Irvine Housing Blog

Whether people consider the homedebtors unethical or immoral is irrelevant to me.

I know people who borrowed heavily against their homes and I warned them about it as far back as 2005.

They didn’t want to hear about it.

In 2007 as things became obvious (to us bubble bloggers), I told them that there were going to be issues with the economy and it would be wise to start paying down their debt and saving.

Once again, they didn’t want to hear about it.

Come 2008, NONE of them had changed their lifestyle or had tightened their belt.

I wouldn’t be surprised if some have walked from their mortgages by now.

Do I care?

No. 

I don’t talk to them at all anymore.

Life is too short to surround yourself with stupid, greedy, shortsighted people.

“When lenders loan too much money to borrowers, they are behaving immorally.”

When lenders loan too much money they are not behaving immorally, they are behaving stupidly.  Bubble lenders may not have expected to be repaid out of income but they expected to be repaid nonetheless either by subsequent sale or off-loading the loan or whatever.  That is what asset backed securitization has brought us.

Borrowers behaved stupidly too but where is the surprise in that?  They were offered free money with the assurance that repayment would not compromise cash flow or lifestyle. After all, housing values could not fall, right?

If there is immorality in all this it is in government bailouts and banksters bellying up to the trough as if they were owed taxpayer salvation which continues even now.  What happened when you last went to the Fed’s discount window and asked for a couple million $$ interest free so you could buy some 3.9% Treasury paper and live off the spread?

Very interesting series of posts over the past couple of days.  While I might not agree entirely on the ethics vs morality issue, it seems to be that the major failing in the bubble has been that both banks and borrowers have been insulated from the consequences of their foolish actions. That is, they’ve all been allowed to make decisions that it would have been better to avoid.

Actually I’d agree that defaulting on payment of mortgage might well be the best decision an individual can make in some circumstances. The consequences of such default are defined in the mortgage contract and in law, if someone chooses the pay the penalty so be it. But, I still despise the frequent special pleading for principal reductions etc, all of which have to be paid for by someone(else). Is a borrower being moral when they expect another to pick up the tab for the consequences of the borrowers action?

Of course, its the same for the banks - if a bank makes loans that turns into an economic sh@t sandwich, it should be the bank that eats it, all of it.

Apparently, its ethical to involve a nation in fixing the errors of a minority. But doesn’t strike me as moral.

Re: “Government reform is our only hope? We’re doomed. “

Yep, this appeared in the US press very briefly yesterday before the forces that be whisked it away, went looking for it today and finally found it at a UK site.

http://www.independent.co.uk/news/world/americas/democrats-happy-to-keep-goldman-contributions-1951967.html

The Democratic party said it would not be reimbursing almost $1m of campaign contributions from Goldman employees to Mr Obama, and candidates in this year’s mid-term elections are resisting calls to return the money. “We have not accepted contributions from specific individuals accused of wrongdoing,” a spokesman said, “nor have we advocated for positions that big Wall Street banks generally favour.”

There were 2 sets of ethics governing the bubble, either:

A.  Spend as much money as you can

B.  Make as much money as you can

Those in group B are doing very well now.

Those in group A are now seeking a new morale:

C.  Get the repsonsible to pay for it

If you didn’t fall into A or B you lose, you already subsidized group A and B and will continue to do so.

OT - Just read this and had to share it:

“Despite the noble goals assigned to it in textbooks and offered in Congressional hearings, the Federal Reserve exists for only one reason – to make sure the federal government gets all the dollars it wants to spend, ...” - James Turk

I think the frustration here is a a percentage of the population (maybe 20-30%) are abusing the system and the rest of us have to pay for it.  I know their FICO score will be lowered, but it should start at 0.

I have seen too many people driving brand new land rovers and mercedes, eating $100/plate meals, attending $100+/ticket events, and squatting in their houses until it is finally taken away from them.

They are not providing for their families as the next few (maybe even 10) years they will have to live well below their means.  I bet they are not saving for college or even retirement.  So while there are many situations where a strategic default is better for a family, it is not always the case.

Personally I would like to see for the next 10+ years these *defaulters* and *heloc abusers* have limited access to financial products.  Maybe along the lines of if you want this car, pay 50% up front.  I am a big fan of limited government, but if we are all required to pay for this mess, I would like the abusers to pay extra for the next 10 years or so.  Maybe bump their tax rate up another bracket and don’t allow itemized deductions.

World Savings Bank aka Golden West Financial killed Wachovia as an independent bank.  Wachovia had already bought WSB by the time this loan was made.

Wachovia paid $24B for WSB and got $60B in losses for their trouble.  Those loans are now Wells Fargo’s problem.

GWF - most admired mortgage company in 2006

Wachovia has its origins in the Austrian name Wachau. When Moravian settlers arrived in Bethabara, North Carolina, in 1753, they gave this name to the land they acquired, because it resembled the Wachau valley along the Danube River. The area formerly known as Wachovia now makes up most of Forsyth County, and the largest city is now Winston-Salem.[wikipedia]

I shudder to think about how those Moravian settlers from 250+ years ago would view what has become of the Wachovia name.

IMHO, there is one more responsible party. Loan brokers and other financial intermediaries, who originated mortgages to sell them.

I define morals as good vs evil, and ethics as right vs. wrong.  To me, morals are absolute, like faith or religious values.  Ethics is more secular and knowledge-based.

The three principles that govern the code of conduct in a human society is morals (good vs evil), ethics (right vs wrong), and law (reward and punishment).  These 3 works like a trinity in balance.  If one becomes dominate, the society will lean away from balance.

From the “stupid things that banks did” file: We opened a heloc with Ditech, and then two or three years ago they left the heloc business and froze all of their helocs. Even if we had used our heloc, we’d still have over 50% equity. We had to open another heloc and close out the Ditech account, and we went to B of A. We asked for a heloc with 1/2 of the balance that we’d had with Ditech. They refused, and said that we had to qualify for and take out a heloc of the same amount or they wouldn’t approve one at all. We did qualify, but what were they thinking…

The Big Lie
The bankster bailouts did NOT save us from the second Great Depression. We could have wiped out all the equity and bond holders, recapitalized with taxpayer funds, then sold the public interest later. Sweden did this in the mid 90s, and it worked well. At the time the bailouts were engineered, there was no international treaty or procedure for discharging debt across international lines. The US Government could not force a foreign government to drop its claim to the foreign interests of an American bank in bankruptcy. Rather than try to figure out how to make that work, we decided to pay the bills of too-big-to-fail when it failed. Of course, now that the crisis has past, lenders are lobbying to prevent financial reform that may diminish their paychecks.

I don’t think foreign debts were the issue here-domestic debts were the main problem.  I assume you are basically saying here that the government should have nationalized the failing banks, like AIG and GM?  That certainly would have solved the problem, but I know some people (namely, the man who was president at the time (Bush)) would be against such wide scale nationalization.

IR,

While a house is listing as short sale, does the owner still have to pay the mortgage?

I guess they still do, otherwise the house would be in default?

Good post, but I had hoped you would address the 1099/tax forgiveness issue

When a borrower does not pay back money to a bank that they promised to pay, they are hurting someone else, (stockholders or bank owners), with their lack of integrity, therefore they are not only engaged in unethical behavior, but they are also immoral.  A promise is a promise, and although not absolute, the integrity of the one making the promise is defined by their behavior, not the motivation of the receiving party.

Two examples:  WW2, you own and live in the a house and are hiding the Frank family upstairs.  Nazis come to your door and ask if there are any Jews in the house.  You lie and say no.  You are both ethical and moral even though you lied because you lied for unselfish reasons and they were for the moral good.

Next example: You strategically default even though you can afford the payment.  You may not be able to pay for your kid’s college, but they won’t starve.  You have broken your promise at someone else’s expense, (you have appropriated someone else’s kid’s college money), for your own selfish wants.  And it is fairly close to theft when you put it in that perspective.

Lenders (financial institutions) are faceless corporate entities that by design have nothing to do with morality. Their sole mission of existence is to maximize profit, not to uphold moral standard. In fact, the whole purpose of American Capitalism has always been about maximizing profits and returns on capital. Even business “ethics” and contractual obligations are merely arbitrary rules set up to ensure a sense of fair play, i.e., if I agree not to screw you, you will reciprocate by not screwing me either. In essence, capitalism has nothing to do with morality, and no corporate entities are created to be “moral” (they are out there to make money within the confines of established business rules and regulations, pure and simple).
 
The moral code in this country is more or less defined by a Judaic/Christian legacy that is supposed to provide a “standard” for social behavior at individual level. I think that’s why most of anger from IHB readers has been directed to deadbeat house debtors and HELOC abusers – after all these are the average Joe we can relate to – they are your neighbors, your coworkers, or ex-friends you no longer speak to. They grew up in the similar household, went to the same school and church as you did, so they should know better and be responsible as you are and act morally as you do, right?

Without religious connotation you may consider “morality” in today’s society as a protocol that regulates interpersonal conduct, that is, to ensure “fair play” in human interaction. You don’t do to others the things that you yourself would not want to be on the receiving end.  Morality to individuals is what ethics is to business entities. The tragic product of our gov’t policies during the Great Recession is the rapid demolition of both ethics and morality in business and personal domain. “Gaming the system” (translation: screw the others to get ahead) will be the new “morality” for your average Joe six pack.

“That “someone else” you are referring to knowingly took on the risk of the broken promise and factored that in to their interest rate return.”

Query: In any state with only judicial foreclosure or on a non-purchase loan in a non-judicial foreclosure state, will the judge in a deficiency judgement suit agree with you that there is an implied risk of a broken promise and that risk is factored into the interest rate or any other terms of the loan?  And if not, why not?

I believe that most strategic defaults are both unethical and immoral.  It is a general moral imperative that a person act ethically unless there are overriding reasons that compel a person to take actions that would be unethical but that serve an important facilitating force in creating a moral outcome of greater importance than the immediate ethics of the action.  In the case of strategic default, most of them that I have knowledge of are made to increase the cash flow of borrower in the face of a loss in the prospect of asset appreciation.  But the ethics of this decision can only very rarely be influenced by the value of the house because ethically, legally and morally the borrower already owns the house with the consequent risk of loss of value as well as the gain from increase in value.  It is strictly a matter of paying the debt or not.  It is not an ethical lapse for a person not to pay a debt if they cannot pay it.  But if you can pay the debt, there are only a very few kinds of cases where it is clearly moral to default.  Here are two hypothetical cases.  Your sister is killed in an auto accident and you now have her three children to care for on your same income.  You had enough income to pay your loan and support your own family, but this added burden makes it impossible.  Or one of your parents passes away and the other needs your help, but will not relocate.  You have the income to pay your loan, but not the savings to cover the loss of a short sale, which your lender is dragging their feet on approving anyway.  What I think clearly is not a moral imperative is when you notice that you could rent a house for $xyz/month less than you are paying for your mortgage when there has been no change to your situation that compels you to use the money to satisfy an important changed moral obligation in your life.  Yesterday’s case, at least what we know of it, fails this in that there was no change that compelled the decision to default.  They have a daughter and wish to provide her with a college education 12 years from now.  The moment to have thought through the impact of servicing this level of debt on the prospects for his daughter’s education was prior to agreeing to the debt.  At that time, one assumes, they concluded that paying this debt and saving for her education are compatible goals.  What changed?  Nothing ethically or morally significant.  This is pretend morality.

In additional to financial reform and health reform, we will see a lot of more other reforms, such as immigration reform, education reform, military reform and all these reforms are part of Obama’s reelection campaign efforts.

IMHO, all the reforms are rather an expansion than reform. Obama is a great president and great politician , all his policies and “reform” will get passed by Congress because the perfect execution. Must give him an A+ by watching how he beautifully KO his opponent .
For the health reform, the Republicans called him a socialism , actually the reform is more of health benefit expansion which opens a blank check and let tax payers and next generation to pay off. This is not reform and not socialism, the reform means make thing more efficient and socialism means everyone share fixed amount of resources. But the health reform does not address the major issue of the cost reduction or utilization. In here, Obama uses the minimum resist to get max political achievements and Republicans can only sentence him for giving the wrong reasons. This is a beautiful strategy.
Same as financial reform, the meaning of financial reform should improve government’s debt level. But didn’t Fed already project at least $1 trillion annually debt for next few years. And the “reform” will expand Fed role to have more control of the market.
In addition immigrant reform, I predict there will be an education reform in some time next year and which will allow government to inject fund to public school (this is actually good idea).  and the peak of the reform movement will be 2012 military reform which Obama will withdraw the troops from Iraq and claims the V. All these are well planned for 2012 president election.
Actually I kind agree this is good for us and for the country at certain level. If we cannot find a Great leader of all time that can help US to become country totally denominates the world again but at least we have an A+ leader that can shut down all other politicians’ mouths.

Perspective: “Strategically defaulting on a mortgage promise is not a black-&-white moral issue.”

Should soldiers die fighting for their country or “strategicaly default” for their families?

The answer is pretty black and white. One strategic defaulter always wins. Army of strategic defaulters always lose.

Economic crisis is just different kind of war.

IR: “The lenders, investors, realtors, mortgage brokers, borrowers, HELOC abusers, government regulators, the Federal Reserve, the Treasury department, everyone who was involved indirectly conspired to steal wealth from savers, renters and prudent homeowners who did not participate in the madness.”

Just wondering, what about the sellers?

Or more exactly, those sellers who went “realtor shopping” to enlist the “go-to” realtor who could “get the right price” and who worked with an appraiser “who can get the right number” for the most “value.”

What about them? Does the seller share some culpability in what you describe above?

*wonders*

~Misstrial

I completely agree regarding the immoral actions perpetrated by the banks.  Irresponsible lending shouldn’t be rewarded with bail outs.