Regarding Caveat Mutuor, I Told You So...

For a while now, I've been arguing that when it comes to lending, caveat mutuor should be a guiding principle. After all, no one held a gun to these guys heads and said, "Make me a shitty loan now!" And these guys were supposed to know how to assess housing loan risk--it's what they do. Well, I would like to think people listen to me (although I'm sure I have nothing to do with it at all). But this NY Times article suggests that people are starting to do this:

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender's permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads....

Foreclosure procedures have been initiated against 1.7 million of the nation's households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

This actually seems to be working:

"I stopped paying in August 2008," said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. "I told the lady at the bank, 'I can't afford $2,500. I can only afford $1,300.' "

Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.

Their attitude seems to have changed since he went into foreclosure. Now their letters say things like "we're willing to work with you." But Mr. Tsiogas feels little urge to respond.

"I need another year," he said, "and I'm going to be pretty comfortable."

For the record, I don't think this is a particularly good state of affairs. I wanted mandatory mortgage cramdowns based on pre-bubble prices (and if the sale price rose subsequently, any profits are split equally between the lender and the owner). Of course, lenders didn't want that because it would kill their balance sheets: loans, for a bank, are assets. So now people are left only with the option of total refusal. Atrios describes what has become the ethical option:

I hope it's finally penetrated the public consciousness that it's perfectly acceptable to make cold-hearted morality free financial decisions when dealing with actors that are making cold-hearted morality free financial decisions. For too long we've heard bleatings from the press painting walking away as some sort of moral and ethical issue, placing ethical obligations on people that aren't put on businesses in similar situations. If it makes financial sense for you, walk away.

Yves Smith describes the current environment:

Bob's post highlights a shift in attitudes that is entirely logical and is the inevitable result of financial firms, taking an increasingly predatory posture toward their customers. Borrowers are responding in kind, by taking a cold-blooded and legalistic look at their agreements with lenders.

Banks may find themselves hoist on their own petard, and the larger implications are even more significant. A calculating, contract-driven mindset eats away at the foundations of commerce.

Put another way, credit requires trust and good faith. Without these things, credit becomes very expensive and very risky.