The morality of deliberate defaults - just saying NO to your lender

[autorank]

I'd say this about sums it up.

The Morality of Deliberate Defaults, Numerian, The Agonist

Over a quarter of American homeowners owe more on their mortgage than their home is worth. In some bubbly markets like California, three out of four homeowners are underwater. Should these homeowners deliberately default, rather than continue to pay on a mortgage when it may take 20 years or longer for market values to equal mortgage values?

Eighty-one percent of Americans think no, according to a survey done this summer by the University of Chicago and Northwestern University business schools. Most American homeowners think it is “immoral” to deliberately default on a mortgage when it is possible to make continuing payments. Yet the numbers of American homeowners doing just that is growing. It is estimated that four percent of all defaults on mortgages are “strategic defaults” according to a phrase used by the financial industry: the homeowner can pay the mortgage but makes a strategic decision to suffer foreclosure rather than continue to make payments on a wasting asset. Snip

Banks also marketed homes as investments first and foremost, to be bought and sold as the homeowner constantly traded up, even to the McMansion level. Extra equity that had built up due to the miracle of market forces could easily be extracted as cash and used as a source of even more lucrative fees for banks in the process.

In these circumstances, there is no morality imposed on the borrower to deal with the bank as a proper lender, or to treat the mortgage obligation as some sacred moral responsibility to be paid no matter what the circumstance.

Numerian, The Agonist:
http://agonist.org/numerian/20091004/the_morality_of_de...

[ret5hd]

1. A mortgage is a contract between two parties...

It lays out the rules for both parties.

It gives the bank the right to reclaim collateral if the loan is not paid.

After the bank forecloses on the property, both parties have fulfilled their obligations under the contract.

[autorank]

2. Right and that leads to the choice

Among other things, the choice of just dumping the loan. I suppose those who default could show
up at a hearing and demand to see the contract, which may not be available. Win-Win

[nadinbrzezinski]

6. IIRC that already happened in California and one of them

Activist right wing judges actually said... no ACTUAL document... aka deed... contract is kind of null and void. Been a while but the family is still at house and bank is still looking for the damn deed... which was creditized and put in a packet and then into another, and another, and another... and so it goes.

[truedelphi]

13. There was just a post the other day here on DU about some

Main archive of mortgage or propety titles. I got the sense reading the post that what the post described was a judge's recent ruling that since this holder of the title was all electronic and didn't really have much information attached, as to when the initial mortgage was set up, how many payments were made, and perhaps didn't even know who the inital mortgage grantor happened to be, the judge was saying that foreclosures based only on thatinformation were not valid.

I thought I had bookmarked but see I haven't. Anyway it seemed rather significant. How can anyone initiate the final repurcussion of foreclosure if they are only providing the shoddiest proofs of what the initial contract elements happened to be?

(If anyone here wants to add to my muddled memory of this, pls do so as response or PM - as I did mean to save it. Or feel free to correct me, as well.)

[Phoebe Loosinhouse]

23. You're talking about MERS

A Kansas Supreme Court judge ruled they had no standing to file foreclosure. That is significant and I think what this guy in this Kos Diary thinks is significant as well.

http://www.democraticunderground.com/discuss/duboard.ph...

[autorank]

28. Isn't that an amazing decision

The decision is a piece of work. The opinion is relentless in a good way

http://www.kscourts.org/Cases-and-Opinions/opinions/cta...

[Oregone]

5. And the bank would not have accepted the home as collateral if it has no more value than the loan

...and if they had no interest in possessing it.

Forclosing properties, in many economic times, can be a large gain to a bank. Why feel sorry for them for getting their end of the bargain?

[autorank]

35. It's a key element of transferring wealth

Good loan, they make out. Bad loan, they make out. Foreclosure, they're making out.

Where do we fit in?

[TexasObserver]

42. Foreclosure does not release the debtor from the lender's claim.

At least not in most states. Certain kinds of loans may be without recourse, meaning the bank can only foreclose the property. Usually, the bank can foreclose, bid the property at foreclosure for less than the debt, and then sue or pursue the debtor for the deficiency between the note amount and the foreclosure price.

Therefore, your statement "After the bank forecloses on the property, both parties have fulfilled their obligations under the contract." is incorrect.

[TwilightGardener]

3. Except that defaults and foreclosures hurt EVERYBODY in terms

of home values, inventory and sales prices. So yeah, there is a moral question in choosing to default when you can pay.

[autorank]

11. Good points but what about the gray area

If you can't pay, then there's no choice. If you can, there is but what about those who are struggling
each month and vulnerable. One upset, unanticipated bill, extraordinary expense, uncovered major medical procedure and you know your done for. Weighing the likelihood of this and then choosing
default isn't the same as paying with some comfort without any clear anticipation of a sudden change of fortune.

[cbdo2007]

4. Much of the damage was done by Appraisers as well.

I had a cousin buy a house 4 years ago for $95,000 and when it was appraised it was appraised at $115,000. The house had been on the market for over a year at $100,000 before my cousin bought it...i.e. there was no chance in hell it was "worth" $115,000 cause no one would buy it for that or anything close.

Still...my cousin isn't the smartest coat in the closet, so he got a second mortgage to buy a car so they then owed the full $115,000 on the house which has now dropped in value even more.

The whole appraisal business is a big scam and needs regulation. Most of the time in our market (Kansas city) they'll appraise for pretty much whatever you ask for.

[autorank]

27. Yes, it was systemic

Go with the flow was the standard. I know two honest appraisers who ended up selling real estate
because of the general attitude (and they're doing well).

Then there was that Freddie online appraisal system. Talk about circular feedback!

[Merlot]

7. "Eighty-one percent of Americans think no..."

I wonder how many of those Americans are underwater.

[ihavenobias]

8. Good question. n/t

[autorank]

9. The difference would say a lot

That would be the strongly committed faction of a very interesting political force.

I can't imagine this figure being even close to this prior to 2004 or so. I'll look around.

[autorank]

10. The difference would say a lot

That would be the strongly committed faction of a very interesting political force.

I can't imagine this figure being even close to this prior to 2004 or so. I'll look around.

[Me.]

12. Hoisting The Petard

If bankers and banks had kept their credibility and the solvency of their character, in short, not broken the faith that has been traditional between citizens and their bankers rather than playing fast and loose, this might not be happening. But the people of this country know they've been played for suckers and I suspect they now feel all bets are off.

[autorank]

14. Right

And when your defaulting on a "securitized" loan that's had multiple owners all over the world,
what's the heartache. It's always good to pay your debts but when the debt is obtained through
fraud, either particular or systemic, then you get arguments like this that make sense, Me thinks.

[Phoebe Loosinhouse]

24. It's also hard for me to have sympathy for entities who made bad loans

anticipating making EVEN MORE money through defaults when the loans went bad.

This is where I want to see the story go, because it's a collusion and fraud on a global kind of SPECTRE scale.

Loans used to have standards. One day they didn't. Why? because suddenly there was a secondary market for loans that didn't meet even the most basic underwriting standards. Why? Because suddenly it was also possible to purchase "bad loan insurance" for pennies on the dollar - CREATING A MARKET FOR BAD LOANS!!!

[autorank]

26. You're dead on. 10,000 felons, no doc, etc.

CREATING A MARKET FOR BAD LOANS - as you say, and creating "prime" securities based on "subprime" loans.
What's that about. This is Alice in Wonderland finance.

[omega minimo]

15. All the players are involved in the broken Ponzi scheme. If morality was involved the bubble would

not have been so enormous.

[autorank]

31. "if"

Isn't there a poem about that

William K. Black said that the S&L crisis was managable because 90% of the bank executives were honest.
He points out that the inverse is true now and that's our great trouble.

How much is enough? Apparently, the finance executives don't know the answer to that question.

[omega minimo]

36. Similar to the "everybody but 'Me' is the chump in America" we just saw here around MM's film...

The nation has reached saturation level of people thinking "it's okay cuz everyone's doing it" (the 90's CEO scandal mantra) and simultaneous "I'm not duped like all the rest of those dumb Americans are....."

[autorank]

47. On a level playing field and by history

the public is right on almost every issue. For example, both Republicans and Democrats were opposed
to invading Iraq until inspectors confirmed that there were WMD there. That's smart. Then they did
it any based on huge lies. We are not dumb

[autorank]

39. .

[snot]

16. Borrowers who default generally remain liable for the deficiency.

I.e., if the loan is $250K and the house is only worth $150K, the lender can foreclose and then go after the borrower for the $100K -- PLUS any and all other expenses incurred by the lender as a result of the default.

If the borrower has no other assets, nothing to lose, they shd go ahead and file bankruptcy, so hopefully they can get the deficiency discharged.

[formercia]

19. Not always.

Some States, like Nevada, allow you to walk away without penalty.

[Joe Chi Minh]

17. Thanks for this, Capting! Joe Bageant has a good handle on it, I think.

He considers the American government a criminal enterprise, most glaringly of course in its friendly dealings with the finance sector.

Ideally, I think Obama would have liked to approach it all like Dennis Kucinich, like any decent human being would in a saner society, but like Bill Clinton, he's trapped to a large extent in "the only way he knows how to go about politics", both having very successfully operated within the big business "ethos", career-wise, even to an extent in the progressive terms natural to them.

However, such is the extent of the malice and power of the cancerous tumour of the Republican rump of super-rich hostile to him, he feels the most he can hope to do for a very long time is try to put a human face on the monster of hypercapitalism. And with each passing day, I think fewer and fewer people consider it nearly enough. I have felt particularly for the probably tens, probably hundreds of thousands who have lost their homes and continue to be slugged by their credit-card companies, as a result of his failure to immediately help them; even retroactively. Helping the worst of the bankers instead just added insult to injury. Now, I feel sorry for the country as a whole.

I owed £63 or £67,000 on my credit cards, (it would be millions by now, I dare say, though most of it have been hived off to debt-collecting companies. In that regard I'm very lucky living in Scotland), but I was advised by our local Citizens' Advice Bureau not to pay any of them anything, as it would just raise their hopes totally unreasonably, of course, since we live on a shoe-string. You've got to feel for them!

If Barak got a grip of the health issue and made it a government-funded, single-payer, health-care scheme, it would be a major, if belated, step in the right direction, but of course, he needs to simultaneously reverse his funding of the bankers, Roosevelt-like, and plough the money into other, complementary infrastructure projects.

Why he ever sought this poisoned chalice in the first place, baffles me, frankly, because whatever hostility he faces now would be multiplied enormously if he'd bit the bullet and acted as the prudent national leader he would have wanted to be. The immediate impact on the markets would I presume, have led to chaos, not least because he has signally failed to get a grip of the media - which should have been his first or one of his joint-first priorities. I'm sure he must realise that the days of the old, Republican-style, demonic, hyper-capitalism are over for good now, so why has he pursued this path of appeasement?

I've been a bit too outspoken for my own good lately, so will have to just pipe down on some key threads, as things are beginning to sound quite critical. Did you read this thread yesterday? Very moving, and the responses also paint a frightening picture.

http://www.democraticunderground.com/discuss/duboard.ph...

All for now, Capting.

Best to you both,

Joe

[autorank]

21. Bageant is first rate

He's "down the road a piece" - like about 50 miles so he's not even close but his political thinking and analysis is solid as can be. He's up in Winchester Virginia, which in 2005 produced a liberal Republican (State Senator) indy candidate for governor who ran to make sure that the extreme right wing nominee of the party lost the election. It worked.

Let us not encourage them. They've had too much already.

[Joe Chi Minh]

22. Sh*te, Capting! I thought I was replying to your private message! No wonder I've been seeing a lot

faces that don't fit, today! Alas, they can be nice and they can be.... not nice, I'm told!

[autorank]

25. It's the thought that counts

But sometimes the thought is the deed

It shows what a high level colloquy we carry on at PM level.

[Joe Chi Minh]

32. "But sometimes the thought is the deed." You rat! Don't give put ideas in their noddles...

They've got too many already.

"It shows what a high level colloquy we carry on at PM level."

"Language! Watch your language!" as the old cockney matrons, such as the ones played by Irene Handle, used to say in those Ealing Comedy films. I often think that the world would be a much safer place, if everyone had been brough up by a wonderful old girl like her for a mother. Poor old Fred Kite (Peter Sellers), though, the shop steward who was her husband in I'm Alright Jack.

[autorank]

34. "Mum"

[Joe Chi Minh]

44. What a find! Top marks to the Capting, and all his crew of American rogues and villains.

[SmileyRose]

18. If AIG can get a fresh start - California Joe should too.

As a country we should collectively reset all of these mortgages, take the hit, and move on. The players that cause this big pile of shit will never take the hit - they never do. But MOST Californians who are upside down in the loans bought in good faith, not greed. Asking them to pay the price is not in the best interest of the state or the country as a whole.

[autorank]

20. 100% true on good faith

There was a lot of mortgage fraud and it was coming from the brokers and sellers. Now
the market is upside down and we're screwed. There needs to be a national cramdown that
fixes this for everybody. The banks can take a hike along with AIG and the other
peripherals. We'll survive without them and they'll finally get justice. It's coming but
the foot dragging by the political crew is making it far too painful for the people who
pay for things around here - us.

[Gormy Cuss]

29. And that same set probably thinks much of what was done to create the meltdown was immoral too.

That includes immoral banks, lenders, brokers, realtors, and anyone else who manipulated the market.

[autorank]

30. 80% of mortgage fraud was committed by lenders

That about sums it up. I agree.

http://money.cnn.com/2009/09/15/news/subprime.perpwalk....

[autorank]

33. Kick

[DemReadingDU]

37. evening kick

[autorank]

38. Thanks!

Interesting viewpoint and well thought out.

[omega minimo]

40. .

[DemReadingDU]

41. ...

[autorank]

46. ..

[Nye Bevan]

43. How often do banks act "morally"?

Not very often. When they kick senior citizens who have fallen on hard times out of their houses, they will say it's just business, we're acting in our shareholders' interests, morality doesn't come into it. So people in non-recourse states with underwater mortgages who want to walk away and erase their negative equity should *not* worry about acting "immorally" against the bank. It's a fair turnabout. It's just business, I'm acting in my family's best interests, and morality does not come into it.

[Joe Chi Minh]

45. One of the sickest and funnest things I've read in a newspaper was a

few years ago. An insurance company - and I'm sure it must have been standard practice - which owned a shopping mall, had their security staff move on any old people who were sitting on the benches ..... because they didn't want them to kind of disfigure the place! Aaah! Hyper-capitalism, a thing of such rare beauty...

[autorank]

48. The elderly were interfering with the assets;)

[Joe Chi Minh]

49. Heedless vandals, ruthlessly destroying value at the edge of the walking stick,

cutting a swathe though their assets, slashing and burning. No violence too extreme.

[autorank]

50. Their guile acquired over years of indifference to pain and suffering;)

slavishly following their leader