...banks should have been allowed to fail. We rewarded bad behavior by rescuing them. As has been said before--privatized the profits, socialized the losses.

Do you think banks would have given mortgage holders a break?

I think it wrong to sign on the line and then not pay when capable of doing so. Understandable, but wrong, nonetheless.

Not paying is the only option for many and the number that fall into that category is likely to continue to grow as people continue to lose jobs and see income dwindle. For those that think we're out of this mess, a word or ten from Karl Denninger.

September unemployment--Actual loss-995K

Employment--You're smoking green shoots

I did inhale.

I find it interesting that corporations have been allowed - even encouraged - to default in order to void "onerous" contract provisions with labor and suppliers without one peep about "immoral" behavior. I guess amoral corporations can swing to the immoral side when it behooves them but real "persons" are expected go down with the ship. Clearly Ken Lewis is surprised to learn that real "persons" have imbibed the morality scum like him have been cramming down America's throats for the last thirty years. That he is surprised just emphasizes his lack of qualifications for the job he held. When does his board claw back all of the bonuses this doofus earned over the last decade, whether his contract stipulates then can or not. If he had any honor he'd return the money and then go off by himself with a loaded revolver and a bottle of good whiskey.

The house is supposed to be collateral for the mortgage. If you don't pay your payments you lose the house. The bank, or now the lending reality whatever it's form, is supposed to be protected from risk by holding the mortgage to the house.

So the bank is the one taking the risk that the value will go down not the individual.

This whole morality thing is nuts. It's business not ethics. Morality is a cultural phenomenon anyway. It's a legal and practical transaction, not a moral one. Look don't Muslims believe that it's immoral to borrow and loan for interest in the first place. So then who's morality are we supposed to be going by anyway?

So this whole discussion draws a blank stare of incomprehension from me.

I suppose if you want to play the morality game with this kind of transaction then it has to be played as a two way street. It the value of the house goes down then the lender has a moral obligation to suffer some loss as well as the borrower. Otherwise you need to stick to business.

This is similar to my views on abortion. Call it murder if you like but laws against it should be based on practicalities not moralities. We outlaw murder because it's not practical to have murderers running loose in society. Fear is not conducive to strong social relationships and especially social relationships like business dealings.

But I'm not afraid of living next to an abortion doctor nor a woman who has chosen to have an abortion. Actually there are practical reasons to not force-ably remove a woman's power to choose to have one nor a doctor's power to perform one.

So the same practical reasoning might apply here. It might damage the larger economy to allow folks to walk away from a debt because the value of the security has decreased dramatically. Of course, for practical reasons we might also want to penalize banks etc. for not taking due diligence before loaning.

The point being that it is practical reasons not morality that underpins the "rightness and wrongness" here. And indeed again it might be more practical and more beneficial to the larger society for folks to walk away from these deals gone bad. As Don suggests, some banks should be failing, for the good of society.

So lets leave morality out of social relations and put it back into your relationship with your God or gods.

These decisions are business decisions ultimately - certainly when corporations are making them. But there is a long history of individuals honoring their financial obligations no matter what, and there has been also a sense of disgrace associated with bankruptcy. These cultural norms are nearly gone now, so even though a large majority of Americans think it is immoral to deliberately default, many may do so given the right situation.

I agree with your analysis, except I think this sentence is contradicted by the rest:

The morality of paying back what you owe is therefore a matter of self-interest, and not something motivated by a sense of personal ethical behavior or contributing in some way to the common good. If there has been a breakdown in the willingness of some borrowers to pay back what they owe, and if this trend is growing, then something must be happening that makes it in the self-interest of borrowers to deliberately default.

Any society is based on shared beliefs about action, conformity to which we call morality. Unless you're given to the argument that ultimately everything can be reduced to self-interest, I think that paying debts was "motivated by a sense of ethical behavior or contributing in some way to the common good." Lincoln paid off debts after they had been legally wiped out by bankruptcy even though they were incurred by his partner's dubious behavior rather than his own. Even if you argue that the reputation for extraordinary honesty was in his self-interest, you wouldn't thereby explain why he was admired rather than ridiculed as a sucker or clueless rube for paying what he didn't legally owe. Certainly, when stockholders in Winston-Salem, NC, tried to hold on to their R.J. Reynolds stock in the face of leveraged buyout in the 70s to prevent the company from abandoning the city with its jobs, they were ridiculed as "reluctant millionaires", because smart people don't care about anything but their own goodies, you know? Community be damned.

Morality is civic infrastructure. In the last thirty years, we've experienced its plunder by large corporations. As I said, I think your analysis of the banks is right (I could tell a personal story from the 80s that made me think, "These sleezes are acting like the worst caricatures of used car salesmen." So I joined a credit union). There's also the stiffing by insurance companies that we've all experienced. There's the constant moralizing about work "If you got time to lean, you got time to clean" for the minimum wage employees while finance corporation managers declare that normal salary is absolutely inadequate to motivate their work.

I could do a whole number on the politics of accountability and its effect on morality. It's part of the same package.

What interests me is the question of political action. Why don't the American people do something about it? Where are the demonstrations in the streets or the successful third parties to rein in corporate and government excess? I think the withdrawal of individual compliance with traditional economic morality is in fact the revolution. We seem to be seeing a withdrawal of consent to governance of the kind that has led to the collapse of governments elsewhere. I wonder if it will actually go that far here.

The book talks freely of the prominent bankers of the day. They are described variously as men of the highest personal standards, with a reputation for probity unparalleled in the business world, and who ran banks that had sterling reputations for safety and soundness. These descriptions went on and on and in themselves begged the question: why did people care so much about bankers' honesty?

The answer lay in the terrible depression in the early 1890s when so many banks failed. Second, a national currency did not fully exist, and banks issued their own currency that traded on something similar to an exchange market. The First National City Bank of New York was well known and highly trusted, so its notes traded in the major cities at 100 cents/dollar. Smaller banks traded at discounts. Third, there was no Federal Reserve or government intervention to help banks. If your bank made too many bad loans, it was wiped out. One of the features of 19th century novels in Britain and the U.S. was the periodic impoverishment of the hero or heroine when all their assets held in a "trusted" bank were brought to zero because the bank failed. This was a very common occurrence and made it incumbent on the individual to research very thoroughly the creditworthiness of a bank which held their deposits.

Even back then, the stress on moral and ethical behavior for bankers was a matter of keen self-interest, for the banker in order to attract deposits and business, and for the individual as depositor. We cannot say everything reduces to self-interest; there were probably bank managers who felt a moral obligation to widows and orphans who were depositors and who would faced ruination if the bank was poorly run. Still, self-interest in the business world seems to be the predominant determinant of moral and ethical behavior.

What has changed since then is that the government now back-stops the banks and has removed the old-fashioned necessity for bankers to be men of scrupulosity, and depositors to be excessively careful about where they put their money. This back-stop is of wide-spread benefit to the economy as a whole, at a cost of eroding the importance of ethics in the behavior of the bankers. The real argument at the moment is whether the government has gone too far in supporting the banks despite their folly, and whether a system with some serious loss of money and a collapse of poorly-run banks would not redress that imbalance.

30 seconds to decide to make a strategic default if my house were more than 15 percent under water. That would be my nuisance threshold of going through the hassle of moving. The bank would screw me in a new York second.

and unfortunately for those that tried to play by the rules, as this economic downturn worsens, you can expect banks not to foreclose on properties that are underwater, but as cash becomes hard or impossible to come by, the banks will foreclose on people that have equity in their property but are behind on their payments.

That happened in the first Depression; it'll happen in this one.

I did inhale.

been wronged by those big nasty immoral homeowners ... NOT! Loyalty and morality must be a two way street. When the time comes, will the bank try to help its borrowers against its own interest? That's what is being asked of the borrowers. Let's see, what are the chances of that happening?

The idea that the banks depend on the value of homes never falling and "morality" has me wondering if the US economy is just some kind of joke. The real estate market of the past forty years has been one giant Ponzi scheme. I knew we were close to the end of the housing bubble when a bank gave a no down payment first time home loan to a friend who no bank would previously give a checking account to; and for good reason; a person who has never held more than a part time job. A classic symptom of the Ponzi perpetrator's desperation to keep it all going. Ah yes, but morality is supposed to hold such an economy together.

We need a NATION WIDE STRIKE for Real healthcare reform

Its a contract. If either party is willing to suffer the consequences (terms) they may decide to not abide by the terms at any time. There is no moral quotient here. Its jus' 'bidness'. Happens all the time.

Americans were handed the best morality lesson in the history of western civilization; and I think they get it. Basically they're saying; fuck you and the horse you rode in on!

Moses is Moses, and business is business. That's what businesses say to everybody they screw over.

All morality brought into business is imported from other value systems. Business itself contains no inherent morality. There is no more "morality" inherent in a transaction than there is "compassion" inherent in a block of mahogany.

Live by the sword, die by the sword - Moses is Moses, and defaulting is business.

This post sums things up concisely. The public supporting this tactic is in the 'rational choice' school of micro economics, so to speak. They're upside down. They can't pay so what's the solution. Dump the loan and harmful relationship with whomever holds the note. Why not? It makes sense. Balance the negative credit hit against the losses and choose.

The 8 of 10 who see this as an option are doing so in the context of a social and financial environment that is filled with lies and fraud. They know who is on the other end of the default and many of them, I suspect, figure, "Screw the bastards, they deserve it." That's the problem with a moral breakdown exemplified by invading Iraq based on lies, dismantling the Constitution, allowing the sick and poor to suffer, and rampant mortgage fraud (probably in many of the 80% who say, "Why not?"d), etc.

Way back, I thought a national cramdown would be the way to go, for everybody. So what if the banks failed. Find an alternative. They deserve it. The people would be preserved and profit and, paired with rational growth policies, this would have been an option to take seriously. As it turns out, the only cramdowns are those that imaginative bankruptcy judges impose, one lender at a time.

Better a cramdown than a bestdown. Better a default than drowning at the hands of someone holding a note that securitized. Some security.
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Furthest from him whom reason hath equaled, force hath made supreme above his equals.

Posted on Sat, Oct. 24, 2009
South Florida homeowners walking away from underwater mortgages

BY MONICA HATCHER

Andres Duque, who stopped paying his mortgage a year ago, says he weighed which was worse … a hit to his credit score or years of paying more than his home is worth.

Andres Duque thought he got a real steal when he paid $125,000 for his Little Haiti condo. But four years later, similar units are selling for $35,000 and even less.

And so, faced with the prospect of being underwater on his mortgage -- owing more than the unit is worth -- for the next 20 years, Duque, 33, made what seemed to him like a rational choice: to cut and run.

He stopped paying the mortgage, basically forcing the lender to take the condo off his hands through foreclosure.

``I was able to pay off all my credit cards,'' said Duque, who is biding his time in the condo, waiting until they come and evict him. ``In a way, it was the best thing that happened to me because all my income is not being consumed by this freaking monster of a debt.''

Duque's game plan is known as a strategic default -- when borrowers walk away from loans, even if they can afford the payments. Here is a look at the benefits, the risks and the ethics of such a move.

As property values have plummeted by an average of 50 percent, such strategic defaults now make up a sizable chunk of South Florida's foreclosures. In the fourth quarter of last year, they accounted for an estimated 28 percent of all defaults in Miami-Dade and Broward counties, according to recent research from the credit bureau Experian and Oliver Wyman, a New York-based international consulting firm.

That's up from 8 percent in the same quarter two years ago. With property values down even further now, researchers are certain the numbers have risen even more.

With the social stigma of foreclosure eroding, experts say it is becoming easier for discouraged borrowers to justify throwing in the towel.

``People are saying, ` Everyone is doing this, and I do not feel any compunction in fashioning my own bailout,' '' said Roy Oppenheim, a Weston real-estate and foreclosure defense attorney who conducts weekly seminars that discuss strategic defaults and other financial options for distressed borrowers.

South Florida is already a veritable Atlantis of underwater borrowers. In September, homeowners here collectively owed $62.7 billion more than their homes were worth, according to an analysis by First American CoreLogic. The analysis found that about half of all outstanding mortgages in Miami-Dade and Broward are underwater.

Among those who bought in Broward in 2006, the median negative equity was $75,000 as of March. In Miami-Dade, the figure was $63,000, the Web-based real-estate service firm Zillow.com reports. Negative equity refers to the difference between a loan balance and the market value of a home.

``I wouldn't blame borrowers who knew they were facing significant losses even if they could afford to stay,'' said Andrea Heuson, a finance professor at the University of Miami. ``Every day you wake up, you are reminded how much you paid for something, and then you read every day in the newspaper how much prices have fallen.''

THE MANY CONSEQUENCES

Walking away, however, is fraught with financial, legal and ethical dilemmas. Lenders, government and the credit industry are starting to pay more attention to how strategic defaulters think and behave -- in an effort to convince them to tough it out.

``It's a huge problem, and it doesn't get addressed in the process right now,'' said Ron Kaniuk, a Boca Raton foreclosure and bankruptcy attorney. He said lenders are encouraging the trend by primarily offering loan modifications only to those who have fallen behind or are seriously at risk of foreclosure.

Duque, in fact, said he shunned a modification because it didn't reduce his balance.

``It's really a social change in the way debtors think, and it's taking creditors some time to absorb that,'' said Mark King, an attorney with the Miami office of Jones Walker who represents banks in commercial foreclosures. Commercial property owners also have started walking away.

William Hardin, a real-estate professor at Florida International University, said people have a moral obligation to honor their mortgages when they can.

``The vast majority knew what they were doing and were taking a risk, and the fact of the matter is [the mortgage] is a contract. We live in a world where contracts have to be honored. It's the way our economy works.''

High default rates have already meant higher loan costs and tougher underwriting standards for all borrowers.

Tracking strategic defaults is an inexact science. Experian researchers identified possible strategic defaulters as homeowners who have gone straight from current on their payments to not paying at all, but remained in good standing on other credit obligations. Nationally, Experian estimated 588,000 borrowers defaulted on purpose in 2008.

Also fueling the phenomenon has been a shift from viewing a home as a place to live to an investment, valued insofar as its potential resale price goes up.

Frustration with the tax-funded bailout of banks and Wall Street may have also emboldened depressed borrowers to default out of anger and a desire to stick it to the banks. Duque's resolve, for example, hardened after watching Michael Moore's movie Capitalism: A Love Story. In the movie, Moore makes a case that corporations preying on consumers led to the housing crisis and recession.

``In the movie, there were Congress people telling the American public to stay in their homes, to squat and do what you have to do to fight. A lot of it struck home in many, many, many ways, and I am going to stay here until [my bank] comes to get me out,'' Duque said.

Aside from the new philosophical justification for stopping his payments, Duque said his decision was fundamentally an economic one. ``My mortgage was killing me, even before things went to hell. I was being choked by the property,'' said Duque, who works at the Mondrian Hotel in Miami Beach.

Most strategic defaulters find themselves weighing whether the hit to their credit scores is easier to bear than paying underwater mortgages for years to come.

The most optimistic analysts say it could be three years before prices begin to appreciate. Others say prices have another 30 percent-plus to fall before flat-lining.

Prepared for the worst, Duque has been surprised by the seemingly minimal consequences so far. His credit limits on two cards were slashed by a few thousand dollars, but they were not canceled.

``I went to BrandsMart and applied for a card, and they denied me, so my credit score must be pretty low,'' he said. ``That's fine with me, as long as I have a couple of credit cards.''

Surprisingly, strategic defaulters with good credit scores who remain current on their other credit lines can quickly rehabilitate their credit scores after foreclosure -- faster than many realize, according to Sarah Davies, a senior vice president at VantageScore, a credit scoring and consumer analytics firm owned jointly by the nation's three major credit reporting agencies. ``You can pull yourself out of any major impact from foreclosure in 24 months,'' she said.

And five years down the road?

``A foreclosure is going to be very easy to explain, seeing there are thousands of others who have also defaulted. So, there is a safety-in-numbers issue there,'' Heuson said, referring to a possible borrower rationale.

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