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Why Are Homeowners Idiots?

33 points by prat 17y ago

chrisgoodrich 17y ago
I generally agree with the sentiment that one is morally obligated to pay debts. This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest. Anytime I think about the morality of abandoning an underwater debt, I remember that $billion corporations do this every single day.
- deleted 17y ago
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- tc 17y ago
  Free markets are also deeply rooted in strong and fair contract enforcement. That's the bounds-check on self-interest.
  - steveplace 17y ago
    And the US markets have some of the best bankruptcy courts in the world, which helps.
- CWuestefeld 17y ago
  This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest. I read it with just the opposite meaning. I understood it to say that the actual, observed behavior in the mortgage market is that howeowners are being moral. The Fools seem to question why people would act following their morals rather than purely financials. And this points to one of my favorite misunderstandings of economics, and one that I'm surprised an economist would fall for. Economics is NOT about just money. It's about why people make a choice for one thing, foregoing another. And it's all tied to what people value. It seems to me that this article validates that people really do value behaving morally, having a clear conscience. And I'm glad, because I don't want to live in the world where people take advantage just because they can.
  - brc 17y ago
    And if you want to go studying Adam Smith for some 'invisible hand', you first need to understand the 'Theory Moral Sentiments'. You are correct in that it's what they value. This is the monetary aspect + other aspects. It's clear to me the reason that people with underwater houses don't default because of the credit history damage, social stigma and other feelings. Plus, they may consider walking away equivalent to selling at the bottom of the market. The article, overall, adds very little to the discussion because it approaches it from the wrong angle.
  - billjings 17y ago
    Homeowner's opinions will likely change if they begin to perceive their lenders as taking advantage of that morality.
    - dagw 17y ago
      Exactly, I'm all for acting morally and sticking to the spirit of an agreement even if I can screw my counterpart by abusing some loophole, but only as long as I feel my counterpart will do me the same courtesy. If I feel my bank is out to screw me and won't give me a break, then I'll have much less problem screwing them right back. If on the other hand I feel that my bank has treated me fairly in the past, and given me a break when they technically didn't have to, then I'd be far more willing to do the moral thing.
  - chrisgoodrich 17y ago
    That is an interesting contrasting viewpoint. You are absolutely correct that the observed behavior is to act morally (as they should). I had missed this point earlier.
  - whyenot 17y ago
    There's an awful lot of experimental evidence coming from psychology that most people do "take advantage just because they can," especially if they think nobody is watching. If you could anonymously walk away from a financial obligation like a morgage, people might behave quite differently.
- maweaver 17y ago
  Do you have examples of big companies abandoning debts like that? The opposite actually comes to my mind: large companies being destroyed by their inability to get rid of underwater debts (putting aside big banks' recent problems, I'm thinking of Enron here)
  - chrisgoodrich 17y ago
    General Motors comes to mind. Bankruptcy allows them to abandon their debt and continue to operate with only the best assets as the "New GM." Basically all the same assets, screwed the stockholders and debtors, but a new company.
  - mrkurt 17y ago
    Ignoring bankruptcy for a second, big companies walk away from contracts all the time. Those contracts normally stipulate that one company will pay another company a certain amount of money over a particular time period, which is effectively debt. The difference between that and a mortgage is that the big companies are usually on a more equal negotiation footing than homeowners are with banks. So rather than signing a boilerplate agreement, they have teams of lawyers to pick things over, write outs, etc. So when they choose to "walk away", they usually have some reasonable way to do it and still comply with the contract.
- toddh 17y ago
  You are obligated to do what your contract says. Your contract says you can walk away and the bank gets the house. If the bank didn't like that potentiality because they were speculating on a loan, then apparently that's all of our problem.
  - zmimon 17y ago
    I don't know exactly what mortgage contracts look like in the US, but the ones I have seen in my country don't say you can walk away. They say you can not walk away. The bank getting the house is just one consequence that happens if you violate the contract and do walk away.
    - DenisM 17y ago
      Most mortgages in US are non-recourse. http://en.wikipedia.org/wiki/Nonrecourse_debt http://en.wikipedia.org/wiki/Nonrecourse_debt
      - anamax 17y ago
        However, refis in CA are recourse. Before the crash, I was getting calls from lenders trying to get me to do a cash-out refi "so I'd have money to invest in the stock market". I assume that some went for that pitch.
    - kls 17y ago
      America severely limited the recourse of creditors when they abolished indentured servitude and wrote the bankruptcy laws. It was common principal that America would not be a debtors nation after that event Some of those laws where changed when, after heavy lobbying by the credit industry at the dawn of housing collapse (2005), a means test was created, to verify that a debtor could not pay back the debt. If he can, no matter what ramifications it has on their personal life, the debtor is required to submit to a 5 year restructuring program in which any disposable income is seized by the court and paid to ones creditors. An individual can no longer declare amnesty from debt no matter what personal reason for doing so, and no matter what hardship is experienced. Corporations are not subjected to the same measure to qualify for a chapter 7 bankruptcy. In saying that, in some states, bankruptcy is the only way to cleanly walk away from your home.
- kyteland 17y ago
  I tend to agree with the sentiment put forward by Karl Denninger at http://market-ticker.denninger.net/archives/1791-Finally-Mainstream-Press-Intentional-Defaults.html http://market-ticker.denninger.net/archives/1791-Finally-Mai... "Years ago there was stigma - a man's word was his bond. But that is gone now, and it is not you, the consumer who made it thus. It is in fact the very people who lent you that money who made it so - who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!"
prat 17y ago
Its not the morality but the expectation of the housing prices bouncing back to normal like the rest of the economy that is keeping them from walking away. But the issue with realestate is that its not as agile a market as stocks or commodities. the volatility observed in a month in the stock market is probably going to be observed in a year in real estate market. And I am not not even talking about the phase lag but the different scales of variation between the 2 types of markets.
- ars 17y ago
  > Its not the morality but the expectation of the housing prices bouncing back to normal like the rest of the economy that is keeping them from walking away. Then they could walk away, and buy a different (cheaper) house, or buy first then walk away.
  - prat 17y ago
    There is cost of walking away, damage to credit. So if they stay, assuming things will get better and they do, they keep their credit too.
- lurkinggrue 17y ago
  Housing prices were not normal when many were buying.
  - axod 17y ago
    Over the long term, on averga, house prices always rise. People always need places to live.
    - lurkinggrue 17y ago
      How can you have prices always going up? Wouldn't that be a bit like perpetual motion?
      - axod 17y ago
lucifer 17y ago
"And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligations." - Paulson Every time these GoldmanSachs critters open their mouth is yet another oblique reminder that the masses are brain dead.
- chrisgoodrich 17y ago
  "Do as I say, not as I do." comes to mind.
  - simon_ 17y ago
    Has Goldman Sachs ever missed an interest payment or otherwise failed to met a financial obligation? The ire in Paulson's quote is directed not against speculators generally, but speculators who don't live up to their agreements when things move against them. That's not really something Goldman is guilty of. ...As much as people would like them and everyone ever associated with them to be guilty of everything.
    - steveplace 17y ago
      Has Goldman Sachs ever missed an interest payment or otherwise failed to met a financial obligation? I'd give Goldman a pass. They really are the best at what they do. But if we expand it further to the rest of the financial industry, what can we see? Back in November, 33 companies skipped their TARP payments. Just recently, Blackrock walked away from a Manhattan building as they couldn't refinance the debt. And that's the problem-- banks and homeowners get into financial, not moral contracts. If the loss off default is smaller than the loss of staying in the contract, you stop paying. Companies do it all the time, and homeowners should view it as an out.
      - yummyfajitas 17y ago
        "...any homeowner who can afford his mortgage payment but chooses to walk away..." "Just recently, Blackrock walked away from a Manhattan building as they couldn't refinance the debt." Were the companies which skipped their TARP payments capable of paying? There is a difference between being unable and unwilling to pay.
tc 17y ago
This is how societies break down. An example is set at the top, by those in power, that self-dealing and self-interest above all ethical standards is standard operating procedure. Eventually this moral decay 'trickles-down' and people start to realize that they are chumps if they don't start playing by the same rules.
- pyre 17y ago
  The problem is that they are chumps if they don't play by the same rules. Which is why the people 'at the top' really need to be used as an example of not acting in such as self-interested way. If the people at the bottom are keeping society together by ignoring the example set at the top, then the people at the top are just plowing over everyone else in a bid to further their own selfish goals.
  - Psyonic 17y ago
    Agreed. Either the common man should play by the same rules, or he needs to fight to enforce that those at the top don't get to cheat either. Otherwise he is basically a "chump."
andylei 17y ago
there may also be the issue of credit score. if you file for bankruptcy, it's harder to get a loan in the future. the prospect of future loans may be more valuable than the difference between what you owe the bank and the value of your house. that said, i suspect most people aren't thinking about this
- chrisgoodrich 17y ago
  This is an important point that I think supports the overarching message if this article and the Paulson quote. The system of credit reporting has been setup to support this "debt as a moral obligation" assumption. The fear of poor credit scares people into continuing to pay. In reality, a bankruptcy only lasts 7 years on your credit report and most banks will start lending after merely 2-3 years. Underwater homeowners should look at the longer time horizon and see that it will take quite a few years for their assets to be above water. That's several years to re-build their credit with a much lower cost of living.
  - lionhearted 17y ago
    > In reality, a bankruptcy only lasts 7 years on your credit report and most banks will start lending after merely 2-3 years. From my understanding, it goes off your credit score but banks can see past bankruptcies forever and it factors into their decisionmaking on whether to lend and what interest rates and terms to offer. This is what my business banker said to me when I was chatting with him casually - so consider the bias, but he's quite the straightforward and standup guy and we're acquainted a bit outside of the bank. He's not the kind of guy that'd pull my chain (and I didn't have any debt anyways - was just getting a rundown on credit scores). Actually, it was pretty damn illuminating when he told me all of the stuff they have records on - they knew all sorts of information about me that I never gave them.
  - kls 17y ago
    It is 10 years and one can get an auto loan in less than a year if they understand how the mechanisms work. The over-reliance on credit score can be used to a bankruptcy filers advantage if they are careful. A bankruptcy usually take a 60 to 100 point hit on ones credit, not at all devastating. The problem is that most people wait to file after they have missed several payments which, each take a toll, on an individuals credit score. If one files at the first sign of trouble, can hold out making payments until the filing and immediately gets a secured credit card after the fact they can repair the damage in a little as a year. You will pay at least a point hire interest for the 10 years it is on your credit. As well, with so much flight from underwater homes I would not be surprised to see the government enact some form of credit forgiveness once the wreckage is cleared and we are recovering. We have to get all of these consumers back to consuming or our consumer based economy will not survive. Both the corporations and the government are in favor of happy consumers who are pacified by their consumption so they will be extremely interested it lighting that economic "engine" again.
argv_empty 17y ago
It's interesting to see the norm asymmetry (i.e. homeowners should just sit and take it) playing out in the Fool comments.
jerf 17y ago
One thing I don't feel the article addressed is that there is a range of being underwater, it's not binary. I bought after most of the deflation of value had occurred, but not entirely. I'm about 3-5% underwater right now. But abandoning my house (even if I was not concerned about the ethics) would still be bad, because percentage fees on getting a new one would eat my "savings" entirely. To say nothing of the beating my credit rating would take. To really make it worth walking away you really have to be underwater by a lot. I don't think that 100% of the people who are underwater are down by 30% or 40%. Real statistics on that would probably be more helpful.
- chrisgoodrich 17y ago
  I agree with this assessment. It definitely isn't a binary decision. Just as it isn't a decision that should be taken lightly. Obviously there are ramifications to abandoning a mortgage and all the risks and benefits need to be weighed based on every situation.
- ajross 17y ago
  Well, it's obviously true that it's not a step function. But the slope is really steep. Someone with just a tiny bit of equity can sell their home and walk away without having to pay anything. Someone with just a tiny bit of unsecured debt who wants to move loses almost nothing (a beaten credit rating for someone with income isn't nearly as serious as you think) by walking away, and saves thousands of dollars in fees (typical real estate fees in the US are 5/6%, and paid by the seller!). That may not be "binary", but it's pretty close. The real determining factor in your case, I suspect, isn't financial but one of convenience. Finding a new home is a hassle, and you don't want to bother with it. It makes more sense to stay where you are because moving doesn't get you anything but grief. But if you got a great job in a different city, would you really be seriously thinking about trying to sell your underwater house?
  - liquidben 17y ago
    "The real determining factor... isn't financial but one of convenience" But convenience is financial as it can be valued. (My statements based upon extensive research involving 7-11 and getting food delivered)
bd_at_rivenhill 17y ago
One issue the article ignores is the damage to your credit. I would assume that having a foreclosure on your record would make it very difficult to get credit at a reasonable interest rate in the future, and that some of the people who continue to pay on a nonrecourse mortgage are accounting for the effect on the price of debt they may wish to incur in the future. I expect that this factor is ignored by economists because it is difficult to quantify.
- prat 17y ago
  If there was someway to manipulate the way credit is damaged by looking at individuals so that only sub-prime borrowers are punished - that would be a possible solution. Let the responsible buyers walk away without penalty. But I understand that this has a potential for regime change and is far fetched in our situation.
  - bd_at_rivenhill 17y ago
    From the perspective of lenders, who are the people that credit scores are supposed to serve, this would be counter productive. Anyone who fails to pay a debt, for whatever reason, should be penalized. For large lenders, the underwriting decision is now almost entirely statistical, which provides them with lots of operational leverage (but is also one of the reasons that the bubble was allowed to inflate in the first place). If you want someone to make an actual underwriting decision, you need to go to a smaller bank or credit union. You will also find that many of these institutions weren't hit as hard because they made better decisions about what loans to make, and they sold off the poor quality loans that the government forced them make to the secondary market to avoid the hit when they went bad.
deleted 17y ago
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ams6110 17y ago
Successful capitalistic democracy requires a moral foundation. Many things that are arguably "in the best interest" of an individual are not in the best interest of a functioning economy, and not honoring one's agreements is one of these. The fact that corporations are not being ethical does not justify on a moral basis the same behavior by anyone else. Further, if the coming predictions of high inflation turn out to be correct, the people who are still holding their mortgages will be paying them back with cheap dollars vs. people who walk away from their current debts and then need to borrow again later.
- kls 17y ago
  > The fact that corporations are not being ethical does not justify on a moral basis the same behavior by anyone else. That is the beauty of Morals and ethics, is that groups of people subscribe to different ones just as you say it does not give them the right. Other subscribe to an-eye-for-an-eye morality. I personally think that it does justify it, my moral compass says that if a cooperation is abusing the people via deception, unethical and immoral behavior then that corporation should be dissolved and all debts to that corporation should be terminated. covering it up their appalling nature with a double ethical standard just emboldens more corporations to engage in unethical behavior and allows more abuse of the people. Let me be clear, I am not anti-corporation, i am just anti-double standard.
dkimball 17y ago
The Motley Fool seems to have forgotten this, but rational-agent theory is a useful fiction, not a statement of reality. The best analogy I can think of is Skinner's behaviorism; rational-agent theory seems to fail in the same kinds of places as behaviorism does, too. Look up the "Ultimatum Game" for a particularly effective demonstration of where it fails -- and the commenter here who points out that rational-agent theory would destroy civilizations is completely correct. (Mental exercise: apply "the tragedy of the commons" to a defensive war.)
petercooper 17y ago
Why Are People Who Pay For Porn Idiots? Why Are People Who Pay For Music Idiots? Why Are People Who Don't Sell Drugs To Make Lots Of Money Idiots? Because some of us have pride and morals.
- prat 17y ago
  thats okay - but this is like paying for music/porn to be taken away from you. A big part of the equity you got when you signed up and paid for has been taken away but you are still paying the full price!!
  - pyre 17y ago
    Nothing has been 'taken away' from you. Someone lent you $X to buy something that you thought was worth $X. The value of what you bought has gone down, it's now worth $(X-Y). The bank didn't do this. They lent you $X and you're paying them back for that $X at the interest rate that you both agreed on. Cars notoriously devalue over time. Are you saying that the bank is stealing money from you because you new car dropped 10% in value the moment that you drove it off the lot, but you are still paying the bank for a loan of 100% of the original value of the car?
    - prat 17y ago
      I understand and agree.. but banks set up there loan terms and conditions assuming that real estate (unlike cars) increase not decrease in value over time. Ofcourse, thats an assumption that buyers have too and that's their risk. So what do you suggest if that assumption doesn't hold any longer? should the terms and conditions remain the same?
    - kls 17y ago
      >The bank didn't do this. But they did, they took you loan packaged it with poop and sold it to the after market. They gave loans to people who could not afford and when it all cam crashing down they lobbied for bankruptcy law changes to make it difficult to absolve yourself from the debt and they lobbied for your tax money to bail them out of the bad speculations that they made on junk loans. All of this affected your mortgage and the underlining assets value. Now they are stable, they expect you to hold up your contracted obligations which you are free to make your own decisions on, but to say that they did not do this is wrong, they just did not do it in the contracted terms of your contract.
rleisti 17y ago
While reading this article, I felt there was as strong connection to this one (recently posted on hacker news): http://www.economist.com/sciencetechnology/displayStory.cfm?story_id=15328544 http://www.economist.com/sciencetechnology/displayStory.cfm?... ...which basically says that entitled people in positions of power tend to hold others to a higher moral standard than themselves.
kscaldef 17y ago
This article is remarkably oversimplified. First, the obvious: once you ruin your credit rating by defaulting on your mortgage, it might not be so easy to just waltz right into a lower price rental. Not to mention that you'll be paying more on any other loans you take out for the next <strike>10</strike> 7 years, and probably your car insurance. You might also consider the increasingly common phenomenon of employers running credit checks on applicants. There are a variety of legitimate factors in a decision like this which aren't purely financial: the time, emotional, and social costs of moving. Do you move your children to another school? Do you take your children away from their neighborhood friends? Perhaps you like your neighbors as well, or the neighborhood businesses you frequent. If you move into a rental, you can no longer make certain changes to your home to suit your needs and desires. It's naive and insulting to call people "idiots" because they aren't simple money-maximizing machines, particularly if you're going to pretend that monthly housing cost is something that exists in a vacuum.
- pyre 17y ago
  > Not to mention that you'll be paying more on any other loans you take out for the next 10 years [...] I thought that bankruptcy came off your credit score/rating/listing after 7 years.
  - chrisgoodrich 17y ago
    It does. After 7 years a bankruptcy should not show up on your credit report.
    - kls 17y ago
      it's 10
kylec 17y ago
Maybe people like the house they're living in? Everyone seems to be talking about the financial side of things, but isn't it likely that many of the people still paying their mortgage do so because they like where they're living and don't want to be foreclosed on?
- adharmad 17y ago
  Exactly.....something that i never understood in all these articles is this: If I have bought a home for living in it, and not for speculation, how does it matter what its market price is? I knew _before_ I bought it what I will be paying the whole way and I don't want to sell it.
  - chrisgoodrich 17y ago
    Absolutely. I think this is the root of why most people do continue to pay their mortgages. If you can afford the payments and are satisfied with where you live, then there is no reason to abandon your mortgage. Then there's the other group who (a) can't afford their mortgage anymore or (b) want out. This is the group who should evaluate this as a financial contract and evaluate the risks/benefits of abandoning the mortgage.
- chengas123 17y ago
  But you're not going to be living there for the entirety of your 30-year mortgage in most cases. What happens when 5-6 years from now, you want to move, but you're underwater and can't pay off the mortgage by selling your house?
  - lanaer 17y ago
    If you're able to afford the payments, and are otherwise financially stable, I'm not entirely sure how another 5-6 years will worsen things. Unless the economy manages to crash again in that time, and worse. Then, though, you'd probably be in a crappy situation even if you left now. More than likely, at this point, your house will be worth more (though probably not a lot more) than it does now, and (since you've been meeting your payments) your debt will have shrunk, too.
njharman 17y ago
As a recently newly minted homeowner who paid appropriate price in a non-bubble market I find the title highly offensive and hyperbolic. "Why are underwater homeowners idiots" is the appropriate title. Re: article itself. There's also the small matter of jacking your credit for 7 years. With uncertain future and no savings many people rely on access to credit for emergencies. Not saying that is wise or that they should, but that is a fact.
- DenisM 17y ago
  Assuming you took out a mortgage, you are financing consumption by leveraging up. It's no different than buying a pack of beer on the pay-day-loan money. Not a financially smart move (unless your loan interest rates is below the long-term treasury rates).
  - njharman 17y ago
    house != pack of beer tax deductions, appreciation, equity, income(it's a duplex and I rent 1/2), plus all sorts of small things such as reduced auto insurance as it's rolled into home owners insurance
axod 17y ago
Can you put a [US] tag in the title. It's not really relevant in other countries. Also a slightly less inflammatory hyperbolic linkbait title would be good.
colomon 17y ago
It sounds like a small thing, but I'm glad just to see an article which doesn't just assume that people who are underwater were foolish or reckless buying a house in the first place. I bought well within what I could afford in 2001, and routinely paid down extra principal every month. Now that I am married and have a small child, I'd like to move someplace bigger, nicer, and closer to the rest of my family. Only thing is, according to the real estate agents, if I'm really lucky selling my house will just cover what remains on the mortgage. If I'm not lucky, selling the house could easily cost us $20,000. Crazily, the most likely reason for that to happen wouldn't be that we couldn't find someone to buy the house for what we'd like to sell it for -- it would be that we couldn't find a lender to appraise it for that much. Personally, I haven't sussed out the moral implications of just giving the bank the house instead of paying back the loan. On the one hand, it's hard to see how the bank could complain: yeah, they might be getting a house valued at $N in lieu of $N + $20,000, but they also got 8.5 years of interest on it, too, which probably amounted to around $45,000. On the other hand is the notion that implicit in our loan contract was the idea that we would pay it off if humanly possible; that allowed the bank to lend us the money for less than would have otherwise been possible. I don't know how to balance those two things.
- chrisgoodrich 17y ago
  In my opinion, you are the prime example of whom this article is discussing. In my view, the bank will still profit off of your loan. If market value is about equal to what you owe, but it could only be reasonably sold for $20k but you have paid $45k in interest thus far, they still profit $25k from your loan. I have a hard time seeing where the bank could be morally right in damaging your credit for walking away...

33 points by prat 17y ago

I generally agree with the sentiment that one is morally obligated to pay debts. This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest. Anytime I think about the morality of abandoning an underwater debt, I remember that $billion corporations do this every single day.

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tc 17y ago
Free markets are also deeply rooted in strong and fair contract enforcement. That's the bounds-check on self-interest.
- steveplace 17y ago
  And the US markets have some of the best bankruptcy courts in the world, which helps.
CWuestefeld 17y ago
This article makes a good argument that free markets don't work on morality, instead they are rooted in the assumption that everyone acts in their personal best interest. I read it with just the opposite meaning. I understood it to say that the actual, observed behavior in the mortgage market is that howeowners are being moral. The Fools seem to question why people would act following their morals rather than purely financials. And this points to one of my favorite misunderstandings of economics, and one that I'm surprised an economist would fall for. Economics is NOT about just money. It's about why people make a choice for one thing, foregoing another. And it's all tied to what people value. It seems to me that this article validates that people really do value behaving morally, having a clear conscience. And I'm glad, because I don't want to live in the world where people take advantage just because they can.
- brc 17y ago
  And if you want to go studying Adam Smith for some 'invisible hand', you first need to understand the 'Theory Moral Sentiments'. You are correct in that it's what they value. This is the monetary aspect + other aspects. It's clear to me the reason that people with underwater houses don't default because of the credit history damage, social stigma and other feelings. Plus, they may consider walking away equivalent to selling at the bottom of the market. The article, overall, adds very little to the discussion because it approaches it from the wrong angle.
- billjings 17y ago
  Homeowner's opinions will likely change if they begin to perceive their lenders as taking advantage of that morality.
  - dagw 17y ago
    Exactly, I'm all for acting morally and sticking to the spirit of an agreement even if I can screw my counterpart by abusing some loophole, but only as long as I feel my counterpart will do me the same courtesy. If I feel my bank is out to screw me and won't give me a break, then I'll have much less problem screwing them right back. If on the other hand I feel that my bank has treated me fairly in the past, and given me a break when they technically didn't have to, then I'd be far more willing to do the moral thing.
- chrisgoodrich 17y ago
  That is an interesting contrasting viewpoint. You are absolutely correct that the observed behavior is to act morally (as they should). I had missed this point earlier.
- whyenot 17y ago
  There's an awful lot of experimental evidence coming from psychology that most people do "take advantage just because they can," especially if they think nobody is watching. If you could anonymously walk away from a financial obligation like a morgage, people might behave quite differently.
maweaver 17y ago
Do you have examples of big companies abandoning debts like that? The opposite actually comes to my mind: large companies being destroyed by their inability to get rid of underwater debts (putting aside big banks' recent problems, I'm thinking of Enron here)
- chrisgoodrich 17y ago
  General Motors comes to mind. Bankruptcy allows them to abandon their debt and continue to operate with only the best assets as the "New GM." Basically all the same assets, screwed the stockholders and debtors, but a new company.
- mrkurt 17y ago
  Ignoring bankruptcy for a second, big companies walk away from contracts all the time. Those contracts normally stipulate that one company will pay another company a certain amount of money over a particular time period, which is effectively debt. The difference between that and a mortgage is that the big companies are usually on a more equal negotiation footing than homeowners are with banks. So rather than signing a boilerplate agreement, they have teams of lawyers to pick things over, write outs, etc. So when they choose to "walk away", they usually have some reasonable way to do it and still comply with the contract.
toddh 17y ago
You are obligated to do what your contract says. Your contract says you can walk away and the bank gets the house. If the bank didn't like that potentiality because they were speculating on a loan, then apparently that's all of our problem.
- zmimon 17y ago
  I don't know exactly what mortgage contracts look like in the US, but the ones I have seen in my country don't say you can walk away. They say you can not walk away. The bank getting the house is just one consequence that happens if you violate the contract and do walk away.
  - DenisM 17y ago
    Most mortgages in US are non-recourse. http://en.wikipedia.org/wiki/Nonrecourse_debt http://en.wikipedia.org/wiki/Nonrecourse_debt
    - anamax 17y ago
      However, refis in CA are recourse. Before the crash, I was getting calls from lenders trying to get me to do a cash-out refi "so I'd have money to invest in the stock market". I assume that some went for that pitch.
  - kls 17y ago
    America severely limited the recourse of creditors when they abolished indentured servitude and wrote the bankruptcy laws. It was common principal that America would not be a debtors nation after that event Some of those laws where changed when, after heavy lobbying by the credit industry at the dawn of housing collapse (2005), a means test was created, to verify that a debtor could not pay back the debt. If he can, no matter what ramifications it has on their personal life, the debtor is required to submit to a 5 year restructuring program in which any disposable income is seized by the court and paid to ones creditors. An individual can no longer declare amnesty from debt no matter what personal reason for doing so, and no matter what hardship is experienced. Corporations are not subjected to the same measure to qualify for a chapter 7 bankruptcy. In saying that, in some states, bankruptcy is the only way to cleanly walk away from your home.
kyteland 17y ago
I tend to agree with the sentiment put forward by Karl Denninger at http://market-ticker.denninger.net/archives/1791-Finally-Mainstream-Press-Intentional-Defaults.html http://market-ticker.denninger.net/archives/1791-Finally-Mai... "Years ago there was stigma - a man's word was his bond. But that is gone now, and it is not you, the consumer who made it thus. It is in fact the very people who lent you that money who made it so - who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!"

prat 17y ago

Its not the morality but the expectation of the housing prices bouncing back to normal like the rest of the economy that is keeping them from walking away. But the issue with realestate is that its not as agile a market as stocks or commodities. the volatility observed in a month in the stock market is probably going to be observed in a year in real estate market. And I am not not even talking about the phase lag but the different scales of variation between the 2 types of markets.

ars 17y ago
> Its not the morality but the expectation of the housing prices bouncing back to normal like the rest of the economy that is keeping them from walking away. Then they could walk away, and buy a different (cheaper) house, or buy first then walk away.
- prat 17y ago
  There is cost of walking away, damage to credit. So if they stay, assuming things will get better and they do, they keep their credit too.
lurkinggrue 17y ago
Housing prices were not normal when many were buying.
- axod 17y ago
  Over the long term, on averga, house prices always rise. People always need places to live.
  - lurkinggrue 17y ago
    How can you have prices always going up? Wouldn't that be a bit like perpetual motion?
    - axod 17y ago

lucifer 17y ago

"And let me emphasize, any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligations." - Paulson Every time these GoldmanSachs critters open their mouth is yet another oblique reminder that the masses are brain dead.

chrisgoodrich 17y ago
"Do as I say, not as I do." comes to mind.
- simon_ 17y ago
  Has Goldman Sachs ever missed an interest payment or otherwise failed to met a financial obligation? The ire in Paulson's quote is directed not against speculators generally, but speculators who don't live up to their agreements when things move against them. That's not really something Goldman is guilty of. ...As much as people would like them and everyone ever associated with them to be guilty of everything.
  - steveplace 17y ago
    Has Goldman Sachs ever missed an interest payment or otherwise failed to met a financial obligation? I'd give Goldman a pass. They really are the best at what they do. But if we expand it further to the rest of the financial industry, what can we see? Back in November, 33 companies skipped their TARP payments. Just recently, Blackrock walked away from a Manhattan building as they couldn't refinance the debt. And that's the problem-- banks and homeowners get into financial, not moral contracts. If the loss off default is smaller than the loss of staying in the contract, you stop paying. Companies do it all the time, and homeowners should view it as an out.
    - yummyfajitas 17y ago
      "...any homeowner who can afford his mortgage payment but chooses to walk away..." "Just recently, Blackrock walked away from a Manhattan building as they couldn't refinance the debt." Were the companies which skipped their TARP payments capable of paying? There is a difference between being unable and unwilling to pay.

tc 17y ago

This is how societies break down. An example is set at the top, by those in power, that self-dealing and self-interest above all ethical standards is standard operating procedure. Eventually this moral decay 'trickles-down' and people start to realize that they are chumps if they don't start playing by the same rules.

pyre 17y ago
The problem is that they are chumps if they don't play by the same rules. Which is why the people 'at the top' really need to be used as an example of not acting in such as self-interested way. If the people at the bottom are keeping society together by ignoring the example set at the top, then the people at the top are just plowing over everyone else in a bid to further their own selfish goals.
- Psyonic 17y ago
  Agreed. Either the common man should play by the same rules, or he needs to fight to enforce that those at the top don't get to cheat either. Otherwise he is basically a "chump."

andylei 17y ago

there may also be the issue of credit score. if you file for bankruptcy, it's harder to get a loan in the future. the prospect of future loans may be more valuable than the difference between what you owe the bank and the value of your house. that said, i suspect most people aren't thinking about this

chrisgoodrich 17y ago
This is an important point that I think supports the overarching message if this article and the Paulson quote. The system of credit reporting has been setup to support this "debt as a moral obligation" assumption. The fear of poor credit scares people into continuing to pay. In reality, a bankruptcy only lasts 7 years on your credit report and most banks will start lending after merely 2-3 years. Underwater homeowners should look at the longer time horizon and see that it will take quite a few years for their assets to be above water. That's several years to re-build their credit with a much lower cost of living.
- lionhearted 17y ago
  > In reality, a bankruptcy only lasts 7 years on your credit report and most banks will start lending after merely 2-3 years. From my understanding, it goes off your credit score but banks can see past bankruptcies forever and it factors into their decisionmaking on whether to lend and what interest rates and terms to offer. This is what my business banker said to me when I was chatting with him casually - so consider the bias, but he's quite the straightforward and standup guy and we're acquainted a bit outside of the bank. He's not the kind of guy that'd pull my chain (and I didn't have any debt anyways - was just getting a rundown on credit scores). Actually, it was pretty damn illuminating when he told me all of the stuff they have records on - they knew all sorts of information about me that I never gave them.
- kls 17y ago
  It is 10 years and one can get an auto loan in less than a year if they understand how the mechanisms work. The over-reliance on credit score can be used to a bankruptcy filers advantage if they are careful. A bankruptcy usually take a 60 to 100 point hit on ones credit, not at all devastating. The problem is that most people wait to file after they have missed several payments which, each take a toll, on an individuals credit score. If one files at the first sign of trouble, can hold out making payments until the filing and immediately gets a secured credit card after the fact they can repair the damage in a little as a year. You will pay at least a point hire interest for the 10 years it is on your credit. As well, with so much flight from underwater homes I would not be surprised to see the government enact some form of credit forgiveness once the wreckage is cleared and we are recovering. We have to get all of these consumers back to consuming or our consumer based economy will not survive. Both the corporations and the government are in favor of happy consumers who are pacified by their consumption so they will be extremely interested it lighting that economic "engine" again.

argv_empty 17y ago

It's interesting to see the norm asymmetry (i.e. homeowners should just sit and take it) playing out in the Fool comments.

jerf 17y ago

One thing I don't feel the article addressed is that there is a range of being underwater, it's not binary. I bought after most of the deflation of value had occurred, but not entirely. I'm about 3-5% underwater right now. But abandoning my house (even if I was not concerned about the ethics) would still be bad, because percentage fees on getting a new one would eat my "savings" entirely. To say nothing of the beating my credit rating would take. To really make it worth walking away you really have to be underwater by a lot. I don't think that 100% of the people who are underwater are down by 30% or 40%. Real statistics on that would probably be more helpful.

chrisgoodrich 17y ago
I agree with this assessment. It definitely isn't a binary decision. Just as it isn't a decision that should be taken lightly. Obviously there are ramifications to abandoning a mortgage and all the risks and benefits need to be weighed based on every situation.
ajross 17y ago
Well, it's obviously true that it's not a step function. But the slope is really steep. Someone with just a tiny bit of equity can sell their home and walk away without having to pay anything. Someone with just a tiny bit of unsecured debt who wants to move loses almost nothing (a beaten credit rating for someone with income isn't nearly as serious as you think) by walking away, and saves thousands of dollars in fees (typical real estate fees in the US are 5/6%, and paid by the seller!). That may not be "binary", but it's pretty close. The real determining factor in your case, I suspect, isn't financial but one of convenience. Finding a new home is a hassle, and you don't want to bother with it. It makes more sense to stay where you are because moving doesn't get you anything but grief. But if you got a great job in a different city, would you really be seriously thinking about trying to sell your underwater house?
- liquidben 17y ago
  "The real determining factor... isn't financial but one of convenience" But convenience is financial as it can be valued. (My statements based upon extensive research involving 7-11 and getting food delivered)

bd_at_rivenhill 17y ago

One issue the article ignores is the damage to your credit. I would assume that having a foreclosure on your record would make it very difficult to get credit at a reasonable interest rate in the future, and that some of the people who continue to pay on a nonrecourse mortgage are accounting for the effect on the price of debt they may wish to incur in the future. I expect that this factor is ignored by economists because it is difficult to quantify.

prat 17y ago
If there was someway to manipulate the way credit is damaged by looking at individuals so that only sub-prime borrowers are punished - that would be a possible solution. Let the responsible buyers walk away without penalty. But I understand that this has a potential for regime change and is far fetched in our situation.
- bd_at_rivenhill 17y ago
  From the perspective of lenders, who are the people that credit scores are supposed to serve, this would be counter productive. Anyone who fails to pay a debt, for whatever reason, should be penalized. For large lenders, the underwriting decision is now almost entirely statistical, which provides them with lots of operational leverage (but is also one of the reasons that the bubble was allowed to inflate in the first place). If you want someone to make an actual underwriting decision, you need to go to a smaller bank or credit union. You will also find that many of these institutions weren't hit as hard because they made better decisions about what loans to make, and they sold off the poor quality loans that the government forced them make to the secondary market to avoid the hit when they went bad.

deleted 17y ago

[deleted]

ams6110 17y ago

Successful capitalistic democracy requires a moral foundation. Many things that are arguably "in the best interest" of an individual are not in the best interest of a functioning economy, and not honoring one's agreements is one of these. The fact that corporations are not being ethical does not justify on a moral basis the same behavior by anyone else. Further, if the coming predictions of high inflation turn out to be correct, the people who are still holding their mortgages will be paying them back with cheap dollars vs. people who walk away from their current debts and then need to borrow again later.

kls 17y ago
> The fact that corporations are not being ethical does not justify on a moral basis the same behavior by anyone else. That is the beauty of Morals and ethics, is that groups of people subscribe to different ones just as you say it does not give them the right. Other subscribe to an-eye-for-an-eye morality. I personally think that it does justify it, my moral compass says that if a cooperation is abusing the people via deception, unethical and immoral behavior then that corporation should be dissolved and all debts to that corporation should be terminated. covering it up their appalling nature with a double ethical standard just emboldens more corporations to engage in unethical behavior and allows more abuse of the people. Let me be clear, I am not anti-corporation, i am just anti-double standard.

dkimball 17y ago

The Motley Fool seems to have forgotten this, but rational-agent theory is a useful fiction, not a statement of reality. The best analogy I can think of is Skinner's behaviorism; rational-agent theory seems to fail in the same kinds of places as behaviorism does, too. Look up the "Ultimatum Game" for a particularly effective demonstration of where it fails -- and the commenter here who points out that rational-agent theory would destroy civilizations is completely correct. (Mental exercise: apply "the tragedy of the commons" to a defensive war.)

petercooper 17y ago

Why Are People Who Pay For Porn Idiots? Why Are People Who Pay For Music Idiots? Why Are People Who Don't Sell Drugs To Make Lots Of Money Idiots? Because some of us have pride and morals.

prat 17y ago
thats okay - but this is like paying for music/porn to be taken away from you. A big part of the equity you got when you signed up and paid for has been taken away but you are still paying the full price!!
- pyre 17y ago
  Nothing has been 'taken away' from you. Someone lent you $X to buy something that you thought was worth $X. The value of what you bought has gone down, it's now worth $(X-Y). The bank didn't do this. They lent you $X and you're paying them back for that $X at the interest rate that you both agreed on. Cars notoriously devalue over time. Are you saying that the bank is stealing money from you because you new car dropped 10% in value the moment that you drove it off the lot, but you are still paying the bank for a loan of 100% of the original value of the car?
  - prat 17y ago
    I understand and agree.. but banks set up there loan terms and conditions assuming that real estate (unlike cars) increase not decrease in value over time. Ofcourse, thats an assumption that buyers have too and that's their risk. So what do you suggest if that assumption doesn't hold any longer? should the terms and conditions remain the same?
  - kls 17y ago
    >The bank didn't do this. But they did, they took you loan packaged it with poop and sold it to the after market. They gave loans to people who could not afford and when it all cam crashing down they lobbied for bankruptcy law changes to make it difficult to absolve yourself from the debt and they lobbied for your tax money to bail them out of the bad speculations that they made on junk loans. All of this affected your mortgage and the underlining assets value. Now they are stable, they expect you to hold up your contracted obligations which you are free to make your own decisions on, but to say that they did not do this is wrong, they just did not do it in the contracted terms of your contract.

rleisti 17y ago

While reading this article, I felt there was as strong connection to this one (recently posted on hacker news): http://www.economist.com/sciencetechnology/displayStory.cfm?story_id=15328544 http://www.economist.com/sciencetechnology/displayStory.cfm?... ...which basically says that entitled people in positions of power tend to hold others to a higher moral standard than themselves.

kscaldef 17y ago

This article is remarkably oversimplified. First, the obvious: once you ruin your credit rating by defaulting on your mortgage, it might not be so easy to just waltz right into a lower price rental. Not to mention that you'll be paying more on any other loans you take out for the next <strike>10</strike> 7 years, and probably your car insurance. You might also consider the increasingly common phenomenon of employers running credit checks on applicants. There are a variety of legitimate factors in a decision like this which aren't purely financial: the time, emotional, and social costs of moving. Do you move your children to another school? Do you take your children away from their neighborhood friends? Perhaps you like your neighbors as well, or the neighborhood businesses you frequent. If you move into a rental, you can no longer make certain changes to your home to suit your needs and desires. It's naive and insulting to call people "idiots" because they aren't simple money-maximizing machines, particularly if you're going to pretend that monthly housing cost is something that exists in a vacuum.

pyre 17y ago
> Not to mention that you'll be paying more on any other loans you take out for the next 10 years [...] I thought that bankruptcy came off your credit score/rating/listing after 7 years.
- chrisgoodrich 17y ago
  It does. After 7 years a bankruptcy should not show up on your credit report.
  - kls 17y ago
    it's 10

kylec 17y ago

Maybe people like the house they're living in? Everyone seems to be talking about the financial side of things, but isn't it likely that many of the people still paying their mortgage do so because they like where they're living and don't want to be foreclosed on?

adharmad 17y ago
Exactly.....something that i never understood in all these articles is this: If I have bought a home for living in it, and not for speculation, how does it matter what its market price is? I knew _before_ I bought it what I will be paying the whole way and I don't want to sell it.
- chrisgoodrich 17y ago
  Absolutely. I think this is the root of why most people do continue to pay their mortgages. If you can afford the payments and are satisfied with where you live, then there is no reason to abandon your mortgage. Then there's the other group who (a) can't afford their mortgage anymore or (b) want out. This is the group who should evaluate this as a financial contract and evaluate the risks/benefits of abandoning the mortgage.
chengas123 17y ago
But you're not going to be living there for the entirety of your 30-year mortgage in most cases. What happens when 5-6 years from now, you want to move, but you're underwater and can't pay off the mortgage by selling your house?
- lanaer 17y ago
  If you're able to afford the payments, and are otherwise financially stable, I'm not entirely sure how another 5-6 years will worsen things. Unless the economy manages to crash again in that time, and worse. Then, though, you'd probably be in a crappy situation even if you left now. More than likely, at this point, your house will be worth more (though probably not a lot more) than it does now, and (since you've been meeting your payments) your debt will have shrunk, too.

njharman 17y ago

As a recently newly minted homeowner who paid appropriate price in a non-bubble market I find the title highly offensive and hyperbolic. "Why are underwater homeowners idiots" is the appropriate title. Re: article itself. There's also the small matter of jacking your credit for 7 years. With uncertain future and no savings many people rely on access to credit for emergencies. Not saying that is wise or that they should, but that is a fact.

DenisM 17y ago
Assuming you took out a mortgage, you are financing consumption by leveraging up. It's no different than buying a pack of beer on the pay-day-loan money. Not a financially smart move (unless your loan interest rates is below the long-term treasury rates).
- njharman 17y ago
  house != pack of beer tax deductions, appreciation, equity, income(it's a duplex and I rent 1/2), plus all sorts of small things such as reduced auto insurance as it's rolled into home owners insurance

axod 17y ago

Can you put a [US] tag in the title. It's not really relevant in other countries. Also a slightly less inflammatory hyperbolic linkbait title would be good.

colomon 17y ago

It sounds like a small thing, but I'm glad just to see an article which doesn't just assume that people who are underwater were foolish or reckless buying a house in the first place. I bought well within what I could afford in 2001, and routinely paid down extra principal every month. Now that I am married and have a small child, I'd like to move someplace bigger, nicer, and closer to the rest of my family. Only thing is, according to the real estate agents, if I'm really lucky selling my house will just cover what remains on the mortgage. If I'm not lucky, selling the house could easily cost us $20,000. Crazily, the most likely reason for that to happen wouldn't be that we couldn't find someone to buy the house for what we'd like to sell it for -- it would be that we couldn't find a lender to appraise it for that much. Personally, I haven't sussed out the moral implications of just giving the bank the house instead of paying back the loan. On the one hand, it's hard to see how the bank could complain: yeah, they might be getting a house valued at $N in lieu of $N + $20,000, but they also got 8.5 years of interest on it, too, which probably amounted to around $45,000. On the other hand is the notion that implicit in our loan contract was the idea that we would pay it off if humanly possible; that allowed the bank to lend us the money for less than would have otherwise been possible. I don't know how to balance those two things.

chrisgoodrich 17y ago
In my opinion, you are the prime example of whom this article is discussing. In my view, the bank will still profit off of your loan. If market value is about equal to what you owe, but it could only be reasonably sold for $20k but you have paid $45k in interest thus far, they still profit $25k from your loan. I have a hard time seeing where the bank could be morally right in damaging your credit for walking away...