Strategic Default and The Unceremonious Fall From Entitlement
July 5, 2010 7:45 PM Subscribe
"The Great Housing Bubble cultivated a gentility of entitlement, a sordid societal residue, a system of reliance, a conviction among people that they may possess anything they wish just because; deserving without earning; Grace."
The Irvine Housing Blog has been documenting the housing bubble in Southern California since 2006. Highlights include an analysis of why "the California economy is dependent upon Ponzi borrowers."
Now, as the term "strategic default" (discussed previously here and here) continues to trend upward , the stars of Bravo Network's reality television series The Real Housewives of Orange County are confronting realities of a different sort including bankruptcy, short sales and loan modifications.
Discussion boards are filling up with legal talk concerning recourse vs. non-recourse loans, 2nd and 3rd lien holders and the prospects of settling 2nd lien debt at 4 cents on the dollar.
Given the decreasing societal stigma associated with the issue of strategic default, many are speculating that this trend is in fact acting as an economic stimulus of a different kind
Fantastic writing at that first link. High fucking dudgeon.
posted by fourcheesemac at 8:25 PM on July 5, 2010
posted by fourcheesemac at 8:25 PM on July 5, 2010
Yes, it's just shocking that people took free money that was offered to them with the promise they'd never really have to pay (because house prices would go up forever)! It's definitely not the fault of wallstreeters desperate for mortgages of dubious quality they could package into tranches and CDOs they fob off on everyone else.
posted by delmoi at 8:28 PM on July 5, 2010 [7 favorites]
posted by delmoi at 8:28 PM on July 5, 2010 [7 favorites]
Lex Luthor had the right idea.
posted by RobotVoodooPower at 8:32 PM on July 5, 2010
posted by RobotVoodooPower at 8:32 PM on July 5, 2010
A few years ago, I was feeling left out of the whole real-estate thing since prices around me were only going up a few percent a year. But now prices around me are still going up a few percent a year and foreclosures are at less than 1%. Sometimes it pays not to be trendy.
posted by octothorpe at 8:32 PM on July 5, 2010
posted by octothorpe at 8:32 PM on July 5, 2010
people took free money that was offered to them
What's kind of hilarious about this concept is that when my wife and I tried to buy a house that was a bit out of our range (at the time, but it would have been fine), we were told that there was no frigging way we could make the payments and we should buy a cheaper house, which we did.
This was at the height of the housing boom, when apparently everyone except us was getting the free money deal. But whatever, we're happy where we are, and we won't be losing our house.
posted by Huck500 at 8:35 PM on July 5, 2010 [1 favorite]
What's kind of hilarious about this concept is that when my wife and I tried to buy a house that was a bit out of our range (at the time, but it would have been fine), we were told that there was no frigging way we could make the payments and we should buy a cheaper house, which we did.
This was at the height of the housing boom, when apparently everyone except us was getting the free money deal. But whatever, we're happy where we are, and we won't be losing our house.
posted by Huck500 at 8:35 PM on July 5, 2010 [1 favorite]
To wit (from the second link):
Do you like paying the bills of the Ponzis? You are. If you are a responsible saver, the Federal Reserve has lowered interest rates to take money from you and give it to banks. If that form of theft is not enough, the Federal Reserve will keep interest rates low and steal from savers by devaluing the currency with inflation. One way or the other, the Federal Reserve is stealing from the responsible to pay for the irresponsible. If that wasn't enough, our own federal government is stealing from you with a variety of tax incentives and bogus loan modification programs to transfer the losses from banks to the taxpayer.
posted by fourcheesemac at 8:35 PM on July 5, 2010 [1 favorite]
Do you like paying the bills of the Ponzis? You are. If you are a responsible saver, the Federal Reserve has lowered interest rates to take money from you and give it to banks. If that form of theft is not enough, the Federal Reserve will keep interest rates low and steal from savers by devaluing the currency with inflation. One way or the other, the Federal Reserve is stealing from the responsible to pay for the irresponsible. If that wasn't enough, our own federal government is stealing from you with a variety of tax incentives and bogus loan modification programs to transfer the losses from banks to the taxpayer.
posted by fourcheesemac at 8:35 PM on July 5, 2010 [1 favorite]
High interest rates reward rich people with money for hoarding their money and not spending it (OVERSIMPLIFICATION, PROBABLY TOTALLY WRONG).
For the sizable portion of the U.S. that is in debt right now, low interest rates are a good thing so long as inflation isn't out of control.
posted by Deathalicious at 8:43 PM on July 5, 2010
For the sizable portion of the U.S. that is in debt right now, low interest rates are a good thing so long as inflation isn't out of control.
posted by Deathalicious at 8:43 PM on July 5, 2010
Do you like paying the bills of the Ponzis? You are. If you are a responsible saver, the Federal Reserve has lowered interest rates to take money from you and give it to banks.
I was a responsible saver. But when the fit hit the shan, it seemed wiser to be holding debt than dollars, so I bought a car. Good price, good terms, and the Fed will slowly devalue the amount that I owe. Plus, I get a car :-)
(I know it depreciates even faster than that, but so far it's working out pretty well)
posted by -harlequin- at 9:50 PM on July 5, 2010
I was a responsible saver. But when the fit hit the shan, it seemed wiser to be holding debt than dollars, so I bought a car. Good price, good terms, and the Fed will slowly devalue the amount that I owe. Plus, I get a car :-)
(I know it depreciates even faster than that, but so far it's working out pretty well)
posted by -harlequin- at 9:50 PM on July 5, 2010
So, the lesson is? No matter what toxic products the financial powers-that-be create and push, no matter how loudly the financial press pimp those products, no matter how forcefully financial outlets sell those products...it is always, always, always the consumer's fault for the problems those products create. Gotcha.
posted by Thorzdad at 5:15 AM on July 6, 2010 [3 favorites]
posted by Thorzdad at 5:15 AM on July 6, 2010 [3 favorites]
So, the lesson is?
The lesson is, educate yourself or suffer the consequences.
The lesson is, you can't get something for nothing.
The lesson is, those who forget (or never learn) their history are doomed to repeat it.
By the way, these lessons are older than dirt. So if you didn't get the memo, take your head out of the sand.
The average price for any house, given the current state of the economy, should be at 1994 levels. They're currently hovering around 2004-5 levels. It's going to get a lot worse.
posted by Civil_Disobedient at 7:09 AM on July 6, 2010 [1 favorite]
The lesson is, educate yourself or suffer the consequences.
The lesson is, you can't get something for nothing.
The lesson is, those who forget (or never learn) their history are doomed to repeat it.
By the way, these lessons are older than dirt. So if you didn't get the memo, take your head out of the sand.
The average price for any house, given the current state of the economy, should be at 1994 levels. They're currently hovering around 2004-5 levels. It's going to get a lot worse.
posted by Civil_Disobedient at 7:09 AM on July 6, 2010 [1 favorite]
I think the author of this blog has been following the housing crash too closely, and can now only see it in terms of a moral panic and the breakdown of the down-home-American Protestant work ethic. Talking disparagingly of people who bought homes they felt they "deserved" but could not afford?
Give me a break.
The housing crash can be explained entirely in terms of incentives that were completely out of whack. Implying that we as a society would have avoided disaster if only we still had humility and moral fiber is shrill and useless, and will not help us fix this crisis or prevent the next one.
When the incentives are screwed up, individual people will make decisions that harm everyone else, without malicious intent. The way to prevent the next crash isn't to bewail the collapse of sanity, but rather to change the incentives. What incentives am I talking about?
1. Mortgage brokers that made loans they knew would go bad, because they could just sell them to Fannie, Freddie, or private banks and take the commission. Fannie and Freddie are backed by the government, so why worry about one loan that might go bad? Better to put someone in a home and get a nice commission than turn them down and make no money.
2. Investment banks that could bet against their own investors - see Goldman Sachs' latest debacle with mortgage-backed securities. The guy in one part of the company betting against the securities gets a nice bonus even if he makes the salesman in the other part of the company lose his bonus, and even though the net result for the economy was lost wealth.
3. Government regulators that are paid by the companies they regulate. Don't bite the hand that feeds you!
4. Debt rating agencies that are paid by the companies whose securities they rate. Again, don't bite the hand that feeds you!
The crash did not just "happen"; it was inevitable with those incentives in place.
posted by LightStruk at 10:16 AM on July 6, 2010 [2 favorites]
Give me a break.
The housing crash can be explained entirely in terms of incentives that were completely out of whack. Implying that we as a society would have avoided disaster if only we still had humility and moral fiber is shrill and useless, and will not help us fix this crisis or prevent the next one.
When the incentives are screwed up, individual people will make decisions that harm everyone else, without malicious intent. The way to prevent the next crash isn't to bewail the collapse of sanity, but rather to change the incentives. What incentives am I talking about?
1. Mortgage brokers that made loans they knew would go bad, because they could just sell them to Fannie, Freddie, or private banks and take the commission. Fannie and Freddie are backed by the government, so why worry about one loan that might go bad? Better to put someone in a home and get a nice commission than turn them down and make no money.
2. Investment banks that could bet against their own investors - see Goldman Sachs' latest debacle with mortgage-backed securities. The guy in one part of the company betting against the securities gets a nice bonus even if he makes the salesman in the other part of the company lose his bonus, and even though the net result for the economy was lost wealth.
3. Government regulators that are paid by the companies they regulate. Don't bite the hand that feeds you!
4. Debt rating agencies that are paid by the companies whose securities they rate. Again, don't bite the hand that feeds you!
The crash did not just "happen"; it was inevitable with those incentives in place.
posted by LightStruk at 10:16 AM on July 6, 2010 [2 favorites]
For the sizable portion of the U.S. that is in debt right now, low interest rates are a good thing so long as inflation isn't out of control.
It's a serious problem for indebted if we have deflation, as we did for most of last year. And there's a school of argument that suggests it is coming back. (NB also that US government inflation figures are calculated in really strange ways to under report the issue.)
Be attentive.
posted by IndigoJones at 10:22 AM on July 6, 2010
It's a serious problem for indebted if we have deflation, as we did for most of last year. And there's a school of argument that suggests it is coming back. (NB also that US government inflation figures are calculated in really strange ways to under report the issue.)
Be attentive.
posted by IndigoJones at 10:22 AM on July 6, 2010
I thought the California economy was dependent on porn shoots. You know, all the money from lube sales and pizza deliveries. Huh.
posted by elder18 at 11:37 AM on July 6, 2010
posted by elder18 at 11:37 AM on July 6, 2010
Say, did anyone who is ripping on the site actually read it? It's not about the housing bubble in general and every last one of the bad actors involved and all that other groovy stuff that you think you sorta understand from having listed to those This American Life episodes; it's specifically about people that have abused HELOCs (home equity lines of credit), and to what extent. They've even got a well-defined scale of abuse showing the various degrees to which people used their home equity as a sort of never-ending cash cornucopia.
They're not denying that the other institutions listed in LightStruk's comment exist or that they did what they did; they're just pointing out that foreclosures aren't limited to people who bought at or near the height of the bubble.
posted by Halloween Jack at 1:07 PM on July 6, 2010
They're not denying that the other institutions listed in LightStruk's comment exist or that they did what they did; they're just pointing out that foreclosures aren't limited to people who bought at or near the height of the bubble.
posted by Halloween Jack at 1:07 PM on July 6, 2010
Hmmm... WRT what I said above, I may have spoken a bit hastily. (tl;dr version: he's not letting people targeted by predatory lenders off the hook.)
posted by Halloween Jack at 1:49 PM on July 6, 2010
posted by Halloween Jack at 1:49 PM on July 6, 2010
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Her ex-husband, who worked indirectly in wall street and made enough money to buy one of the bigger houses in one of the exclusive areas of South Orange County, quit his job and started a business that imported cabinetry hardware from Europe at the exact moment that the housing market collapsed, losing vast sums of money on the behalf of every family member except my wife and me.
He now lives on a sailboat in Mexico, his children and wife live in an apartment a couple of blocks from us in South OC, and we still live in the house we bought at the beginning of the housing boom, a house we could afford, that still has a couple hundred thousand in value more than we paid, and that we will have paid off in another 8 years.
The point being, I guess, that not everyone in the OC is the same, you bastards.
posted by Huck500 at 8:04 PM on July 5, 2010 [3 favorites]