Why Are Homeowners Idiots?
fool.com
fool.com
To really make it worth walking away you really have to be underwater by a lot. I don't think that 100% of the people who are underwater are down by 30% or 40%. Real statistics on that would probably be more helpful.
The real determining factor in your case, I suspect, isn't financial but one of convenience. Finding a new home is a hassle, and you don't want to bother with it. It makes more sense to stay where you are because moving doesn't get you anything but grief. But if you got a great job in a different city, would you really be seriously thinking about trying to sell your underwater house?
But convenience is financial as it can be valued. (My statements based upon extensive research involving 7-11 and getting food delivered)
Personally, I think one of the reasons people hang on is that they're too optimistic about a recovery in prices. I'm sure prices on houses in the vegas desert will eventually start to rise again, but from $190k to 550K? Nope.
First, the obvious: once you ruin your credit rating by defaulting on your mortgage, it might not be so easy to just waltz right into a lower price rental. Not to mention that you'll be paying more on any other loans you take out for the next <strike>10</strike> 7 years, and probably your car insurance. You might also consider the increasingly common phenomenon of employers running credit checks on applicants.
There are a variety of legitimate factors in a decision like this which aren't purely financial: the time, emotional, and social costs of moving. Do you move your children to another school? Do you take your children away from their neighborhood friends? Perhaps you like your neighbors as well, or the neighborhood businesses you frequent. If you move into a rental, you can no longer make certain changes to your home to suit your needs and desires.
It's naive and insulting to call people "idiots" because they aren't simple money-maximizing machines, particularly if you're going to pretend that monthly housing cost is something that exists in a vacuum.
I thought that bankruptcy came off your credit score/rating/listing after 7 years.
Anytime I think about the morality of abandoning an underwater debt, I remember that $billion corporations do this every single day.
I read it with just the opposite meaning. I understood it to say that the actual, observed behavior in the mortgage market is that howeowners are being moral. The Fools seem to question why people would act following their morals rather than purely financials.
And this points to one of my favorite misunderstandings of economics, and one that I'm surprised an economist would fall for. Economics is NOT about just money. It's about why people make a choice for one thing, foregoing another. And it's all tied to what people value.
It seems to me that this article validates that people really do value behaving morally, having a clear conscience. And I'm glad, because I don't want to live in the world where people take advantage just because they can.
The article, overall, adds very little to the discussion because it approaches it from the wrong angle.
If you could anonymously walk away from a financial obligation like a morgage, people might behave quite differently.
In saying that, in some states, bankruptcy is the only way to cleanly walk away from your home.
Before the crash, I was getting calls from lenders trying to get me to do a cash-out refi "so I'd have money to invest in the stock market". I assume that some went for that pitch.
"Years ago there was stigma - a man's word was his bond. But that is gone now, and it is not you, the consumer who made it thus. It is in fact the very people who lent you that money who made it so - who proffered documents to you written in 4 point type that were impossible for anyone with less than a PhD to understand (and sometimes even then), that contained intentional tricks and less-than-honest inducements, and who themselves were in fact stuffing bogus loans into securities that they then peddled out to the masses!"
The difference between that and a mortgage is that the big companies are usually on a more equal negotiation footing than homeowners are with banks. So rather than signing a boilerplate agreement, they have teams of lawyers to pick things over, write outs, etc. So when they choose to "walk away", they usually have some reasonable way to do it and still comply with the contract.
Re: article itself.
There's also the small matter of jacking your credit for 7 years. With uncertain future and no savings many people rely on access to credit for emergencies. Not saying that is wise or that they should, but that is a fact.
tax deductions, appreciation, equity, income(it's a duplex and I rent 1/2), plus all sorts of small things such as reduced auto insurance as it's rolled into home owners insurance
But the issue with realestate is that its not as agile a market as stocks or commodities. the volatility observed in a month in the stock market is probably going to be observed in a year in real estate market. And I am not not even talking about the phase lag but the different scales of variation between the 2 types of markets.
Then they could walk away, and buy a different (cheaper) house, or buy first then walk away.
Wouldn't that be a bit like perpetual motion?
In reality, a bankruptcy only lasts 7 years on your credit report and most banks will start lending after merely 2-3 years.
Underwater homeowners should look at the longer time horizon and see that it will take quite a few years for their assets to be above water. That's several years to re-build their credit with a much lower cost of living.
As well, with so much flight from underwater homes I would not be surprised to see the government enact some form of credit forgiveness once the wreckage is cleared and we are recovering. We have to get all of these consumers back to consuming or our consumer based economy will not survive. Both the corporations and the government are in favor of happy consumers who are pacified by their consumption so they will be extremely interested it lighting that economic "engine" again.
From my understanding, it goes off your credit score but banks can see past bankruptcies forever and it factors into their decisionmaking on whether to lend and what interest rates and terms to offer.
This is what my business banker said to me when I was chatting with him casually - so consider the bias, but he's quite the straightforward and standup guy and we're acquainted a bit outside of the bank. He's not the kind of guy that'd pull my chain (and I didn't have any debt anyways - was just getting a rundown on credit scores). Actually, it was pretty damn illuminating when he told me all of the stuff they have records on - they knew all sorts of information about me that I never gave them.
Only thing is, according to the real estate agents, if I'm really lucky selling my house will just cover what remains on the mortgage. If I'm not lucky, selling the house could easily cost us $20,000. Crazily, the most likely reason for that to happen wouldn't be that we couldn't find someone to buy the house for what we'd like to sell it for -- it would be that we couldn't find a lender to appraise it for that much.
Personally, I haven't sussed out the moral implications of just giving the bank the house instead of paying back the loan. On the one hand, it's hard to see how the bank could complain: yeah, they might be getting a house valued at $N in lieu of $N + $20,000, but they also got 8.5 years of interest on it, too, which probably amounted to around $45,000. On the other hand is the notion that implicit in our loan contract was the idea that we would pay it off if humanly possible; that allowed the bank to lend us the money for less than would have otherwise been possible. I don't know how to balance those two things.
In my view, the bank will still profit off of your loan. If market value is about equal to what you owe, but it could only be reasonably sold for $20k but you have paid $45k in interest thus far, they still profit $25k from your loan. I have a hard time seeing where the bank could be morally right in damaging your credit for walking away...
Then there's the other group who (a) can't afford their mortgage anymore or (b) want out. This is the group who should evaluate this as a financial contract and evaluate the risks/benefits of abandoning the mortgage.
Specifically, Vegas, Arizona or Florida I would have had to do some soul searching , if I where not going to be there for over at least 10 years.
Unless the economy manages to crash again in that time, and worse. Then, though, you'd probably be in a crappy situation even if you left now.
More than likely, at this point, your house will be worth more (though probably not a lot more) than it does now, and (since you've been meeting your payments) your debt will have shrunk, too.
Further, if the coming predictions of high inflation turn out to be correct, the people who are still holding their mortgages will be paying them back with cheap dollars vs. people who walk away from their current debts and then need to borrow again later.
That is the beauty of Morals and ethics, is that groups of people subscribe to different ones just as you say it does not give them the right. Other subscribe to an-eye-for-an-eye morality.
I personally think that it does justify it, my moral compass says that if a cooperation is abusing the people via deception, unethical and immoral behavior then that corporation should be dissolved and all debts to that corporation should be terminated. covering it up their appalling nature with a double ethical standard just emboldens more corporations to engage in unethical behavior and allows more abuse of the people.
Let me be clear, I am not anti-corporation, i am just anti-double standard.
http://www.economist.com/sciencetechnology/displayStory.cfm?...
...which basically says that entitled people in positions of power tend to hold others to a higher moral standard than themselves.
An example is set at the top, by those in power, that self-dealing and self-interest above all ethical standards is standard operating procedure. Eventually this moral decay 'trickles-down' and people start to realize that they are chumps if they don't start playing by the same rules.
Look up the "Ultimatum Game" for a particularly effective demonstration of where it fails -- and the commenter here who points out that rational-agent theory would destroy civilizations is completely correct. (Mental exercise: apply "the tragedy of the commons" to a defensive war.)
Because some of us have pride and morals.
It's not like these 'underwater' people are going to immediately move to some island in the Caribbean with bags full of money and sit on the beach in the sun living the good life until the end of their days while the poor, sickly bank dies alone and impoverished in a gutter somewhere.
Cars notoriously devalue over time. Are you saying that the bank is stealing money from you because you new car dropped 10% in value the moment that you drove it off the lot, but you are still paying the bank for a loan of 100% of the original value of the car?
But they did, they took you loan packaged it with poop and sold it to the after market. They gave loans to people who could not afford and when it all cam crashing down they lobbied for bankruptcy law changes to make it difficult to absolve yourself from the debt and they lobbied for your tax money to bail them out of the bad speculations that they made on junk loans. All of this affected your mortgage and the underlining assets value. Now they are stable, they expect you to hold up your contracted obligations which you are free to make your own decisions on, but to say that they did not do this is wrong, they just did not do it in the contracted terms of your contract.
Every time these GoldmanSachs critters open their mouth is yet another oblique reminder that the masses are brain dead.
The ire in Paulson's quote is directed not against speculators generally, but speculators who don't live up to their agreements when things move against them.
That's not really something Goldman is guilty of. ...As much as people would like them and everyone ever associated with them to be guilty of everything.
I'd give Goldman a pass. They really are the best at what they do.
But if we expand it further to the rest of the financial industry, what can we see?
Back in November, 33 companies skipped their TARP payments.
Just recently, Blackrock walked away from a Manhattan building as they couldn't refinance the debt.
And that's the problem-- banks and homeowners get into financial, not moral contracts. If the loss off default is smaller than the loss of staying in the contract, you stop paying. Companies do it all the time, and homeowners should view it as an out.
"Just recently, Blackrock walked away from a Manhattan building as they couldn't refinance the debt."
Were the companies which skipped their TARP payments capable of paying?
There is a difference between being unable and unwilling to pay.
Sounds like unwilling to me. Just because they couldn't refinance that debt doesn't mean they are unable to pay it.
For instance, if Blackrock manages two pension funds (e.g., Target Retirement 2050 and 2040), they can't raid TR2050 to pay for obligations owed by TR2040.
The non-recourse loan agreement spells: the loan is secured by the property the loan it taken against, and if the borrower defaults the property is repossessed by the bank.
The recourse-loan agreement spells: the loan is secured by the property the loan it taken against and all borrower's assets (except secured protected assets such as 410k or IRA). If the borrower defaults the property and assets are repossessed by the bank via bankruptcy proceedings.
The Paulson's quote is exactly an attempt to guilt people into taking more responsibility than their contract requires. Something GS would never do.
No they got bailed out before they had to. A luxury that no homeowner who defaults has yet seen.
I think that this situation happens in part for the "moral"restrictions, in part for the credit rating, but also because of the effect that once that you invested a certain ammount of money in something, you keep pouring money on it even when its not good for you.( the famous throwing good money after bad money)
"i have already commited to buying this house, and pay this much already, so i might as well put more".
Im sure many of the readers here have put money into fixing their computer several times before acknowledging that to buy a new one would be cheaper :).
Being underwater today doesn't imply being underwater next year. A home's value may return, so long as you didn't buy at some idiotically high price.
Also a slightly less inflammatory hyperbolic linkbait title would be good.