Fannie Mae is encouraging strategic default in an attempt to qualify more borrowers for future loans. One more example of moral hazard.
Irvine Home Address … 36 PARKCREST Irvine, CA 92620
Resale Home Price …… $915,000
I'm saddle sore
Four bits gets you time in the racks
I scream for more
Fools' gold out of their mines
I'm back in the saddle again
I'm back in the saddle again
I'm riding, I'm loading up my pistol
I'm riding, I really got a fistful
Aerosmith — Back in the Saddle
Everyone who loses their home in the deflation of the Great Housing Bubble will be counting the days until they are back in the saddle again riding their cash cows. Thanks to recent policy changes, those borrowers ready to play in the next Ponzi scheme won't have to wait too long.
Fannie Mae is changing its policy in a way that will encourage strategic default. The resulting walkaways will increase delinquency and foreclosure rates, lower home values, and cause billions of dollars in losses for the US taxpayer.
Fannie Mae wants to help some troubled borrowers get back into home market
Kenneth R. Harney
Saturday, April 24, 2010
Here's some good news for people who had to give the deed on their house back to the bank because of financial problems, or who have done a short sale to avoid foreclosure [and those thinking about strategic default]: You may not have to wait the typical four or five years to re-qualify for financing to buy another home.
Instead, it could be as little as two years. In a bulletin to lenders April 14, mortgage giant Fannie Mae said it is relaxing rules that prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for extended periods of time. The new rules are scheduled to take effect July 1.
Many borrowers are choosing not to strategically default because they know it would take five full years to get another home loan. Now that Fannie Mae (and probably soon Freddie Mac and FHA) has announced they will only make default cost two years, that is one less reason for underwater homeowners to tough things out.
Take careful note how this changes the equation for those considering strategic default. Here is what happens if they stopped paying today:
- They could save 12 to 36 months worth of housing payments with the amend-pretend-extend dance.
- After they go through the foreclosure, they could rent for a couple years at a cost less than the previous payment they quit making years ago.
- After three years of squatting and two years of inexpensive renting, they could buy a comparable substitute for their former home and pay less for it with money down.
- In the end, they would have the same house with a much smaller mortgage and plenty of equity.
Strategic default is a huge benefit to the underwater borrower because the waiting time to get back into the market has been substantially reduced. If they had to wait a full five years, they might be better served to wait it out and let the market come back to them — or so they might convince themselves. If they only have to wait two years, it isn't very likely they will miss a huge market rally, and the punishment for their bad borrower behavior fails to be the deterrent it was intended to be.
Do you get the sense that the people at Fannie Mae did not think this through? Did they forget why they had the five-year waiting period to begin with? Are they so desperate for new buyers to clean up their mess that they are willing to encourage much more strategic default? This seems really stupid to me.
Homeowners who have done short sales — such as under the Obama administration's new Home Affordable Foreclosure Alternatives program — will also be able to qualify for a mortgage in as little as two years. Although Fannie Mae officials declined to discuss the reasoning behind the changes, the bulletin to lenders said the company hopes to encourage troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
How is that supposed to work? That phrase suggests to me that Fannie Mae is well aware of the moral hazard they are creating and is doing it anyway. They are instituting a policy almost certain to increase strategic default, and they give lip service to efforts to prevent it.
Fannie's new standards come with some noteworthy fine print, however. To qualify for a new loan in the minimum two years, most borrowers will need to come up with down payments of at least 20 percent. If they can scrape together only 10 percent for a down payment, the wait will revert to the four-year minimum. And if their down payments are less than 10 percent, the wait could be even longer.
Well, if the borrowers planning to strategically default can squat for long enough to save a 20% down payment — something made much easier by not having any housing costs — then this requirement is not a barrier. I do like that they are encouraging saving.
On the other hand, if borrowers can demonstrate that their mortgage problems were directly attributable to "extenuating circumstances" — such as loss of employment, medical expenses or divorce — they might be able to qualify for new loans with minimum down payments of 10 percent in just two years.
They didn't wait long to add loopholes that everyone will jump through.
Freddie Mac, Fannie's rival in the conventional secondary mortgage market, has slightly different policies on mandatory waiting periods after short sales or deeds in lieu of foreclosure. For borrowers who cannot demonstrate that extenuating circumstances caused their financial problems, Freddie Mac will not approve new mortgages in less than four years. For people who lost their houses to foreclosure because of their financial mismanagement, Freddie's mandatory waiting period remains at five years.
On the other hand, when there are documented extenuating circumstances, the wait at Freddie Mac drops to two years after short sales or deeds in lieu and to three years after foreclosure.
In other words, the other GSEs will also be encouraging strategic default on a grand scale as each of them competes with the others (under the guiding hand of our government) to lower standards until borrowers can get 100% financing stated-income loans the day after a foreclosure or bankruptcy. Let's re-inflate the housing bubble.
Housing and consumer counseling advocates welcomed Fannie's relaxation of rules that had penalized borrowers who lost their houses after layoffs, illness and other unforeseen events.
"This is a positive move," said Marietta Rodriguez, director of homeownership and lending for NeighborWorks America, a national nonprofit network created by Congress to assist with homeowner financial counseling and community development.
"We all know that there are many people who through no fault of their own have to sell," she said, but they were blocked from buying a house again for four years or longer, even though they had rebuilt their credit, had qualifying incomes and were fully capable of handling a mortgage responsibly.
I would estimate one percent lost their house due no fault of their own. Those cases are sad, but it doesn't justify bailing out the other ninety-nine percent who are HELOC abusing squatters who gamed the system. Let's punish them as little as possible and see what happens in another ten years.
Also, did you notice this woman is a spokesperson for a government sponsored aid boondoggle. To me that demonstrates this is being coordinated by officials in the administration. They are telling this woman what to say to make the program sound like a good idea.
The main potential complication in Fannie's new approach, said Rodriguez, is in its credit-rehabilitation requirements. To qualify for a new mortgage, Fannie expects borrowers to reestablish their credit sufficiently to get passing grades from the company's automated underwriting system, which considers credit bureau data, among other factors.
Why don't they just change their underwriting system? This sounds like a problem any programmer could solve for them. They could streamline the process to always say "yes" just like the automated underwriting models of the housing bubble.
But according to Fannie's bulletin to lenders, it will not consider applicants with "nontraditional" credit or "thin files," where there is not enough history on file with the national credit bureaus to generate a risk score.
Rodriguez worries that many homeowners who have lost their houses during periods of high unemployment and stricter underwriting requirements by banks won't have sufficiently "traditional" credit histories — home-equity lines, revolving credit card accounts, personal loans and the like — to pass Fannie's test. After the years of recession, their main credit data may instead be their rent payment histories and telephone and utility bill payments, none of which show up in the national credit bureaus' files.
So the prudent who fail to use consumer credit, borrow for cars, or otherwise allow themselves to be slaves to lenders are punished by the GSEs. That is a great system. They only want to deal with people who have pledged their souls to their lending overlords.
Actually, I expect the credit history requirement to be relaxed. They need new borrowers. Besides, if people are forced to live without credit long enough, they come to realize what a trap it really is. If more people experienced the freedom of zero debt, lenders would make far less money.
Fannie Mae's revised standards may well provide an early second chance at homeownership for thousands of borrowers who assumed they would need to wait much longer than two years. But for those who don't have traditional credit profiles and sufficient down payments, that second chance is likely to be deferred.
If I read that closing properly, Fannie Mae is sending the message that it is acceptable to strategically default as long as former borrowers start saving and behaving well after the fact.
I appreciate messages of redemption. The indebted who rejected the idea of strategic default should reconsider their decision now that Fannie Mae has said it won't punish them for it. The crushing lender losses — which we as US taxpayers will be largely responsible for — should provide the full measure of pain lenders deserve for inflicting this madness upon us all. It may not all be financial for the lenders. Huge taxpayer losses will be the impetus for some truly punitive financial regulation. Lenders will get their comeuppance.
This one is really bad
Sometimes the HELOC abuse, gaming the system, and squatting is so egregious, so unbelievable, that even I am shocked.
The owners of today's featured property really hit the lottery. They bought at the very bottom of the market last time around, they HELOCed every penny out of the property right up to the very peak, then they stopped paying, and they have been squatting since 2008. They squeezed every available dollar out of this deal, and they are still squeezing today.
- Today's featured property was purchased on 8/20/1997 for $349,000. The owners used a $279,100 first mortgage and a $69,900 down payment — borrowers needed down payments back in 1997.
- On 1/3/2000 this couple began the new millenium by embarking on their own personal Ponzi scheme. They opened a HELOC for $150,000.
- On 4/8/2003 they enlarged their HELOC to $200,000.
- On 1/5/2004 they opened another HELOC for $353,500.
- On 4/22/2004 they got another HELOC for $145,000.
- On 2/25/2005 they refinanced their first mortgage for $661,000.
- On 2/23/2006 they obtained a HELOC for $344,000.
- On 9/18/2006 they obtained what appears to be a stand-alone second for $390,000.
- The total property debt is $1,051,000.
- Total mortgage equity withdrawal is $771,900.
- Total squatting is at least 18 months and counting.
Recording Date: 03/26/2010
Document Type: Notice of Sale
Recording Date: 12/21/2009
Document Type: Notice of Default
Recording Date: 06/25/2009
Document Type: Notice of Rescission
Recording Date: 04/20/2009
Document Type: Notice of Default
They are scheduled for auction on May 18, 2010, but if the postponements continue so the banks can dance some more, they will likely continue to squat in the house that already has provided them nearly three quarters of a million dollars in free money.
Think about what these people must believe about themselves and the things they are entitled to. In their minds, they are rich.
Whatever the owners may have done for a living, their house was providing them with a substantial additional living, and once the inflows were cut off, the outflows stopped. After six years of borrowing about $130,000 a year in tax-free income and 18 months of squatting, these owners are accustomed to a lifestyle that they will never have again. Unless, of course, we put them back into a house two years from now and inflate another housing bubble — which could happen.
Is this the kind of behavior we want to see more of? Should we really let this couple back into the housing market in two years? They weren't good examples of financial prudence last time around, and with as much as they were rewarded for this behavior, there is no reason to believe they would do anything differently next time.
Irvine Home Address … 36 PARKCREST Irvine, CA 92620
Resale Home Price … $915,000
Home Purchase Price … $349,000
Home Purchase Date …. 8/20/1997
Net Gain (Loss) ………. $511,100
Percent Change ………. 162.2%
Annual Appreciation … 7.7%
Cost of Ownership
$915,000 ………. Asking Price
$183,000 ………. 20% Down Conventional
5.16% …………… Mortgage Interest Rate
$732,000 ………. 30-Year Mortgage
$192,926 ………. Income Requirement
$4,001 ………. Monthly Mortgage Payment
$793 ………. Property Tax
$150 ………. Special Taxes and Levies (Mello Roos)
$76 ………. Homeowners Insurance
$170 ………. Homeowners Association Fees
$5,191 ………. Monthly Cash Outlays
-$985 ………. Tax Savings (% of Interest and Property Tax)
-$854 ………. Equity Hidden in Payment
$372 ………. Lost Income to Down Payment (net of taxes)
$114 ………. Maintenance and Replacement Reserves
$3,838 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$9,150 ………. Furnishing and Move In @1%
$9,150 ………. Closing Costs @1%
$7,320 ………… Interest Points @1% of Loan
$183,000 ………. Down Payment
$208,620 ………. Total Cash Costs
$58,800 ………… Emergency Cash Reserves
$267,420 ………. Total Savings Needed
Property Details for 36 PARKCREST Irvine, CA 92620
Baths: 2 full 1 part baths
Home size: 3,000 sq ft
($305 / sq ft)
Lot Size: 4,927 sq ft
Year Built: 1997
Days on Market: 56
MLS Number: S607304
Property Type: Single Family, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
This property is in backup or contingent offer status.
Fabulous opportunity in the guard gated community of Northwood Pointe. 4 spacious bedrooms plus extra large bonus room/office. Formal living room and dining room. Kitchen with double oven, cooking island and breakfast nook. Super sized family room with fireplace and built in entertainment center. Corner lot with great curb appeal. A short walk to award winning Canyonview Elementary and Northwood High. Enjoy community pool, parks and trails. Close to shopping, dining, entertainment, 5 fwy and toll roads.
“Fabulous opportunity”! Looks like the previous inhabitants had the fabulous opportunity, to me.
Let’s see, they took over $70,000 a year out of the house for over ten years. That’s like getting a $100,000 a year pay increase. Nice.
And now Fannie and Freddie and queing up to loan them money again. Think about it: if they had simply saved all the money they pulled out of this baby with their HELOC abuse, they could almost buy the place back WITH CASH. Nice.
If the previous owners had been smart, in two years they could buy a nice, similar, reasonably priced house in Irvine with a 20% down payment, and sit on around $500,000 of retirement money. It’s too bad that HELOC-abusing sociopaths are sneaky and clever, but always in a stupid way. The money was probably spent on trips to Bali.
I sure hope these idiots are writing checks to the government for taxes on their debt relief (or, maybe, gain on sale) until they croak.
So let me get this straight. The ’97 buyer has to put down only 70K in the middle of a booming economy. Fast forward to 2010, incomes are down or about the same as ’97, 2 years into a massive recession, and the buyer of today has to come up with 180K down payment.
Makes perfect sense. Today’s price is not still bubbly or anything like that no sir. Now is the time to transfer this guy’s debt onto your balance sheet.
Buy now or be priced out forever.
Your income was flat over the last 13 years? The aggregate will bite you in the ass. Moderately successful people have seen their incomes triple over that time period, and for truly successful people 4 X, 5 X, 6 X ….this has been an excellent time period to make huge money. The last 3 years have had the most opportunity for exponential wealth transfer.
Here’s an example for you, PR.
Silicon Valley Salaries Down 14% Since Tech Boom
This category seems like a good one to look at as it was employing many people during the late ’90s.
The starting salaries for people in this field have not changed significantly since ’97. The only thing that has changed is the costs of everything.
How do you expect to be successful in America, and buy in the prime areas, if you don’t move on to the next bubble?
Planet Reality is absolutely 100% correct.
Don’t worry about getting a job, building a competency, learning new skills, or ensuring stability.
The only true way to success in America is through riding ever-increasing bubbles of irrationality. Please, get with the program.
I knew guys during the lending boom making over 500K per year with nothing more than a high school diploma and experience selling cell phones at the mall.
Why would we need to compete in the world marketplace when all we have to do is hire Indian and Chinese workers who will work for half while we live it up on commissions?
I say, the next bubble, really make it count. Sell everything, leverage any house you have, and liquidate your kids’ college fund on one gigantic directional bet. You’ve got the Bernanke put! What’s there to worry about?
I don’t see AZDavid’s argument being an antithesis to PR’s. They are talking about two different groups of people, and they are mutually exclusive:
PR was referring to the 10% of population who have truly mastered the art of money shuffling and made a kill in the last decade. And given their risk taking instinct, correct reading of political pulse and a tad of dumb luck, this group will likely continue their winning streak and prosper for the next 10 years. I think PR’s point seems to be “follow the money” – watch closely where the top 10% (not just from the US, but especially “winners” from the new bubble areas like China) buy RE as means of storing their new wealth and follow the suit. If Irvine turns out to be one of the chosen sites by the riches (domestic or foreign), so be it. No sense to fight against the tide of money flooding in (that would define its “prime market” status). And you can forget about those pesky factors like local income or rental parity.
AZDavid was talking about the rest 90% of the population who did not enjoy real income growth. Their overall standard of living actually deteriorated as a result of credit bubble and will continue to do so in the future. You can divide the pool into two subgroups:
(A). Folks who refused to participate in money shuffling due to (1) their adherence to a prudent life style and (2)gross misjudgment of how our economic/political system really works. They are suffering the consequences of their rational decisions now and have been watching gov’t/Fed endless bailout schemes in horror.
(B). Dabblers of money shuffling but ended up losers due to lack of animal spirit of true gamblers, low IQ, bad market timing, and terrible luck.
Obama administration’s tactics now focus on bailing out group (B) at the expense of group (A). Absurdity and unfairness aside – this approach will not save the RE price for the areas occupied by (A) and (B), as markets in those areas are determined by DTI ratio, unemployment rate, wage income, rental parity and other pertinent factors in the long run.
Exactly. However I would add that even the top 20% and top 21-30% have and continue to prosper at a far accelerated rate than the bottom 70%. Obviously areas that attract the top 10%, 20%, and 30% can have a different market dynamic due to the inequalities of our prolific bubble economy.
Chuck, was that 500K from selling cell phones, or did these hacks end up selling RE?
It seems the requirements to become an agent were just as low (if not lower) than the requirements to get a loan.
“Do you have a pulse?”
You just have to be working for the govt . . .
1 in 3 San Francisco employees earned $100,000
David, to be fair though, that article compares salaries paid at the height of one massive bubble (the internet bubble) in 2000 to what is paid in the wake of the following bust (the housing bubble). Having an ‘average’ salary of $100k is still pretty damn good, which may explain why Bay Area pricing is generally holding up pretty well compared to places like OC that don’t have quite the same economic drivers.
I was in Silicon Valley during the boom and it was kind of depressing. Nobody wanted to build a career, everyone just wanted to make a killing on the IPO. Let’s hope that the same type of sober-mindedness takes root in the wake of the housing bust.
Freetrader makes a great point. I was in college during the .com boom, interning at a chip company that sold primarily vaporware with orders placed 5-7 years in the future that propped our stock price up like the guys on Weekend at Bernie’s. My salary was approx. 74K, if I remember correctly. The bubble burst, I was laid off, and after I graduated it took me a year to find a job with the starting salary of 58K. That’s the usual starting salary for a BSEE. The 74K was inflated, and to say salaries are down WRT that is a little misleading.
That exactly the point. The workers and most middle management professional salaries have not been on par with inflation, but those that shuffle money have gone dramatically up. A real transfer of wealth. Shuffling of some money is useful, but when it becomes a significant part of the GDP, a waste of resources and a crash will occur. The workers are punished again with the bill from the bailout.
The “home owner” get a F for gaming the system. Looks like an amatueur — no complete refin into one first. The multiple loans opens up the possiblity of recourse actions from the multiple Jr. loans. Free rent, HOA and RE taxes for 2 years is about 10% to 12% of the principle. If they can sting the free rent to 3 years and with all the HEW, that’s really a big stimulus package!
The recovery is in full swing. Buy before your priced out of the market. Obamaism at it best,
All of this is legal. You rob a bank for $10,000 and you go to jail for 20 years. But if the bank invites you to rob them they have no problem since both the bank and ‘customer’ know they are really robbing the tax payer for which there are no consequences. I would put both parties into jail. This example is outrageous.
oh man…who’s the bigger fool here, the ones that took out $70k/yr tax free or the people stuck paying the bills (taxpayers)?
Man, if I had a DeLorean, I’d go back and do exactly what these people did. I’m not even going to pretend I’d take the moral high ground here.
Very nice. Especially like the cat.
I always enjoy your cartoons. You say more in fewer words by juxtaposing better images.
I hate slippery slope arguments. Yes, no one here wants to return to 0% DP, and certainly not for former defaulters. But is that really a reason to postpone short sellers who have subsequently saved up 20% from buying again?
Yes, the GSE’s guidelines are internally conflicted, save up 20%! While paying absorbanant rates on the only CC’s you can get after your default, and please, take out a 12% or higher car loan while you’re at it, that’ll prove your trustworthiness. I don’t see how a borrower could do both in 2 years. Pay themselves (savings) and pay interest on new debt at raised rates due to their low FICO scores.
Do you end up limiting eligibility to those who stockpiled the rent-savings during the squatting stage and already had CC and car loans bought during the flush times? A friend of a friend supposedly bought her BMW out of her lease for a higher monthly payment so that she could “secure the family car” before her FICO score dropped when selling her condo short. If she’s been making those car payments, is she really who the GSE’s want buying sooner rather than later? Because think about it, anyone who gets new debt after the short or deed in lieu will be paying too much in interest to save up the 20%.
So is the slippery slope argument more valid because the existing statement is so conflicted? Maybe. But personally I’m just not that pessimisstic.
The conflicts you point out in the Fannie Mae program are very real, and it exposes why this is such a bad idea. Fannie Mae will almost certainly see an increase in strategic default because of this, and since borrowers will have a very tough time qualifying for the next loan, Fannie Mae will not see the benefit of their actions through increased numbers of borrowers able to get loans in the future.
I have speculated in the past that some form of subprime lending would spring up to serve the otherwise financially prudent that lost homes during the bubble. I just never thought the Federal government would be that subprime lender.
It is clear to me from our government-backed policies that the US taxpayer is going to become the defacto subprime lender for the next housing bubble. As many political operatives have pointed out, the government is often the one putting pressure on lenders to give out bad loans to people who shouldn’t have them. With the government owning the GSEs, there is no party who can say no.
The collapse of the next housing bubble will be completely at taxpayer expense.
> The collapse of the next housing bubble will be completely at taxpayer expense
buy the biggest house you can. take out the biggest heloc you can. sell at the peak. then profit.
if you can’t beat them, join them.
What you do not understand is that these people who walk away from their mortgages are victims and our government really really wants to help them out because that is the job of the government – to help consumers buy things that they cannot afford.
I always get a nice chuckle when the government does The spoon trick with all the various gimmicks that it uses to bamboozle us.
Hope there’s enough space on the gravy train for everyone this time.
“I hate slippery slope arguments. Yes, no one here wants to return to 0% DP, and certainly not for former defaulters. But is that really a reason to postpone short sellers who have subsequently saved up 20% from buying again?”
This “slippery slope” question goes away if we let the private market decide to whom they want to lend.
The real question should be “Why do we need the GSE’s?”.
The answer is we don’t. Affordable housing will return as soon as the government gets out of the marketplace.
I understand your point, cara, and I agree with you.
Even with the FMAC/FMAE change to a 2-year wait, I really have doubts that most of these homedebtors will be able to save up enough other than to pay cash for a home in Boron, CA.
Simply because life happens: root canals, medical treatments, school items for the kids, etc.
Plus, lenders want not just a 20% down, but also 6-8 months of mortgage payments in the bank plus liquid and non-liquid assets in *both* signers names’.
The only people that would have the knowledge to game the system as IR describes are those who are:
present and former real estate agents
former mortgage brokers
others employed or formerly employed in FIRE industries
So even with squatting and federal loan breaks, the amount and life’s problems, in my considered opinion, they aren’t going to be able to outdo others, such as myself who’ve been saving patiently.
OK, so they have to pay all cash for a fixer in the Moreno Valley OK….yeah there will be a few who can put 20% down in Irvine, but those folks will be few and far between.
Generally, those who have been buying recently are not the squatters but those who sold at or before the top and who really do not rely on blogs like this for their guidance.
Australia Saturday clamped down on foreigners buying property after complaints that a rapid influx of Asian money had helped make its housing among the most expensive in the world.
“We want to make sure that foreign speculators are not going to force up prices for Australians seeking to buy their own home, buy their first home and we think this is the right course of action.”
I wonder if money of this same color has anything to do with Irvine house prices…
I’m not sure if there is speculation, however Asian money definitley impacts both Irvine house prices and Irvine schools. No offense to any Irvine teachers who want to take credit for the quality of schools. Screw it, please take offense, it’s the students.
Cashed-up Asian buyers have certainly affected the Irvine prices. Australia has had a booming property market for the past 15 years; but because you could never leverage 100% of the loan balance in Australia, there was never the same bust as in the US. It is easier for someone in Asia to emigrate to Australia than California, and buying a property is a preferred way to accoplish that. Finally, California is significantly larger than Australia in terms of population and so a few rich buyers have less impact on the market.
Wealthy Asian investors from abroad does impact local RE prices, but only in very limited areas. For example, Los Angeles Koreatown has received a lot of investment from S. Korean investors. But their overall impact on CA RE market as a whole is very small.
If strategic default is not immoral, how is Fannie Mae’s encouragement of strategic default a moral hazard?
Perhaps we should call it ethical hazard. The definition is not as important as the circumstances and results it creates.
Is it a moral or ethical hazard, when the originator (banks and GSE) are setting up the situation for walk-aways and allowing them by law and contract?
Is the moral and ethical hazard in the bailouts and creatators of the Ponzi scheme or those that are just purchase the the raffle tickets?
Since you are fixated on this distinction, I have a scenario for you to consider:
Imagine you go shopping at the grocery store, and when you get home, you check the receipt, and you realize the store did not charge you for a $1 can of soup. You are now aware that you have taken something home which you did not pay for. You have committed an unintentional theft.
At that point, you have two options: (1) keep the soup or (2) return the soup at expense of time, effort, and gas. Which option do you chose?
Let’s parallel this example to someone considering strategic default.
(1) The strategic defaulter was given too much money by the lender just as the shopper was given too much product by the grocery store. Neither party set out to steal.
(2) Both the strategic defaulter and the shopper have capacity to rectify the situation.
(3) Both the strategic defaulter and the shopper are pro-actively choosing not to clean up the financial transaction because of the cost and perceived hardship that it causes their family.
Therefore, it would appear that the strategic defaulter and the shopper are both behaving immorally — at least by your definition.
IMO, in both cases, the lender and the store owner made a mistake, and it is incumbent on them to put the necessary systems in place to fix this problem rather than relying on the morality of consumers (or government bailouts) to make a broken system work.
If grocery stores did not have efficient checkout systems and security at the exit, they would go out of business. Have you noticed how much Wal-Mart spends on checkout and security systems?
If grocery stores were given government bailouts to cover their shrinkage losses, they would have very little incentive to fix the problem. In fact, they would encourage more theft because it becomes a revenue stream to them.
Similarly, if lenders did not have efficient underwriting standards, they would go out of business because defaults would ravage them. If lenders are given government bailouts — which they are — then they have little incentive the fix the problem — which they don’t. This encourages more imprudent lending because the taxpayer backstop becomes another income stream.
In either scenario, the customer is not the problem, and the morals of customers should not be the necessary ingredient to make the business model work. Customers who walk away from an over-sized mortgage they never should have been given are no more or less immoral than the shopper who fails to take back the $1 can of soup. Perhaps it looks that way because the dollar numbers are larger, but the effect is the same.
I have a difficult time chastising the shopper as immoral. And despite how much HELOC abusing squatters who walk away from their debts irritate me, I can’t call them immoral either. They should not be loaned money, and their FICO score — the measure of borrower ethics — will reflect their behavior.
One of the reasons I have such a problem with today’s announcement is that the lenders are going out of their way to give these people a pass. Whether you want to call it morals or ethics, borrowers are being given another chance at borrowed money when they have done little to prove they have mended their ways.
First, it is not me who makes the distinction or is fixated on it. You made the distinction between ethics and morality.
Second, your analogy is fatally flawed and can not be addressed because of the flaw. The strategic defaulter has made and agreement and chooses to break his promise. The receiver of the mistaken $1 has made no such choice and has not broken any agreement.
You choose to ignore that the strategic defaulter is breaking their agreement and that contribution to the question of rightness or wrongness.
Please, forget the definition. It was never mine and I have no attachement to it.
To rephrase, if it is ok for the strategic defaulter to create the situation of default, why is not ok for Fannie Mae to create the conditions for default?
I think what you are missing in your ethics vs. morality distinction is, “What did the involved parties agree to?” What did they sign? The rightness or the wrongness is determined by what they agreed to.
The shopper and the grocery store owner have an implied contract just as real as the signed document between the borrower and the lender. The receiver of the $1 can of soup made an agreement to pay for anything they obtain in the grocery store. The fact that this is not a signed contract is only for expediency. The implied contract certainly does exist or grocery stores would go out of business in short order. If people started to act as if written contracts were required, grocery stores would quickly put a guard at the door requiring people to sign a contract before entry. Therefore, the analogy is not fatally flawed.
It would be okay for Fannie Mae to create the conditions for default if they were going to bear the full responsibility for the losses when incurred. That isn’t what is happening.
If the rightness or wrongness is determined by what people agreed to, then the guy who fails to return the $1 can of soup is just as guilty as the strategic defaulter. Both agreed to obtain a product for a cost, and both failed to make good on their agreement despite the capacity to do so.
The shopper has agreed to pay and rightly he should pay, but your analogy is flawed because you do not recognize the choice of the strategic defaulter. The shopper did not choose not to pay. The strategic defaulter did. The shopper needs to pay, but of course they do not need to incur greater costs for the market’s mistake. There is a contract to pay when the shopper shops, but it is not unreasonable as your straw man argument about driving to the store makes it seem. It is perfectly resonable to pay for the soup the next time you are at the store. The shopper in your analogy did not choose to steal. The strategic defaulter may or may not have chosen to steal depending upon what they signed. If they live in California and it was a purchase mortgage, they agreed to a this or a that. And if they choose the that, strategic default, they have done nothing wrong. If they have any other type of mortgage contract and the lender sues for deficiency judgement and the borrower tells the judge that they, the borrower, does not have to pay because the lender assumed the risk as part of their business, the judge may have a difficult time not laughing in the borrower’s face. The law in this case is also what is moral. Laws are society’s attempts to enforce morality, and in the case of strategic defaulters the law reflects correctly the morality, or rightness or wrongness, or ethics or whatever. The rightness or wrongness is determined by the agreement, not whether it was personal or business and the courts recognize this.
“The shopper did not choose not to pay. The strategic defaulter did.”
Once the shopper recognized the error and did not pay, they are making a choice. They intended to pay at the time, just as a strategic defaulter did.
“If they have any other type of mortgage contract and the lender sues for deficiency judgement and the borrower tells the judge that they, the borrower, does not have to pay because the lender assumed the risk as part of their business, the judge may have a difficult time not laughing in the borrower’s face.”
The judge should laugh because this is not a legal defense that will stand up. The recourse nature of the debt means the borrower will have to repay the shortfall. As you pointed out, whether or not the debt is recourse matters.
“And if they choose the that, strategic default, they have done nothing wrong.”
Now you are making my argument. You are shifting the morality of the borrower’s decision based on whether or not the loan was recourse. IMO, that changes the ethics of the decision because it impacts the rules of the mutually agreed upon game, but it does nothing to change the morality of what occurred.
If a borrower defaults on debt because the moral imperative to provide for their family takes precedence, they have done the right thing irregardless of what the contractual arrangement the parties may have agreed upon. They will have to endure the consequences of that decision, but I can’t call the defaulter immoral for choosing their family first, unless the consequences outweigh the benefits. Clearly with the way the rules are being constantly changed, the consequences of default are low compared the benefit of getting out from under a multi-hundred thousand dollar debt.
This whole polite discussion thing is really getting annoying. Can we just move on to some serious name calling?
You go first.
IrvineRenter – I think you are making a bit of an appeal to emotion by saying that strategic defaulters are doing it for the family. This is similar to the “for the children” argument that FB’s love to invoke. I just do not believe that people rationalize that way – they just come up with the idea in hindsight. During the boom, the REIC told buyers to overpay for the sake of their family having a “home” – now it is being used to justify walking away from one’s obligation?
These people decide to stop paying because they see a loophole that can be taken advantage of to get out of their commitment which was to repay principal plus interest. That’s the difference between the shopper and the borrower – the conscious decision to bail out of one’s moral obligation by exercising a loophole.
It is a fallacy of relevance know as the appeal to pity, sometimes called the appeal to emotion.
But, more importantly, I do not know what a yummyhatoraid is so it did not hurt. Is that anything like a yummyhemorroid?
awgee, that was the screen name of the second banning of a disgruntled IHB hater. I thought you might remember her.
AZDavidPhx, I agree with you that it is an excuse given far to often and usually with too little sacrifice before it is invoked; however, there is a truth buried beneath the oft-told lie. There are families that are $300,000 underwater paying on a mortgage 50% higher than comparable rent. I think those borrowers are shirking their duty to their family to stay in that situation, and I think it is immoral of our government to encourage them to..
Oh no, not irregardless!
Regardless or irrespective.
sorry pet peeve police.
First a slippery slope argument and then a $1 unwittingly “stolen” is morally equivalent to any other sum of money.
Interesting that the magnitude is irrelevant to you.
The size does matter. A $1 error in your favor in one place will probably be balanced by a $1 error against you in another. And the confusion involved in you returning it at your next trip (i.e. zero cost to you) might well not be worth the worker’s time to figure out the situation, update the inventory and put the can back. A $100,000 HELOC? Not so much.
I have accidentally not been charged for grocery like soup, my solution is next time I go to the store, I buy another can of soup and ask clerk to scan it twice and charge me for the soup they forgot to charge me for last time.
NO SOUP FOR YOU.
Come on, you know you were thinking this…
The additional layers of “wrong-ness” to the whole argument of morality and ethics in strategic defaults to me runs to these two issues:
A) Zero penalties – Banks, nor borrowers, are being held accountable for this gigantic clusterf@#^.
B) Socializing the cleanup – Why am I required to pay through taxes, fees, etc for the poor decisions made by other people? I’m ready to help the harmed, but I’m not so thrilled to help those with self inflicted wounds.
Soylent Green Is People.
“… those borrowers ready to play in the next Ponzi scheme won’t have to wait too long …”
Fannie Mae’s policy is not legally binding contract. It may be changed at any moment, and 2 years are very long time.
Well, if they change it back, then they would have the worst of both worlds; people will strategically default because they thought it was only two years, and Fannie Mae would not get the extra buyers they are hoping for if they put it back to five years.
Ah, but maybe that’s not the aim. Maybe the aim is to snag the 2007/2008 defaulters into buying today’s delinquencies as short sales to clear today’s coming shadow inventory. Thus the policy both provides buyers (who were prudently improving their credit anyway and saving due to renting because they thought it would be 5 years) pulling them forward 3 years, and provides sellers by re-assuring them that they’ll be able to get another mortgage sooner.
IMHO, Fannie Mae and Freddy Mac have no idea what may happen in 2012, and they are always late to act.
By the way, there is always fine print:
– “Yes, sir strategic defaulter! We are ready to underwrite your mortgage. All you have to do is to accept our 50% APR rate and $5000 per month mortgage insurance.”
Anyway, government wants to accelerate short sales at any cost, and there are new taxpayer money to spend.
You can see the family picture over the fireplace. If that lady is holding a baby..there are 9 family members. No wonder they needed their HELOCs :coolgrin:
The HELOC abuse for featured home also shocked me, but what surprised me more is that this home is “back up offer” status.
Don’t these buyers out there look at the price of the house previously sold? and if they did look at the price, how can they justify within their heads the valuation of the house now? Plus, if they’re a little more inquisitive, they would look up and see how the current owner abused the HELOC and now they (buyer) are paying for it and that’s ok with them?? and Don’t they know that at least the previous owner get to party with the HELOC, the buyer now are only left to hold the bag cuz how long will it take for house price to go up to 2006 level.
Regarding the HELOC abuser: I don’t see any expensive furniture or upgrade in the house, so where did the three quarter of the million of HELOC money go? the only possible answer to this is:
there must be an illness in the family and the money all went to the medical bill…
just like all the family who took out HELOC in Irvine! They all have serious illness in the family! 🙂
There isn’t a day that goes by when I hear the following conversation:
Borrower: Hi, I’m looking to buy a new house.
SGIP: Great, where are you living now?
Borrower: In the house I own.
SGIP: Are you planning on keeping it, or selling it?
Borrower: I’m kind of in the middle of a short sale (or foreclosure). But I’m a good person (yes, I get that too believe it or not…) and I want to still own.
SGIP: I’m sorry. It must be your ATT service on your Iphone. I can’t hear you any more (click).
The alternative call goes like this:
Realtor: Hi (name withheld). I have a buyer I want you to pre-approve.
SGIP: Great, where do they live now?
Realtor: In their house I have listed. It’s a short sale (sub foreclosure), but they got a really bad loan from the last lender I referred to them. It’s not their fault and they really want to own again.
SGIP: I’m sorry, you must be going through a tunnel. I can’t hear you. Call back later when you have a REAL CLIENT.
To reinforce: this is a near daily event for me. The strategic default, new victim class, continues to game the system. This new reduction in standards by FNMA is gasoline on a wild fire. When I first saw this rule change about 2 weeks ago my initial reaction was “hey… why am I paying my mortgage”. I laid down for a while until that feeling passed.
Soylent Green Is People.
Would you mind if I made a couple of cartoons from your phone calls? I think it would be hilarious.
It is amazing what people think they can get away with.
Heck, you could even serialize it like a “Judge Parker” cartoon.
When you said “This new reduction in standards by FNMA is gasoline on a wild fire.” Do you mean strategic default will increase? or you mean home price will rise again?
Strategic defaults will increase geometrically. Why (in this age of zero responsibility) would you continue to pay on your $600k nut, when you could foreclose, then buy your same home two years later for $400k?
It’s akin to MEW on the way up. “Smart” borrowers MEW’ed their way to wealth on the way up, and strategically default to shed debt on the way down.
Soylent Green Is People.
SGIP, do you hang up on these types of callers because they don’t have a chance to get a loan and thus, are wasting your time? Or, for instance, if a borrower is otherwise qualified and if the rules allow such (potential) borrower to instantly turn around and qualify for a mortgage loan after foreclosure or short sale, would you turn down his/her business if he/she otherwise qualified?
The Astute Observation you’re referring to should be viewed in the context of “reality based humor”. I’ll try and be clearer next time.
I have a Real Estate License. I’m supposed to use the Finance and Ethics classes required to maintain that license to assist any borrower, no matter their current circumstance. I’m bound by Fair Lending laws and other regulations to help clients, and would do so anyway without the “benefit” of Federal and State laws regarding the treatment of potential home buyers. That’s why I’m a survivor in a business that has flushed out most of the bad actors. There still is plenty of work to do on that front, but for the most part, the better lenders have made it past this recent cull.
I’m a for profit lender. Of course I give everyone as much time as I can to see if there is some way out of their current situation. Most buyers and their Agents are living in an Alternative Reality known as the Planet of Zero Responsibility. Buyers of the sort noted in the astute observation, have a belief that their situation is one caused by outside issues – a mysterious hand that forced them to overleverage and thus are scot free to repurchase at any time. For those calls, I am the voice of negativity. Bear in mind that one persons negativity is another persons dose of reality. The buyers that call with a story of woe, how they didn’t understand the 40 pages of loan documents and 3 day right to cancel the transaction, cannot be helped for the most part. After going through every possible option, and I mean EVERY option, and without a possible way out, I suggest they contact a credit repair shop, perhaps an attorney, then wish them well. My vitriol is reserved for people who, after going through all the ways they can (or cannot) buy 1 hour after the bank has auctioned their house yet still get pissy about the news I’m giving them: I give them a tall glass of STFU and tell them to GBTW.
In the second example, the Realtor has put their client in harms way. They’ve sold the property out from under the buyer without an exit strategy that takes into account the sellers long term needs. Yes, the bank was going to eventually take the house, but the Realtor accellerated the process by Short Selling the home, likely with promises of re-purchasing later. Why else do I get these calls from Agents? It’s a very, very rare thing to find a Realtor who has done the kind of required primary research up front, before the listing has been taken, before the sale has been made, telling the seller exactly what their up against post close of escrow. I salute those Agents who do this on behalf of their clients. They are putting money away in the bank, like a 3 year CD that eventually will mature into a sale for that Realtor. I also salute the Realtors who call me with the problem I listed earlier. That salute consists of a single, smartly raised middle finger. I only wish those Realtors would get flushed out of the industry as the turds in the mortgage business did in the past year. These Agents are why Realtors (and their associates like lenders and appraisers) are ranked right below used car sales persons, but just above flesh eating disease.
Soylent Green Is People.
I like your writing style and agree with you 100%. I laughed out loud when reading “Most buyers and their Agents are living in an Alternative Reality known as the Planet of Zero Responsibility.” Was this an indirect reference to our blogger Planet Reality or just a strange coincidence? I love it.
The analogy would be if the shopper bought the groceries with a check, went home and ate some of the groceries, and then stopped payment on the check and returned the remaining groceries.
What did the shopper and the grocery store owner agree to? Was there a money back, satisfaction guarantee, (purchase contract in a non-judicial foreclosure state), or was it a you bought it, you pay for it deal, (all other mortgages)?
What if the shopper paid 1$ for the can of soup with his credit card. He then returned to the grocery store the following day and found the same can of soup on sale for 50 cents. Would it be morally OK to not pay the credit card bill? Or demand that the bank work out some kind of a payment modification since his can of soup is now worth half of what it was the day before? He has a family to feed and the 50 cents is a meal for his children.
Believe it or not, most stores already have policies to refund you the 50 cents in that situation for those willing to ask for it. It’s for the children of course..
Can we give the strategic defaulters a free toaster too?
Free toaster: No
$2000 vacation bonus for getting a loan through … or cash back if upfront cost are paid with a CC. Yes sir’re.
SGIP, The more he screamed, the more people chowed down. The joy of Bushism and Obamaism — HEW on the way up, and free rent with debt forgiveness on the way down. Banksters collect 4 times – points, bailout, resaling of the bad loans, and new loans.
This all assumes that there will be a FNM or FRE in 2 years. Even Barney Frank doesn’t think so. Look for a big change in January 2013.
IMO Irvine’s RE price is cheap compared to most of large coastal cities in China. My friend’s 1,200 sq ft condo (not even in the prime area in that city) is now worth more than your typical 2,500 sq ft house in West Park. Believe me compared to the RE bubble in some of the large cities in China the great housing bubble in US looks like a kid’s play. Here at least we still talk about price to income ratio. That concept has become completely irrelevant in Chinese RE markets. The great housing bubble in the US was still just a bubble, Chinese housing bubble has evolved into a true housing mania.
And on a side note – Shanghai stock exchange index dropped a whopping 5% in a day last week after Chinese gov’t announced its new policy to curb bank lending to the purchase of the 3rd housing unit (assuming the owner/investor already owns two houses/condos). And you call that their best shot to date to prick that awful bubble.
So if price to income ratios are so far out of alignment in China, how do these ‘owners’ cover the present day ownership costs? Are option ARM loans common in China, or are these people who just have a TON of cash tied up in a house/condo rather than another investment vehicle?
I read an article in Time about huge cities in China that were invested-in and built up to support 5M people, however they’re ghost towns.
Is there really a bubble waiting to bust in China, or is this the new world economy?
The simple fact that needs to be understood is that currently the income ratios of the people who are buying in prime areas are normal and sane. These people can afford their purchases. The middle person in society could not afford these prime locations. For whatever reason this is an impossible concept for most to grasp here.
A suggestion that can save our country from going into more debt:
Extend Obama’s 2012 term to 2016 without reelection. (Since there is no Republican have any chance to win in 2012 anyway).
Meanwhile, Congress awards Bernanke and extend his Fed chain tenure to 2026.
So both of them can really focus on their really jobs not re-election.
Nuts! We need Pancho Villa and Emiliano Zapata to ignite a new revolution.
Just not in Arizona.. ;-D
If we let Obamalosi run the show, the best investment in the US will be the Mexican Peso.
Option ARM type of loans do not exist in China. The typical RE loan is variable rate mortgage with >20% down payment. Commercialization of resi RE has only come into existence in China over the last 10-15 years. Traditionally condos (as main dwelling units) were allotted to employees by their working place (state owned enterprises) at nominal cost as a compensation for low wages. As RE market developed in late 90’s and flourished in 2000’s, local gov’t and RE developers colluded to jack up prices. Local gov’t would sell land at artificially inflated price to RE developers who then pushed up prices of condos. Many housing units are bought up by speculators with deep pockets. There is no property tax in China. And rental market is awfully underdeveloped. Most investors simply left their properties sitting vacant. In fact, over 1/3 of housing units are vacant nationwide.
For ordinary families buying a condo means pooling and exhausting savings of not only the buyer’s family, but also family of their parents and siblings. But for those in power and the well connected they could often acquire multiple units at minimal or no cost. In places like Shanghai and Beijing anyone who owns a couple of properties has become instant millionaire (at least on paper).
They are certainly hoping this will prop up prices, but with the strategic defaults that will result, I don’t see prices as going up.
You argue like an immoral strategic defaulter….
You are Janet.
You are yummyhatoraid…. Or is that the same thing.
IR – BTW, I saw your request for the 417 day reference a day or so later and answered.
Thanks. I saw it and used it as a link in the post today.
I’m not sure I have a problem with the 2-year rule. It will, as Cara has noted above, turn ne’er-do-well HELOC abusers, serial refinancers, and, of course a few fiscally-prudent people, into buyers sooner.
On the surface, this is not fair, but the rub is that anyone who buys in the next 3-5 years will be jumping into a sinking market anyway. Sure, I dislike the shafting of a few honest people, but they’re getting the easy credit, same as the forgiven abusers. All this will not keep prices up in the long term, but it will have the salutary effect of turning HELOC abusers into debt slaves. Keeping them out of the market for mortgage debt for five years would only serve to protect them from pain, and I, for one do not want that! I think there are lessons to be learned here, and the sooner these cockroaches are locked into indentured servitude, the better.
There will not be the same forgiveness the next time around, once the banks’ exposure to this garbage has been reduced. Some of the buyers over the next 3 years will be spending the rest of their lives locked into a mortgage on an underwater asset.
At the heart of the credit expansion Ponzi scheme lies the housing market. Since private lenders are still shell shocked from the housing bubble burst and holding onto a more stringent lending standard, it’s only “natural” for GSE’s step up to the plate and fill the void as the last ditch effort by our gov’t to perpetuate the Ponzi scheme. We’d better all be mentally prepared as socialization of credit/debt (moving private debt to public domain) will be a recurring theme in the next 5-10 years (perhaps much longer), when our gov’t facilitates to have cheap credit pumped back into the system with increasing sense of desperation, then quickly socialize debt via new rounds of bailout. GSE’s new policy to further tantalize home debtors with strategic default is just one more big step toward that direction.
I always got a big laugh every time I heard those “tea party” people calling Obama healthcare plan socialist agenda. But that was nothing compared to the real elephant in the room – the gradual socialization of private debt in this country. Those folks need to have their eyesight checked so that they can focus on the big object.