Friday, July 09, 2010

Just Walk Away Wealthy

For an insightful peer into the double standard that exists between wealthy and typical homeowners give this article a read.

Although the data compiled may simply be revealing the fact that larger debt instruments have a higher propensity to fail during hard economic times than loans of more modest size, the results may highlight an important difference between the treatment of the wealthy versus the typical.

In general, “homeowners” of modest means who walk away from their housing debt are viewed as dead beats while the wealthy that do the same are presumed to be making a good financial decision.

In this way, a person’s prior economic status appears to influence the way others judge their actions and ultimately likely contributes to shaping the defaulters sense of their decision.

The wealthy likely, rationally, believe that walking away from a debt laden deflated home is the best financial choice that they could make while individuals of more modest means face more scrutiny and pressure to make good on their debts.

Meanwhile, in states in which non-recourse loans are the standard, mortgage debt is simply secured with the collateral of the home so while the banking industry and others with financial interests attempt to brand those that walk away from their loans (particularly those that can afford to continue paying) as “ruthless”, the terms of the agreement allow for the debtor to turn over the keys.

By contrast, consider what would be the outcome should the circumstances be reversed.

If economic conditions were strong and home prices were rising steadily and a homeowner were to experience some form of hardship leading to a loss of income and delinquency of their mortgage debt (even as little as 5% or 10% of debt remaining on the loan) the bank would eventually act in their best financial interest and take the home, forcing its sale and causing substantial additional hardship... talk about ruthless.

All in all, wealthy delinquents are simply doing the same, not concerning themselves with the blowback on their communities or the economic fallout for their lenders but simply making the decision that is in their own best financial interest.

All others would probably do best to follow suit.


  1. If economic conditions were strong and home prices were rising steadily and a homeowner were to experience some form of hardship leading to a loss of income and delinquency of their mortgage debt (even as little as 5% or 10% of debt remaining on the loan) the bank would eventually act in their best financial interest and take the home, stripping the homeowner of whatever equity accrued for in property... talk about ruthless.

    Except a bank can only take what they are owed. If a bank forcloses on a house where they are owed $100K and the house sells for $250K they need to give $150K to the (former) owner.

  2. Good point but they force the sale... that's a substantial hardship and possibly coming with a real loss.

  3. Anonymous9:22 AM

    I normally agree with you, but I think you're a little off base in this post.

    The "wealthy" who walk away when they could afford to pay are much larger deadbeats than those who walk away because they are legitimately in financial distress. Foreclosure is a safety net set up for those who have scarce other options. "Strategic defaulters" are abusers of this safety net and deserve all the scorn they are getting, and more. Turning the keys in is a penalty for breaking the contractual obligations of the mortgage, not a payment option. This only absolves them of the debt (in some states) because the law limits how far the bank can go to enforce their contract.

    Your example of the "reverse" situation is wrong on two major counts. First and foremost, your example was of somebody with a legitimate hardship, not of a "strategic defaulter." Defaulting because you have a legitimate hardship is precisely why the safety net of foreclosure exists, and I have no problem with that. Second, in a market where prices were rising, the borrower could easily unload the home on his own and pocket the increase in equity.

  4. Dagger10:04 AM

    The point is that in the past "morality" was important for everyone. But lately many elites think morality is for unsophisticated suckers.

    Banks and credit-card companies are run by the most amoral elites. Which explains a lot.

    Corrosive elite attitudes tend to trickle down and corrupt regular folks. Think Roman empire. Or the regular people, to avoid decadence, can foment revolution. Like 1790s France.

    Not a great choice.

  5. Smack MacDougal10:18 AM

    Your anonymous commenter says those who default on mortgages should get scorn.

    Scorn? From whom? That's laughable.

    Who, among the 7 billion on earth, lives a perfect life such that they deserve to be held above all humans and thus can render scorn upon others?

    No one in the U.S.A, let alone the earth, is so exaulted that they can render scorn upon anyone else.

    In money games, only contracts and terms exist that define foreseeable outcomes. Procedures exist to bring forth one of those potential outcomes into the now.

    Only the highly indoctrinated, often with mediocre IQs, who do not get money games, who play the games of life according to rules that do not exist, but which they believe exist, feel shame and expect scorn when they decide in ways that others might not like.

    The extremely rich are so because they do not let their feelings get in the way of decision-making with respect to money.

  6. Dagger11:20 AM

    Smack MacDougal,

    Your attitude is exactly what I'm talking about. You scorn social morality, saying it's a symptom of indoctrination and mediocre IQ. For you your account balance is your score in the game of life.

    For most people it's not. Thank god.

  7. Great comments....

    I'm swayed one way... and then the next... and then the next...

    Reviewing my post I think I should have written as the last line:

    "At this point... All others would probably do best to follow suit."

    Because I used to firmly believe that a mortgage really was a contract that you had an obligation to make good on at all costs (I still ultimately believe this for myself) but given the events of the last couple of years, I think I can see it from many different points of view.

    Strategic default from an "investor" like the little nincompoop from the "I'm Facing Foreclosure" blog back in the day deserves to be bound to some form of obligation for his recklessness but...

    If you are a regular person who works every day and earns a regular pay and lives a typical life in a in typical area why should you feel yourself a failure if you want to bailout of a bad mistake?

    Why should you continually pay for an enormous asset that was made in err... that may see its peak value regained some 20-30 years down the road... or maybe not all... All the banks got bailouts...

    These are the very same banks that charge customers 15%-30% interest on credit cards when you miss a payment or calculate the best methods of charging you overdraft fees... or own most of the pawn shops and payday lenders across the country...

    So, my point being... the downturn has brought out the worst pretty much in everyone... in government, individuals, firms...

    At this point its hard for me to firmly say what truly is moral and probably the quicker people get back to square one... have debts be destroyed and losses taken.. the better.

    But still this is just personal opinion and you all made great arguments.

  8. Cannonfodder3:16 PM

    I had a teacher tell me once that I "would never be a good business owner, because to be successful and wealthy, you can't have a heart." If you let emotions and feelings get in the way, others are going to take advantage.

    A few years following that, I bought a house in 1978; by 1983, interest rates nearly tripled. I lost the house when our second income was reduced during the downturn, and most of the equity vanished with fees, penalties and extra charges.

    There was ABSOLUTELY no mercy from the bank. I give THEM the same consideration now...30 years later.

  9. dagger6:47 PM

    Cannonfodder, great story.

    Banks used to foster relationships with people and the community. They tried to treat you with respect, they cut you some slack if you'd been with them for a long time. They'd listen.

    You probably didn't even think about it when you signed up with the bank. It's only something that matters in the long term.

    But everything has changed. Good will and community are assets, but they're not on the books. Managers realized that if they could cash out these intangible assets they could call it profit. And get big bonuses. Short term trumps long term.

    It was good for the bankers, but bad for the banks, communities, and everyone else.

    It also became the accepted wisdom. A dumb-hick bank manager has no pity or compassion. A smart banker goes for the jugular. And gets the prize.

    Thus civil society falls apart. Nice guys finish last.

  10. Cannonfodder10:41 PM

    Thanks Dagger.

    I dealt with that branch since 1968 and knew the loan manager well - she was there til she retired; but things changed in the early 1980's with policy and approval decisions increasingly made in central locations. This has now reached the point where you are no longer a client, but just another resource to be tapped. Local personnel have little to do with the process aside from filling out forms to forward to head office. You are seen as a page of numbers instead of a person....

  11. Tishman Speyer wlaks away from their Stuyvesant Town development, and I doubt that their credit rating has been affected at all.

    The Donald's Trump Organization has defaulted on real estate loans, but apparently not enough to keep this fellow from having his own TV show.

    Why is it that the peasants are expected to foot the bill, but not the elite?