“Strategic Defaulters” On Home Mortgages Are Barbarians Looting Rome
The “strategic default” phenomenon for home mortgages has hit the mainstream… and it shows, more than ever, how the fall of America is like the fall of Rome.
Roughly two months late, The New York Times is catching up with Taipan Daily.
Earlier this spring, your humble editor wrote on the topic of “Strategic Default” – the phenomenon of strapped homeowners skipping out on mortgage payments and trousering the cash.
In the April 5 Taipan Daily piece, “Did the Housing Bust Fuel the Consumer Spending Binge?” we noted the following:
In regard to the “Strategic Default” dynamic, we can see this logic writ large. To let go of one’s home is to be resigned to a grim financial fate no matter what… even as the monthly cash flow suddenly takes a sharp turn northward.
Financial doom plus temporary cash flow respite, mixed with an already pronounced taste for shopping, can only lead to one conclusion, suitable for reading in full-throated Dick Vitale voice: “Why not spend, baby!”
As usual, the government plays a large role in this tragicomic farce…
“Why not spend” indeed – the New York Times cottoned to that same dynamic this week (nearly two months behind) in an article titled “Owners Stop Paying Mortgages, and Stop Fretting.” Here is the flavor:
For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life – something they did not want but are in no hurry to get out of.
Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.
“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”
“Force me out if you can” is the new mantra for those feeling upside down and trapped. “Any moral qualms are overshadowed,” the piece goes on to add, “by a conviction that the banks created the crisis by snookering homeowners with loans that got over their heads.”
Ladies and gentlemen, we no longer have to joke about the economy going to hell in a handbasket. We are IN the handbasket. This is the decay and the slow crumbling. This is the fall of Rome.
Let me try to explain that harsh assessment, and then let me know if you agree.
The Road to Hell…
First off, let it be clear: Your editor feels no ill will in his heart toward strapped couples like Alex Pemberton and Susan Reboyras. They are just “doing what they can”… and surely they feel justified in their circumstances.
In some ways, the growing wave of strategic defaulters are merely flotsam and jetsam on the dark tide of current events. They aren’t responsible for the zeitgeist, they will tell you – just as no individual raindrop is responsible for the flood. The defaulters are merely responding rationally to events around them.
With that said, the tit-for-tat morality of strategic default – “you screw me, I screw you” – is not the issue here. Justified or not by surrounding circumstance, strategic default behavior taking hold on a broad scale shows America is truly on the road to hell.
Here is why: You cannot have a functional economic system in which a critical mass of participants decide “not paying their debts” is okay. When the system is allowed to rot, the system eventually breaks down.
Believe it or not, it comes back to culture. In a culture where paying one’s debts and honoring one’s commitments is seen as a clear moral obligation, the rule of law is intact. When the state of the union is good, these cultural norms are subtly reinforced in a thousand different ways. A sense of fairness – though frayed at the edges at times – generally prevails.
When you lose that sense of cultural obligation though – when people start saying “Forget the home mortgage, let’s go have a steak and visit the casino” – the social fabric is torn asunder.
Just imagine you are a strapped homeowner yourself (and well you might be), fighting hard to pay the bills and keep your head above water.
If you are struggling with all your might, but then look left and right to see your neighbors living high on the hog, what are you going to think? How are you going to feel?
It’s like a toxic weed… strategic default begets more strategic default. Immoral behavior spawns more immoral behavior. “If the neighbors are doing it, we can too… and we would be fools not to.” People just stop caring.
…And the Road to Greece’s Debt Crisis
Of course, the road to hell can appear pleasant for a while – just as it did for Greece.
In the wealthy suburbs of northern Athens, the New York Times reported last month, only 324 residents admitted to owning swimming pools on their tax forms. That number seemed low to Greek tax investigators, so they made some calculations of their own based on satellite photos of the area.
Their estimate of the actual number of pools, as opposed to the 324 reported: 16,974.
When lying about assets becomes such an epidemic that more than 98% of the citizenry does it, the economic system can no longer be called functional. And that is partly why Greece, a country that dined well for years on the credit of others, is now staring down the prospect of a brutal, crushing depression. The bread and circus money has simply run out.
There are no good options for Greece. If they stay in the eurozone, they will have to endure horrifying economic pain to do so… the equivalent of a small-scale Great Depression. And if Greece tries to leave the eurozone, the ejection process could be just as painful – the economic equivalent of amputating a leg.
As Greece has sown, Greece now shall reap. In the end, the piper is always paid. Getting to this place has largely been a function of deep moral decay in respect to the obligations of the citizenry, the paying of taxes, and the paying down of debt.
America is on the same path.
The Mystery of Capital
If you want to better understand how capitalism works, get your hands on a book called The Mystery of Capital by Hernando de Soto. The subtitle of the book is Why Capitalism Triumphs in the West and Fails Everywhere Else.
To give you the condensed Cliffs Notes version, capitalism triumphs in the West because of rule of law and property rights. Westerners have more access to “liquid assets” – and the mutually beneficial ability to trade on and borrow against those assets – by way of their natural ability to trust each other. But in making this work, social trust is a critical component of the system… and that trust should never be taken for granted.
It has taken us a long, long time to knit together the invisible fabric that all together comprises a willingness to trust, a sense of faith in the rule of law. That fabric is now being torn to shreds.
And this is why, when we see spreading evidences of immoral, anti-social behavior… a wholesale abuse of trust and trampling of the rule of law, accompanied by a “who cares” style shrug… we can know that the entire capitalist system is in peril.
If people no longer care about paying their debts (as strategic defaulters do not), the system stops functioning. Meanwhile, if those who do pay their bills (and pay their taxes) are overwhelmed by outrage at the sight of “free riders,” the cohesion of the political system breaks down too.
You cannot have a healthy economy where anyone with a retained sense of social and moral obligation feels like a sucker… where adherence to values and principles brands one a dumb cow waiting to be milked.
Spreading the Rot Around
When we try to pinpoint the source of all this rot – when we “seek the source” – where does the trail lead?
In your humble editor’s opinion, it leads back to government.
It leads back to Keynesian economic policies, and especially to the stupid, vicious, fantastically idiotic belief that a debt crisis can be solved by piling on more debt.
It leads to a culture of bailouts in which there is no true accountability, only an escalating cycle of ever larger transfer payments, as those who blew up the economy with their recklessness and greed are made whole at the cost of the American taxpayer.
It leads back to a horrifying inversion of “leadership by example,” in which the example set by Washington and Wall Street tells the rest of the country that morals don’t matter… principles don’t matter… that the rule of law doesn’t matter. All that matters is having the right set of connections and getting yours while the getting is good.
We aren’t spreading the wealth around – we’re spreading the rot around. Whether they realize it or not, strategic defaulters are like the 21st-century version of barbarian looters, picking through the smoking rubble of a fallen empire.
“Hey,” they may say. “It wasn’t OUR fault. We’re not the ones who made Rome fall.” And you know what? They would be 100% right. But what does that change?
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It will be interesting to see what happens when the banks catch on to this phenomenon. Will they pursue judicial foreclosures, and go after people’s personal assets? Homeowners who bought at artificially inflated prices are angry and creating their own personal bailouts. They fulfill their contract; the bank takes their homes when they stop paying. But so many are in foreclosure (or the bank doesn’t want to go through w/ the foreclosure because it becomes a negative asset on their balance sheets and less capital to leverage), the homeowners get to stay in the homes rent free for a year. Govt. loan mod programs have been a massive failure; no incentive for the banks to modify loans when they can walk away w/ cash on a short sale. Will the strategic default movement bring banks an incentive to modify loans? Until then, people are just doing what the banks do, making the most self-interested financial decision.
I didn’t stay in my home waiting for an eviction notice! I notified the Bank right away and let them know I was moving! I turned over the house to one of their real estate agents and that was that. One year later they finally foreclosed. No free ride here from me on the banks. I offered to give them a deed-in-lue to save them money and they didn’t want it on there books right away so they wasted money on attorney and court costs! My medical conditions didn’t allow me to stay in my home!
Here is an opposite view on strategic defaulting:
Its unpopular but I don’t know why. The housing market is still in a depression thanks to our government giving the banks, largely mortgage lenders, an economic injection they called a stimulus, the functional equivalent of our money. When the banks fell flat on their face, especially the large … See Moreconglomerate banks like AIG, they got a bailout. Now people are hurting and they call their bank only to have the door slammed in their face, they are out of luck. Let’s be honest here, it’s nearly impossible to renegotiate the terms of a mortgage. Homeowners have NO leverage and the banks usually have NO intention of writing down principal or modifying a mortgage. Left with no choice, some people are choosing to just walk away or strategically default. Wealthy investors, banks and corporations do it all the time and have no shame but now some people are outraged because the “little guy” is beginning to guide themselves by these same principles. The irony is unbearable. If the banks adhered to the virtues they advocate I might not be siding with the homeowners here. I’m amazed by the amount of people who subscribe to the propaganda stating only “bad people” default. Nonetheless, it’s really an easy calculation when it comes to the homeowner who has a $500,000 loan on a home worth $200,000. If the bank won’t work with you, stick it to the bank, strategically default and transfer the loss onto them. If they pursue a deficiency judgment, file chapter 7. This obviously isn’t for everyone and I wouldn’t dispute the morals or ethics of this. However, given the current state of the housing market, this really is the best solution for some. Besides, the banks don’t care if you walk away, they will just get bailed out again. We are now in the era of socializing loses and privatizing profits. There’s a lot of controversy about this right now. Banks, corporations and business in general do NOT do what is right but rather, what is profitable. They look at the numbers with a cold eye. It’s time people began behaving in this way. I didn’t create the system, I just live in it. What’s good enough for the banks is good enough for me. Walking away is sometimes the best (only) remedy. So then, I say, fashion your own bailout. Do whatever is legal and necessary to improve your economic situation.
Its unpopular but I don’t know why. The housing market is still in a depression thanks to our government giving the banks, largely mortgage lenders, an economic injection they called a stimulus, the functional equivalent of our money. When the banks fell flat on their face, especially the large … See Moreconglomerate banks like AIG, they got a bailout. Now people are hurting and they call their bank only to have the door slammed in their face, they are out of luck. Let’s be honest here, it’s nearly impossible to renegotiate the terms of a mortgage. Homeowners have NO leverage and the banks usually have NO intention of writing down principal or modifying a mortgage. Left with no choice, some people are choosing to just walk away or strategically default. Wealthy investors, banks and corporations do it all the time and have no shame but now some people are outraged because the “little guy” is beginning to guide themselves by these same principles. The irony is unbearable. If the banks adhered to the virtues they advocate I might not be siding with the homeowners here. I’m amazed by the amount of people who subscribe to the propaganda stating only “bad people” default. Nonetheless, it’s really an easy calculation when it comes to the homeowner who has a $500,000 loan on a home worth $200,000. If the bank won’t work with you, stick it to the bank, strategically default and transfer the loss onto them. If they pursue a deficiency judgment, file chapter 7. This obviously isn’t for everyone and I wouldn’t dispute the morals or ethics of this. However, given the current state of the housing market, this really is the best solution for some. Besides, the banks don’t care if you walk away, they will just get bailed out again. We are now in the era of socializing loses and privatizing profits. There’s a lot of controversy about this right now. Banks, corporations and business in general do NOT do what is right but rather, what is profitable. They look at the numbers with a cold eye. It’s time people began behaving in this way. I didn’t create the system, I just live in it. What’s good enough for the banks is good enough for me. Walking away is sometimes the best (only) remedy. So then, I say, fashion your own bailout. Do whatever is legal and necessary to improve your economic situation.
We had to move to Florida for health considerations. Our home in Minnesota has been on the market for 2+ years and will probably be on the market for another 2 years before it will sell. It is currently priced $100K less than what we bought it for in 2003. Since I own a business, I don’t want to do a short sale or strategic foreclosure, but it may come to that.
Around the corner from the place up north is a mortgage broker that specialized in sub-prime loans. He built his house in 2005 for about $800K. By 2007, his place was in foreclosure. After living in the house free for 2 years, he had friends set up an LLC in Texas and buy his house for $265K at the sheriff’s sale. He promptly bought it from the LLC for $343K on a contract for deed.
At the end of the day, he shaved over $450K off his mortgage and saved another $100k living in his house free for two years and his buddies at the LLC picked up a quick $75K for a short term tranaction.
The FBI says they are after “bigger fish” while all the other governmental agencies one would think would investigate this turn a blind eye or say they don’t see anything wrong.
When people get away with stealing, whether they are crooks on Wall Street, or the guy around the corner, the rest of us are left to shoulder the burden. Who can blame the homeowner that walks from their mortgage when everywhere else people are scamming the system or getting bailouts. If you can look at yourself in the mirror with no remorse, then walk.
The rest of us will continue picking up the tab, but don’t expect any help when the day of reckoning finally does come.
Your other commentary aside, you’re mistaken in your remarks regarding the NYT’s coverage of the issue. They covered this phenomenon in – a piece from January 7, 2010, a full four months ahead of Taipan’s piece and ahead of your first post as well. Doesn’t necessarily reflect on the rest of your arguments, but the cheap shots at the Times are unwarranted.
“Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?”
whoops! my apologies. I’m clearly new to learning how to use these tags. Below is the link:
“Walk Away from Your Mortgage!” (1/7/10)
NYT: http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html
Whoops! I am clearly failing with this whole “tags” thing. The article is titled “Walk Away from Your Mortgage!” and ran on 1/7/10.
We put $20k down on our home even though the bank said we qualified for 100% financing, we bought well within our means even though the bank said we could spend far more, we wanted to make sure we had enough invested in our home so we could downsize when the kids moved away. We had no earthly idea that the banks were giving loans to every person with a pulse & only to turn around and quickly sell off those loans to some other sucker investor. We thought the banks were verifying employment, wages, credit etc. & that the banks were actually holding the loans as they did in the past, but little did we know that they were in the gambling business doing such shady deals because all along they intended to get it off their books by selling our futures off to other investors. The banks were paid time & time again. NO ONE who purchased a home during this frenzy was spared from disaster! STOP trying to blame the homeowners! Granted there are stupid greedy buyers who bought McMansions they couldn’t afford but then again, WHY are THE BANKS APPROVING them?? We don’t gamble & had we known the banks were in this ponzi scheme we’d have NEVER bought in the first place! So for anyone saying it is IMMORAL for us to exorcise a LEGAL right & to stop dealing with the DEVIL (Banks) then you are just whining because you won’t take action yourself! The simple fix is for the Banks to go back to holding the loans they underwrite & stop gambling. The buck stops when the banks say so! We have no other recourse but to lay down & die like some of you fear mongers preach we should morally do!!