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You can never go home again (and nor should you)

PH2010011000442.jpg

Roger Lowenstein thinks people should stop pretending that mortgages are a moral obligation and begin viewing them as a business contract -- and one that it often makes sense to break:

[T]he 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?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. [...]

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

The key moral point, I think, is this one: "Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them." If banks aren't supposed to view mortgage contracts as moral agreements that should be followed in spirit as well as in letter, why should homeowners?

Photo credit: AP Photo/Marcio Jose Sanchez.

By Ezra Klein  |  January 11, 2010; 10:00 AM ET
Categories:  Housing Crisis  
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Comments

I don't think recent events give bankers any moral authority to lecture anyone.

Posted by: AuthorEditor | January 11, 2010 10:08 AM | Report abuse

The problem is individuals defaulting on their mortgages are tortured and punished for at least a decade afterward whereas a large company can brush off any breach of contract dues. Ruining one's credit can have deep repercussions that a big business wouldn't consider a problem.

Posted by: edmigper | January 11, 2010 10:27 AM | Report abuse

There should be no morals whatsoever! It is a signed business contract.

"If banks aren't supposed to view mortgage contracts as moral agreements that should be followed in spirit as well as in letter, why should homeowners?"

Who says homeowners do? Morgan Stanley will probably take a loss on those buildings similar to the loss for the homeowner.

Posted by: Holla26 | January 11, 2010 10:38 AM | Report abuse

It is a debt with collateral, so default is somewhat easy (the lender doesn't come after your car to make up the difference, for example). However, I wouldn't trust you enough to lend to you next time without a higher rate and a much higher down payment. So, the decision depends somewhat on what you do in the future.

@edmigper Business do suffer huge consequences from bond and loan defaults, very similar to what individuals experience in terms of higher rates to borrow money and asset seizures that force them into bankruptcy protection.

Posted by: staticvars | January 11, 2010 10:53 AM | Report abuse

Ezra, what can account for your strange love-affair with the construction "and nor"? You use it all the time, and you ought to stop. "Nor" can do all the work by itself; it doesn't need help from "and". "And nor" has about as much legitimacy as "and but" would have. (You also use "but nor", and you shouldn't do that either.)

Posted by: thehersch | January 11, 2010 11:05 AM | Report abuse

Cue Mandy Rice-Davies. In the old days, residential foreclosure could even be profitable for a bank: they could take a property for the balance of the mortgage plus fees (unless somebody else bid higher, in which case the profit was guaranteed), then turn around and sell it for a market value that was often higher (especially when you factor in the down payment). But now, not only are they going to take a bath on resale, they're going to have to recognize that loss immediately on their books.

So of course they're preaching the moral duty of homeowners to keep paying.

Posted by: paul314 | January 11, 2010 11:06 AM | Report abuse

Is the argument that I should default on a loan because I could not sell the property at the same price I bought it for (or higher) in the foreseeable future, even though I can continue to make the payment and, you know, actually *live* in the house? That thing that houses used to be for, back in the old days?

Or is the argument that companies choosing to default on leveraged business properties as a strategic decision the same thing has having my home foreclosed on because I've lost my job?

In the latter, I really don't have a choice. I'm going to default, no matter what, because I can no longer pay the mortgage.

In the former, I will be hounded for the difference of the price of the house and what it might be sold at auction for by the bank, unless I declare bankruptcy, and nuke my credit rating. Even though I could have continued living in the house and kept it up nicely and paid enough on the mortgage in the interim that, even if house prices did not go up, I still might come out on the positive side of the ledger when I sold my house in 10 years. And house prices might appreciate reasonably in the next 10 years--better odds than winning the lottery or playing the slots, at any rate.

Even if it made moral sense to default on a loan I could otherwise manage to pay, I'm not sure it ever makes much practical sense.

Posted by: Kevin_Willis | January 11, 2010 11:12 AM | Report abuse

Whose fault is it if a loan was made for a bubble-inflated amount more than any reasonable estimate of the actual value? The home buyer isn't a financial or real estate professional. The appraiser and bank presumably are.

Posted by: tl_houston | January 11, 2010 11:22 AM | Report abuse

@Kevin_Willis:

Paying the mortgage to live in the house doesn't really make sense if you could get an equivalent rental for a third or half the monthly cost. Take a hypothetical where you can pay $3000 a month on an option ARM or rent the equivalent for $1500 a month. After five years renting, you have a nest egg somewhere north of $70,000, with essentially zero risk. Unless you're sure that your house will appreciate by at least that much plus selling costs (and that you won't lose it to unemployment or other unforeseen circumstances) it absolutely makes financial sense to walk away. (That's leaving out taxes, insurance, and so forth, but it's a first approximation.)

Posted by: paul314 | January 11, 2010 11:47 AM | Report abuse

I think the problem with people simply bailing on their mortgages that they can actually pay is that, ultimately, the banks have the money and the end result of this is tight credit. If people who can afford to pay walk out on their houses, banks are going to be even more careful that the the price of the collateral never falls below the value of the loan.

That may not be a bad thing - I think lenders should require 15%-20% down and should make sure that the mortgage payment is a reasonably low percentage of a person/family's income.

I just don't want to hear people whinning about how the $30k/yr families "can't get financing" and are "missing out on the American Dream", about how the homeownership rate is down to 60%, and seeing new homeownership subsidies from Congress to offset those greedy banksters who are keeping mortgages away from high risk borrowers. In fact, I would like existing subsidies such as the mortgage interest deduction phased out. Most of these subsidies are offset by the fact that their very existence pushes up the size of homes and house prices for any given size/location.

Renting - and saving for a downpayment if you want to live in a home - really isn't a hardship. I think that if people decided to rent and invest the extra amount that they would have spent paying a mortgage and maintaining a house, that they would be pleasantly surprised in the long run.

Posted by: justin84 | January 11, 2010 11:53 AM | Report abuse

"It is a debt with collateral, so default is somewhat easy (the lender doesn't come after your car to make up the difference, for example)." -- staticvars.

Actually, borrowers whose cars are repossessed do get calls for the difference after the loan has been sold to collection agencies for pennies on the dollar.

Posted by: Athena_news | January 11, 2010 12:01 PM | Report abuse

I read the article. I think the default of the finance industry has diluted the sense of morality attached in many people's minds to paying back loans, as well as having shown us all the fabricated nature of most of the "money" involved in most of our loans received.

The article suggests explicitly that actually it's only people's residual sense of morality that's prevented many of them from walking away from upside-down arrangements.

My guess is that this moral tie will continue to weaken to whatever extent that events show continued disregard for the working stiff.

In short, we're witnessing a massive destruction of cultural morality caused by a massive display of immorality in our nation's institutions.

Posted by: rosshunter | January 11, 2010 12:02 PM | Report abuse

thehersch is right. "And nor" is language abuse.

Posted by: leoklein | January 11, 2010 12:05 PM | Report abuse

Nuking your credit can be seen as an acceptable cost. You need credit to take out a loan. Why do you need to take out a loan? For most people, to buy a home. So going without home ownership for 5-7 years may seem to be an acceptable cost in exchange for lowering your monthly payments on rent and not being saddled with debt. You could even do this strategically by purchasing a new car and financing it before defaulting on the mortgage, so you won't have to take on any more major debts until years down the road when the bankruptcy lapses on your credit report.

There's a saying that goes "pay yourself first." Your priorities are things like paying your bills and saving for retirement, not working for the bank for the next 20 years to pay off a debt gone bad.

Posted by: constans | January 11, 2010 12:08 PM | Report abuse

constans makes a great point.

i'm reminded of my father who is 72 and two years ago had a doctor send him a threatening collection notice for $52 saying basically that they'd ruin his credit. He's 72. He owns his home outright, he doesn't have any credit cards, pays for eveything in cash or check and owns the building his company is run from. He has almost zero debt.

I recall the story of his call with the collection agency that was threatening him and he basically told them (in his best Dirty Harry voice) "Go ahead, make my day!"

Credit is only ruined if you're at an age or stage in life where you're worried about it or need it.

Posted by: visionbrkr | January 11, 2010 12:56 PM | Report abuse

"[T]he housing collapse left 10.7 million families owing more than their homes are worth."

I don't understand why this is supposed to be a game changer. Virtually all consumer debt is incurred for depreciable assets. No one expects an automobile to have appreciated in value 3 years after purchase and every dollar of credit card debt represents money that is owed for assets that are now worth less. Longer payment periods don't imply that appreciation is assured.

These are supposed to be *home* mortgages -- the buyer has borrowed to purchase a home (not a house). They benefit from lending and tax policies that are supposed to encourage stable communities as an environment for nurturing families and our future. The resale value of a home has nothing to do with that.

I find it interesting that no one wants to talk about the degree to which the home mortage interest deduction helped fuel the bubble.

Posted by: Athena_news | January 11, 2010 1:25 PM | Report abuse

Uh, Athena_news? As you may have noticed, cars are priced according to the fact that you won't have a valuable asset to sell at the end of its useful life for you. That's why leases and loans are fairly comparable. Houses, during the past decade, were priced according to the notion that you'd have a valuable asset to sell at the end of your occupancy -- in fact, significantly more valuable then when you moved in. Take away that assumption, and the cost of purchase settles to more or less the cost of rental, which in many parts of the country implies house values about half of their most recent purchase price. You change the rules midstream for 10 million people, you change the game. Maybe in another 10-20 years things will sort themselves out, but in the meantime we are most definitely not in kansas any more. (And no one talks about the mortgage deduction fueling the bubble because, erm, the deduction has been in place much longer than any single real-estate cycle?)

Posted by: paul314 | January 11, 2010 2:09 PM | Report abuse

Hurray for Roger Lowenstein! Let me pose the question, how much fake debt must one repay before it outweighs the potential hit to one's credit score?

This reminds me of Warren Buffet's number one rule, don't lose money. This rule stems from the fact that if one loses 50% of one's equity, one needs a 100% increase in equity just to break even.

Posted by: bcbulger | January 11, 2010 3:53 PM | Report abuse

"You change the rules midstream for 10 million people, ...." -paul314

The point was that there was no "rule" that said home prices would appreciate fast enough for people to make a profit after 2 or 3 years of residence. That was a recent phenomenon.

If you were actually buying a home, the fact that an equivalent unit is now available at less cost is irrelevant. Getting upset because you can't flip a home in 2-3 years is not a justification for "help"? Why should it be a matter of public policy to help people who were supposed to be there for the long haul in the first place?


"And no one talks about the mortgage deduction fueling the bubble because, erm, the deduction has been in place much longer than any single real-estate cycle"

Although the deduction may not have ignited the bubble, it most certainly did fuel it. Many, many buyers were persuaded by real estate agents that they could afford the payments because "after all, you get a nice deduction so you are wasting money to rent". If you don't think that drives up prices, consider the temporary effect of the rebate for home buyers.

Posted by: Athena_news | January 11, 2010 6:41 PM | Report abuse

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