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bank shot
March 27, 2008 3:57 AM   Subscribe

Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed — sometimes heavily — against the roofs over their heads.

Now the bill is coming due.
posted by plexi (122 comments total) 5 users marked this as a favorite

 
The article actually does a pretty good job laying out the issues, and showing some pretty good examples of what's happening from a practical perspective. Is the ominous tone of the FPP entirely necessary, though? It might just be my own issue, as I'm suffering from DoomFilterFatigue.
posted by psmealey at 4:24 AM on March 27, 2008


Well the FPP is the first paragraph of the article...
posted by PenDevil at 4:26 AM on March 27, 2008


I just don't see any problem, people writing 2nd mortgages knew they were 2nd in line, let them take the hit.
posted by jeffburdges at 4:31 AM on March 27, 2008


as I'm suffering from DoomFilterFatigue.

Doom, dooooom! *evil cackle*

(yeah, I get tired of it too. :) )
posted by Malor at 4:31 AM on March 27, 2008


It is hard to fault folks for living on credit when our illustrious government is making the dollar fade away. At least their debt is shrinking, rather than savings, as for those of us who have kept to the black.
posted by ackptui at 4:35 AM on March 27, 2008 [1 favorite]


The banks want bailout money.
Bailout money ultimately has to come from those damn taxpaying plebs, even if they borrow/print it for now and pay later.
Therefore, the plebs must be sufficiently scared to pony up the dough.
Therefore, there must be scary newspaper articles.
Therefore, there must be DoomFilter.
posted by TheophileEscargot at 4:37 AM on March 27, 2008 [2 favorites]


psmealey writes "as I'm suffering from DoomFilterFatigue."

Really? I'm totally into it. I've been picking out really great shotguns, hunting rifles, and defensive anti-personnel devices. It's still possible to find surprising bargains on non-perishable food items. However, it is surprisingly difficult to find a group of women of childbearing age who will agree to stay in my bomb shelter no matter how tastefully I decorate it.
posted by mullingitover at 4:40 AM on March 27, 2008 [12 favorites]


ackptui: You must be mistaken. Haven't you heard Treasury Secretary Paulson state that the Bush administration has a 'strong dollar policy'. I mean he said it so it must be true right?
posted by PenDevil at 4:45 AM on March 27, 2008


ackptui writes "At least their debt is shrinking, rather than savings, as for those of us who have kept to the black."

Indeed. I'm in permanent forbearance on my student loans, waiting for the day that hyperinflation kicks in and I can pay all my loans back with a single $20,000 bill that I find on the ground somewhere. I bet it'll even have Dubya's face on it.
posted by mullingitover at 4:45 AM on March 27, 2008 [24 favorites]


Back in the 90s, when I first heard of "home equity loans", I was like "isn't that the same as a mortgage"? And I was told that no, it was like a second mortgage.

I knew then that we were doomed.
posted by DU at 4:45 AM on March 27, 2008 [4 favorites]


One really has to wonder what sort of long-term damage this seemingly endless flow of bad financial news is going to do to the general population's confidence in, well, everything.

I mean...all through the past 20-25 years, every damned supposed financial expert you could find/read/hear was singing the praises of "unlocking the equity in your home". How home equity loans were a solid, positive financial move. That it was making your largest investment work for you. The implication was that you were an idiot and financially imprudent not to do it.

And now...not so much.

Interestingly, many of those same experts are quickly jumping on the revisionist bandwagon, beginning to drone on about how no-one in their right mind should have made these moves and that consumers should have done their homework. Ignoring, of course, that studying the opinions of financial experts is a large part of doing your homework.
posted by Thorzdad at 4:47 AM on March 27, 2008


Man, am I ever glad that I sold up. Debt-free is where to be in 2008. I will still be affected by all this, but at least I sleep well.
posted by chuckdarwin at 4:51 AM on March 27, 2008


Wait, wait, wait....is somebody saying that real estate doesn't always go up!?
posted by de void at 4:52 AM on March 27, 2008


You've made your bed, now sleep in it.

No, I'm not being glib, it's just a summary statement:

many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first
posted by Pollomacho at 4:58 AM on March 27, 2008


I'm sorry, who is the "you" in "you've made your bed"? The unsuspecting homeowners who did what they were told, perhaps optimistically? Or the predatory lenders who exploited them?
posted by DU at 5:13 AM on March 27, 2008


DU writes "The unsuspecting homeowners who did what they were told, perhaps optimistically? Or the predatory lenders who exploited them?"

I'm sure there were more than a few idiots who made bad choices based on bad advice. However, for every one of them, I suspect there's one who understood the risks and decided that s/he had to have that new SUV/boat/[other $10k+ depreciating asset].
posted by mullingitover at 5:23 AM on March 27, 2008 [7 favorites]


Thorzdad I mean...all through the past 20-25 years, every damned supposed financial expert you could find/read/hear was singing the praises of "unlocking the equity in your home".

They were right, then ...

Interestingly, many of those same experts are quickly jumping on the revisionist bandwagon, beginning to drone on about how no-one in their right mind should have made these moves

... and they're right, now. :) That's the trick of it. It was a good thing to do, until everyone started doing it, and that made it a bad thing. At some point there, it would have been an OK thing, and then a what-the-hell thing, and then a slightly dumb thing, and that would have been the time to get out; but the avalanche has started, and we're all in the snow and the rocks. Isn't finance fun?

As for singing doom songs, no-one does it better than Gir. It's very apropros. I think he's just put his finger up and started his last chorus.
posted by aeschenkarnos at 5:31 AM on March 27, 2008


That 'Walk Away' site was interesting. - does anyone know what happens when you foreclose on a loan? - ie if you default and just leave the property to the bank, does the bank have any legal recourse to your other savings or say other property?
posted by mary8nne at 5:43 AM on March 27, 2008


oh it seems to depend on the local laws
posted by mary8nne at 5:49 AM on March 27, 2008


Dear People,
It's a home first and and second, an investment a distant third.

love,
Common Sense.
posted by Brandon Blatcher at 5:53 AM on March 27, 2008 [14 favorites]


for anyone with 'negative equity' in their home and a non-recourse mortgage: Defaulting on the loan totally makes sense. - just fuck off the banks and stop paying. - by the time they manage to kick you out one shodul be able to save a bit of cash.
posted by mary8nne at 5:57 AM on March 27, 2008


Is there any difference in the situation in Texas, where up until recently HE Loans were restricted (I seem to remember)? Haven't read any articles about it.
posted by Eideteker at 5:58 AM on March 27, 2008


rubbish..
posted by mary8nne at 5:59 AM on March 27, 2008


mary8nne: You'll also be taking an extremely big knock on your credit rating which will make it extremely difficult to get a loan in the future until you build it back up.
posted by PenDevil at 6:05 AM on March 27, 2008


As I'd previously mentioned, up before, at Business School I was taught that "equity stripping" was something only high net worth litigation targets should engage in.

I don't live in The United States any longer, and was surprised to learn during a brief visit in 2000 or so that the technique was not only common place, but widely considered to be common sense. Very curious I thought.

Well, I run a strong personal balance sheet and couldn't convince anyone that debt was something to at best, be avoided or at worst, minimised. As my grandparents raised me, this view wasn't deemed acceptable in this day and age. Ok.

I pushed the same point across to Business Week in mid 2006, will excerpt again (we were discussing inappropriate loans such as ARMs)

"The social fallout will be severe and pronounced as families lose homes, marriages are ruined and families torn apart.

All driven by these irresponsible lending practices.

There is a reason why our parents and grandparents eschewed floating rate debt in favour of long term, fixed rate mortgages. Having lived through The Great Depression, they knew the cost of uncertainty. This is a lesson millions of Americans will be forced to relearn in the months and years ahead.

An expensive - and totally avoidable - lesson."


But you that being said, when I first started working in Investment Banking my boss at the time had an expression (referring to equity markets, but widely applicable) - "If everyone is thinking the same, then no one is thinking".

So I actually pulled out £20K from my home last September, back when the lending crisis first reared it's ugly head. Floating rate, I immediately dropped it into a fixed rate deposit and now the BOE have cut rates twice since I grabbed the cash. I've got no prepayment penalty, so I'm just gonna sit on the money and see what happens.
posted by Mutant at 6:07 AM on March 27, 2008 [2 favorites]


I'm sorry, who is the "you" in "you've made your bed"?

Well, according to the quote from the article that I added it would be the homeowners apparently. Again, that seemed to be the gist of the bank's attitude.
posted by Pollomacho at 6:10 AM on March 27, 2008


the credit rating is a slight problem. but i think you'd be worse off in the end trying to repay the loan. get out with as much savings as you can.
If you have a large enough deposit (say +20%) the banks will give you a loan no matter what your credit rating is.
posted by mary8nne at 6:11 AM on March 27, 2008


Where does personal responsibility figure into this? I'm tired of hearing about predatory lenders when no one wants to talk about the greedy bastards taking out the loans for a house that is way out of their price range and then getting a home equity to buy a new boat or other status toy.

Bigger is better and more, more, more. Living in Flor-i-duh I see this on a daily basis. Let the fuckers reap what they have sown. Maybe, just maybe, this will become a national lesson in living within your means and why credit should only be used for things you NEED and not things you want - if at all.

(and I know some innocent folks got caught up in this but I believe they're the exception and not the norm)
posted by photoslob at 6:13 AM on March 27, 2008 [5 favorites]


When my husband and I first moved to Tucson, AZ - a notoriously low wage town, we used to sit at traffic lights in our third-hand car with no AC and wonder how everyone around us could afford huge trucks and SUVs. Now I know.
posted by TorontoSandy at 6:13 AM on March 27, 2008 [3 favorites]


Eideteker said: "Is there any difference in the situation in Texas, where up until recently HE Loans were restricted (I seem to remember)? Haven't read any articles about it."

You are remembering correctly; home equity loans were (state-)constitutionally illegal in Texas, as a consumer protection, till the Legislature changed the Texas Homestead Act in 1997; some decent background on the new laws here.

There are still some restrictions on Texas home equity loans, but I haven't heard anything about a correlation to less of a mortgage problem here. I'm sure other Texan MeFites might know. My understanding was always that the laws changed mostly affected equity against existing homes owned.

Also, since I'm already posting, I would like to say that I don't care for the FPP formatting trend of not using quotation marks to separate what is quoted from the linked article from what is generated by the poster. I believe it creates a failure to attribute (which I feel MeFi in general should care a lot about); and fwiw, I also clicked on the post with a grain of irritation at the DoomFilter tone -- which I wouldn't had I been able to tell the FPP was a quotation.
posted by pineapple at 6:16 AM on March 27, 2008 [3 favorites]


Once we get through with the property loan debacles, what market implosion comes next? I'm thinking the whole private, adjustable-rate, LIBOR-based, student loan market is probably next to implode. One interesting wild-card in all that is that, by law, one cannot have student loans vacated via bankruptcy.
posted by Thorzdad at 6:18 AM on March 27, 2008


Home-equity loans and refinanced loans are often (or even typically) recourse loans rather than non-recourse. That means that if the foreclosure on your home doesn't result in enough money to clear the debt you can't walk away from it short of chapter 7 bankruptcy. However the new bankruptcy law lobbied for by the very banks that pushed refi's and equity loans require a means test before you can file if you earn more than the median income for your state.

If your loans are non-recourse, you can walk away and just lose your home.
posted by BrotherCaine at 6:19 AM on March 27, 2008


The first article boo-hoos too much for the banks, methinks. I think the key fact is that the issue with 2nd mortgages and home LoC's will further tighten credit, which means it will dampen consumer spending, which will be the most significant effect.

There's also a "companion" article there on the "illogic" of home sellers who refuse to lower their asking price. It seems to concentrate on those who bought within the last few years and have listed their homes for what the author considers absurdly high prices. The author's point is that if people won't price realistically, the volume of home sales will drop dramatically (duh) and it will have the effect of drawing out the correction period.

Reading between the lines, the 2nd article told me that it's mostly the flippers (people who have been in their house for less than 4 years) that are resistant to dropping price. I understand that, it's not illogical at all. It will certainly stop the flipping, which helped inflate house prices in the first place. People who have been in their house for 10 years or longer will still see a gain when they sell.
posted by Artful Codger at 6:20 AM on March 27, 2008


Also, even though a lot of new homebuyers got fleeced, and the mortgage brokers are the villains of the piece, that doesn't mean we should bail them out. Nor should we bail out the banks who threw caution to the wind. There are plenty of banks out there who still have extremely low foreclosure rates, because they put proper fiscal controls into place in their loan authorization process.
posted by BrotherCaine at 6:23 AM on March 27, 2008


There are two situations:
  1. Someone has more debt than equity in their property, but has enough income to service their debt - not a good situation to be in, but sustainable. These people should not be allowed to default on their debts just to make things easier for themselves.
  2. Someone has more debt than equity and is unable to service their debt - they are bankrupt and should be declared as such. Their debt should be treated the same as for anyone else who is bankrupt.
The big problem seem to be people in category 2 who want their debts to be written off and people in category 1 who, for whatever reason, seem to think that they should have an easy out.

It seems that in the US, their has to be someone to blame, as it couldn't possibly be the fault of the people who got themselves into the mess.

People are legally and morally liable for whatever they sign up to - if they're too stupid to understand how a debt works then they should be in an institution.

For anyone who follows the advice:
for anyone with 'negative equity' in their home and a non-recourse mortgage: Defaulting on the loan totally makes sense. - just fuck off the banks and stop paying. - by the time they manage to kick you out one shodul be able to save a bit of cash.
You are morally bankrupt and deserve to be treated like a financial leper for the rest of your life - you will be paying 0.5-2.0% above standard for loans for decades and it will serve you right.
posted by daveg at 6:25 AM on March 27, 2008 [1 favorite]


Don't take out loans against homes you barely own? Shocking!
posted by chunking express at 6:28 AM on March 27, 2008 [3 favorites]


People are legally and morally liable for whatever they sign up to - if they're too stupid to understand how a debt works then they should be in an institution.

For anyone with 'negative equity' in their home and a non-recourse mortgage: Defaulting on the loan totally makes sense. - just fuck off the banks and stop paying. - by the time they manage to kick you out one shodul be able to save a bit of cash.

You are morally bankrupt and deserve to be treated like a financial leper for the rest of your life - you will be paying 0.5-2.0% above standard for loans for decades and it will serve you right.


You don't recognize the cognitive disconnect between your statements? People are responsible for their bad contracts but banks aren't?
posted by BrotherCaine at 6:31 AM on March 27, 2008 [4 favorites]


mary8nne -- "...for anyone with 'negative equity' in their home and a non-recourse mortgage: Defaulting on the loan totally makes sense."

Ah, what you're describing is Merton's (Merton, R., C. 1974. 'On the pricing of corporate debt: the risk structure of interest rates', Journal of Finance, 29, 449-470.) fundamental insight that helped us revolutionise loan pricing; it is indeed perfectly rational behaviour for the obligor to default once the value of the home is exceeded by the debt.

Effectively, the obligor has puchased a put option from the bank, and can exercise that option (i.e., "put" the home back to the bank) at a time of her own choosing.

Of course I'm using the phrase perfectly rational in the economic manner; not commenting on the morality or personal fallout i.e., credit rating, PenDevil mentions, possible claims on other personal assets. One can only advise that you choose your state carefully should you decided to purse this course of action. Me? I'd play hardball with the bank as in the end, the last thing a bank wants to do is take distressed property onto their books. Its precisely because of situations like these that we've got Loan Workouts.

But exercising the embedded put in a mortgage is rational, and priced into the loan.


Thorzdad -- "Once we get through with the property loan debacles, what market implosion comes next?"

Well, you're correct in that there most certainly is a bubble brewing. In fact almost anytime we get negative real interest rates, bubble inflate. Money is too damn cheap, folks get all crazy and spend money like a bunch of drunken cowboys visiting the local brothel on payday.

With three month TBills yielding about 1.3%, and official CPI running at about 4% (and unofficial CPI running perhaps 10% or higher, depending upon who you read), rates are most assuredly negative real now.

Bottom line: the borrower is being paid to take out a loan in this environment.
posted by Mutant at 6:36 AM on March 27, 2008 [2 favorites]


daveg, while I might agree with you, you gotta concede that by offering (pushing) risky loan products and approving people who should not really have qualified, the industry itself is morally bankrupt.

People are legally and morally liable for whatever they sign up to - if they're too stupid to understand how a debt works then they should be in an institution.

Well, I think back to my high school... we didn't learn a freaking thing about basic personal economics. No-one walked us through the process of how to budget for living expenses, howto get a mortgage, how to assess our debt-carrying capacity. All this came through trial and error, and mostly by relying on the banks acceptance or rejection to indicate whether we were being realistic or not. The cynical part of me insists that this is deliberate; an uneducated consumer is malleable and it's easier to maximise the take per consumer when they're financed right up to the limit of their carrying ability.
posted by Artful Codger at 6:37 AM on March 27, 2008 [1 favorite]


For anyone who follows the advice:

"for anyone with 'negative equity' in their home and a non-recourse mortgage: Defaulting on the loan totally makes sense. - just fuck off the banks and stop paying. - by the time they manage to kick you out one shodul be able to save a bit of cash."

You are morally bankrupt and deserve to be treated like a financial leper for the rest of your life - you will be paying 0.5-2.0% above standard for loans for decades and it will serve you right.


Oh REALLY now? Next time, try harder to put your moral indignation on the shelve before clicking "Post Comment."
posted by KevinSkomsvold at 6:49 AM on March 27, 2008


daveg, while I might agree with you, you gotta concede that by offering (pushing) risky loan products and approving people who should not really have qualified, the industry itself is morally bankrupt.
In recent history more often than not the entity who winds up owning the mortgage has not been the same entity that issued it. It seems that mortgage brokers would issue a mortgage to anyone because they had no skin in the game and were making money purely on a one time commission and not via the interest repayments over the life of the loan.
posted by PenDevil at 6:52 AM on March 27, 2008


I'm sorry, who is the "you" in "you've made your bed"? The unsuspecting homeowners who did what they were told, perhaps optimistically? Or the predatory lenders who exploited them?

Oh please. I don't have a lot of sympathy for people who "do what they're told", particularly adults who should know better. As for "predatory" lenders, it's the swiftest, smartest most alert "prey" animals who avoid the jaws of the fox. That's just nature culling the herd, I suppose.

Having not bought into such an obviously bad idea like borrowing against my home equity, I am a happy, healthy bunny.
posted by Scoo at 6:56 AM on March 27, 2008 [1 favorite]


DoomFilter

I hate to be the bearer of bad news but we're all going to die. At some point.
posted by i_cola at 6:57 AM on March 27, 2008


Ha ha! Silly homeowners and their financial folly! I laugh at all of them! You'd never catch me doing anything silly like that with my money!

Now, if you'll pardon me, I'm going back to buying some up-and-coming stocks on margin. And when they finally repeal Prohibition, I'll buy you all drinks!
posted by Spatch at 7:07 AM on March 27, 2008 [1 favorite]


In short :-

BrotherCaine: No cognitive disconnect, I don't believe that a business has a moral imperative.

Artful Codger: Same answer, businesses are amoral institutions that operate according to a given set of rules, which may in some circumstances look like morality, but morality is different

KevinSkomsvold: I'm not sure what point it is that you're trying to make with your link - do you think that because a load of people are doing something that it makes it moral?
posted by daveg at 7:15 AM on March 27, 2008 [1 favorite]


You are morally bankrupt and deserve to be treated like a financial leper for the rest of your life

Blessed be the moneychangers and the usurers, for they shall truly inherit the earth (or convert it after the deedholders go belly up).
posted by psmealey at 7:21 AM on March 27, 2008


Interesting to see a couple of comments on learning about budgeting and home finances in school and at home. The post that comes two after this one is about a British magazine called Viz. In there they had these spoof adverts for the kind of tat you can send off for from a certain kind of magazine. A common one would be a set of plates that commemorate some event, and they were near identical to ones you'd find in some major selling British magazines of the day. You'd fill out the form in the magazine, put your address in and there'd be a box to tick to indicate whether you were paying by cheque, credit card or what. The spoof one said "I am rich / stupid (delete as applicable) and wish to pay by credit card". To this day that's about as close as I ever got to being given any kind of formal budgeting advice. It always comes to mind when thinking of loans.

I guess what I'm saying is that there are myriad ways in which you can pick up the knowledge that outgoings exceeding income is a bad situation to be in. There are times when people's situations mean they can't avoid it, but to willfully dance with such situations is incredibly stupid. I can't imagine the walking, talking disaster a person who doesn't know that would have to be before they could be in any kind of position at all to be ignorant of that simple fact.
posted by vbfg at 7:24 AM on March 27, 2008


DaveG, But foreclosures are part of the fiscal analysis that is made by the lending institution. Morality plays no part in it. There's a legal mechanism for exiting the contract, and in this case it behooves the banks to consider the implication rather than the borrower.
posted by BrotherCaine at 7:27 AM on March 27, 2008


Usually, I am a live and let live kind of guy, but when you are surrounded by people who live a life way outside the limits of what they can afford, and you endure the smugness for years of these same people, who are smarter than you, because they have the biggest house, boat, car ect, then there is a part of me that feels some sort of satisfaction from this.
posted by Senator at 7:29 AM on March 27, 2008 [2 favorites]


KevinSkomsvold: I'm not sure what point it is that you're trying to make with your link - do you think that because a load of people are doing something that it makes it moral?

My point with the link is that walk-aways are becoming the new reality in this business (maybe they are an old reality but I've only recently heard of this). I've read a number or articles recently about this very phenomenon and it is shocking to me. Mary8nne's comment, while possibly curt, was valid.
posted by KevinSkomsvold at 7:32 AM on March 27, 2008


Usually, I am a live and let live kind of guy... there is a part of me that feels some sort of satisfaction from this.

Translation,: I like to think of myself as a non-judgmental sort, but I actually have a huge chip on my shoulder about people that I sense are looking down at me, and I will relish any opportunity opportunity to feel superior to them... at least until someone else comes along and bruises my self esteem through actions or words real or imagined.
posted by Flem Snopes at 7:34 AM on March 27, 2008


As for "predatory" lenders, it's the swiftest, smartest most alert "prey" animals who avoid the jaws of the fox. That's just nature culling the herd, I suppose.

Wow. It's cool to judge people burdened with debt. I wanna be a social darwinist when I grow up.
posted by Laugh_track at 7:35 AM on March 27, 2008


If you have a large enough deposit (say +20%) the banks will give you a loan no matter what your credit rating is.

I don't think you can get an 80% LTV (LVR, if you're an Aussie, mary8nne) loan with a 500 FICO score in very many places right now unless you qualify for one of the government programs. And it (really) may be years until you can.
posted by Kwantsar at 7:37 AM on March 27, 2008


Flem Snopes,

EXACTLY!!
posted by Senator at 7:38 AM on March 27, 2008


Wow. It's cool to judge people burdened with debt. I wanna be a social darwinist when I grow up.

Why refute someone's point, when you can just snark instead?

Again, I say that no one with half a brain would go for something so obviously risky. Until my fellow Americans learn to live within their means, stop saying yes to everybody with a TV show, and crack a history book once in a while, I say tough luck.

NO ONE is going to take care of you but you. Virtually EVERYONE trying to sell you something has THIER best interests in mind, not yours. You can call it social darwinism. I call it common sense, and I sincerely hope that this debacle will knock some of it into these rubes.
posted by Scoo at 7:52 AM on March 27, 2008 [2 favorites]


daveg -- "I don't believe that a business has a moral imperative."

Wow harsh! I'd have to disagree here; business do have a moral code to adhere to, that of the society in which they're operating. A business must be a responsible citizen, first and foremost, before they are a successful enterprise. These principles seem to have been lost to some extent in lending that took place during the housing bubble.

Myself, I'm an old style banker, still remember doing five / ten million dollar deals on nothing but a handshake - and one's reputation.

I understand your point, but might suggest that's a very, very abstract view in the sense that we can't have businesses break laws, essentially ignoring any moral imperative, simply because laws may not apply to entities (in the financial sense, to distinguish business vehicles from individuals), or ample funds exist to subvert or otherwise delay justice.

This is indeed a messy area that we're not likely to get agreement on; after all, not only are entire courses are taught on this subject at Business Schools, people do disserations on topics such as Bhopal.

I read one such dissertation a few years ago where author was arguing against the extradition of Warren Anderson, CEO of Union Carbide during the Bhopal disaster.

All I can say is I'm glad I'm in Quantitative Finance; my head was spinning afte plowing through that tome (to all legal folks who understand such stuff: Maximum Respect).


Senator -- "Usually, I am a live and let live kind of guy, but when you are surrounded by people who live a life way outside the limits of what they can afford, "


I think one of the problems folks have today is they don't live absolutely, and instead live relatively.

I live in London's East End, The Ghetto. Bought a fixer upper, seven years later I'm still fixing it up. Cheap markets / pubs / council tax, when folks at the bank ask me (sometimes incredulously) "How can you live there?", I usually answer "Six hunderd pounds a year for Council Tax, very well thank you"

You see, most bankers live in Seven Oaks, Reigate or other towns out in the Stock Broker Belt. Nothing wrong with that mind you, but I find the combination of a high mortgage and high Council Tax anatehma to financial independence.

Most folks like relatively, and, as most of their colleague live in Reigate, they also must live in Reigate. Usually in a house JUST AS LARGE IF NOT BIGGER. And that's ok.

But myself? I don't care. I walk to work along The Thames, I can walk to Tate Modern, lots of galleries nearby, live music, I can pay my mortgage off this afternoon if I wanted to and I don't really give a crap what other folks got. Mrs Mutant & I are very, very comfortable in The Ghetto (even if now & then you run across a merchant who has never seen a Platinum card before...)

Peope have to live absolutely.

Isn't jealously one of those seven deadlys?
posted by Mutant at 7:54 AM on March 27, 2008 [19 favorites]


Personal responsibility is the key in this equation, and applied to corporations too. That should guide any and all government and quasi-government and industry response.

I think the point about teaching financial education in school is a great one, though a little tangential here.

To get off on my own tangent, I blame rampant advertising and poorly vetted media which encourages the weak-minded and uneducated portions of the populace to incur expenses which they should not, and replaces financial understanding with credible sounding messages which stink of insight, but possess none.

The media issue is also to blame in the hysteria which characterizes the popular treatment of the credit situation as it stands today.
posted by sfts2 at 8:06 AM on March 27, 2008


Mutant, as usual, makes a great point on this topic.
posted by sfts2 at 8:07 AM on March 27, 2008


Mutant - I agree totally; we also live quite happily in a modest area. But we didn't come to this insight immediately, it took a while, and some will never get it... but ignorance and herd mentality makes bubbles, right? so it's apparently in no-ones interest to have an economically sophisticated consumer base.
posted by Artful Codger at 8:15 AM on March 27, 2008


I saw this short film - Money as Debt by Paul Grignon - the other day and it scared the hell out of me. Doomsfilter, indeed.
posted by lunit at 8:16 AM on March 27, 2008


ahhh, but there's a thread about it already. Sorry, carry on.
posted by lunit at 8:22 AM on March 27, 2008


fwiw, I made this chart of the consumer borrowing, 1992-2007, from the most recent Federal Flow of Funds report.

I believe the analytical mind can construct some important facts from this simple picture.
posted by tachikaze at 8:25 AM on March 27, 2008


We bought our apartment.... I mean condo in 2000 for $99K with $5K down on the north side of Chicago. At it's peak, the value was $195K. We did a $20K equity loan to pay for my daughter's school and to improve the place. Recently we thought about another one but after doing the numbers and with value still dropping, we would have ended up owing more than it is worth or at least very close to it.

I always was of the mind set that I had no business owning a home. My credit wasn't awesome and I've grown up in apartments or the street. In 2000 though, banks were throwing themselves at anyone with a pulse and a desire to own. I went through the process and actually managed to snag an FHA loan and off we went. Within two years my loan was sold to WAMU, Prudential, HFC, some other bank I don't remember the name of and finally now with Fifth Third. It's a huge game. My loan originator had no vested interest as long as his commission was safe. He made the sale and cut the cord, so to speak.

I can empathize with homeowners in this situation. I had minimal knowledge of the process and still managed to partake in the American Dream. However, I would never consider walking away from my responsibility and I'm afraid in the current climate that this is becoming more acceptable.
posted by KevinSkomsvold at 8:28 AM on March 27, 2008


Someone has more debt than equity in their property, but has enough income to service their debt - not a good situation to be in, but sustainable. These people should not be allowed to default on their debts just to make things easier for themselves.

I fail to understand your morality here. There are clauses in your mortgage that describe what happens if you stop paying. Why should you not take advantage of them? It's not like they wouldn't take advantage of anything they felt like in the contract, no matter what the cost to you.

Consider also the power balance between you and the bank. They literally have men with guns and clubs called "the police" who can enforce their judgements; it's far harder for you.

For example, a co-worker once had $10,000 taken out from his Citibank account. He called them (I heard the whole thing, sitting four feet away from him) and they said it was a check. He asked to see the check, they said they didn't have it; he asked who the name and account number was and they told him that they couldn't tell him for privacy reasons(!) You can imagine his frustration. Finally he got a lawyer to write them a rude letter and they simply returned the money without explanation.

Point is, if the situation were reversed, my co-worker would have been arrested and jailed for grand larceny.

A mortgage contract specifically spells out what will happen if you cease to pay. There is no moral reason not to do this. The bank would grind you and destroy your life for a few dollars if the contract allowed it; feel no compunction about doing anything *legal* that is to your advantage.
posted by lupus_yonderboy at 8:37 AM on March 27, 2008 [10 favorites]


These people should not be allowed to default on their debts just to make things easier for themselves

That's an infantile view.

All contracts can be renegotiated at any time. Market conditions change, operating dynamics change, financial stability changes and so on. Now, the ability to drive whether a contract can be renegotiated can be forced (or blocked) by the party having more power in the relationship, but if both parties can find another way that repositions themselves within the relationship (ie. a Bank wanting to recover some portion of their principle rather than to wait until the bankruptcy proceedings are finalized), then there's no reason not to do it.

Nothing moral or immoral about it. It's just business.
posted by psmealey at 8:49 AM on March 27, 2008 [2 favorites]


I agree: if these home equity loan companies were so greedy and stupid to not consider what would happen when you give anyone and everyone a loan, sucks to be them.
posted by chunking express at 8:52 AM on March 27, 2008


chunking express: The point is that many home loan originators didn't care what happened to the loan because they took commission and sold it off to other investors. They made their money already (Exhibit A: CEO of Countrywide Angelo Mozilo selling a few hundred million dollars worth of Countrywide stock at the top of the market). It's the people holding the actual mortgages, which includes many pension schemes for instance, that will ultimately pay the price.
posted by PenDevil at 9:03 AM on March 27, 2008


Eh morality is a harsh word for this. It's not murder. If you could "technically" walk away from a loan but no one ever did then the few outliers would be considered deadbeats or whatnot. If it becomes common then eventually people consider it part of the business of home loans. If that doesn't work, laws can be changed, contracts can be changed even easier (though within the constraints of the law.)

I mean, seriously if businesses are utterly amoral then who cares about them? I mean if I owe you 100K & I don't pay well then I'm a jerk, but if I owe some amoral entity the money and I don't pay, well... But really the difference between the business and the individual is the amount of diligence, competence and care required of the business. If your job is to loan out millions you are seriously on the hook for whatever happens to you. Not that individuals aren't on the hook for their own debt decisions but the lender is in a substantially more involved position. What can they really say to someone who walks away? Use puppy eyes?

I'm not saying I like it one bit. I'm a renter and a saver in one of the overheated markets that really isn't sinking one bit, in a place where people have a lot of expensive nice toys (I rent in downtown Seattle.)

As for consequences, well, I'm highly in favor of consequences for other people. But theoretically your interest rates are an estimate of risk. As more and more people walk away that blemish will not be as substantial as it once was.

Oh & PenDevil, same old same old, if you're a manager of a pension scheme potentially managing 7,8+ figures of money you damn well should know who you trust. If you're going to come out & say, "well you mean my money ended up in the hands of a sleazy home originator but how could I know", then you deserve to lose your money. What did you think you were investing in? The whole system is corrupt, the ratings agencies are basically A+++++ would buy again & the guy walking away from his house is the least of the problems here.
posted by Wood at 9:18 AM on March 27, 2008


Scoo: Why refute someone's point, when you can just snark instead? Again, I say that no one with half a brain would go for something so obviously risky. Until my fellow Americans learn to live within their means, stop saying yes to everybody with a TV show, and crack a history book once in a while, I say tough luck.

OK, well, here's my point. First, predatory lending does not "cull the herd". No one is removed from the American economy on account of their experimentation with debt. On the contrary, they are bound to it even more firmly. Their crime was pursuing what appeared to them as a viable economic option, foolishly or not. Their punishment is exorbitant interest rates, through which banks sap their productive potential away for the rest of their lives, often with no way out. So they are not "culled away", but in fact become a fixture of our economy, in a twisted way.

Second, their punishment becomes everyone's punishment, as this practice destabilizes the economy and lowers the value of the dollar, and citizens are called on to fund government bailouts.

So while I agree with your point, that you have to be smart about how you spend money, I am basically rejecting your self-righteous attitude towards people who are trapped in debt now. Just because you managed to beat the system, does that make the system fair? Maybe so -- maybe not.
posted by Laugh_track at 9:23 AM on March 27, 2008 [5 favorites]


BrotherCaine: No cognitive disconnect, I don't believe that a business has a moral imperative.

Really? That's awesome news! Woo-hoo! I'm gonna incorporate myself and go on a killing-spree! (Hey, as long as I remember to steal my victims' wallets as they lay dying, I'm a good corporate citizen, no?)

/snark

Seriously, though. This has always been my major grievance with modern corporate practices. So many seem to take the attitude that, when running a business, normal rules of individual responsibility, ethics and accountability don't apply--as if by incorporating, a business magically stops being a collection of individual people with all the same moral and legal obligations and duties people have under other circumstances.

IMO, if you're in the business of making loans to people, it's your obligation to make sound choices in who you lend to--you're the one who's agreed to take on the risks by making the capital available. That's always been the understanding; it's why we have a credit rating system. Besides, there's no practical way to have it any other way--if the assets aren't there for a debtor to pay off a bad loan, they're not going to magically appear just because we think they should be responsible. The creditors have always been the ones on the hook when a loan goes bad, and it should stay that way. Assuming those risks is just the cost of doing business.
posted by saulgoodman at 9:25 AM on March 27, 2008 [1 favorite]


Wood: I agree with you that rating agencies have definitely been caught with their pants down. Mortgage backed securities should have been some of the safest investments out there ('safe as houses' as they say), and as such ideal for pension funds which look for low risk investments.

Like you I don't feel much sympathy for overpaid fund managers, but the blue collar workers who are about to find out they might not be able retire anytime soon unless they off themselves at 75 are up shit creek without a paddle. I think already some pension funds in Michigan who were big investors in Bear Stearns are suing to have the JP Morgan take over overturned.
posted by PenDevil at 9:29 AM on March 27, 2008


Ya know, if you signed a TIL form (which everyone involved in this fucking mess did) then you deserve EXACTLY what you're getting. Deal with it.
posted by lattiboy at 9:44 AM on March 27, 2008


There's been a huge pressure to own a home in recent years. In my own life, my wife's friends almost act as if there's something immoral about the fact that we'll be raising our first child in an apartment in the city.

We almost bought a home last year. We were approved for the loan and everything, but after running the numbers, we realized that it just wasn't a good idea in our lives yet.
posted by drezdn at 9:49 AM on March 27, 2008


I would very much appreciate someone to explain to me how a bailout (of either banks OR borrowers) is the "right thing to do" when I, who qualified for these obscene and ridiculous "no money down, no income verification, watch your payment quadruple when the rate resets" loans decided not to buy a house that was more than 10x my annual income.

You see, when all of these people with bad credit and lower income than I were able to get themselves into houses that were 3000 square feet and I continued to languish in an apartment where the four of us in the family still share a bathroom, I reassured myself that I was putting myself in a position to buy an even better house when all those other people were back in tiny apartments with a foreclosure on their credit report.

But now everyone seems obsessed with keeping the median house price at 10x the median income just so those people who bought WAY, WAY above their means (believing the boom would last forever!) and if they get their bailout, I will STILL be without a house.

Please tell me about predatory lending and those poor people who have been living in 4BR/3.5bath 3000 square foot houses that make 25k less than I do and have credit scores 200 points lower for the last few years when the four of us have less than 1000 square feet, renting, hoping that maybe we can someday afford to get a house.

Anyone?

Convince me why I should feel the slightest bit bad for either the banks or the borrowers right now when the LA market is overvalued by probably double and everyone seems to be focused on preventing that overvalue from correcting itself.
posted by chimaera at 9:52 AM on March 27, 2008 [6 favorites]


You know PenDevil, it's a crap situation but I basically can't see the point of pensions. The idea that I'd take a possibly worthless promise for something so essential to my life. The only solution is to give people their retirement money. That's not going to be easy at all, and people are still going to have to trust someone with their money but the alternative of just relying on GM or whoever to have enough money to pay you what they said they would is just a non-starter.

Not that I don't sympathize with the little guy. It's really the outrage over how they're getting screwed that makes me hate pensions. If we want to keep them then the business that made the promise should have to keep that promise before anything else. If they go belly up no other debts or obligations come before paying retirement to your employees. That really wouldn't help enough though.

Pension or not I hope no one gets anything out of Bear Stearns unless they try to sell it without the fed guarantees.
posted by Wood at 9:53 AM on March 27, 2008


The bailout isn't likely to help out the people who bought houses they couldn't afford, it's only likely to help out the banks that lent them the money.
posted by drezdn at 9:58 AM on March 27, 2008


Where does personal responsibility figure into this

I think this is a more complicated idea than it seems on the face of it. The politicos were big on this for a while, and in fact we raised an entire generation based on the idea that you are responsible for everything about yourself-- your feelings ("Johnny can't make you feel bad, you can only make yourself feel bad" kind of child rearing), your education (never mind that the local school is a disaster, we'll give you "vouchers" and you can take responsibility for your own child's education), etc. The downside of "personal responsibility" not a negative thing per se, is that we have used it to deny collective and societal responsibility.

When your educational system is a shambles, grown ups who have been victims of it are going to make bad financial choices out of ignorance and ill-education if nothing else. When you eviscerate the independent media, making the guys selling the products and the guys reporting on the products one and the same, these same poorly educated people are now getting only bad information, on which they must act. Then you have a government telling you that business regulation is the government trying to "regulate your life" (another personal responsibility shiboleth), for more than a generation, people start believing that pretty much any law that is not directly concerned with street level crime must in some way be the government trying to impose immorality on an unsuspecting population. (And while Reagan started this ball rolling, Clinton did not do a lot to stop it.)

We no longer recognize a collective responsibility to educate our children, oversee our legislators, or reign in the robber barons. So while I do believe that a lot of the people in financial straits right now got there through their own cupidity, ignorance, and avarice I don't entirely blame them. We need to take *collective* responsibility for them too.
posted by nax at 10:05 AM on March 27, 2008 [9 favorites]


There's been a huge pressure to own a home in recent years. In my own life, my wife's friends almost act as if there's something immoral about the fact that we'll be raising our first child in an apartment in the city.

You're definitely not alone. Like many others, we ran the numbers at lease time every year from 2002 onward and found that it just didn't make sense in the long run. So we continue to rent our comfortable-enough duplex in our comfortable-enough working class neighborhood, knowing that one day it will make sense.

We've dealt with the slack jaws too, although we also commit the Cardinal Sin of remaining a single-income family until the kids are all in school for a full day, and for some reason they just don't get that by not spending $1500 or more per month on that suburban palace, and by buying $10,000 cars rather than that $30,000 Leviathan, and using credit sparingly and paying cash whenever possible, we actually have a better quality of life than many of them. We can take a weekend trip mostly when we want, we can take a small vacation every couple of years, the bills get paid on time, and there's usually a bit of 'mad money' left after. And even if I face a layoff, we're ok, because she can always go to work to make up the difference until I'm at work again.

I finally knew for sure, though, that we were doing things right when one of my co-workers recently confided in me that he was paying $1600 a month for a single-family home only a couple of hundred sq ft larger than ours.

It was also due to doing our homework that we found out as early as 2004 that many of our peers were a financial shipwreck waiting to happen.
posted by spirit72 at 10:09 AM on March 27, 2008


chimaera - your silver lining is that soon you can maybe scoop a house that someone defaulted on, for a great price. Assuming that you've been saving as well as griping ;^)

nax - shhhh! shaddup! remember the first rule of Rich Club - it's the same as Fight Club - don't tell anyone about Rich Club!
posted by Artful Codger at 10:20 AM on March 27, 2008


Their crime was pursuing what appeared to them as a viable economic option, foolishly or not.

But this is your house! You have simply GOT to read the fine print, and do your homework, and have a back-up plan, right? These are adults for crying out loud. Am I that out of step? I guess we really do need to make personal finance a fundamental school topic, because people sure as hell aren't earning it from their parents. I'm not an economic sharpie like the people selling these products, so I stay the hell away from 'em.

So while I agree with your point, that you have to be smart about how you spend money, I am basically rejecting your self-righteous attitude towards people who are trapped in debt now. Just because you managed to beat the system, does that make the system fair? Maybe so -- maybe not.

Ah, but I didn't beat the system in this case; I declined to participate, because I KNOW it isn't fair. My knowledge was hard won, too but I only needed one lesson. My lack of empathy stems from the fact that yes, I'm going to have bail these people out one way or another, because they assumed high risk debt to buy themselves some stuff they wanted, rather than needed.

*Throws up hands, yells at TV, tells kids to get off lawn*
posted by Scoo at 10:21 AM on March 27, 2008 [1 favorite]


I think one of the problems folks have today is they don't live absolutely, and instead live relatively.

that's very true, but i think you should remember that it's a lot easier to say, and do, at the top of the heap rather than towards the bottom - especially when 9 zillion ads a day are trying to rub your nose in the fact that you don't have certain things and should run right out and get them

if everyone took your position, our economic system would suffer a bigger adjustment than this banking crisis is going to create - and, yeah, we'd all be better off for it, but still ...

don't hold your breath
posted by pyramid termite at 10:27 AM on March 27, 2008


I guess we really do need to make personal finance a fundamental school topic, because people sure as hell aren't earning it from their parents.

Yes, we do. My high school offered an Intro to Business, which I took in my freshman year, as well as some basic accounting classes. If schools today don't, they're doing their kids an amazing disservice. More important than Algebra even, for most kids.

Parents need to step in on it, too. The best thing Dad ever did for me was cut off my allowance at age 16 and say, "OK. From this point foward, I provide your home, your meals, and your clothing. Anything beyond that is your problem. Wanna go out with your friends? Wanna go on spring break? Want that Nintendo? Go earn the money." So I started slinging burgers part time at age 16 to do exactly that, and have worked constantly since then, even during college.
posted by spirit72 at 10:30 AM on March 27, 2008 [1 favorite]


your silver lining is that soon you can maybe scoop a house that someone defaulted on, for a great price

I'm not so sure about that... the great prices are looking like 15-20% lower than their all-time highs, not 40-50% lower like they would be if there were no bailouts.
posted by chimaera at 10:33 AM on March 27, 2008


For a brief comment on corporate morality, let me enter this from friedman into the debate "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." (from The Social Responsibility of Business is to Increase its Profits).

On th eother side of the fence, it pains me that so many people seem to think that because something involves a contract then that obviates any moral element. If you say that you will do something and enter into a contract to that effect, then you have both moral and legal responsibilities. It may be that you can side step the legal responsibilities by 'playing' the legal system, but it is simply not possible to do that with morality. IF YOU DEFAULT ON YOUR PROMISE THEN YOU ARE ACTING IMMORALLY!
posted by daveg at 10:33 AM on March 27, 2008


LOUD NOISES!
posted by psmealey at 10:37 AM on March 27, 2008 [1 favorite]


It's a little disconcerting to hear people advocating various kinds of bailouts. The fact is EVERYONE has acted completely irresponsible about housing. It's been pretty obvious that housing is not an investment, or an ATM, or a moral good that improves neighborhoods or any one of the many myths people beat me over the head with.

I didn't buy a home (oh, that should read "house") not because I was morally upright, but because I knew I couldn't afford one. But it's not like I didn't benefit from this most recent madness of the masses. My business has done very well these last few years, with people spending all that equity/real estate money. It's not like I can act like my hands are clean.

That said, some of the bailouts are going to be necessary. Otherwise the economy has a whole will grind to a halt. We're not looking at a correction if the markets fail, we are looking at a total shitstorm. Ideology aside, the government is going to have to step in on some level.
posted by elwoodwiles at 10:55 AM on March 27, 2008 [1 favorite]


daveg, the point is that all contracts have explicit and implicit exit clauses.

People can attach more or less opprobrium to those implicit exit clauses but it hardly seems as cut and dry as you make it out to be. I assume you think that bankruptcy is also immoral? Walking away from your house is more or less a miniature bankruptcy. I see where you're coming from, some people wouldn't go bankrupt until their life was hell and they were about to steal bread to eat. I'd say that's fairly uncommon though. I & the rest of the world just aren't living up to your moral standards.

I'd love to loan you money though. Not that you'd want my money but who wouldn't want to loan to someone with really strong anti-default morals?
posted by Wood at 10:57 AM on March 27, 2008 [1 favorite]


there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game

Yes yes yes. Businesses are acting morally when they behave in their own self-interest, namely making money for the owners/shareholders. Any business that tells you it is working to do good for the community is lying/selling moonshine/pumping up its image so you don't notice that it's trying to sell bad second mortgages to grannies on fixed incomes. This is why we need business regulation: so that the body politic, collectively, define the rules of the game. When we leave this in the hands of lobbyists, corporate interests and political fundraisers we are abdicating a primary democratic responsibility to act collectively for the collective good. (Have I said collective enough yet?)
posted by nax at 11:02 AM on March 27, 2008


Hit send to fast. That is, we need to define the "rules of the game."
posted by nax at 11:02 AM on March 27, 2008


i freely and absolutely admit that i don't get much of what you're all talking about. i'm a smart cookie, but i just have a wall up in my brain when it comes to finance. a wall that, no matter how hard i try -- and i have tried self-education, non-profit sponsored seminars, municipally-sponsored homeowner education programs, and talking with friends who DO get this stuff -- i still just can't seem to get past.

which is why i never bought a house. if i can't "get" the terms, i have no business engaging in that contract.

whether or not corporate entities *should* be moral is one debate; my sense is that, even if we all can agree that they should, the facts-on-the-ground point to the fact that, in the here and now, they're NOT. i can't tell you why, in specific terms (see para. 1), but that is my intuition.

i didn't let my desire for things or the american dream of homeownership overcome my intuition. and now it seems that i made the right decision.

count me among the ones who have only a limited amount of sympathy for those who willingly entered into contracts they KNEW they couldn't hold up.

....especially since now, it seems that ALL of us may indeed be fucked, whether we owned a home or not. whether we own a home we can afford, or not. when so many people make bad decisions, and then walk away from those bad decisions, leaving a cataclysmic mess that impacts EVERYONE...yeah, it really pisses me off.
posted by CitizenD at 11:32 AM on March 27, 2008 [1 favorite]


I don't believe that a business has a moral imperative.
By the same token, neither do people, when making decisions that are "just business." People who run businesses won't give a second thought to writing off a non-performing asset. Running your own finances is no different than running a small business.
posted by deanc at 11:57 AM on March 27, 2008


I do have to wonder what bizarre political/economic philosophy daveg adheres to which believes that businesses are allowed to make the best economic decisions they need to under the circumstances, while individuals who happen not to be incorporated are tied to facing lifetime condemnation for making those same economic decisions when negotiating with businesses.
posted by deanc at 11:59 AM on March 27, 2008 [7 favorites]


daveg: For a brief comment on corporate morality, let me enter this from friedman into the debate "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

In opposition to Friedman's view, let me point out Peter Drucker's view: businesses are run by people, who have moral responsibilities. A businessman can't abandon his moral responsibilities to other people just because he happens to run a business. Hence Drucker's statement: There is neither a separate ethics of business nor is one needed.

chimaera: I would very much appreciate someone to explain to me how a bailout (of either banks OR borrowers) is the "right thing to do"--

It looks like a bailout may be necessary to keep the whole financial system from melting down. Brad DeLong explains. A government agency, like the Resolution Trust Corporation or the earlier HOLC--would be set up to buy mortgages from the banks (at a discount, so they wouldn't be let off the hook entirely).
posted by russilwvong at 12:08 PM on March 27, 2008


On th eother side of the fence, it pains me that so many people seem to think that because something involves a contract then that obviates any moral element. If you say that you will do something and enter into a contract to that effect, then you have both moral and legal responsibilities. It may be that you can side step the legal responsibilities by 'playing' the legal system, but it is simply not possible to do that with morality. IF YOU DEFAULT ON YOUR PROMISE THEN YOU ARE ACTING IMMORALLY!

Bullshit. If you "default" by burning down the house and claiming insurance money, you're acting immorally. Otherwise, you're following the contract as stated—you're not breaking your promise, you're honoring the terms of the promise regarding how you'll dissolve the business relationship.
posted by klangklangston at 12:16 PM on March 27, 2008 [1 favorite]


I have owned several homes. I've taken out several home equity loans. I have refinanced several times. And in the market in Seattle with the way it was growing at 30%+ annually one would have had to be insane not to. And it all so worked out for me. We paid off all our equity loans and made up to 200% on our investments.

Sure. That was luck and great timing. However we were advised to do this and informed of the risks. And during the big crash of 2000 when both my wife and I were laid off credit lines and equity loans were the best options available to both keep a fledgling business afloat, pay off credit cards, and keep our home. And it was a calculated risk that paid off for everybody.

But had it not what choice would we have but to default and declare bankruptcy. What else is there? Debtors prison? Convict colonies in Antarctica? What?

So why are people so pissed off at home owners who are essentially taking advantage of the system of financial options guaranteed them by law? The entire problem is a result predatory loans that banks have been cramming down consumers throats for over ten years. It's not like the financial institutions involved are not also taking advantage of every loop hole they can.
posted by tkchrist at 1:13 PM on March 27, 2008 [2 favorites]


Again, I say that no one with half a brain would go for something so obviously risky. Until my fellow Americans learn to live within their means, stop saying yes to everybody with a TV show, and crack a history book once in a while, I say tough luck.

NO ONE is going to take care of you but you. Virtually EVERYONE trying to sell you something has THIER best interests in mind, not yours. You can call it social darwinism. I call it common sense, and I sincerely hope that this debacle will knock some of it into these rubes.


Kill the weak!
posted by jokeefe at 1:36 PM on March 27, 2008


The structure of our society has gotten so large, no one can see the whole thing. It makes personal responsibility both harder to measure and more crucial at every level.
posted by Eideteker at 1:55 PM on March 27, 2008


The entire problem is a result predatory loans that banks have been cramming down consumers throats for over ten years.

No, the real problem is that there's too much money available for loans, courtesy of the Fed, which dropped lending standards to an incredible low, and blew housing prices up into a bubble.

Without all that extra cash driving prices up so steadily, lending standards wouldn't have dropped to that degree, because bankers, too, would have remembered that nothing goes up forever.
posted by Malor at 3:58 PM on March 27, 2008


Some banks were resorting to "Zippy Cheats & Tricks."
A newly surfaced memo from banking giant JPMorgan Chase provides a rare glimpse into the mentality that fueled the mortgage crisis.

The memo's title says it all: "Zippy Cheats & Tricks."

It is a primer on how to get risky mortgage loans approved by Zippy, Chase's in-house automated loan underwriting system. The secret to approval? Inflate the borrowers' income or otherwise falsify their loan application.
posted by ryoshu at 4:20 PM on March 27, 2008 [1 favorite]


Kill the weak!

That's taking it too far, how about a little human compassion, jokeefe?
posted by Scoo at 5:41 PM on March 27, 2008


DaveG No cognitive disconnect, I don't believe that a business has a moral imperative.

There's an easy counterargument to that: morality is a participatory concept. It's quid pro quo. If you don't behave morally, as an actor in the system, you don't qualify to receive the benefit of others' moral behavior; to do so, would be cheating them. Free-riding morally works in an equivalent manner to free-riding financially.

If you and I interact in some way, I will assume that you will behave morally at first, but if you cheat me, I will seek redress. If no redress is open to me, I will do my best to cheat you; aside from my pride, if you get away with it, you might do it again to me or others. Start nice, then tit for tat. It's the second-best winning method in the Prisoners Dilemma. The best of course is the exercise of telepathy, or some equivalent method of accurately modelling the other participant's behavior; not normally considered practical, but in the case of banks, we have a fair idea what they are and what they're up to, and helping us isn't really on their agenda.

As others have said, businesses are constrained, by law and custom and common sense, to behave morally. Or at least, act according to a set of rules largely intended to reward moral and punish immoral behavior. To the extent that they behave morally, they deserve to get moral behavior back.

For instance, if a bank lends me money, I will pay it back, if I can do so and remain solvent; but under circumstances where the bank, facing the possibility of giving the vast majority of its assets to me for no return, would default on me, I will without hesitation or regret default on them. Conversely, if I had borrowed $1000 from a friend, and were forced by rising bank-related costs to declare bankruptcy, I would still repay my friend. He or she would show a greater standard of moral behavior towards me than the bank would, and therefore deserves a greater standard of moral behavior from me.
posted by aeschenkarnos at 6:25 PM on March 27, 2008 [1 favorite]


So, according to Daveg, in the following situation I am being terribly immoral:

1) I borrow $200 from Al so I can buy a TV. (LOAN)
2) Al says I can pay him back $10 every Friday until it's paid off. (TERMS)
3) But Al's kind of a dick, so he says if I miss the payments, then the whole TV is his, even if I've already paid him back for some of it. I shrug and agree. (COLLATERAL)
4) A few months pass, and I've paid Al $100, but now there's a big sale on TV's and I could buy a whole new one for $50, so rather than keep paying Al, I just say, "Screw it. The TV is yours." (DEFAULT)
5) Al would rather have the rest of the money than the low-value TV at this point, but he set the dickish terms of the deal himself, so he takes the TV. (FORECLOSUE)

Seems pretty reasonable to me ... but then, I never liked Al.
posted by kyrademon at 7:18 PM on March 27, 2008 [2 favorites]


(But I guess the question might be ... would I think that was terribly immoral if I were Al? Not so sure I would.)
posted by kyrademon at 7:19 PM on March 27, 2008


In opposition to Friedman's view, let me point out Peter Drucker's view: businesses are run by people, who have moral responsibilities. A businessman can't abandon his moral responsibilities to other people just because he happens to run a business. Hence Drucker's statement: There is neither a separate ethics of business nor is one needed.

Precisely. Or rather, people who run businesses can and do regularly abandon their moral responsibilities to other people, but that this ethical failure neither can nor should be dismissed as acceptable because it's 'just business'.
posted by stavrosthewonderchicken at 7:46 PM on March 27, 2008


5) Al would rather have the rest of the money than the low-value TV at this point, but he set the dickish terms of the deal himself, so he takes the TV. (FORECLOSUE)

kyrademon: I think your story's missing a couple of plot points:

6) Al promised someone else he would pay them $350, based on the expected total value of my loan (with interest--the dick insisted I pay interest on the loan, too).

7) The TV Al took from me, which is now both used and obsolete because newer models have come on the market, is worth only about $50 at the pawn shop, so Al's left holding the bag for the difference of $200.

8) Al gets a no-strings-attached bailout for the difference from his uncle Sam, who also happens to be my landlord.

9) Sam makes up for this and the many other business losses of his no-good nephew by raising my rent.
posted by saulgoodman at 8:47 PM on March 27, 2008 [5 favorites]


Al gets a no-strings-attached bailout for the difference from his uncle Sam, who also happens to be my landlord.

And there's the problem, really. Sam's supposed to be looking out for us, but he's a bit too fond of Al, and a bit too tolerant of Al's endless whinging. If Sam told Al to go take a long walk off a short pier, it might discourage Al (and Sam's numerous other no-good nephews) from behaving so riskily in the future.

Putting the screws to Sam seems appropriate. How does one do that, under the circumstances?
posted by aeschenkarnos at 10:48 PM on March 27, 2008


So if there is a bailout, is there a way to make sure that banks with low to no foreclosures benefit more in the long run over lenders with poor fiscal controls? Does the mortgage market need some kind of FDIC style regulation?
posted by BrotherCaine at 12:49 AM on March 28, 2008


We should let the bad players fail. Figure out what the good ones did, and try to make sure everyone does that, although the market will tend to encourage that anyway.

If we over-regulate, we can strangle innovation, but we can also do it with under-regulation as well. Maybe that's an area we don't want any innovation at all... maybe we want mortages to be a staid, predictable backwater of finance.

But the first step, I think, is to figure out what best practices are. We probably know most of them already, but let's make sure before making hasty and, possibly, stupid laws.

The whole fundamental system of packaging up risk and transferring it needs to be looked at extremely carefully.
posted by Malor at 1:52 AM on March 28, 2008


Precisely. Or rather, people who run businesses can and do regularly abandon their moral responsibilities to other people, but that this ethical failure neither can nor should be dismissed as acceptable because it's 'just business'.

If that was directed at me, I feel I need to clarify. When two businesses are party to a contract that no longer benefits either party because market or operating conditions have changed, they often renegotiate it. This is the "just business" part. There is no difference between two companies doing that versus two individuals or an individual and a company. Nothing immoral or amoral about it. Conditions are constantly changing, and sometimes it's just in the run of business that you have to do that.

As for simply walking away from your obligations, well yeah, that's bad. I could never do it, myself because I'd be haunted by the guilts forever, but I know a few people who wouldn't bat an eye. Just as I know some pretty unscrupulous business people who would screw over competitors or colleagues alike to gain an advantage.
posted by psmealey at 6:51 AM on March 28, 2008


Not directed at anybody, just sayin' what I think about this and that.
posted by stavrosthewonderchicken at 6:54 AM on March 28, 2008


As for simply walking away from your obligations, well yeah, that's bad.

But here's the thing-- the essence of a contract agreement is that it provides a method through which one can "walk away" from one's obligations. There's a consequence to walking away, but if one is willing to pay the consequence, you can't blame the person for doing so. The consequence of walking away from your mortgage is that you lose your home and hurt your credit rating. If paying that consequence is cheaper than keeping your home, I can't argue that the individual did something immoral. The mortgage holder made a business decision, and the bank made a business decision. The mortgage holder lost his house, and the lender lost money on an investment, similar to losing money on a stock. Imputing some deep, moral meaning to all of these decisions is just a formula for needlessly making people slaves to their homes instead of making the best financial decisions for themselves and their families.
posted by deanc at 8:32 AM on March 28, 2008 [2 favorites]


For all the talk of "Just let 'em fail," wasn't that what caused the runs on banks that essentially made the Depression Great?
posted by klangklangston at 12:06 PM on March 28, 2008


Maybe, but by not "letting them fail" we create an environment where high risk behavior is rewarded disproportionately over cautious behaviour. Often high risk investments pay off proportional to the degree of risk. If the government bailouts eliminate the downside, high risk business behavior starts to become the only sensible financial choice. I'm sure I don't have to draw you a map for where we'd be headed then.

There are banks like Union bank that have very few foreclosures even in today's market. A government bailout (unless carefully structured) will effectively punish them relative to their competitors for being careful with their assets.

One of the tragedies of the free market is the tendency of people to choose high risk activities even when it's a poor investment strategy.
posted by BrotherCaine at 3:04 PM on March 28, 2008 [2 favorites]


I really can't see any "amorality" in walking away from a mortgage that you can't pay. As others have said, it's written into the contract for a reason. You're a bit of a fool to run yourself into the ground and not take advantage of a clause that could be to your advantage.

My rule of thumb is that you're stupid to cut any entity any slack if they wouldn't do the same to you. Kindness to people is always good; kindness to institutions who would steamroller you without so much as a flicker of recognition, if some computer model somewhere suggests that it's most profitable? I can't get very worked up about it.

If you have a mortgage that you can walk away from, and you know that you'll never be able to pay it off ... I don't think there's any reason not to walk away, if the numbers work.

However, I am strongly, vehemently against any sort of government tampering or interaction. If people made stupid financial decisions and got themselves underwater in debt, that was their call. The other side of profit is risk; you can't shield people from risk and still expect to be living in a free society with opportunities for profit and success at the end of it. The only people who should get an "out" from their mortgage (besides what's actually written in the contract, which as I said before they should feel free to take full advantage of) are people judged to be mentally defective and thus incapable of entering into a contract. There's no other excuse, if your signature is on the bottom line. If you didn't read and understand what you were signing up for, well, that sucks, but too much of our society is based on the idea of enforceable contracts and the ability of an individual to consent to risk. I'm not going to sacrifice that for the benefit of idiots who wanted stainless-steel appliances or more house than they could afford.
posted by Kadin2048 at 3:29 PM on March 28, 2008


Actually, there is a risk shield already, AKA bankruptcy. It is appropriate, not because people should be shielded from risk, but because society is better off if unrecoverable debt is written off the books, and some mechanism exists to allow people to restart their participation in the economy without pursuing illegal identity changes (or suicide)
posted by BrotherCaine at 6:37 PM on March 28, 2008 [1 favorite]


I am strongly, vehemently against any sort of government tampering or interaction.

You can't have enforcement of contracts without government interaction. If any private entity could enforce contracts of its own accord, due to its overwhelming power, there would be nothing making it adhere to contracts.
posted by aeschenkarnos at 10:51 PM on March 28, 2008


Something came up in conversation yesterday; a realtor I was talking to said that a mortgage holder can take your house in foreclosure AND get a cash judgment against you. So you lose your house, but you still have to pay off the mortgage. Anyone ever hear of this? It seems just hideous enough to be true.
posted by nax at 4:24 AM on March 30, 2008


Nax, only if your mortgage is classified as a recourse loan (usually not first mortgage, but rather an equity line or refi). In California, there's some kind of state law that most mortgages have to be non-recourse. It gets worse though, if it's a recourse loan and the creditor writes off the debt, the unpaid difference must be declared as income on your tax return (unless you are bankrupt or insolvent).
posted by BrotherCaine at 5:01 AM on March 30, 2008


a realtor I was talking to said that a mortgage holder can take your house in foreclosure AND get a cash judgment against you.

that varies from state to state - it's true in michigan
posted by pyramid termite at 6:12 AM on March 30, 2008


I see the credit crisis as an example of the Tragedy of the Commons where the commons in this case is the collective financial future of all the borrowers which the banks have been forced by competitive forces to feed on vociferously. Just as in the case of the village commons, "property rights" of this collective future need to be more precisely defined. Some degree of centralized oversight/management will be essential.
posted by vizsla at 5:43 AM on March 31, 2008


aeschenkarnos: I wasn't clear earlier. When I said "I am strongly, vehemently against..." what I meant was "I am strongly, vehemently against any sort of government tampering or interaction [with the current mortgage 'crisis']." It came across as though I was speaking more generally than I really meant to be.

I'm not necessarily against government interaction in all cases, and particularly in regards to the maintenance of the market separate from the entities participating in it (e.g. ensuring maximum transparency, execution of contracts, providing a venue for dispute resolution, etc.). Without some regulatory structure you wouldn't have capitalism at all, you'd just have people poking each other with sticks.

I just think that it's easy to fall into a trap where the regulators stop becoming basically impartial referees allowing the market to play itself out according to well-understood and agreed-upon rules, and start becoming quasi-participants who are simultaneously charged with both maintaining the fairness of the game and also keeping some of the players from losing.
posted by Kadin2048 at 11:29 PM on March 31, 2008 [1 favorite]


what are you talking about? Immoral? I'm flabergasted. you have an agreement with a bank that general sets out the provisions for a Default.
- There is a business agreement between you and the bank - you pay them to give you some money. they price the loan to insurance against the risk that you may default.
The Defaulting is not a moral choice. its purely business.
posted by mary8nne at 5:21 AM on April 25, 2008


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