Casaubon's Book

I’ve been meaning to write something about this New York Times article that suggests that affluent homeowners are strategically defaulting more than middle class and poor ones, but Mike the Mad Biologist said it better.

While I realize regulation has become a four-letter word, regulation does force the regulated to act in certain ways that they would otherwise not. To the extent we want an ethical economic system, it needs to be structured and enforced in order to remove incentives and advantages for unethical (or ‘athetical’) behavior.

But I realize that would be like totally Hitler

What I think is interesting about the Times article is that it actually includes the sentence – that’s quite a radical quote to appear in the New York Times

The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

I’m not sure the Times’ conclusion that the middle class and working class are more ethical is actually correct. More likely, I think that most of the middle and working class have fewer options and are more intimidated about exercising them. You often aren’t going to be able to buy anything else after you default (or even before) and moving into rental housing requires dealing with the realities that most landlords don’t really like children or pets. The costs to your credit rating are a much bigger deal for most people with out huge wads of cash. And you don’t have that second home to sell to raise first month, last month and security.

Still, I think this is important, particularly if housing prices have further to drop, which some commenters suggest they do. I thought Stuart Staniford’s latest review of possible measures by which to calculate expected deleveraging was interesting.

Sharon

Comments

  1. #1 Susan in NJ
    July 11, 2010

    Sharon — My take away from the article wasn’t that the article concluded “the middle class and working class are more ethical.” I even went back and read it a second time and didn’t get that either. “Not having civic good uppermost” doesn’t necessarily equal “not being ethical.” And you have to drill down pretty deep through “ruthless” to “opportunistic” to get to anything that might translate to not adhering to a code of ethics. (And “ruthless” was a quote from someone else as was the comment about feeling less shame).
    And I’m pretty sure middle class and working class folk who are struggling to pay a mortgage are for the most part not doing it for the greater civic good whatever Freddic Mac says. Plus, to my read the NYT article got that the non-rich have fewer options.
    A niggle of a comment, I know. The only excuse I can offer is that my brain is in brief writing mode.
    I think the real difference might be that at bottom the decisionmakers in a monied family make their personal decisions on a more business-like model — whether a good model or not is another matter. Breach a contract, take the consequences, etc., but live to fight another day. They may also be more optimistic about ultimately recovering from the consequences — all of which comes back to more options be they cash, other assets, access to legal and financial advise, connections, etc.

  2. #2 Isis
    July 11, 2010

    “Still, I think this is important, particularly if housing prices have further to drop, which some commenters suggest they do.”

    I don’t see how housing prices could FAIL to drop further, frankly (barring hyperinflation, that is). I don’t know what the trend will be over the next year or two, but long term, I don’t see how mortgage as an institution is supposed to survive. Mortgages (and other long term loans) only make sense at a time of financial stability, when not too many people expect to find themselves out of work for extended periods of time, and when people’s income can, at least statistically speaking, be predicted relatively accurately decades in advance. This is no longer the case, and I imagine that in a not too distant future, the banks will figure this out, and stop giving out any long term loans.

    But if people can’t get mortgages, that will mean that if you want to sell your house, you’ll be selling it to someone who can pay for it from savings (and possibly some small, short-term loans). So whereas today, you might sell your house for $200K to someone who has $40K saved up and is getting the other $160K from a bank, in (say) a decade, you’ll be selling that same house for $50K to someone who has $40K saved up, and got the other $10K as a short term loan. And if you still want that $200K for your house, then you just ain’t gonna sell the house at all because nobody will be able to come up with that sort of money except for the rich, and the rich will be paying those $200K for mentions, not for your cozy little home.

    Just my 2c.

  3. #3 Isis
    July 11, 2010

    I meant ‘mansions’ not ‘mentions.’ Spelling, Isis, spelling…

  4. #4 Claire
    July 11, 2010

    Here are the lines that struck me from the article:

    “In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away ‘might well be a good decision for certain borrowers’ but argues that those who do it are trashing their communities.”

    and:

    “The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.

    ‘They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,’ Mr. White said. ”

    A couple of observations:
    1. Notice the attempt to shame individuals inherent in these statements. In fact, I’d argue that the reason this article is in the NYT is to keep middle class and poor folks from thinking that they, too, might want to implement this strategy, by pulling on their moral strings. (Not that it would be easy for them to do it as was amply pointed out already, but I sense an attempt to use shame to keep middle and poor folks from doing it when it might make sense to do it.)
    2. Notice that corporations aren’t included in the shaming. In other words, defaulting is purely a personal issue, a flaw whether it is of improper planning, bad luck, or moral deficiency. Corporations, such as banks and other mortgage lenders, and the corporations that have thrown people out of work, are not considered to have any agency in the decisions of people to buy housing or to default on it when times get tough.

    Ever notice the real estate agents, housing contractors, and banks who are always encouraging us to put down the least amount of money possible and buy the most expensive house the bank will let us buy? These forces aren’t included as responsible parties in the NYT article. I’d argue that by only presenting the most expensive options that benefit the corporations the most, that corporations are as much responsible for the current debacle (if not more responsible) than individuals. But we won’t see an article in NYT pointing this out.

  5. #5 Jenn
    July 17, 2010

    I’m a relatively new follower to your blog and enjoy reading. I started reading because I blog (totally just for fun) about our experiences on our little farm.

    The situation with the housing market is something we became all too acquainted with last year. I’m a marketing exec in the high tech industry. I was laid off from my company (which actually turned out to be a blessing) and then recruited by a Fantastic company out of State and so we had to move. We were blessed to find a lovely little farm to move to and we love it. Unfortunately, we were not so blessed in selling our house. Even at a ridiculously low price, it sat and sat and we became so strained with it that we considered just letting it foreclose and walking away (in fact, that was something an attorney recommended even though I “made too much money” for us to have completely walked away in that scenario). We are by no means “rich” and I can tell you that we go through the same “end of the month” crunches that every working family does. We also have college expenses on the horizon. Quite frankly, I just couldn’t justify pouring good money after bad into that stupid house. Renting it was considered but having had investment properties in the past, we knew it would be painful and more trouble than it was worth. To make a long story short, we got a buyer and thankfully were able to sell it (though certainly not at a profit).

    What I found through this experience is that our laws and regulations are written such that they really only benefit either the wealthy or the poor. The working middle is basically screwed. The wealthy always have a way out and the poor can declare forms of bankruptcy that totally forgive their debt in the house and even allow them to stay in the house (which is a good thing, no doubt). I just wish that there were more programs aimed at the earners in this country who are suffering (through no fault of their own from the decline in the economy and the housing market). I still have friends who haven’t found work after being laid off because they simply can’t afford to move. So there are people who could be contributing to the economy if there was some kind of “hand-up” to help them do so.

    On a related (but separate subject)… We now live in a beautiful area. It’s primarily rural. We love old houses and now we live in a 100 year old farm house. One of the things my husband and I love to do is drive around and look at other old houses (are we lame? :). After getting to know some folks in the community, we have realized that many of these old homesteads are sitting abandoned and empty while the owners are living in a more modern residence on the farm or near by. I am simply stunned by this phenomena. I can’t understand it. I’m actually so intrigued by these “vacant ladies” that I’ve decided to work on making a documentary film about them (since most are historical properties of interest).

    Sorry for the long comment ;).

  6. #6 hemorex
    March 6, 2011

    Here are the lines that struck me from the article:

    “In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away ‘might well be a good decision for certain borrowers’ but argues that those who do it are trashing their communities.”