Bank Friendly, Borrower Bashing New York Times Article on Home Equity Defaults

Wow, the efforts to find and discredit strategic defaulters and other types of mortgage borrower reprobates appear to be picking up steam at the New York Times.

Let’s be clear: there are not doubt more than a few people who bought more house than they could afford who had out of control spending habits. But there is a disturbing propensity in the media to find egregious cases and write them up, with the implication that they are representative. In fact, they are a tail end of behavior. It might be a pretty fat tail, but it would take a good deal of forensic work (construction of a large sample, detailed work on the motives and behaviors of borrowers, with efforts to check what they say about their motives now with evidence of their actions at the time the loans were entered into) to get to the bottom of why people are defaulting.

For a lot of subprime and option ARM borrowers, whether they understood it or not, their out was supposed to be yet another refi, but the ATM of ever-rising housing prices was shut down. Many other homeowners are in trouble due to un and underemployment, or the big historical source of bankruptcies, medical emergencies. Some, as Tanta pointed out, were people who had been prime who refied into subprime (who knows the motives, to pay off student or credit card debt, to invest in their house, to finance a business, to fund consumption) and their plans did not work out.

The reason my suspicions go up when I see an article like “Borrowers Refuse to Pay Billions in Home Equity Loans“as the title is that it clearly announces a point of view (although the web allows the NYT to show different versions in different views of the article, so the full page view has the comparatively anodyne, “Bad Debts Rise, and Go Unpaid, as Bust Erodes Home Equity.”

Let’s look at a critical fact, buried in the piece: the delinquency rate on home equity loans is 4.12% as of first quarter 2009, which is actually a smidge lower than in the previous quarter and far from a scary level in this crappy economy. What makes these loans troublesome to banks is the high loss severity, which is well over 90%. And the reason for the banks to freak out about this a bit is that home equity loans, a type of second mortgages, are junior to the first mortgage. If you are having to make deep writedowns on severely delinquent home equity loans, how can you justify rosy valuations of seconds that are in or are on their way to default?

Yet the article attempts to frame the issue as “ruthless borrowers are now defaulting in droves” with statistics that don’t bear that out, bolstered by a few stories. The bias here is that the report comes largely from Phoenix, ground zero of underwater mortgages. Now if you believe what passes for research on strategic defaults (and what there is is thin and poorly designed), it appears that the factors that make homeowners most receptive to the idea is first, how deeply underwater they are and second, whether they believe others who are similarly situated are doing so as well. So it is plausible that to the extent strategic defaults are happening, Phoenix would logically show one of the highest incidences. But the article never mentions that Phoenix is almost certain to be an outlier. (As an aside, I’m skeptical regarding discussions of this trend, since there are serious problems with classification. Most people would probably classify a strategic defaulter as someone who is perfectly capable of paying his housing-related obligations, but decides to default because his house is worth so much less than its mortgage balance that keeping it is a bad investment. By contrast, banks appear to regard anyone who is defaults suddenly as a strategic defaulter, since most borrowers fall in and out of arrears before becoming hopelessly delinquent. But more borrowers who are long-term goners may simply be operating rationally as the stigma of default is lessening, and choosing to pull the plug when they realize that they will hit the wall in the not-too-distant future).

The story has a notable pro-bank, anti-borrower bias, Even though it duly notes the level of home equity lending writeoffs in 2009 ($11.1 billion in home equity loans plus $19.9 billion in home equity lines of credit) and lists some banks seriously exposed (the usual suspects), we get the “whocoulddanode” defense:

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say….

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

Yves here. So the ABA has never heard of Sweden, Finland, England, or Norway, all of which saw housing markets that suffered serious downdrafts in the early 1990s, or Japan, whose housing market after 20 years may still not have hit bottom.

Contrast this with the remarks of Christopher Combs, a Phoenix lawyer:

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”…..

“People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Yves here. Note the framing: borrowers treated as profilgate (when universe is varied) and default is voluntary. And no mention of the banks’ failure to anticipate that these were pretty risky loans and maybe they better not hand them out so freely.

The CEO of debt collector also takes to moralizing:

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

And we get a remarkably precise estimate of strategic defaulters from an attorney in a two partner firm handling 300 cases (which lawyers I know doing real estate say is a very large number). Google Earth shows his offices are in a what looks to be a markedly less than prime neighborhood and his website has a rather unusual list of resources and lists personal injury as another major practice area:

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Yves here. Even the parts that give the borrower side of the story undercut it:

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Yves here. Schlegel is one of three purported strategic defaulters presented (note we don’t know whether they are on good financial footing or not). He started speculating in real estate (it isn’t made clear as to whether it was on the side or as a job) and got in trouble. This sounds an awfully lot like what Wall Street did, just with a lot more zeros attached.

This case example is curious:

During the boom, he [Eric Hairston] bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Yves here. Hhhm. A home equity loan….on an investment property? Sounds like a wee bit of misrepresentation. But it also sounds like he has some survival skills. His leveraging up his property and investing again has at least left him with a job in his investee company after Lehman cratered.

As I’ve said before, I’m a believer in honoring agreements, but it needs to be a two way street for it to have a chance of enduring as a social value. The reason for caviling about financiers and their (sometimes unwitting) allies harping about borrower morality is that it is banks who trained borrowers to take a narrow, contractual view of their commitments by acting in a fee-gouging, legalistic manner across all their products. It’s way too late to try to play the morality card.

“901 West McDowell Road
Phoenix, AZ 85007

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  1. Richard Kline

    Joe Normal and Jane Cominup _will_ be expected to pay the oligarchs. Every last cent. Those oligarchs? Bailed out by the billions by their cronies in government. That is now the American way. Until some who think themselve small stand up. Until then, they’re debt slaves by choice.

  2. Jojo

    There was another very good housing related story with much bigger implications today:
    Feds rethink policies that encourage home ownership
    By Paul Wiseman, USA TODAY

    Just how much should Uncle Sam do to help Americans buy their own homes?

    For 70 years — and for the last 15 in particular — the answer has been: Whatever it takes.

    Now, policymakers are pausing to reconsider. In the next few months, they’ll weigh whether there can be too much of a good thing when it comes to helping families finance the American Dream.

    The rethink could mean a shake-up for a mortgage market addicted to government subsidies.

    “This process of figuring out the government’s role is going to involve some hard choices,” says Alyssa Katz, author of Our Lot: How Real Estate Came to Own Us. “The moment you start changing the nature of what is guaranteed by the government, what is subsidized, you start to change the alignment of winners and losers. … We took for granted that anyone could get a mortgage.”

    Using guarantees and tax breaks, the government pushed homeownership past 69% in 2004. Then it all came crashing down.

    Find this article at:

    1. ChrisPacific

      Good link, thanks. I found this bit particularly interesting:

      ‘One example: Freddie and Fannie, with their government backing, allowed the proliferation of 30-year, fixed-rate mortgages — a product that lenders would otherwise shun. Reason: Long-term, fixed-rate loans struggle in any interest rate scenario. If rates rise, banks are squeezed, because their revenue remains fixed even though they have to pay more for deposits and other funding. If rates fall, homeowners refinance. “No rational market participant is going to bear that risk,” Date says.’

      I always wondered how that worked. You don’t see it much in other countries.

  3. attempter

    The first response of any citizen (defaulter or not, “strategic” or not) to any of the idiotic moralizing from the MSM or any other system thug about people “getting away with stuff” should be: “Yes, you taught us well.”

    (Since anyone who would make such a hypocritcial accusation in the first place is clearly beyond the reach or dessert of the kind of rational argument p[resented in this piece.

    How many rich criminals does the NYT whitewash in an average day, to help them get away with stuff? How many in this piece?)

    Lately we’re seeing a lot of extreme examples of the bully whining about the victim fighting back. The predatory lending system is now whining about some among the people (all too few so far) fighting back with quasi-“strategic”* defaults; Obama sending out his hack to whine about those nasty professional leftists; the Pentagon saying how mean Wikileaks is.

    I think examples like this are encouraging. It means some resistance is penetrating the facade of arrogant unconcern. Everywhere we’re getting past the “ignore” stage, and the administration is running out of room on the “ridicule” stage.

    The new anti-jubilee propaganda signifies the felt need to reinforce the clearly deteriorating pre-existing indoctrination. Demonization of walking away has long been baseline propaganda policy. But they feel this slipping, and I think it’s too late for the same criminals who already handed over ten trillion to the rioting banks and continue to hand over tens of millions every day to recover any moral authority to lecture anyone about financial morality or any kind of morality.

    On the contrary, we’ve never in histroy had a greater counterindicator for morality. Nietzsche wrote of how clarifying it can be to identify one’s antipode.

    This barbaric system is the moral antipode of any concept of democracy, civilization, humanity. The system as a whole already morally defaulted on we the people. Only a born slave would continue to make payments on that social contract.

    [*Since there’s no clear way to identify a strategic default, and since the banks and the MSM feel free to define the terms so broadly, we are equally free to deny there’s any such thing as a strategic default. ALL defaults have elements of financial compulsion, I say. So I’ll no longer argue, “if it would be rational for you to default, you should, even if you can afford to keep paying”. I’ll say, “if you’re in any doubt about your ability to keep paying for the indefinite future, that’s as good as knowing you can’t, so you should default and feel circumstances forced you to.”]

  4. SidFinster (impostor)

    I seem to recall that contract law had nothing to do with morality.

    This is why strategic default was always permitted under the common law: if it made sense for one party to a contract to default, he was free to do so, provided he paid actual damages to the other party. The defaulting party was not required to perform on the defaulted obligation or pay a penalty.

    Just recompense the other party for actual economic losses, if any.

    It’s not like any of this was kept secret from the banks or their lawyers. This is all first weeks of law school stuff.

    1. russell1200

      In response to Sid’s: “This is why strategic default was always permitted under the common law: if it made sense for one party to a contract to default, he was free to do so, provided he paid actual damages to the other party. The defaulting party was not required to perform on the defaulted obligation or pay a penalty”.

      Yes, but they used to have debtor prisons too. You are comparing apples to oranges. Within your normative Judeao-Christian ethics is immoral to feel no compunction about honoring your side of a contract agreement. There are many behaviors that are legal, but not moral. our current marketplace economy generally requires a level of presumed trust to make its markets to work. The breakdown of that trust at so many levels will have serious consequences going forward.

      1. aet

        In addition, contracts for the sale of land and other unique items could be ordered to be performed.
        it’s called “specific performance”: not all breaches of contract can be recompensed adequately by money.
        Also, there is indeed an element of morality in contract law: people ought to keep their promises made, where they have received something from others in exchange for that promise.
        That it’s just business is true enough for those who buy and sell for a living: but for those people who do not , the moral content does – and should -exist.

  5. albrt

    I would not read too much into the statements by local lawyers. Chris Combs is a pretty straightforward guy, and I see nothing wrong with him acknowledging that the system “rewards immorality to some extent.” It does.

    Mr. Combs probably said a bunch of other things that didn’t make it into print. The author of the article is responsible for the overall lack of balance, because there is plenty of material here in Phoenix to support any story you want to tell. The overall story should be about a sociopathic Ponzi economy, but that story won’t get told in any official outlet as long as we’re trying to revive residential construction and related industries as the driver of economic growth.

    I don’t know Mr. McCain, but again, I would not read too much into the word “retained.” A typical representation in a case like this consists of an initial consultation for an hour or so, with a few ten minute phone calls over the course of six months to answer questions. Total bill maybe a few hundred dollars, or maybe nothing at all. A small shop could easily have several hundred clients over the past year.

    The only responsible advice for many of these folks is to stop paying and set aside enough money to pay for the bankruptcy if anyone ever comes after you. The house is never going to regain its value, and much of the new construction from the past ten years should be bulldozed. Arizona is a non-recourse state for purchase money loans, and there has been very little litigation so far on the equity withdrawal loans unless the amount would justify it and the borrowers appear to have significant assets.

    1. Diogenes

      “The overall story should be about a sociopathic Ponzi economy…”

      Spot on. I couldn’t have said it better.

  6. Neil D

    Speaking of morality…

    While all the people were listening, Jesus said to his disciples, “Beware of the teachers of the law. They like to walk around in flowing robes and love to be greeted in the marketplaces and have the most important seats in the synagogues and the places of honor at banquets. They devour widows’ houses and for a show make lengthy prayers. Such men will be punished most severely.”

    While I’m not much of a religious person, the irony is too rich to pass up! Luke 20:45-47.

  7. Bates

    Strategic default is what happens when a huge majority of the people tell their representatives to vote ‘NO’ on bank bail outs and their representatives vote against the will of the people and bail out the banks anyway…the very same banks that offered rediculous loans to unqualified home buyers while telling them that real estate will go up forever and ‘you will be able to sell that house at a profit next year’. Attempter is correct…they are simply defaults and business decisions. Forget the ‘strategic’.

    Who in their right mind would continue to pay on a home that is now worth 1/2 of the mortgage amount? If the loan is non recourse it’s time to hire a RE attorney and send jingle mail.

    If the bankers toned down the exhorbitant pay, bonuses and lifestyles after receiving bail outs from the Fed/treasury/congress then the anger of the people might not have risen to current levels. If the people saw some suffering on the part of banks, even a small degree of the pain Main St is feeling, maybe the people would have a little sympathy for the bankers.

    The Fed and the bankers have exposed themselves and the exposure was only possible because of the current financial crisis. The Fed held interest rates too low for too long and blew a bubble in real estate. The bankers made lots of money securitizing mortgages and selling them to others entities. Both the Fed and the bankers knew the RE bubble would collapse but they assumed that the sheeple would continue making payments on waaay underwater mortgages. They assumed the ‘new’ bankruptcy law of 2005 would stop people from declaring BK and defaulting on debts.

    What has the Fed done for the Main St economy and the American People that need jobs? Has the administration mentioned new corporate tax incentives and tariffs to move jobs back to the US from overseas? Cash for clunkers, tax credit for home purchase, AIG bailout, TARP and all the other credit windows, etc…all actions aimed at propping up real estate values and to stop loan losses at banks.

    The Fed is aware that they have failed. The language changed from ‘moderate growth’ two months ago to ‘more modest than anticipated’ on Tuesday. Words have meaning and these changes of phrasing are not Greenspanese. If the future did not look bleak to the Fed they would never use such language.

    If the US Gov and the Fed and the treasury will not teach the bankers the implications of moral hazard by liquidating underwater banks, the underwater homeowners might.

    1. aet

      Why even grant non-recourse mortgages?
      Mortgage terms are statutory ,are they not?

      Simply end the tax-deductibility of mortgage interest payments….

  8. leroguetradeur

    “The overall story should be about a sociopathic Ponzi economy”

    Very true. and all that needs to be said. Taking sides with borrowers or lenders is like cheering on one fighter in a prizefight, when the problem is the wickedness of prizefighting.

  9. Owe Jessen

    I can’t understand the hype about strategic default: Strategic defaulters are working in exactly the same manner as described in the Merton Model of Credit Risk, that is in exactly the manner which the banks assumed they would act in their own valuation models. So, if banks are making excessive losses relative to expected losses, it is their own fault, because they had too rosy assumptions about the rate of default and the rate of recovery – hardly the fault of the borrower.

    1. aet

      The lenders control the terms of the mortgage contract: if they’ve mis-priced risk, why ought we to payt for their mistakes?

      How can people blame the weaker party?>

    1. Neil D

      We got rid of debtor prisons years ago. Why would you want to bring that back just because some bankers loaned out money without regard to the risk then foisted it off unsuspecting, naive, and lazy speculators.

      If there is a moral to this whole story (and I don’t think there is) it would be “Neither a borrower nor a lender be!”

  10. Perspecticus

    This is just more of the same old “the poor and powerless are bringing down the rich and powerful” argument. Poor people unscrupulously took money banks were insisting they could have. Workers ruthlessly brought down horribly run industries. Immigrants are shamelessly offering their services to defenseless American employers at 25% of minimum wage. Nobody, particularly the low and middle classes who buy these arguments as readily as the uber rich, ever questions how, shy of storming the castles with pitchforks and torches, the moneyless and powerless are able to destroy the moneyed and powerful.

  11. Lynda Scott

    Why was so much $$$ loaned out in the first place ! Americans were “targeted” . Our young people (most with no debt, clean balance sheets) were target to sign up for debt for school. Young adults were targeted to buy houses…..for what ?! FOR A STEADY STREAM OF INTEREST PAYMENTS TO BANKS TO SATISFY BANKERS’ GREED ! Way back when I was in my youth no one in their right mind would loan us big money !! MAYBE THE BANKS SHOULD HAVE KNOWN BETTER !

    1. Tom Crowl

      The Financial/Political elite ‘model’ … whether realized beforehand or not… whether intentional or not…

      essentially envisions a nation with a majority of citizens permanently and perpetually indebted (e.g. like for a college education) to a small minority who are net lenders… and moreover who are in control of credit and currency creation.

      It becomes a permanent entitlement for an entrenched elite if it should become an accepted pattern.

      As for the student loan situation… don’t hold your breath for those to be paid back. There will be massive defaults with those as well… at least I certainly hope so!

      That’s because I’m convinced that in the final analysis citizens aren’t going to co-operate with this bogus model.

      However I could be wrong… if people roll over for this model… then they might as well go all the way and crawl in the oven and start basting themselves as well… because like any self-respecting turkey with a sense of purpose, they’ll be proud to be carved-up by their betters.

  12. Richard

    I have a very different take on the NYT’s motives in publishing this and prior articles on “strategic defaults”. You see their focus on Arizona as attempting to magnify the issue by choosing a not nationally representative sample. I see that same focus as attempting to convince the rest of the country that these options are already more mainstream than they actually are. You focus on the quotes “It rewards immorality, to some extent,” and “Americans seem to believe that anything they can get away with is O.K.”, from a lawyer and a debt collector, respectively. I focus on “I am not going to be a slave to the bank” and “It’s come to the point where morality is no longer an issue.” You draw the conclusion that the author is sympathetic to the lenders. I draw the opposite conclusion.

    The Times has, in multiple articles, publicized to a nationwide audience that these default options exist and that borrowers often have some leverage over lenders. I think they’re doing a remarkable job trying to shift the norms away from “always pay your mortgage no matter what” to “it’s business and sometimes you have to cut your losses.”

    1. Chester Genghis

      I agree. Note that strategic default rates are much higher for $1 million-plus mortgages than for smaller amounts.

      The rich are generally more strategic, and more ruthless. Morality is essentially a middle class construct. The rich feel the need to give it lip service, but have never felt terribly bound by it.

      1. aet

        Not “middle-class”, but a concept for those who live closely with their neighbors and fellows.

        Morality does not influence the unsociable, or uncaring.
        But those had better hope that they are not in a postion to require the aid of those they have dealt with “immorally”.

        Solitary beasts in the desert know not from morality.
        Morality requires sociability: and Americans have become remarkably callous and un-social of late.

  13. AnecdotevsAnecdote

    After paying down my HELOC monthly for about 7 years I wrote a 4K check to help pay to replace a retaining wall. This was on July 28th. Less than a week later I got a letter from Jamie’s bank saying that effective July 28th I could no longer draw on my HELOC. I was spared embarrassment because they decided to honor that last check. A friend of a family member was not that lucky. So it appears that these lines of credit exist until you try to use them. The reason given was they were using new metrics due to the falling value of the houses. When I took out my primary mortgage you would qualify for a HELOC as long as you had 10% equity. Now the value of the primary loan cannot exceed 70% of the market value if you want a functioning HELOC. But I am grateful to James as its 50% in some states. Surely not news to readers of this site. Its just when I saw this article about strategic defaulters I couldn’t help but think must be a lot of people finding out they no longer have a line of credit …

  14. MikeRG

    Despite the right wing saw about the “liberal media,” esp. the NYT and Washington Post, these papers have simply been arms of the establishment for the past two decades. Examples were the NYT shilling for the Bush Administration in the run up to Iraq and the recent offers by the WP to bring lobbyists and lawmakers together for a fee. Woodward and Bernstein’s early work were probably the pinnacle of investigative reporting; unfortunately, that was over 30 years ago. Since then “journalists”, including Woodward and Bernstein, have been increasingly co-opted by those they should be investigating. They have traded their good names for access and book deals.

    Omnia Romae Venalia Sunt?

  15. fog Horn Leg Horn

    “Americans seem to believe that anything they can get away with is O.K.”

    How did AIG and Goldman’s PR Firm get into this article?

  16. Siggy

    I fail to understand how morality attaches to defaulting on a contract that is uneconomic. This is especially confounding in that the typical home loan contract exists in two parts, the note and the mortgage/deed of trust. The potential for default is acknowledged in the contract. Given that acknowledgement, is it equitable to deny the borrower his implicit right to default?

    Differentiating the event of default between being merely a default; or, a ‘strategic’ default strikes me as being silly think. Whether the borrower can or cannot make the loan payments is irrelevant. The event of default may be defined by any number of occurances the most common of which is late or missed payments. The fact that the house now commands a price that is less than the loan balance speaks volumes about the quality of underwriting that was done by the lender.

    Propagandizing ‘strategic’ defaults as being immoral strikes me as a campaign to mitigate the inevitable losses that will be incurred by profligate lenders. The lender did not have to make the loan. The lender did not have to lend in an amount that did not have a sufficient differential between loan amount and house price that would provide a cushion against potential market price movements. The lender did not have to make a loan whose terms of payment would escalate beyond the capacity of the borrower to honor.

    Other than it’s a story that can be spun as chum to sell papers, it strikes me as being a non story. Is the NYT playing drummer for the banksters? I’m uncertain as to that. I am certain that if there is any immorality in these defaulting events, that immorality lies in the contract that was offerred and accepted and not in its subsequent event of default.

  17. MinnItMan

    I meet people nearly every day who are considering whether to “strategically default.” They bring this concept up, not me. I am not a personal finance expert, but I know a fair amount about it. So far, of all these people, I have met only one who I would consider a true “strategic defaulter.” The rest are, for lack of a better term, are “survival defaulters.” While they may be able to pay right now, the chances they can continue to pay 1, 3, 5-10 years into the future are very small, the likelihood of serious depletion of their “wealth” (very broadly defined to include health) is high, and the incentives to do so are are diminishing. In short, default is a when, not an if. IMO, the most powerful weapon of compulsion the lenders have had is the carrot of rewarding borrowers with higher debt limits, not the log of bludgeoning them with a bad credit score, particularly now. (Note: I am not a Kantian deontological moralist, but rather a consequentialist, and think it is entirely likely that a default now may be less disasterous for lenders than a default two years from now. I got your back, Jamie).

    One known known is that default will decrease access to credit – for a while. However, in context, access to credit is diminishing anyway even if the debtor pays. Iyves is right that it used to be there was “supposed to be yet another refi.”

    The establishment policy is that “we need to get lenders lending again” which really means we need to get borrowers borrowing again. But there just aren’t enough borrowers – the pool is shrinking.

    The key fear for “survival defaulters” is at what point they have to live on a cash basis. The unknown is how hard the financial industry will push to get them back into the debt fold. My prediction is pretty damn hard, but it could/may/should be a lot harder to re-create the securitized debt markets to do this. Maybe not.

    So, the way I would address the morality question is that lenders will need to forgive more than borrowers will need forgiveness. On the morality question – disadvantage lenders.

  18. curmudgeonly troll

    after reading the article, I didn’t understand why the headline didn’t read – ‘Many Borrowers Unable To Repay Home Equity Loans.’

    if you know you can never pay it back, why would you keep making payments?

    the astounding thing is that 1) the banks made the loans to credit-unworthy borrowers when 2) there was no cost-effective way to foreclose.

  19. ep3

    I would like to dig deeper in Mr. hairston’s story. Why did he take out the home equity loan? Could it have been that rents had risen so sharply in his area that he couldn’t rent his apartment building and the bank said “take out a LOC to cover your expenses until you rent again. it will be alright. things will continue to get better.”
    What was the quality of the apartment building? What location? Here in Lansing there are apartments in bad parts of town that rent way too high for the area. So people lease then skip town without paying the rent. So you as a landlord are out the rents and then the costs of going to court to try to recover the funds, which is pretty hard to do when the lessee is broke.

    I’m with Yves on this. You end by saying he is employed with the pizza company. Could it be he’s a delivery driver?

  20. Bates

    Then there is this bit of news from Florida which might not be ‘ground zero’ for home mortgage defaults but is very close. This is a little off topic but may be of interest to posters that are facing default…

    “TALLAHASSEE, FL – Attorney General Bill McCollum today announced his office has launched three new investigations into allegations of unfair and deceptive actions by Florida law firms handling foreclosure cases. The Attorney General’s Economic Crimes Division is investigating whether improper documentation may have been created and filed with Florida courts to speed up foreclosure processes, potentially without the knowledge or consent of the homeowners involved.”

    “Because many mortgages have been bought and sold by different institutions multiple times, key paperwork involved in the process to obtain foreclosure judgments is often missing. On numerous occasions, allegedly fabricated documents have been presented to the courts in foreclosure actions to obtain final judgments against homeowners. Thousands of final judgments of foreclosure against Florida homeowners may have been the result of the allegedly improper actions of the law firms under investigation.”

    Hat tip to Karl Denninger (Florida resident) and owner of the Market Ticker Forum. Remainder of article here:

  21. JS

    The American Bankers Association itself, though, offers a much rosier assessment of the situation with an article titled CONSUMER LOAN DELINQUENCIES CONTINUE BROAD-BASED IMPROVEMENT IN FIRST QUARTER 2010. There is less anti-consumer sentiment in that article:

    ABA Chief Economist James Chessen said the improvements reflect concerted efforts by consumers to shore up their finances. “It’s clear that consumer balance sheets are improving. People are borrowing less, saving more and building wealth. These are all positive signs, ” he said.

    And in July, the LA Times also reported the 4.12% figure in a positive light, under the title Home equity loan delinquencies fall for first time in two years, and rather positive spin coming from the ABA:

    The delinquency rate on home equity loans has fallen for the first time in two years, reflecting the slowly stabilizing housing market and consumers’ efforts to clean up personal balance sheets, the American Bankers Assn. said Wednesday.

    So maybe it’s just the NY Times.

    1. JS

      Which adds credibility to Richard’s (7:42 AM) interpretation, namely that the NY Times may be trying not to bash consumers, but to offer them advice on available options.

  22. CingRed

    I believe the king of England regarded the acts of those who signed the Declaration of Independence as immoral. I regard them as heroic.

    When I personally observed the tactics of the mortgage lenders when they were trying hard to shove one of my kids into a house they couldn’t afford 4 years ago my sympathy for any losses the banks would take in the future went out the door. The lenders were lying then and working very hard to take on huge risks of default with no risk premium and they are getting just what they deserve now. The banks were clearly the more sophisticated and knowledgeable parties in these contracts and should have know better. When one side of the contracting parties starts out by being immoral they have no grounds to call the other side immoral. They were taking advantage of persons with lesser financial savvy and now they cry foul when the tables are turned. Give me a break!

    1. leroguetradeur

      “they were trying hard to shove one of my kids into a house they couldn’t afford 4 years ago my sympathy for any losses the banks would take in the future went out the door. The lenders were lying then and working very hard to take on huge risks of default with no risk premium”

      CingRed, why were they doing that? It makes no rational sense why anyone would do that? Don’t you think it more likely that they thought the risks were low, and the housing was affordable? However wrong they may have been?

      1. attempter

        It doesn’t make rational sense to make a predatory loan, pocket the profit, and sell the risk down the line, so for you there’s zero downside? (Needless to say there’s no conscience which could bother them.)

        If you really believe that and aren’t just a pro-bank troll, you have a rather eccentric view of rationality. I think I see the problem with your other comments as well.

        Unfortunately, the rationality of it is impeccable. That’s what happens when you base a “society” on greed and instrumental reason.

      2. Skippy

        I always point out the $$#GET IN THE PIT#$$ clause in mortgages, that being if you win, we win but, you lose we win and you “get in the pit”.

        Skippy…I love humanity, its sooo warm and cuddly.

  23. Dirk

    Funny how the morality tale does not hold when it is the big boys who are the strategic defaulters. Blackstone did a strategic default on a $4 B loan from the purchase of Styvesent town. Yet when some out of work person with big medical bills walks away from a $400,000 mortgage secured by a house that is now worth $200,000 they are immoral.

  24. threadkilla

    to default or not, that is the question!

    my answer is do what a corporation would do….our leaders gave the corporations the same rights as an individual so it’s high time individuals start thinking like a corporation.

    and a corporation would walk away in heart beat…..there is no morality in your financial well being.

    do what is in YOUR best interest, fuck the bank, they would you.

  25. Christine Springer

    Yves, great post! The banks are still playing the morality card…which is so tired. I think strategic defaults along with other types of defaults on real property will increase and there is nothing the banks can do about it.

    We shouldn’t feel sorry for them. They are still profitable thanks to credit default swaps and insurance claims that pay off the mortgage pool when the borrower becomes 90 days past due.

    If the banks want to pursue borrowers in the states where it’s legal to do so, they will push these people into bankruptcy, because, again, it’s probably a better business decision to file BK rather than repaying all those debts.

  26. Chris of Stumptown

    “We would love to change history so more conservative underwriting practices were put in place.”

    Right. Just what I was thinking. If loan officers could do it all over, they would rather not make the loan and not get the commission.

  27. Rahul Deodhar

    I have read of borrowers after a strategic default can still avail of cheap credit. These are sane borrowers who read the fine print. I don’t see any reason why borrowers should not default strategically and save themselves.

    Second, as more people default, strategically or otherwise, the cost for those who don’t increases. Don’t ask me how, but banks eventually move the cost to those still paying the mortgages.

    Any ways the borrowers will pay the costs as taxes so why pay twice.

  28. Skippy

    Contracts are not moral, they are an agrement wetted on the day. If you want morals go to a curch of your choosing.

  29. Piero

    This line:

    ” . . It might be a pretty fat tail, but it would take a good deal of forensic work (construction of a large sample, detailed work on the motives and behaviors of borrowers, with efforts to check what they say about their motives now with evidence of their actions at the time the loans were entered into) to get to the bottom of why people are defaulting.”

    explains why the medial coverage of the issue is disproportionately pro-lender and anti-borrower. Who is more likely to have the resources and time to be able to spoon feed a story to the press, the banking and mortgage industries or isolated individuals?

    This is all about the pathetic state of our 4th estate.

  30. S Murray

    What B.S. I put $1 in the bank, Fed prints $29 from thin air against my $1 as collateral and gives $28 to bank so they can loan me $28 plus charge me interest on the loan. Eventually, ponzi scheme blows up and banks whine that they lost $28 that never really existed except on the Fed ledger. Homeowners paid capital gains on gains but could never write off losses. So now they want to take away the mortgage interest deduction and finish demolishing the housing market. We can be like the slaves and rent over-priced “homes” from the government plantation. No one would have ever bought a house if they thought they could never sell it and come close to getting their down payment and principal payments back. Most of us did not buy our homes as a revolving credit source. We bought them as a conservative investment providing a home until we liquidated our equity at retirement or when our kid’s left home. No one cares about all us honest folks that qualified for our loans and gave 30-50% down payments to banks with REAL money on homes before the bubble. We also went down too in Phoenix and now we have homes we can’t sell for more than the remaining mortgage. The $500K that I lost was supposed to pay for my retirement and my kid’s college when I sold it. Now I can’t sell it and can’t pay it off in my working lifetime. Bank received $500K + $250K interest of REAL money in 7 years. Yet I am an immoral criminal if I walk on my house and rent down the block.

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