These Loans Were Made for Walking: The End of the Subprime Crisis

[sinkingfeeling]

http://www.truthout.org/docs_2006/020408B.shtml


The latest data show house prices were falling at a 16 percent annual rate in the fourth quarter of 2007 and were already down by almost 8 percent from their year-ago levels. In several cities, the rate of price decline was considerably more rapid. In San Francisco, prices were dropping at a 22.2 percent annual rate, in Los Angeles at a 24.7 percent rate and a 27.0 percent rate in San Diego.

This rate of price decline means millions of recent homebuyers, who put little or nothing down on their home, now have houses that are worth less than the value of their mortgage. This is important for two reasons. First, homeowners with no equity in their homes have no margin for error. If they lose their job or get a serious illness, they cannot borrow against equity to pay their mortgages through the bad times.

However, there is another dimension to this story. When the house price is less than the value of a mortgage, there is a strong incentive to give up a home even if the homeowner is able to pay the mortgage. The logic is simple. Suppose a homeowner owes $400,000 on a home that is now worth just $300,000, a situation common in places like Los Angeles, Miami and San Diego. If the homeowner continues to pay their mortgage, they will have eventually paid $400,000 (plus interest) for a home that is worth $300,000. That's not a very good deal.

Is it moral to just walk away from a loan and leave the bank holding the bag? That's an interesting question.

We live in a country in which CEOs can run a corporation into the ground and then walk away with pay packages worth tens, or even hundreds, of millions of dollars. Equity and hedge fund managers, who rank among the richest people in the country, have successfully lobbied Congress so that they pay a lower tax rate on their earnings than schoolteachers and firefighters. After walking away with this multi-million dollar tax break, at least one prominent member of this crew has been leading the charge to cut Social Security, pointing out he doesn't need his Social Security check.

[TooBigaTent]

1. Except for having that blt on the credit record, I see nothing wrong with walking

away and leaving the bank holding a depreciating asset.

Hey - it even adds to the opportunities for the speculators who have so distorted the real estate market.

[sinkingfeeling]

4. You must be of the generation that doesn't accept personal responsibility and loves the new 'ethics'

taught in business schools.

[fed-up]

7. hmmm, wasn't it the bank that (shouldn't have given) gave the loan in the first place? nt

[sinkingfeeling]

9. Isn't the borrower's signature on the dotted line? They borrowed someone else's money.

The article is about well-off people who could afford mortgages and are defaulting. It seems there's one hell of a lot of DU'ers who think they have no responsibility to repay borrowed money.

Edited to correct tense

[BridgeTheGap]

11. I read years ago that the average self-made millionaire in the U.S.

has filed bankruptcy an average of 2.5 times. The moral issue may still be there, but clearly risking other people's money is the American way.

[TooBigaTent]

8. Psychic, are you? Which generation would that be - the Obama children who

have enthusiasm and idealism but no grasp on the reality of the rigged system we all live in or the Clinton millionaires who are insulated from the pains of trying to eke out a living in corporatist Amerika?

My perspective is that banks pushed the bad loans for typically greed-driven reasons and deserve what ever negative equity flows their way. And I agree with others that it is the consequence of these bad business decisions by the financial institutions that is bringing these consequences. Fuck them.

As for me, personally, we live totally within our means - which means no vacations, a 95 Neon as a car, no credit card purchases that cannot be fully paid off monthly, daughter's college paid for without any significant financial aid, and no debt except for a $585 monthly mortgage. So, don't accuse me of not accepting personal responsibility.

[sinkingfeeling]

10. Yet you defend well-off people who are deliberately defaulting on their debts as being moral?

I also have lived within my means for 40 years, have about $500,000 in home equity and will pay off my mortgage completely in about 4 years, have a nice savings account, and drive a 1991 Subaru and a 1999 Saturn, but these folks who are NOT paying their mortgages so as to be free from a declinging home value are just fueling the fire for the rest of us. Our houses will decrease in value as a result of all the foreclosures. They're making money and you and I lose because neither of us has we didn't try to live above our means.

The article isn't about sub-prime loans, it's about good mortgages and people who are defaulting by choice.

[fed-up]

14. those borrowers fueled the bubble, now deflating it-your temp increase in value was on paper only nt

[El Pinko]

15. What makes you think all of these people are well-off?

A lot of them can't afford the payments, especially when the interest rates adjust.

When I was living in the SF Bay area, the Chronicle reported that only 15% of Bay Area residents could afford the median home price in the bay area! How does that work?

By 2005-2006, fully 60% of new Bay Area mortgages were subprime adjustable.

Your home value should decrease, because whatever valure increase you've seen over the last 7 years was illusory and 100% due to the influx of money from these risky loans, which the lending industry flooded the market with.

The lenders threw money at people who they knew couldn't afford homes, and you're blaming the homebuyers?

Whatever loss you might see will be on paper only. These people have upside-down mortgages - 6 figures of negative equity. It makes no sense whatsoever for them to keep paying when house prices will not be in 2006 territory for another ten years minimum, even if they could afford to, and most of them can't.

You should count your blessings that you still have home equity and realize that whatever loss you sustain is on paper only.

[El Pinko]

2. It's no more immoral than flipping and speculating.

And the net effect is that it will bring prices back down to a level that is actually justified by area incomes.

The attempts by politicians to keep real estate values artificially high by moratoria, rate freezes, etc."to keep people in their homes" may be well intentioned but are misguided in the long run. The market needs to correct, big-time. People who bought in the last 6 or 7 years are going to be hurt by it, but that's the breaks.

In the kind of cases cited here, no amount of rate freezing will make them want to keep paying huge payments on these depreciated homes.


The lesson politicians need to learn from this is that there is a reason for government regulation - the market does NOT always know best. This could have been prevented by better regulation of lending practices.

[sinkingfeeling]

5. I don't get what's going on here. So many don't think anything about borrowing money and then not

paying it back. How does that differ from stealing?

[El Pinko]

12. I'm not saying it's right. But neither was flipping and speculating.

They were all playing the same game. Some got out in time and made a tidy sum. Others got burned royally.

The lenders who gave these people the money on homes that they KNEW were grossly overvalued without adequate credit checks or proof of income, without even a 10% down payment had people with MBAs and PHDs concocting these loan gimmicks for them. They knew exactly what they were doing but did not want to stop the gravy train. Many of the homebuyers were unsophisticated rubes who thought the price would go up up up forever.

I'm sorry but the bulk of the blame has to lie with the lenders - the homebuyers are just trying to salvage their lives - it's the lenders who were making money hand over fist on this scam - and it was investors, many of them foreign investors who were sold these bad loans in the form of CDO's, which they were told were solid, mortgage-backed investments.

[sinkingfeeling]

19. That's not what the article is about.

[TalkingDog]

23. I think the point some are making and you are missing is:

Children learn what you teach them. Not only by word, but by deed.

If people of the next generations have grown up with a mindset that they have no personal responsiblity for their choices, this generation has demostrated how that is possible. In Spades.

I neither agree nor disagree with what these people are doing. Conditions have been set that a)promote the behaviour by example (i.e. the bank didn't concern themselves with the impact of their choices to generate profit, therefore it is an institutionally acceptable behaviour) and b)when the culture at large spend the years from 1969 onward suggesting that the individual and his selfhood (self fullfillment, self awareness the whole section of any bookstore entitled "self help") is primary, then don't be so surprised when that seed bears bitter fruit.

We stopped teaching our children about the social contract they implicitly agree to by enjoying the benefits of our society and our culture. We talk about pollution and crime and poverty in the abstract, as if we had nothing to do with producing it. And seemingly no way to have prevented it. We see sacrifice and relinquishment of even a portion of earnings, time, labor and luxury for the common good as "quaint" or "socialistic" or as fundamentally "wrong" because it suggests that those "other" people are as important, if not moreso, than "ME"

Even in your responses, you suggest the primacy of your experience: "I also have lived within my means for 40 years..." "They're making money and you and Ilose because neither of us has we didn't try to live above our means." and your inability to empathize or comprehend why the "others" would make self interested choices. They do that because we've spent years teaching them to.

When the "President" and a Congress full of Baby-Boomers gets around to abandoning their essential hedonism and self-centered approach to the rule of law, then they can begin to set examples by punishing those people (human and corporate) who insult the social contract.

Does this post address the minutia of your concern? No. It is an overview of some of the broader mechanisms that allow the behaviour you are addressing to become widely accepted. A point to ponder, nothing more.



My Favorite Master Artist: Karen Parker GhostWoman Studios

[Mountainman]

3. "they cannot borrow against equity to pay their mortgage"

If you can't pay your mortgage, no lender will lend you money on the equity, you'd have two payments you can't make then!

If they stay put and make their payments the value will return over time.

[El Pinko]

13. Home values in many areas have just begun to fall.

Look for them to be back to 2001 levels in about a year or two in much of California, Florida, DC Metro. Prices won't be at 2006 levels again for at least a decade, maybe more. And in the meantime, many of these people do't have the income to make the payments, especially when the interest rates adjust. They were banking on refinancing, or selling once the price got higher. Foolhardy, yes, but that's why lenders are SUPPOSED to do due diligence...

[bemildred]

6. Hey, it's the magic hand of the "free market", it must be OK. nt

[Demeter]

16. When I Buy Real Estate, It's My Home, and I'm Going to Keep It

I don't care what the price is doing, because I need to keep a roof over our heads. I don't buy more than I can handle, and I don't let it run down.

And I do what I can to keep the whole commmunity healthy.

But then, I'm not into greed or conspicuous consumption. I'm into family.

[uberotto]

17. I was curious about this myself, so I did some checking...

And whether or not you could do this really depends on what type of loan you have. If you have a contract with the bank (mortgage co.) to either pay off the loan or they get your house, then there is nothing wrong with just giving them the house. You're still abiding by the contract. However, it seems that these type loans aren't even legal in most states these days. Now days, if you don't pay back your loan, the bank takes your house, sells it and gives back to you anything over the amount of outstanding debt. Of course, it is not likely they will sell it for more than they think they are owed.

The flip side of this, however is what happens if you just walk away. They get the house, sell it for what they can get then come after you for any remaining debt not covered by the sale of the house. So what would happen is that you bought a house for $400,000 that is now worth $300,000. You stop paying your mortgage, the bank takes your house, sells it for $250,000 then turns around and comes after you for the remaining $150,000.

So before you decide to just walk away, you might want to check on what your States laws are.

[JPZenger]

18. Negotiated End vs. Foreclosure

If you "walk away" from a mortgage, there is a much bigger hit on your credit, much more harm to the neighborhood, and much more expense to the financing institution. I believe most financing institutions would rather negotiate the person ending the mortgage in a cooperative manner. That involves signing away your rights to the house, so that the bank does not have to go through a legal foreclosure.

In a negotiated ending, the homeowner who have an easier time buying a less expensive house in the future, and the bank could quickly put the home up for re-sale - before it is damaged by vandals, and without high legal expenses.

[fasttense]

20. I just don't see how a person can pull this off.

You live in a house that is worth less than you owe. Let's say it's a good 15 year fixed rate mortgage. You see a house across the street for sale almost exactly like your current house. You manage to get a loan for it even though you have a huge loan on your current house? I find that hard to believe.

But let's assume in these very tight credit days you manage to get a loan for another house, even though you have a large mortgage already outstanding. You move in and stop paying on the old house and start paying on the new house. The bank takes your old house, sells it, and hunts you down for the difference between what they sold it for and what you owe. How are you any better off?

I think if you sold it you would be better off. You can keep up the property and probably sell it for more than the bank would sell it for. You could pay off most of the loan and work with the bank to get the remainder down to more reasonable payments (you would have to rent in the mean time).

Yet, in the beginning of the article he talks about having no equity to take a second mortgage to cover a temporary unemployment period. Well if you are unemployed you can't get a loan anyway. I don't know of a bank that will give a second mortgage to people with no income (at least not anymore).

This article makes no sense. On the surface it sounds reasonable but when you start thinking about it, it doesn't work. I usually trust TRUTHOUT but this article seems very unrealistic.

[sinkingfeeling]

21. If you have equity in a house, you can take it out without being employed. You would still have to

keep up with the mortgage payments.

[fasttense]

22. You must have very kind bank managers.

Because my bank tried to get me into an equity loan (I turned them down), and the first thing they asked was where did I work and how much did I make.