 after 5 1/2 years. In addition to the basic annual wages, Sanitation Workers may also earn differential payments based on their specific assignment and overtime.

        1. RueTheDay

          While we do have to be careful about labelling people “rich” based on the purchase price of their home, I highly doubt that many people earning $31k-$67k/year bought >$1 million homes. Run the numbers. Even with IO loans and other trickery, they wouldn’t have the cash flow to pay the mortgage, property taxes, insurance, and utilities.

          1. b

            Rue the Day,
            Isn’t that precisely what happened all over the country and in every income bracket, i.e. loans were given to anyone with a pulse regardless of whether they had the cash flow to pay the mortgage, property taxes, insurance, utilities, condo association fees, etc.? IO only loans and other trickery (ninja loans, stated income, seller contributions) were quite sufficient in placing people in homes they obviously could not afford.
            I live in one of the bubble states that also happens to be a recourse state. In my profession, I witnessed countless individuals and couples closing on homes where the bank had no business lending and the buyers were told repeatedly (by me) what their payment obligations would be throughout the life of the loan. The banks doled out the loans like candy. The homebuyers dismissed any contrarian point of view, lest they be left out of not only the American Dream, but also the Great Wealth Building Machine.
            Neil D’s comment above also rings hollow. The median household income in Miami, FL in 2005-2006 was around $40K. The median home price at that time was around $500K. People in the lower 50% didn’t need $100K to invest on a house. And, yes, even non-conforming mortgages were being offered with no money down, or very little down.

          2. Anonymous Jones

            @b – There are hundreds of millions of people in this country. Just because you saw “countless” examples does not mean those examples are a statistically significant part of the problem. Talk about selection bias…

          3. RueTheDay

            b – There’s a big difference between mortgage trickery that allowed people to stretch to buy way more house than they should have (with disastrous results later at the slightest shock) versus simply not having sufficient cash to cover the payment from day one. This is a case of the latter. There’s no way households with $30-60k in annual income were buying houses for >$1 million. A $60k annual income is around $4k/month after taxes. A 30 Year FRM @ 5% is $5,368/month of which over $4,100 is interest in the beginning. Even with teaser rates, they’re not making the payment plus property taxes from day one.

  9. Richfam

    Its the angle of this post and the story. The rich are immoral if they default, they knew better. The poor need our help because they were duped.

    1. attempter

      But I’ve always been told the rich are rich because they’re so smart, and the poor are poor because they’re so dumb.

      Are you here today to say that’s not at all true? Then I don’t get it: Why are a few rich and many more poor?

      1. Art Vandeley

        @ attempter,

        During the bubble, there were the truly rich, who recognized the bubble and took advantage of low rates, locking in attractive fixed rate mortgages. They were intelligent.

        Then there were the aspiring rich ($150K+ income), who were the housing bubbles most profitable borrower, thanks to the Interest-Only and Negative Amortization loans. Countrywide and Wamu thrived and then collapsed with these borrowers.

        Having liquidated many of these distressed mortgages the last few years, most of the borrowers’ got into the house thanks in part to underwriting and securitization miracles. (You should see the original Stated Income loan applications – Talk about fraud!) Most lost their business or income stream from the credit crunch of 2008, have business loans with personal guarantees, and are filing Chapter 7 BK.

        It took the bubble bursting to reinforce financial intelligence and basic fundamentals of money.

        1. aet

          Indeed.
          The question: are we done yet, for now?
          Has what needed to be done, been done?
          I am not even going to hazard a guess.

      2. aet

        IIRC Thoreau had something to say about the true worth of poverty, and wealth: again IIRC, it had little to do with the world at large.

      3. Richfam

        I know some pretty smart people who don’t have much money. I just think its a double standard. Plenty of rich and poor (smart and dumb) people lost their homes, jobs, etc.. So shining a light on some random statistic is data mining to attack a particular group to reinforce some b-s agenda.

  10. Bates

    ‘Rich’ is a subjective term and difficult to apply to anytime…especially to those making a decision to default on a house that is now worth half of their remaining mortgage on their home.

    A quote from the article: “The perverse part is a New York Times article today indicates that the affluent are far less burdened by consideration of morality in their financial decisions, including their mortgages: “’The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”

    If the word ‘rational’ is substituted for ‘ruthless’ I believe we get a clearer picture of why those borrowers very far underwater on their mortgages are defaulting. Words are important and can be very inflamatory…’ruthless’ imo, is better applied to a large commercial bank that structures ‘investments’ that the bank realizes will fail, then shorts the ‘investments’ after selling them to unsuspecting investors, said bank making billions when the ‘investment’ blows up, while the investors lose their shirts.

    If investment banks make ‘ruthless’ decisions, and they do so constantly, why should underwater mortgage holders be expected to follow some moral code that the investment banks completely ignore? A dual standard is on display here.

    …disclosure; I have no dog in this hunt…our home was paid for long ago and we have never taken a second mortgage or used our home as an ATM…My wife and I are thrifty and do not seek instant gratification. Our parents lived through the great depression and they were not borrowers and, evidently, they passed on some good genes to us…albeit with holes in the knees.

  11. Sechel

    According to a post by Frank Rich…

    A net worth of $1.4 million will put you in the top 5% of Americans, according to the Federal Reserve. Yet to the wealthy today, having $1 million (including the value of your homes and certain retirement assets) seems like chump change.

    Previous studies have shown that when people are asked how much it takes to be rich, they always give a number that’s twice their current net worth or income. Those with $100,000 in incomes say $200,000, while those worth $5 million say $10 million.

    1. alex

      “Previous studies have shown that when people are asked how much it takes to be rich, they always give a number that’s twice their current net worth or income.”

      Of course, that’s the definition of rich: anybody with a lot more than you have, just as the definition of poor is anybody who has a lot less than you have.

      When I say “soak the rich” (and I say it a lot, albeit not in so many words) I mean “people who’ve got a lot more money than me”.

      Where’s Mark Twain when you need him?

    2. aet

      How much to be rich?
      I don’t know, I’ll have to price the cost of non-stop cakes and ale.

  12. vlade

    ruthless poor is contradiction of terms – if someone is sufficiently ruthless, they tend not to stay very poor for long. In fact, I’d be willing to bet that the poorest have the best payment history – as long as they actually can pay somehow.

    1. traderjoe

      I used to run a business serving people with 400-600 credit scores, or no score at all. 30% of the customers defaulted on their 1 to 2 year auto loans. I tried really hard to be an honest and shining light in a gritty and dishonest business. I read “Nickeled and Dimed in America” and made all my employees do so as well. We had a corporate values statement and lived by it every day, I’d like to think.

      I closed the business after a year because it was just no fun constantly being lied to, deceived, and outright stolen from. I learned to not make assumptions about human nature (and even came away a bit skeptical). Many of my customers were solid, honest people in tough circumstances. Many had no training in money management (something our schools should focus more on), budgeting, etc. But a fair number had bad credit scores because they didn’t care about paying their bills. I had probably 10 cars over the course of a year where people never made any payment at all – basically car theft (some were never found).

      Long story short, I learned not to make assumptions, particularly about the nobility of a certain group of people. There also seems to be a hint of suggestion in your comment “sufficiently ruthless – they tend not to stay very poor for long” that ruthlessness is a condition used to get ‘wealthy’. That’s a bit off-base as well, IMO.

      1. vlade

        Oh, I have no idea about nobility of any group as such.
        would not say that the only way of being rich is to be ruthless – but it helps quite a bit, and in my experience ruthless people do not stay poor for long (even if they have miserable money management skills, they tend to just bully more people out of their money).

        Chances are that your 10 thief customers had higher disposable income (or at least lifestyle, as in getting more goods) than your X other customers who struggled to pay their bills due to the lack of their financial skills.

        In my experience poor tend to pay the bills not because of inherent nobility or anything so highbrow like that – it’s more of an observation that those who can borrow and not pay their bills repeatedly (on purpose, rather than due to exceptional one-off circumstances) tend not to be as poor (defined by amount of stuff they have and money they can spend) as those who do pay them in the end.

        1. aet

          I think they pay their bills because it is better to pay your bills, in light of what happens if you don’t pay your bills, which the poor know about only too well.

        2. Ming

          My family has been in business for many years,
          many of our customers could be deemed poor.
          We have found that in the short term,
          people who are ruthless to the point of being untrustworthy, can enjoy short term success, but they are always trying to hide their past behaviour.
          Inevitably it does ‘catch- up’ to them; either it hits them in their business or personnal life. The ones who are more calculating
          and have a longer term perspective tend to inhibit their short term ruthless behaviour, for the sake of creating effective trust and information networks which are important for business success.

          The trustworthy and reliable people, although they may not be rich, can usually last a long time in business, or they have supporters who can help them.

          From a large scale societal perpective though, the growth of a ruthless ‘me first & I don’t care what happens to you culture’ is the powerful carcinogen that spawns the cancer of corruption. And I state with confidence that largescale corruption always results in largescale strife
          and poverty for the society(I believe that it is human nature for individuals and groups to not accept being ‘screwed by others’…I refer to various pychological studies on fairness) ,even as it grants tremendous wealth for
          the few.

    2. jonboinAR

      I’ve lived amongst the poor and worked for the rich most of my life. My experience corresponds with others who have responded to you. The poor are not a whole lot less ruthless than the rich. They’re possibly a bit less calculating overall but I tell you, not much. They do seem to possess less foresight and less of either ability or inclination (not sure which)to make long term plans and goals. Everywhere I’ve been, people will “get over” given half a chance.

  13. suceeder

    @ attempter

    “the stereotype among teabagger types is of lower income people acting this way”

    Not a tea party person myself, but I’d guess they’re against gov’t bailouts of mortgage delinquents, regardless of income.

    The stereotyping is in your head.

    1. attempter

      I know it’s pointless of me to keep asking, but it’s also kind of fun: If you hate bailouts and handouts so much, where were all of you for 8 years of the worst, most debauched corporate welfare orgy in all of history, by far?

      Isn’t it embarrassing to you having absolutely zero principles and zero morality, and constantly running around advertising that fact?

      1. aet

        I ascribe it to superstitious idiocy: close the barn door after the horses have already escaped.

        Why?
        Well, it’s just what we do…

  14. Francois T

    Back from a WBTYM (Wam-Bam-Thank-You-Mam) mandatory business trip. I’m dead tired, with perilously little sleep in my tank. Let me see if I can make this short and sweet.

    Could we all make a conscious effort to stop using the terms “rich” and “poor” when talking economy/finance? In the already hyper-polarized political and social atmosphere poisoning the civil discourse in the USA right now, using those terms just doesn’t help anyone who aspire to exchange ideas and understand better the problems at hand.

    Can we make an attempt to talk about “one percenter” (1%er) or “five percenter” (5%er), where percent is the rank of the net worth compared to the population at large? We sure can fetch official stats about that and agree on their validity.

    For those who want to make it a morality play, that’s fine, but the median level of discourse of the regular participants on this blog is absolutely able to go beyond that…correct?

    And for those who REALLY want to make anything economic a morality play, there are tons of ranting and spleen-venting blogs where indignation is the mother of stupidity and righteousness the father of extremism.

    Ladies and Gentlemen…Thank you for your time and attention.

    1. alex

      “Can we make an attempt to talk about “one percenter” (1%er) or “five percenter” (5%er)”

      Excellent point.

      We can still use torches and pitchforks though, right?

      1. Francois T

        We should’ve started to use these forks and varied tools of discontent expression a while ago.

        1. alex

          We did. Think Shay’s Rebellion. Then we stopped. Is it time to re-start a great American tradition?

          Excuse me, DHS is knocking on the door …

    2. Mickey Marzick in Akron, Ohio

      I second that! Vilifying the rich/wealthy as evil and characterizing the “poor” as noble and virtuous contributes little to analysis. There are decent, good, ethical people to be found in both.

      As for the 1% – the movers-and-shakers with the decision-making authority/power [CONTROL] to make things happen or not happen – ruling class or ruling elites will suffice. But even here two caveats are necessary. Said class or elites is not opposed to change as much as it is concerned to CONTROL its direction and pace. Nor can it be treated as a monolithic entity insofar as its member interests vis-à-vis change may differ.

      That said… someone still has to explain to me how this 1% or so CONTROLS the other 99% with so little coercion. Could it be that the other 99% really want to be rich – they buy the argument put forward by the 1%? Isn’t that the real problem – the argument – not whether you happen to be “rich” or “poor”?

      1. aet

        Poverty has often been the sternest – yet most effective – guardian of virtue.

        That said, wealth in itself is no bar to virtue.

        1. aet

          Further: one has not been paying enough attention, if one has not noticed that there may be people who are very wealthy, and yet still worthless.

    3. ReaderOfTeaLeaves

      Well, unfortunately the morality play is both simple and emotionally engaging…

      But what concerns me is that the dataset Yves points to seems to be rather muddied, which is always an invitation to confusion.

      Of more concern to me are the following:
      – I live in an area that was overtaken by McMansions between 1994-2006, and no one but a dumb bunny didn’t see a bubble in the making.
      – Many didn’t want to see the bubbled and marginalized any ‘bubble alarmists’, as the average number of people involved in a single house sale in my area was apparently 23. (Inspectors, gardeners, home repairs, title agents, yadda, yadda…)
      – In the early part of the 20th century, about 1:4 people actively produced food, IIRC.
      – By 2000, about 1:180 Americans were actively involved in food production.
      – I figure that leaves us with about 176 people with time on their hands, reasonable education, and ready to work in office parks doing title searches and finding real estate.
      – The ‘home building’ segment of the economy became disproportionately large, and a whole lot of people who were eating food produced by a very tiny portion of the population were selling, consuming, borrowing, and buying things related to housing.
      – All this activity fed the Wall Street securitization mania, as near as I can figure.
      – In my area, because the political vibe was ‘government can’t do anything right’ the whole idea of city planning was sued, sabotaged, and derided so that the homebuilders basically ran the local government via their elected sock puppets.
      – Because there was no city planning, and because the builders made the most profit off McMansions, they built 3-car garage monstrosities that left a large portion of the population either: (a) stuck in rent, which in the US is a rotten tax category, or else (b) striving to get into a house they could not afford.
      – In other words, there was a severe shortage of ‘affordable’ homeowner property available, which made it more likely that more people would stick their necks into mortgages they could not afford — and mortgage fraud accommodated their desires.

      What I see is a lack of community: sure, we had a whole lot of homebuilders creating a whole lot of pseudo-communities (mostly gated, almost always upscale). But what Yves describes — people walking away from mortgages and basically screwing the rest of the taxpaying public who are now dealing with dreadful government budget problems (!) — is a sign of too little sense of personal obligation and an absence of ‘community’.

      Not to be moralistic, and not to be a scold — but I think the money issues are really symptomatic of other deeper social and cultural issues. It concerns me that walking away from mortgages will only magnify and deepen those social problems — starting with the budget problems of cities whose leaders were far too indulgent of short-term, housing based economic models.

      I’m not entirely certain, but it seems to me that if people had a stronger sense of community, the ‘logic’ about whether to keep the mortgages would rest upon a different set of decision criteria.

      When a house is primarily an ‘investment’, you walk.
      When it means that you are part of a community, and that community provides you some measure of social support, you do whatever it takes to stay in it. At least, that’s my best interpretation.

      1. attempter

        But these aren’t communities, and never can be for as long as the land and city governments are under the tyranny of bankster debt.

        It’s never any good clinging to the fraudulent simulacrum of something, to our own devolving detriment, when only by breaking with it completely do we have any hope of reaching for the real thing.

        Morality demands running that risk and undertaking that work. Only pseudo-morality, as astroturfed by the enemy, propagandized by the government and the MSM, tries to claim the opposite.

        We need to jubilate all the bank debt. Only that path can lead to freedom. So walking away is a social good. It sounds harsh, but I said once before that those underwater who hang on out of false morality or fear of the tyranny of credit scores are a kind of strikebreaker.

        1. Ming

          Society will achieve sustainable prosperity if it learns to face issues proactively, and make sure the proper link between reward for positive outcome and poverty or punishment for negative outcomes is maintained. Although I agree that a full or partial debt jubilee is required(since it would be imprudent and immoral to have millions of homeless people), we cannot allow people to feel that nullification of their debt contract is a
          proper way to conduct themselves. Some sort of negative
          consequences must accrue. Conversely, the salaries and bonuses paid
          our in the ‘FIRE’ industries over the past 8 years are a bigger obscenity; the bonuses and high salaries should be forcefully stripped away(arguments about individual merit and honesty, although perhaps true on a individual scale, must be balanced against the governing facts that the industry could not have afforded to pay such high renumeration packages without the massive growth of credit extened to private business and individuals, the massive use of leverage by the financial system, and the cynical application of ‘ratings’, ‘regulatory’ and
          ‘legal’ arbitrage of the USA) and the key perpteators of the fraud should be investigated, exposed and imprisoned.

          1. Ming

            Btw….. Some ancedotal evidence. I come from Indonesia. That is a country blessd with incredible natural wealth…minerals, oil, excellent agriculture. Most of the country does not suffer from internal political strife and violence. However, there is incredible poverty, and it is a country of incredible corruption and widescale distrust of public and private instittuitions. The application of laws is simply an opportunity for police and goverment institutions to extract bribes. Looting of the country’s wealth is rampagnt. In Indonesia, people are only trustworthy toward family, close friends, and very longterm business associates. I believe that this untrustworthiness and corruption, that is deeply imbeded in the common culture, that has impoverished this nation. Markets, investment, and knowledege training and discovery can never operate properly in an environment such as this, hence poverty is the outcome. I am sure that untrustworthiness and corruption have contributed to widescale poverty n many other countries and regions of the world as well.

          2. readerOfTeaLeaves

            You may want to check out Fukuyama’s “Trust”, in which he looks at how different nations create (or fail to create) ‘social capital’. One of the things that he points toward, IIRC from a long while back, is how many Asian and SE Asian cultures rely on ‘family’; high trust within the family, but very low trust outside of it.

            This tends to translate to government corruption; anything ‘outside’ the clan structure is not to be trusted (unless you control resources, in which case this mindset appears to have few qualms about pillaging ‘anyone not in my clan’).

            With respect to the post’s examination of mortgage defaulting, as with ‘community’, you wouldn’t take an action that harms your own social support network. In a lot of places that network is still ‘family’; in other places it is ‘college ties’ or other affiliations.

            Shorter: the way that banks behaved by giving liar’s loans, the way the government behaved by handing out TARP money with no clawbacks, the way that default is being ‘chosen’ as an option by many all seems to me to be destroying social fabric.

            But then, I tend to see economics as primarily a social activity; it is many other things as well. But primarily, it is a social activity IMVHO. Therefore, in my view whatever damages the social fabric is going to reveal itself as economically imprudent, if not disastrous.

  15. Dan Duncan

    Why not use MMT and promote “Full Solvency” in addition to “Full Employment”?

    Remember: MMT says that the dollar is public money. The dollar is an illusion created by the state. Since the state exists to “promote the general Welfare”, why not continue down the path of promoting Full Solvency? [TARP and QE were mere appetizers.]

    There’s nothing about MMT which suggests our society must choose between “Full Employment” and “Full Solvency”. We can do both.

    If, however, the Austerian Deficit Terrorists demand that we can only promote one of the two: Why is Full Employment more “worthy” than Full Solvency?

    Sure, some people who bought these homes made poor choices. But some people who decided to work for either dying industries or poorly run companies also made poor choices.

    It’s a tough call. But either way, we cannot go wrong promoting either Full Solvency or Full Employment (or, better yet– both).

    One take away from all this: If you are a believer in MMT, you just have to be thrilled with the way the past couple of years have gone. Yes, we have a lot of work to do promoting full employment, but we’ve come so far in the promotion of Full Solvency. TARP and QE…MMT masterstrokes in the promotion of Full Solvency!

    As a promoter of Full Solvency, be prepared to counter much resistance. But do not take it personal. Forgive them, for they know not what they do.

    They know not 600 years of double entry bookkeeping.

    1. alex

      “They know not 600 years of double entry bookkeeping.”

      That line means that MMT is a valid, self-consistent theory. It can be used to analyze many monetary approaches, including the current ones. It does not necessarily mean that all of the policy suggestions of MMT proponents are realistic.

      For example, some MMT proponents say the US government should just print money instead of taking on debt. Then when it comes time to tame inflation the US government can reduce the money supply by raising taxes and burning the money it collects. Fine, but is that second step politically realistic? Can you imaging the US government doing that?

  16. tyaresun

    “claim to know someone who went hog wild spending on their home ATM and have now had their comeuppance”

    Yes, I do know a number of people who did this.

    “The problem is that their willingness to see their neighbors suffer, when it really is their neighbors, is cutting off their nose to spite their face, since foreclosures, particularly when homes sit vacant, drag all property values nearby down”

    Yes I do want all of these people to suffer because I believe that price discovery is a key benefit of free markets and the home prices right now are where they are due to a lack of a free market in housing.

    According to zillow my house appreciated by $50K in the last three-four months. I think that is ridiculous. I believe the two reasons for zillow reporting this increase are 1) fraud in reporting sale prices, and 2) Fed and Fannie/Freddie shennanigans. I believe that a fair value of my house is at least $150K less than what zillow shows and I would me much happier if the market reflects that price. Will I be less rich on paper if that happens? Yes, but still I will be much more at ease with the world.

    1. Bates

      “According to zillow my house appreciated by $50K in the last three-four months. I think that is ridiculous.”

      It is rediculous. Housing prices are going down in most areas, not up, and according to the latest stats housing prices have entered another leg down with about 52 months of inventory on the market at the current rate of home sales.

      “Will I be less rich on paper if that happens? Yes, but still I will be much more at ease with the world.”

      I believe a house is a place to hang one’s hat, not an investment. During the housing boom I was approached numerous time by realtors that suggested that I sell my home for WAAAY over what I paid for it. So what? Should I live under a bridge? Should I live in an apartment? Should I buy another house with…wait for it…granite countertops? No.

      I chose to stay in a neighborhood where I am comfortable, know my neighbors, and not be bothered by the inconvenience and costs of moving to another house. My home is not an investment and I never consider what Zillow or some damn gov agency thinks my home is worth. People thinking in terms of what their home is ‘worth’ can lead those same people to think ‘well, what if I take a little second mortgage on this house and buy a few widgets’…Next thing they know they are underwater and imo, are debt slaves. Number one rule…Stay out of debt! Credit cards are handy IF one has the discipline to pay them off every month…without fail. Number two rule…Get into the habit of saving some money every month and forget about it. In a couple of years you will be surprised by how much you have saved. Saving will become easier as the saving habit becomes ingrained. Humans need food, water, shelter, clothing and occasional medical attention. Beyond those necessities it’s all bullshit.

      1. Mickey Marzick in Akron, Ohio

        Bates,

        “Number one rule…Stay out of debt! Credit cards are handy IF one has the discipline to pay them off every month…without fail. Number two rule…Get into the habit of saving some money every month and forget about it. In a couple of years you will be surprised by how much you have saved. Saving will become easier as the saving habit becomes ingrained. Humans need food, water, shelter, clothing and occasional medical attention. Beyond those necessities it’s all bullshit.”

        Debt-FREE! Something about that.. this relationship between debt and freedom got lost in the shop till you drop mania.

        My father used to tell me that if your HOME was warm, there was food in the refrigerator, your clothes were clean, and you had money stashed away in the bank, you didn’t know how RICH you really were! Back then I thought he was just another cheap hunkie! 40 years later I’m very fortunate that I turned out like him… with money in the bank and no debt.

        Thanks for reminding this “cheap” old hunkie that the rest is ALL BULLSHIT!

  17. alex

    Are defaults and foreclosures necessarily bad for the economy? The private sector needs to seriously deleverage, and defaults are a fast way to do that. If the banks, etc. holding the mortgages go insolvent, then that’s what receivership is for (not that Obama would let that happen to the TBTF’s, but that’s part of the same problem).

    I know that might make me sound like an Andrew Mellon style liquidationist, but the difference is that I think general deflation should be avoided, and fiscal stimulus used to keep the economy alive. We shouldn’t spend all our resources on preventing deflation in one specific over-inflated sector. I don’t want people to become homeless, but a Dean Baker style “own to rent” plan could avoid that.

    I suppose as a homeowner who’s still well above water (and I only bought in 1999) I shouldn’t be saying this, but what other options do we have? I don’t want America to turn Japanese.

    1. traderjoe

      @Alex – yes, de-leveraging is needed (IMO). I think one of the big problems of all of these bailouts and mortgage modification programs is that it increases moral hazard, and both (1) prolongs the pain of the coming de-leveraging; and (2) further stresses households that would be better off downsizing.

      The banksters will fight for as long as possible to make sure it doesn’t happen. I almost look at strategic defaults (across all income spectrums) as a social protest (not really, but why shouldn’t households make rational business decisions).

      I think the question really is – are the big banks too big to fail? Is the banking system so fragile, inter-connected, and leveraged that a collapse of housing (and therefore bank balance sheets) would collapse the banking system?

      My sense is that the answer is yes – the system is too fragile. Massive derivative positions, the Sovereign debt issue in Europe, CRE, etc. – and the concept that fractional reserve banking requires growth (sort of like a perpetual motion machine) to roll over loans.

      I don’t believe we should bail them out, and certainly not leave them in place with any number of subsidies so that they can bonus themselves. But a 20% down leg in housing would probably collapse the banking system as we know it. So be it. I think it will happen either way. Hopefully what emerges on the other end will be better.

      1. alex

        “I think one of the big problems of all of these bailouts and mortgage modification programs is that it increases moral hazard”

        I certainly agree with you about bank bailouts, but am not entirely convinced about mortgage mods. Admittedly HAMP seems more designed to help banks than homeowners, but if a bank agrees to a mortgage mod because it figures it’ll do better than with a foreclosure it’s another story. That’s just a business trying to minimize its losses. Not sure if that happens much, but at least conceptually it could.

        Steve Keen’s graphs showing us having private sector debt of almost 300%/GDP are scary. But is it the debt level or the debt servicing costs that really matter? I’m not sure. An interest rate cut on a mortgage for example does cut your monthly payments. But if you have to sell the house it doesn’t matter – without a principal reduction (or the bank agreeing to a short sale) you’re still screwed.

        “But a 20% down leg in housing would probably collapse the banking system as we know it.”

        But what does “as we know it” imply?

        There’s no question that we have to save the banking _system_ unless we want to increase the market for canned goods and firearms, but the problem is that we’ve saved specific TBTF banks. There’s a big difference between saving the system and saving specific banks. I’m not convinced we need to save specific banks in order to save the system.

        1. traderjoe

          I don’t think we disagree on much, but just to clarify. I think the government’s involvement in the mortgage mod process (paying servicers to participate, etc.) is the moral hazard part. It’s more than just two parties making rational business decisions, it’s also the government incentivizing the banks and persuading them. Now, neighbor 1 feels as a taxpayer that they are subsidizing neighbor 2. It was a part of Rick Santelli’s (in)famous rant. Reality? Perception – a part at least.

          Debt rollovers don’t matter until they do. If every business/real estate deal/homeowner that took out a loan from 2004-2009 is underwater – and has no equity to recapitalize the loans upon maturity you have massive defaults (see extend-and-pretend). Cascading into more defaults.

          The worst thing we did in this crisis was to allow the TBTF banks to get even larger. The top 3-4 banks have 96% of the total notional derivatives exposure. Top 6 have assets equal to 63% of GDP. That’s what makes them TBTF – can let just one go, or they will all go. I don’t agree with it at all, but that seems to be the quandary.

          But the small and medium banks are swimming in under-water CRE loans. So is there anyone left worth saving? Is the whole system just too far gone? And the FDIC is functionally insolvent. What about FRE/FNM/FHA guaranteeing or purchasing 96% of all mortgage loans originated in Q1? There is no private mortgage market at the moment…

          And what about the financial condition of the municipalities? We’ve obviously dug ourselves a HUGE hole to get out of.

          1. alex

            “It’s more than just two parties making rational business decisions, it’s also the government incentivizing the banks and persuading them.”

            Yeah, I was referring to the (possibly mythical) mod between the bank and the homeowner. Government programs to help underwater homeowners (and banks in the process) I have mixed feelings about.

            “What about FRE/FNM/FHA guaranteeing or purchasing 96% of all mortgage loans originated in Q1?”

            Combined with Turbo Timmy’s Christmas Eve announcement that Treasury was lifting the cap on the Fannie/Freddie bailout funds ($100 billion each just wasn’t enough). It’s a back door bailout for the banks – have Fannie/Freddie buy overpriced mortgages from banks and then claim Fannie/Freddie need help.

  18. Ronald

    The million dollar homes are in the most desirable area’s, the best views,best schools,low crime rates, and they are white upper class in fact very white. The shock and awe of debt service has finally caught up with white flight and gated communities.

  19. ep3

    “know someone who went hog wild spending on their home ATM and have now had their comeuppance (having never met anyone like that, I cannot verify if this pattern is anywhere near as prevalent as it is alleged to be). ”

    it was quite prevalent here in Michigan, Yves. I am from the Lansing area where we had 30,000 GM jobs in 1980; now we have 6000. But to say these people went hog wild is wrong as well. Most of what I saw was people paying for basic necessities on the charge card (also buying a new car) until a little equity was built up in the home, then refinancing and rolling all those payments into the home loan. Some yes did take vacations and eat out more. But I think we are missing something when we accuse them of living beyond their means. The previous generations increased their standards of living greatly. So why wouldn’t current working age 30 sumthings expect that their standards would not be that much higher? But because we have had near zero wage growth for those people over 30 years, the only way they survived was by that borrowing.
    I am sure you have probably covered this topic before somewhere. But I feel sorry for this generation. Hey so what they took a vacation. Is it their fault dad then gets laid off (unexpectedly) 18 months later so his job can go to Mexico? Were those families supposed to live in utter poverty worrying that someday their job just mite disappear? Again, they grew up under a generation that expected those jobs to be there. No, that’s not an excuse. But find me an average Joe on the street that is that in tune with the world around him to put all the pieces of the puzzle together. Average Joe can only do what he knows around him. Especially with the housing bubble, all the people who saw it coming were completely shut out of the conversation before the bubble burst (some are still shutout).

    1. jonboinAR

      Where I think you’re wrong is in failing to acknowledge that there’s a gulf between the way your friends have been living and “utter poverty”. I’ve spent my life with the working class. This generation, over time, has lost all its sense. My son in law just insisted on trading in his paid off Dodge Dakota for a full sized Chevy because he couldn’t stand not having a note to pay. He made a bunch of excuses, but the reality was that he felt badly driving his mini-truck while his friends drove full sized ones. I guess he felt utterly poor.

      I don’t mean to single out the younger cohort. My generation taught them this.

  20. Erich Riesenberg

    I don’t understand why anyone should be bothered by defaults.

    It is a legal contract and the option is there to default and take the consequences. If we had all done it two years ago we would be better off now.

    The losses are taken, the world resets and moves on.

    It doesn’t even make sense to question why people are trying to prolong the downturn, except perhaps to bail out the failed lenders.

  21. Glen

    Defaults will continue to happen, and in all probability increase if the economy worsens. Is it safe to assume that rich people are getting legal advice that defaulting is a good option?

    I don’t think any of the proposed FinReg changes will even influence this problem. Cramdowns will not happen so people will continue to walk.

  22. Ryan Candee

    Yves: When you wrote that “[a]nother message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously” that’s actually 100% true.

    Virtually none of these $1 Million+ homes are eligible under FNMA and FHLC guidelines, meaning that the vast majority of these mortgages aren’t owned by FNMA and FHLC and that the next homes purchased by these high rollers won’t be either. So, the GSE’s have effectively zero leverage over them.

  23. Maggie Knowles

    From California Association of REALTORS sponsored bills 2010:
    http://www.car.org/governmentaffairs/stategovernmentaffairs/

    SB 1178 (Corbett) Anti-Deficiency Protections – Anti-Deficiency rules protect a borrower from personal liability on a purchase money mortgage which goes into default and eventually foreclosure. Due in part to lower interest rates, many purchase money mortgages have been refinanced and have lost their characterization as “purchase money”. Homeowners were not informed by the lender that when they refinanced they lost their legal protections and may be personally liable for the difference between the value of the foreclosed property and the amount of the loan. C.A.R. is sponsoring SB 1178 to extend borrowers’ anti-deficiency protections to refinanced purchase money mortgages. The lenders are opposed to this bill. (see also, AB 111 and SB 97)

    Status: Assembly Floor

    1. aet

      So refinancing is like a trap-door, to land in the pit of liability for the difference.

      Cool

  24. econimus

    Honestly, what has this to do with rich vs. non-rich? Let’s see some rigor here in both discussion and analysis. For example, take the median prices and income in the area into account. Plot the income and type of loan against the “million dollar houses”. Let’s see what the terms were like. What was the average percentage down on the loan? How about the price paid vs. the price now and plot that against the default rate and other data points. Without any of this, everything is anecdotal and speculative, not to mention classist and just ugly.

    Frankly, where I live, there are lots of “million dollar houses” because it’s an expensive area. Much more so during the boom. And a lot of people bought what they honestly couldn’t afford. So instead of looking at this as just another example of loose lending standards (which I’m actually pretty sure it is), it’s much more sensational and appealing to the faux-libertarians to make this some morality play on rich vs. poor.

    Let’s face it, the really rich don’t worry about housing value. The people who aren’t but pretending they are worry about it. Because for most rich people a house is NOT an investment. It’s an object, or somewhere to crash whilst on vacation. I could care less that my vacation house is down 30%. Why would I? I have no plans to sell it, it suits me weekends during the summer, and in 20 years it won’t matter. Only people who couldn’t afford it in the first place, are struggling to afford it now, and see the price off 30% are letting things go. And THAT, dear posters, points back to loose lending, not wealth and not a wealth morality play.

    1. scraping_by

      By avoiding reductivism, it can tell us things by good, rule of thumb measurement.

      Nonexistant lending standards were not universal, rather were the hallmark of a handful of bad actors. Specifically, a handful of loan originators and a handful of operators/optimists. Not 100% as implied by most dismissals of the problem. It’s easy to argue by anecdote about welfare queens buying vodka with food stamps, the truth is a lot more complicated and takes a broader sweep.

      The one solid fact given is that more expensive houses are in default at a great rate than less expensive houses. $1M is a pretty good dividing line, especially outside the inner bubble zone. And, it’s still true that high net worth and high yearly income types get seven figure loans a lot more often than middle class folks. So it would be surprising if the majority of people in default weren’t the high enders.

      The one takeaway from the default situation is, never put more of yourself into a deal than the other guy puts into the deal. The only things the loan originators put into this deal is money. So make the decision with bookkeeping.

  25. Ronald

    “One in seven homeowners with loan over $1M are in default. That compares to 1 in 12 loans below the $1M mark. This is putting a huge amount of stress on the financial system as 23% of all luxury homes bought as investments are now 90 days or more overdue compared to just 9% of the smaller homes. Don’t think of this as a 1:1 relationship either as the cut-off of $1M means that a single $10M unpaid mortgage above the line is worth 100 $100,000 loans (the national average) that are unpaid below the line so the distortion from a cash basis is close to a level of 100:1, which just so happens to be the difference in the income level between the top 1% and the bottom 99% as well!”

    http://philsbackupsite.wordpress.com/2010/07/09/foreclosure-friday-the-top-1-stick-it-to-the-banks/

  26. S Brennan

    Rich/poor, moral/immoral is just look over there bull pucky.

    Jobs folks, without a job, you can not pay.

    Medical Insurance in the USA makes the worker in his/her prime earning years much likely to be laid off orfired.

    Age discrimination laws were made unenforceable by the Supremos re-writing the evidence rules.

    US hi-tech workers must compete against 3rd world global labor prices while paying 1st rents.

  27. ÎDavid Scamorza

    This article really set off a great discussion! The message thread has some great information, in fact, several of the posts refer to court cases and laws with the full name. Proof that there is intelligent life out there.

    Thanks for all your posts!

  28. Doug Terpstra

    Yves, IMO, this post chronicles a momentous tipping point, not just the house-of-cards collapse of housing, but the next shoe (as in cement overshoe) to drop on the global economy—a black swan cascade. When a large number of the upper 5% ‘wannabe-one-percenters’ are leveraged at 4 times the historic rate and are forced to deleverage, the entire political dynamic will change dramatically. All the crony capitalists and their apologists will evaporate in the grapes-of-wrath winepress of bankruptcy.

    Meredith Whitney corroborates the gist of this post in a CNN clip posted on the Pragmatic Capitalist: “PREPARE FOR A “DRAMATIC” DECLINE IN HOUSING” wherein, absent bold federal action on the jobs foundation, she foresees an ugly vicious downward spiral. I don’t see that visionary courage evident at all in Washington.

    http://pragcap.com/meredith-whitney-prepare-for-a-dramatic-decline-in-housing

  29. glynn70508

    Does anyone proofread these articles before being published? Of course not. There are so many spelling, grammatical and punctuation errors it’s almost hard to understand.

    1. borkman

      Seems like you have a problem with complex sentence structures. On a quick pass, I didn’t see anything amiss with the post, save perhaps an unclear reference in the first paragraph.

  30. Sweet Janelle

    Go figure…. , I would of thought it would of been the people from peopleofthemta.com

  31. Suburban girl

    So all of you who want the bums out where do you suggest they go… I dont want them camping out on my lawn or parks. Their credit is trash no way to get a rental either!!!

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