Sorry, I’m still stuck in econ-land ... hard not to be fascinated by how exactly the USSA economic train is going to end up jumping the rails.
A matter of pride is the commentary’s title, but it’s the subhead that really lays out the issue: “No one should make it easy to walk away from your mortgage”. Starting at the beginning:
People are walking away from their homes, bailing out on paying their mortgages as housing values drop.
Foreclosures are up 435% in the San Fernando Valley, a suburban area of Los Angeles. Nationwide, foreclosures are up 75%. Meanwhile, sales of new homes have fallen more than 25%, and existing-home sales are down 13%, according to various reports. Prices across the board have fallen.
"It doesn't make sense to make payments on a house that isn't worth as much," one homeowner says. "It makes more financial sense for us to stop paying -- even if that means declaring bankruptcy."
As the news rolls in daily, more and more houses are in default, foreclosed upon or put up for sale. Most of the people who bought these homes knew what they were getting into, of course. They filled out applications, received loans for large amounts of money, made payments -- some at least. ....
But now when the market gets tough, people are getting going; they are quickly tossing the American dream. Whatever happened to pride of ownership? Where's the ethic in breaching contract?
Quickly tossing the American dream? Doesn’t scan that way to me—not for homeowners who lived in their homes, anyway. Those who were in it for the profits probably do walk away with little thought—but then, that isn’t the American dream of home ownership. Based upon the few stories I’ve read on the this subject, many genuine homeowners find it gut-wrenching to consider walking away from a place that they chose to live in, and made a home of, for some period of time. As someone with a known predilection to get attached to certain places, I can empathize.
Which is not to say that I’m willing to give breach of contract a pass, but methinkest there’s much more to this than our essayist, Mr. Kostigen, is letting on. He continues:
It's all too easy to pass the buck to unscrupulous sales agents, mortgage brokers and banks. Even Wall Street is getting lumped into this mess because brokerages purchased the paper banks underwrote. That isn't really fair.
It isn’t fair? It isn’t fair because some of them are now getting left holding the keys to houses that would never have gone to some of those buyers if a modicum of due diligence had been practiced? Has he forgotten that many subprime mortgages were nicknamed “liar’s loans”—as much because the lenders were eagerly pushing buyers into larger loans than they could afford as for buyers inflating their assets? Or for lenders downplaying the “adjustable rate” part of the mortgage, and glossing over just how high—and how quickly—the rates could adjust upward? And Wall Street basically played along with the charade, keeping ratings on the commercial paper unrealistically high until the house of cards started to crumble ... and it “isn’t really fair”? Oh, my heart bleeds for them. Since it’s pretty clear who butters Mr. Kostigen’s bread (his column appears on a site named MarketWatch, for those who didn’t follow the link), his perspective isn’t that surprising. Even with that allowance, he does get tiresome:
The government used to send debtors to prison. We've largely weaned ourselves off those draconian measures, but many people have taken such freedom too far in the other direction.
It would be better if people looked at their homes as a nice place to live and a good place for their kids to grow up and not just as an investment. They'd stay put longer and maybe gain some pride.
Right now pride is at a low point in this country. We need to stand firm and tall -- not walk away. And it seems to me that our homes are a good place to start restoring that pride.
I might be inclined to take some of this more seriously had the author not generalized the issue so broadly at the outset. And there is a grain of truth here: middle-class Americans probably did start to view their houses as more than a home—they did begin to look like a winning investment. That’s certainly what all the mortgage lenders, etc. wanted Ma and Pa Main Street to think, as the bubble grew. Aside from the enormous bubble that cheap credit created, however, is the reality that markets swing in cycles. (Even markets completely free of government intervention will go through booms and busts—with one very important difference. Without state intervention pegging different sectors to each other more or less tightly, as one sector falls, others will be rising, and thus will offer alternatives. [I can’t take credit for this observation; MAL pointed it out to me.]) It requires an understanding of history to recognize market swings; and it requires a measure of self-discipline to avoid getting caught up in the irrational exuberance of one on the upswing.
But all that is a sidebar to Mr. Kostigen’s underlying point, which appears to be this: Ma and Pa Main Street should keep paying those mortgage bills ’till they drop. To what purpose? For pride? What pride is there in being played a chump? It seems to me Mr. Kostigen is confusing pride and hubris; and moreover, is taking a very cheap shot at people with this “take one on the chin for the American economy” crap. Would he really, seriously, advocate malnourishing one’s children in order to keep up payments on a house? What kind of ethics is that?
Back to a point I barely touched on previously:
Somehow lost in the morass of the subprime mortgage debacle is the idea of owner responsibility. It's not "if you break it you own it anymore, it's if you buy it you own it." [sic] People can't whine about being stupid. They should be held accountable for their purchases.
Sure if they were falsely led into a buy or the contracts they signed were falsified or they were provided false information by real estate professionals they should get legal reprieve. But, come on, let's be honest, how many people faked themselves? They knew they were obligating themselves to pay for homes and mortgages way beyond their means to do so.
Responsibility. Being held accountable. Mr. Kostigen earlier accused American homeowners of “breaching contract”. Perhaps he’s missed the headlines regarding the FBI investigating the subprime mess ... here are two recent ones: Bear, Goldman, Morgan Stanley Probed on Subprime; and from today, FBI's subprime crackdown may expand to more firms. A couple of short quotes from the latter piece [all emphasis mine]:
The FBI's investigation of 14 corporations in a crackdown on improper subprime lending could expand to other companies, but the complex probes may take some time before any charges are brought, a federal law enforcement official said on Wednesday.
"Like any white-collar crime investigation, these are very complicated, time-consuming investigations involving the examination of numerous records and interviews of various people. They don't happen in a short period of time," the FBI official said. ....
FBI officials told a briefing on Tuesday the investigations covered corporations across the financial services industry, ranging from mortgage lenders and investment banks to developers and subprime lenders.
They said the investigations involved possible accounting fraud, insider trading and other violations of criminal law. ....
[FBI spokesman] Carter said the FBI around the country has 34 mortgage fraud task forces and working groups that include other federal agencies and state and local law enforcement officials.
Sure looks like someone suspects a lot of fraud going on ... isn’t a fraudulent contract unenforceable? But yeah, let’s just go on believing that banks and the entire financial sector have our best interests at heart. After all, they help the schools so much!
It’s a nice ride up on a market swing, but it hurts like hell on the way down. Unlike Ma and Pa Main Street, Wall Street has friends in low places. So, while it is accurate to say that truth was probably in short supply on both sides of the lending desk, and while I don’t like seeing sites like You Walk Away springing up, I am not ever going to shed a single tear for the real estate and financial whizzes who made gobs of money on Ma and Pa Main Street’s dream and are still trying to suck more from them, after misleading so many of them.
And they can stick their little toady Kostigen where the sun don’t shine.
And then...
Then there are the people who have used their house as a cash cow and owe many times what it is really worth because they used credit instead of good sense.
My own sister has been living in the same house for 37 years, and they now owe more than the original price in second and third mortgages and other home secured loans. As recently as a year ago, it was "worth" 3 times more than they originally paid, but the prices are falling now and they'll be stuck with it regardless - and all the payments.
Sure glad they like that house. I wouldn't give you a dollar for it or any of the others all around her.