Wikinvest Wire

Is it conditioning, morality, or naïveté?

Thursday, December 17, 2009

The question of what motivates underwater homeowners to either stay put and continue to make their mortgage payments (if they can) or "walk away" from their home (and their financial obligations) has been receiving an increasing amount of attention in recent weeks.

In looking at this matter, a good place to begin is with the abstract below from the recent study Underwater and Not Walking Away(.pdf) by Brent White at the University of Arizona:

Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.
Brent probably has more than enough sample data in Arizona from which to draw and his conclusions are no doubt valid in many other parts of the country as well where the magnitude of the current "underwater homeowner" problem is highly correlated to the size of the mid-decade housing bubble.

But, what is most fascinating about this report is the aspect of "emotional constraints" that are "actively cultivated by the government and other social control agents". Apparently, this has played a major role in getting underwater homeowners to act (or, in this case, not act) in ways that work against their own financial interests.

In the report, White noted comments by the former Treasury Secretary on one of the hottest housing market topics of the day - strategic defaults:
The worst criticism has been reserved, however, for those who would walk away from mortgages that they can afford. Typical of such criticism is that of Secretary of the Treasury Henry Paulson, who declared in a televised speech: “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.”
It seems there is a national movement afoot to divert homeowners' attention away from the degree to which they are underwater on their mortgage and focus on monthly payments, that being the thrust of the recent Making Home Affordable government program to slash interest rates while leaving the outstanding debt intact.

To this point, we have lived in a country where the "What's my monthly payment?" culture has thrived, but that seems to be changing and the question that more and more underwater homeowners are now asking is, "If banks can walk away from their obligations, why can't I?"

This is occurring with increasing frequency, Bloomberg reporting just this morning that Morgan Stanley will "relinquish" five San Francisco office buildings after having purchased them more than two years ago near the top of the market. It's probably no coincidence that the phrase "walking away" is noticeably absent from their account when, in fact, that is exactly what the investment bank is doing.

Maybe the rules are different for big banks than for homeowners.

You'd surely think that this is the case after reading part of this story in today's Wall Street Journal, one in a series of excellent reports in the Journal in recent weeks about "strategic defaults" where the morality issue is neatly captured:
A standard mortgage-loan document reads, "I promise to pay" the amount borrowed plus interest, and some people say that promise should remain good even if it is no longer convenient.

George Brenkert, a professor of business ethics at Georgetown University, says borrowers who can pay -- and weren't deceived by the lender about the nature of the loan -- have a moral responsibility to keep paying. It would be disastrous for the economy if Americans concluded they were free to walk away from such commitments, he says.
What banks have done in recent years has not been a disaster?

And Wall Street firms can walk away from their "obligations" but ordinary Americans can't?

That sort of thinking should be about as popular as Wall Street bonuses right about now.

While simple laziness is surely a big reason why most homeowners will continue to pay $3,500 a month (if they can) for a house that is worth $200,000 less than what they owe instead of sending the keys back to the bank and renting a house down the street for about half the monthly payment, there is clearly a very big moral issue here, one that continues to surprise me every time I run across it.

No stranger to the idea of acting in one's own self interest when it comes to real estate (as detailed here, my wife and I did a short sale back in 1995 when the previous California housing bubble went bust), it does continue to amaze me that, in light of some of the most wretched financial market excesses in history, many homeowners continue to think that we live in a world full of Jimmy Stewart-like bankers instead of those populated with the likes of Hank Paulson and Lloyd Blankfein.

It seems that one homeowner's morality is another homeowner's naïveté, that is, unless the latter truly believe that "the meek shall inherit the earth".

We are, by far, the most religious of all western nations, but the idea of somehow being rewarded in the afterlife for continuing to make mortgage payments to Bank of America is beyond my ability to comprehend.

In a place like California, the terms of the deal are quite clear - the bank either gets the monthly mortgage payments until the loan is paid in full or it gets the house back with very few strings attached. And while the word "promise" appearing in the loan documents may prove too much for some borrowers to surmount, it is clearly not a legal impediment.

Without question, many underwater homeowners are acting against their own self interest by continuing to pay their mortgage if other dramatically less expensive housing arrangements can be made.

One could wait for home values to recoup a $200,000 decline, betting on an even bigger housing bubble materializing someday, all the while making good on the monthly mortgage obligations, but that may take much longer than you think and, in the end, it is sure to be much more costly than you could imagine.

Now, there's a big distinction to be drawn here between, say, the just-married couple who bought a house at the top of the market because that's what people do (that's what we did 20 years ago) and your run-of-the-mill wild-eyed housing speculator circa 2005 who managed to amass a large real estate portfolio without ever having earned a high school diploma.

It's not clear if there is any sympathy anywhere for the latter, but too few seem to see any distinction between the two to the detriment of the non-speculator who seems to go on believing that, today, "if you can continue to pay, you shouldn't walk away".

So, where does this all bring us?

A shocking decline in naïveté or, if you prefer, more immoral behavior on the part of the American public regarding their underwater mortgages may be one of the more important developments for the housing market over the next year or two.

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19 comments:

OldSouth said...

Well, there is a moral dimension to this question, and a spiritual one as well.

Yes, there are a lot of scumbags out there who concluded that the best way to rob a bank was to own or work for one. I've run into my share, and work daily to extricate my family from involvement with them. And there are a lot who are honorable, and don't deserve to be lumped in with people like Paulson and Blankfein. They're as horrified as the rest of us at that behavior.

I prefer, if I can, to shave my face knowing I don't operate on the same level of amorality as the scumbags. It's not about self-righteousness, it's about self-esteem.

On the spiritual level, if we believe we live in a created order, created by a righteous Creator, then we play out our lives on a larger stage than this present decade and place. And, we can look to that Creator for both the strength to do the right thing, and comfort and correction when we fail.

I don't know if the house is under water--maybe so, maybe not. In the meantime, I make sure the bank down the street gets its money every month. The Creator had a a direct role in providing it for this family, and I'd like to honor that fact by being faithful to the obligation. When it's time to move, I trust the same Creator will provide. He certainly has to this point.

At some point, the moral calculation may change, but I sense I'll know if that time comes, and have some guidance about how to behave honorably. He's never failed to provide on that score, either.

I'm really not some Bible-thumper. I do think the culture--how we all behave and live our lives--shapes the economy long before the economy shapes the culture. I think our energies should be devoted to building a culture where decency is a base-line expectation. The economy will right itself, given time, if we pursue that first.

Gotta go, work to do to pay the mortgage.

Ted S. said...

Tim, I think you hit the nail on the head with the "lazy" angle, at least for some. That probably accounts for a surprisingly large part of the reluctance to walk away and, in general, people are still in denial about the value of their homes. Also, even though there are websites out there to help, the process is complex, so, when people hear some warning against it they'll stop right there and hope even harder that home prices go back up even though it could cost them tens, if not hundreds, of thousands of dollars over the long-run.

Anonymous said...

Here's a pretty good related rant from Denninger:
http://market-ticker.denninger.net/archives/1749-The-Last-Word-On-Strategic-Defaults.html

Anonymous said...

The wicked borrow and do not repay... Psalms 37:21a NIV

Everyone will one day stand before God to be judged. Rationalize all you want, but that is what the Bible says.

GP said...

"..but the idea of somehow being rewarded in the afterlife for continuing to make mortgage payments to Bank of America is beyond my ability to comprehend."

Wow.. Didn't see that one comin'

Days of Broken Arrows said...

I agree with this original post and am a bit disturbed by the religious comments.

Religion is largely a tool used by the elites to control the masses. They steal from us now, and we believe the next world offers something better and we somehow "deserve" to get screwed because of original sin -- or something.

I think the commenters are cherry picking the bible. I'm sure there is something in there that says if a deal you made is immoral or unethical, it is not only ethical, but your responsibility to break that deal.

If there is a God, my guess is he didn't put us on earth to be serfs and robbed blind by the top one percent. And if you don't fight these people, you're leaving others open to being taken advantage of by them.

PS -- In case any insults are going to be lobbed my way, I've long since paid off my mortgage but because of my own financial beliefs, not those in the bible.

Anonymous said...

Paulson is a scumbag. When he was CEO of Goldman, what would he have done to traders who had money-losing positions they could have legally walked away from? He would have fired them. He would possibly have sought to have them charged with fraud or theft as well.

Paulson is a liar and a thief. When he was a private employee, this was distasteful but not particularly rare or often punished on Wall Street. He is now a public servant and his words and actions are tatamount to high treason. He should arrested, tried, waterboarded and executed.

Fuck you, Paulson.

Expat

Anonymous said...

Not only are people making a bad decision to hold on to a bad investment but they're putting money into a dream that might not exist in 20 years.

Who's going to have to come up with the money that all the local govt's are spending and losing right now. The homeowner.

The suburban way of life is an illusion created out of thin air through the Govt. printing cheap money. If we cant keep pyramiding our money supply, who is going to pay for the suburban upkeep? Who's going to pay the salaries and pensions of the cops, teachers, firemen ect ect. Who's going to pay for the road work, sewer systems, and everything else.

Suburban sprawl will die w/ our economy built on printing money. The people who are underwater on their homes are tethered to a sinking ship.

Anonymous said...

^^^utter nonsense. The so-called surburban collapse is a myth. It is the traditional democratic-controlled union-run Chicago-model cities that are on life support.

http://www.american.com/archive/2009/july/the-blue-state-meltdown-and-the-collapse-of-the-chicago-model

If you have any doubts, look at the census dept's latest ACS results.

george said...

I agree with what old south said. I teach my kids do what's right because it's right. If I BORROW money, I've promised to pay it back no matter what anyone else has done and no matter if the thing I borrowed it for is stolen, burnt down or worth nothing.

Doing what's right because it's right is it's own payback that has nothing to do with money and yet is so much more important than money could ever be.

Anonymous said...

"It is the traditional democratic-controlled union-run Chicago-model cities that are on life support."

Massive unemployment and a broad decline in living standards is not a bad environment for Organized Labor to re-form a base in.

When families cant afford to function in an economic system, workers turn to each other to find a solution. They don't look to politicians for answers.

No form of propaganda can prevent the natural occurrence of collective bargaining and labor organizing from taking place.

Only active fascist intervention can control popular events. Not gibberistic spin in an online article. Nice try though.

fresno dan said...

Couldn't agree more with the blogger.
And why is all that excess payment (payment above the true worth of an asset, i.e., the house, in a market economy) considered a good thing by any self respecting free enterprise advocate??? Any principled capitalist would recognize it as a tremendous mis allocation of resources.

Anonymous said...

There is no God. So, if you continue to believe in that construct, here's something for you to think about. Where was God when all of this greed started? Uh-huh... I thought so.

There is no afterlife. So, don't think you'll get your justice then. Get your justice now.

Walk away from these ridiculous mortgages. The banks are allowed to do it. Assert your right to the same kind of financial freedom that they have.

You'll recover a lot faster then you think when you can afford to feed your family first.

Anonymous said...

Walking away is NOT the same as being a deadbeat borrower. In fact, when you walk away and hand the keys back to the bank, you are fulfilling the part of the mortgage contract which describes default and foreclosure. Giving the home back IS repayment of the debt. There is no "theft" happening here. There is no "wickedness". The contract was fulfilled!

Gary Anderson said...

Good grief, when the wicked borrowed and didn't repay they didn't have usurious interest, ponzi loans, lying banks and scams. People have paid but the interest is killing them because it is usurious. I say in these times of attacks on the middle classes and poor by the banks it is patriotic to walk away.

Anonymous said...

For those who are telling me that the bible tells us that we must repay a house loan I would ask them to reveal to me what the bible tells us about usury? What is it that you might call the interest that the bank charges on a loan? They borrow the money from the government (taxpayer) @ 0.5% and then charge 8% to the home buyer (who is a... taxpayer.)

In addition you have fractional reserve banking and a fiat currency. A bank takes your money, multiplies it by a factor of 10 (give or take) and then lends out the cash they created out of thin air and demands repayment in full. When you have a banking system that works on biblical principals and a currency that is what the bible tells us it ought to be (gold and silver rather than paper and bytes in a computer mainframe) then you can preach all you want about what the bible says in regards to peoples moral obligation to repay their loan. Until then, the bible does not deserve to be associated with this mess of a banking system- it cheapens the bible to use it to support a financial system built on fraud, deceit, lies and usury.

For the record, I have around 50% equity in my house and am not defaulting, should anybody question the reason for the post. Having said that, the minute my house is underwater by 15% or better I would be gone. I would hand my keys back to the bank, thereby fulfilling my responsibilities and obligations of the contract.

Anonymous said...

I hope banksters read this! I have tasted the hatred and anger of banks and now my government who is subjugating all of us for the benefit of bankster financed politicians. I agree 1000% with the article, but from a completely different perspective. Please--!anyone if you can convince me that I am morally wrong, please explain it to me.

I saw the bubble on the horizon in 1999, and immediately sold "my house". I watched as a "renter", as this house TRIPLED in speculative equity over a few years. Even though I built this house, I knew it could Never have the insane value that the Realtors and Banksters PROMISED it was worth to suckers. What about THOSE BAKNSTER and REALTARD PROMISES?

I have been sitting back and watching as my DISHONEST government kindled the insane idea of the homeless buying houses with no money down and cash back at closing and simultaneously throwing hundreds of billions dollars of tax payer money at banksters who cheated and lied and were promptly rewarded for their crimes. They OWN our elected "representatives". Most of our political leaders have been on the bankster dole and are as guilty for the conspiracy to steal FROM TAXPAYERS as the bansksters and the NAR monopoly.

Over ten years, I saved the difference between my monthly rent payments and projected PITI if I bought the REAL Estate lie. I have enough cash to buy several houses. ALL BECAUSE I PAID ZERO INTEREST, not the percentage lying game. BUT NO INTEREST....not one dime to BANSKTERS.

BUT I CAN'T BUY a hosue---all are overpriced ---THE PRICES ARE STILL TOO HIGH. I should know I built my own and know the value. Termites and age NEVER ,make a house worth MORE MONEY, only less. I applaud anyone who walks away from not only mortgage debt but ALL DEBT! REPEAT -- WALK DONT RUN FROM DEBT!

I have not had debt since I sold my house in 1999. I strongly support a backlash against the politicians like Clinton, GW Bush and Obama who are profiting from the carnage. I have plenty of cash to loan, and could easily profit by charging 7% APR on a signature loan. Why are banks charging 56% APR? PLUS FEES? They are criminals, I am not. POTUS wants me to work and GIVE my taxes to banksters like Goldman Sachs and BofA. THEY ARE THE THIEVES NOT ME. I work for a living, have zero debt and applaud walkaways, NOT BANKSTERS.

Say this ten times and repeat AND I promise you will have the guts to walk. "DEBT IS NOT WEALTH!"

Because you are in hock to your eyeballs onlty means you are a DEBTOR. If you get sick, injured laid off or divorced, YOU ONLY HAVE DEBT, and the banksters will pick your pocket, family finances and carcass dry. They will then rape you and reap benefits on their politicians like Barney "bendover" Frank and the erst. RUN away dont walk. Force the banksters to work for a living instead of steal for a living.

We need to have a FEDERAL USURY law. NO interest may cumulate over 9.5% over any 12 month period.

That should shut these thieves down.

Sofia Britts said...

It's a matter of taking responsibility, I guess. People who do not walk away from their debts and continue to pay their house mortgages are highly commendable. Why buy or borrow something you cannot actually payback? Walking away from it doesn't guarantee a thorough solution, but possibly a bigger problem.

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