Not too long ago, the fact that I've paid my mortgage every month for over a decade (even during times of unemployment) would have been considered a sign of responsibility and financial security.
But reading this, I can't help but think that doing so simply makes me look like a chump.
Buying a house with a mortgage is just a market transaction. There is no moral dimension, and it's naive to inject one. These people went into the transaction in good faith. Now, the law gives them the right to invoke the statute of limitations, and the banks knew that when they made the loans. There is nothing wrong with their invoking the legal rights they have. If the shoe were on the other foot, the banks would do exactly the same thing.
> There is no moral dimension, and it's naive to inject one.
I disagree. Obviously, this is just my own personal opinion, and I cannot cite authority because that is how ALL moral questions work. But my moral premisses include keeping commitments I made that others rely on. The stockholders of the bank relied on my promise to pay my mortgage, as far as I am concerned, there is a moral dimension to my making those payments.
The lender for a secured loan is also obligated to not damage or devalue the collateral.
It is clear to me, if not clear to the courts, that in aggregate, mortgage lenders caused the collapse in real property values in 2007, the same properties that were the security for their own loans.
If you pawned a guitar, and as you watched, the pawnbroker snipped each string with wire cutters, then used a gouge to carve an obscene doodle on the body, would you still feel a moral obligation to pay back the full value of the loan as promised? If you got an auto title loan, and one night you discover that the lender was in your driveway, smashing up your car with a sledgehammer, would you still feel a moral obligation to live up to your promise to repay? Why then would you feel a moral obligation to honor the terms of your note for the very people that cut the value of your home in half?
The moral thing to do would be to deduct the damages to the collateral by the lender from the principal on the loans.
So far, the courts have not been considering this angle. Lenders drag their heels on modifications, fighting every step of the way and seizing upon any possible excuse to avoid reducing the principal.
The moral issue here is moral hazard. If you know the government will always take your side, you have significant incentive to always act like a total prick. And that is what the mortgage lenders have been doing.
How do you think that lenders caused the collapse in 2007?
EDIT: I could convincingly argue that lenders (as a group and with the help of a lot of other people) caused an artificial inflation of property values preceding the collapse but at that point the collapse was inevitable and not really the fault of anyone.
Fannie Mae and Freddie Mac (secondary market) were ordered to buy more loans in economically depressed areas. Independent mortgage lenders and banks (primary market) expanded their lending in response, bringing in borrowers that had progressively higher risk profiles. They started falsifying documentation to meet the already-lowered standards of the major players in the secondary market. Those, in turn, fudged their accounting to make re-sales to the tertiary market more palatable. The tertiary market just leveraged the hell out of those repackaged mortgages, and sometimes just made up numbers to fill in the blanks.
Then that first guy that got a mortgage loan with no actual income missed a payment. That increasing leverage all the way up turned that little blip into an explosion. Mortgage businesses hit the ground or hit the brakes, and now fewer new buyers could afford homes without loans. That lowered property values across the board. Those trying to sell their homes to pay off their mortgage loans could no longer do so. The foreclosures started.
Financial businesses like to own liquid currency, not ugly real property. So they auction foreclosed homes at fire sale prices, often because pissed-off former homeowners commit waste prior to losing possession, and the new owner does not bother to even look at their new asset even once before selling it. This lowers values further. Renovation businesses that can afford to pay cash lowball the bank, because they know there might be concrete in the toilet drains now. If they can easily get as many foreclosures as they want, they don't buy regular, non-distressed properties.
That's the summary. There's a lot more to the story than that.
OK ya, I agree with that. Though as I said I think that saying they caused a collapse is really only telling half the story. Before they caused that they also caused an unreasonable run-up in property values.
Why can't there be a moral dimension? It's a market transaction that involves making a promise. Lots of people think that fulfilling promises is a moral thing.
The agreement was entered into with both parties understanding the risks and consequences of default and actions to be taken in such an event were clearly outlined. If all that is understood in advance, what is immoral about taking that option instead of repaying?
You didn't make a "promise" to repay the bank. You signed a contract. As long as you adhere to the terms of that contract you're morally clear.
If you loan me $50 and we agree that either I'll pay you back OR you get to punch me in the face, you can't complain about losing the money if I choose the punch in the face, and there's nothing immoral about that option since we both agreed to it in the beginning.
I don't think that adhering to a contract is automatically moral no matter what the contract says or how you adhere to it. The argument that it must be moral because you both agreed to it beforehand is a non sequitur to me.
"Moral" is, at best, subjective. Personally, I think if two people agree to something, then sticking to the terms of that agreement is moral, and trying to change them after the fact when things don't work out in your favor is not. As long as there was nothing inherently immoral in the agreement to begin with, I don't see how sticking to it could possibly be immoral.
If it's subjective then I'd say it's silly to declare that a mortgage can't have a moral dimension. If you think it doesn't, fine, but it's weird to say that it can't.
Neither are families, what's your exact point here? Moral free reign against groups but not an individuals?
I'm not arguing against using the statue of limitations to keep your house; I'm just wondering exactly what you have shown by reiterating that a corporation is not in fact an individual human being.
There is absolutely a moral dimension - but the same moral dimension should apply to both parties.
Is it immoral to foreclose on a house when the loan goes underwater despite the family living in the house paying normally on the loan? If one side has a history of showing bad faith on the moral dimension of the transaction, how can anybody expect the other side to magically hold up their end?
Why would they foreclose on the house when the loan's underwater and it's being paid off normally? That seems like the worst possible time to foreclose.
> These people went into the transaction in good faith. Now, the law gives them the right to invoke the statute of limitations, and the banks knew that when they made the loans.
First, there was no good faith. Note, not a single monthly payment was ever made. And in this case, this particular statue of limitations did not exist when the loan was signed!
Also worth pointing out, the loans are resold to the Fed, so the banks hold no liability, which I guess is why the loan servicers aren't hustling to file a proper foreclosure. It's the taxpayer on the hook for this.
I've been sharing the story, and hearing back, anecdotally, this is a well-known trick called "quiet title" and apparently a form a welfare. It would be extremely interesting to get hard stats on how often this actually happens.
Yes, you are actually correct. Lots of people would argue that publicly traded american companies are 100% immoral. Their overall duty is to their shareholders and not the american public.
Legally you are, of course, correct. Though it is interesting to think about how "moral norms" reduce the cost of borrowing overall and how as those norms corrode the cost of borrowing will go up.
I think you're right--if lenders were underpricing default risk before, they'll have to factor it in now and the cost of borrowing will go up. I'm not sure if I think that's a bad thing.
I'm not sure if it's a bad thing on a global scale either. But it's certainly a bad thing for certain individuals.
What's super interesting in whether banks will be able to successfully incorporate new data sources to better segment the market to charge different rates for different customers. Will my Facebook posts really tell them if I'm more or less likely to pay back that auto loan on time? Some people certainly seem to think so.
Think of it like this: there are a lot of stores out there that are pretty lenient on shoplifters. They believe, rightly or wrongly, that they're better off that way, either because coming down on shoplifters puts their workers in danger, or it scares off legitimate customers, or whatever reason they come up with.
Does that make you a chump when you go into one of those stores and pay for your stuff like you're supposed to? No, that's just decent behavior.
Thinking about it that way makes me feel better about it all.
Conversely, I walked away from my townhome because it was ~$150K underwater.
I lost my downpayment (~$20K), plus whatever principal was paid over ~4 years. After losing almost $60K-70K in a home I couldn't sell nor could I rent (HOA restrictions), why would I throw good money after bad? New mortgage guidelines stipulate only a 3 year waiting period from foreclosure date to get a new mortgage, even less if you document a financial hardship caused your foreclosure.
Were there other circumstances, like you had to move for a job or something? Walking away in a downturn for its own sake seems like a bad decision, like selling stock because it took a hit.
I bought new construction, my builder went bankrupt, and Bank of America sold the land to a new builder for pennies on the dollar. When the new homes started going on sale for half what I paid, I did the math on how long it was going to take at historical real estate appreciation rates (roughly 3%/year).
I stopped paying, tried to work out a modification to reduce the principal with Bank Of America (who completely botched it), they transferred it to a "specialty servicer" who specializes in modification (who also botched it), and then ended up just letting it go into foreclosure.
Was 3-7 years of less than perfect credit worth it? It appears so. Houses in my old neighborhood are still significantly underwater.
This isn't isolated though. ~17% of homeowners are underwater, and appreciation has slowed to a snail's pace, meaning those people aren't going to be able to sell for a long time [1].
From zillow:
> In the fourth quarter of 2014, the U.S. negative equity rate – the percentage of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – stood at 16.9 percent, unchanged from the third quarter. Negative equity had fallen quarter-over-quarter for ten straight quarters, or two-and-a-half years, prior to flattening out between Q3 and Q4 of last year.
> While this may not seem very notable (after all, overall negative equity didn’t go up, merely flattened out), this represents a major turning point in the housing market. The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived. Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come.
Thanks for taking the time to type this up, it's really interesting.
It is fascinating to me that being underwater in a house is such a big deal to people; almost every car you see on the street is underwater yet people don't care nearly as much about that. The computer I'm typing this on is definitely "underwater" in that it's worth less than I paid. Almost every investment transaction (stocks, etc) are underwater the moment you make them because of transaction fees. If your ability to pay is unchanged and you don't need the liquidity (ie, you don't need to move today), I don't see the problem. You got the short end of the stick, sure, but it was your deal to make or not make in the first place.
Further, if you're considering a home purchase in financial/investment terms, you've got to consider the time scale - real estate operates in terms of decades. A lot of people got used to multi-digit yearly appreciation and to this day think anything else is a bad deal, when it's actually more on-par with other investment vehicles after the adjustment.
> Negative equity is decidedly here to stay, and will impact the market for years to come.
I wonder how much of this is because low-money-down lending (FHA, VA) has opened back up, with down payments barely (if at all) covering transaction costs. It could actually be a good indicator for affordability.
Anyway, I assume you're at peace with your decision and I'm not trying to convince you otherwise. Just trying to understand the logic. No offense meant.
> If your ability to pay is unchanged and you don't need the liquidity (ie, you don't need to move today), I don't see the problem.
> Anyway, I assume you're at peace with your decision and I'm not trying to convince you otherwise. Just trying to understand the logic. No offense meant.
None taken at all. I made a mistake, and I paid for it.
Keep in mind, no one cares when their car is underwater because you can cough up a few thousand dollars to get out of it. When your house is underwater for tens of thousands of dollars you're effectively trapped in it, and can't move if you need to (whether its for work or personal reasons).
Those homeowners underwater are limited in their mobility now, thereby reducing their earning potential if they could possibly move for a better opportunity (either pay or experience). While that might contribute to keeping wage inflation in check, it also limits any economic growth we might realize from those people having more mobility.
TL;DR Housing shouldn't be viewed as an investment, and we're going to feel the pain from the 2008-2009 crisis for many years to come.
Home ownership in the US has traditional been viewed as a means toward upward mobility and a good investment. And it's certainly billed as such by the real estate industry. "Why throw your money away on rent!"
When you buy a car, or most other consumer goods, for that matter, you don't view it as an investment that you will be able to sell at a higher cost in the future
How many mortgage lenders do you think cautioned homebuyers against buying real estate they qualified for? Both parties entering into that agreement must assume some risk. Homebuyers may loose a home they are unable to pay for, plus anything already paid. Banks get to keep payments already made and the collateral they agreed upon when foreclosure occurs.
People have unreasonable expectations of what an investment is though, just browse /r/personalfinance or /r/investing. If you need liquidity, real estate is not for you. For a tiny period of time that's a rounding error in the history of real estate ownership, yes you could buy a house and see a 100% value increase in a year. But going in expecting that isn't investment, it's speculation (see: bitcoin's run up and crash).
The value in real estate - in any true investment - is over the long term. I'm talking decades, not years and certainly not months. For a primary residence it's worth it just to keep your housing payment steady. Your $3k mortgage payment is going to be $3k today, tomorrow, and forever until you pay it off. What's $3k in rent today going to be in 30 years? Nobody could say for sure, but I'd bet everything I own it'll be more than $3k.
But as with any investment vehicle, you have to choose what's right for your risk profile and your liquidity needs. Don't invest in a startup if you need your capital back in 2 months, and don't buy a house if you need to liquidate it in a year. Every vehicle has tradeoffs, and each vehicle can be mis-used and end up costing the investor dearly.
> How many mortgage lenders do you think cautioned homebuyers against buying real estate they qualified for?
Effectively 0, and I can't see a reason it should be otherwise. Does a car dealer caution you about buying too expensive of a car? Does the Apple store encourage you to buy the smallest iPod? Salesmen are not (usually) your fiduciary, and every single person involved in a real estate transaction is a salesperson. Nobody's looking out for you except for you.
> Homebuyers may loose a home they are unable to pay for
Sure, that happens, and I feel bad for people in that situation. What I've heard a lot of though is from people who could pay, but won't because they feel like it's a bad deal now (see: this thread).
> What's $3k in rent today going to be in 30 years? Nobody could say for sure, but I'd bet everything I own it'll be more than $3k.
I don't believe this is the case. Population growth has stopped in the US, and as baby boomers die off you're going to see a glut of housing inventory pushing prices down.
> Effectively 0, and I can't see a reason it should be otherwise. Does a car dealer caution you about buying too expensive of a car? Does the Apple store encourage you to buy the smallest iPod? Salesmen are not (usually) your fiduciary, and every single person involved in a real estate transaction is a salesperson. Nobody's looking out for you except for you.
Small quibble. The real estate agent/broker advising you is required to act as your fiduciary, as is your attorney. I'm able to provide legal citations if necessary.
> Sure, that happens, and I feel bad for people in that situation. What I've heard a lot of though is from people who could pay, but won't because they feel like it's a bad deal now (see: this thread).
Selection bias. For every person you talk to on Hacker News who made a financial decision to walk away, I'd wager there are hundreds of people who lost their home due to a legitimate financial hardship. This can be observed through both the unemployment rate during the crisis [1] (and several years after) as well as people trying to get onto disability due to them no longer having skills to earn a living wage.
> I don't believe this is the case. Population growth has stopped in the US, and as baby boomers die off you're going to see a glut of housing inventory pushing prices down.
Two words: immigrants and inflation. I think I'm going to see a $100k minimum wage in my lifetime just from inflation.
> The real estate agent/broker advising you is required to act as your fiduciary
Of course, as far as trying to get the best deal and informing you of property condition and so forth. In context I clearly meant financial fiduciary [edit: I see even that could be mis-read, so in more words: your realtor has no duty to tell you what you can and can't afford]. RE agents take great pains to know only what your prequal number is to make sure they stay far away from the possibility of financial fiduciary duty.
> Selection bias.
Perhaps. Whether or not their home was underwater, someone hit by unemployment's probably going to end up in that position anyway. Obviously it was all connected; regardless, those instances are not very interesting. As I said elsewhere in the thread, the cases where people are indeed able to pay yet still walk away are interesting to me.
you could also declare bankruptcy as a form of renegotiation or (like a really big company) stop paying all of your bills and wait for your creditors to accept lower offers.
When you gamble you win some and you lose some. Do you have the stomach for it? Maybe this lady in the article is just better at playing hardball.
--
If the banks fail to show up in court, fail to file the correct documents, etc etc etc, why should they be treated any better than a normal person who does the same thing?
It shows the inefficiencies of the courts... whether it helps or hurts businesses or individuals doesn't matter.
Not providing an efficient and sufficiently staffed, well run court system is the crime here... and society pays the costs while never blaming the cause.
Note the rapid rise in arbitration and arbitration agreements-- it's a private system that is far more efficient, and thus a lot cheaper to get issues decided. This is why billion dollar companies have arbitration agreements-- they can afford the lawyers for a court battle and are big enough to get heard, but they'd rather have it settled (even not in their favor) by arbitration.
Arbitration is on the rise because one side has massive power in picking who does the arbitration, and being a private system that system has an incentive to keep the one who picks it happy so they won't change. Thus arbitration will favor the side who sets the terms of the contract.
Do you have the stomach for it? Maybe this lady in the article is just better at playing hardball.
Maybe I'm old fashioned, but it seems to me that making ends meet is the way hardball is played. The woman in the article looks like she just relied on running the clock out in order to get the game declared a tie.
I have little sympathy for the banks. But I have little more for folks who choose not to meet their financial obligations.
Just another hammer-blow to the underlying element that makes any society work: trust. Given that we nuked contract law when GM bond holders got shafted in '08, any reaction is simply the twitching of a dead corpse.
With high trust social environments, almost any government and financial system can work. In low trust social environments, none do.
I think I agree with you, but how do you see this playing out? Or maybe, how has it played out in the past?
Certainly I lost trust in the US federal government when I saw that it wasn't obeying its own laws, and not prosecuting itself, and there was no method to bring it into compliance. I lost trust with state governments when I got "audited" for a business I never owned, assessed a tax liability for that business which never even existed in the state, based on an auditors assumptions about business done in the state, and was told that it was legally binding in a "guilty until proven innocent" way, and that I had to pay half a million dollars in order to appeal the audit (for a business, remember, that I have never had any connection to.) Needless to say I don't live in that state anymore.
But I do have to live somewhere. I would like to buy a house. But how can I when I could lose it to imminent domain when the mayor's cousin's construction company gets a great opportunity to develop a multi-use master planned community on the land?
My guess (and it is just a guess) is a continuing stagnation and transition into a south american situation, where everyone is either connected to power, poor or trying to look poor. As it becomes increasingly clear that the rules are unstable, subjective and enforced arbitrarily, people will turtle up.
As far as what I'd recommend, well, first I'd recommend not listening to me.
After that, I'd recommend getting as lean as possible. Mr. Money Moustache has some good tips on this, with two caveats: I think he is too optimistic about equities and I don't mind spending money on a few high quality things that I can give to my kids. For all his talk about mindless index-fund investing, he did pay off his house when the chance came up, so do as he did, not as he says.
The nice thing about this minimalist approach is that it's probably the right thing to do anyway, when it comes to being happy.
Very hard to feel bad for the banks in this, since it's only the epic scale of foreclosures that allowed anything like this to happen, and the scale of foreclosures is a direct result of non-existent underwriting.
However, the problem is, it's not the banks footing the bill, it's the taxpayers. As usual, the less you pay, the more you get, and now apparently that includes the wholesale American Dream of home ownership.
What I don't understand from a legal perspective, is how statue of limitation can possibly apply. The time limit would have to be filing of the case, not conclusion right? I know there were issues with robo-signing and all that, but did the loan servicers really drop the ball so badly? (Edit: The answer is in the actual case PDF I found and linked to below -- the original foreclosure was dimissed without prejudice because the bank couldn't produce the necessary documents, namely an original copy of the mortgage.)
Mortgage servicing is outsourced by the government in fairly lucrative contracts. The bank you get the loan from is almost never (credit unions are the obvious exception) the company that collects your payments each month. I would have guessed it's up to the loan servicer to handle the foreclosure... the article simply doesn't have enough details behind the catchy headline.
“No one gets a free house.” This Court and others have uttered
that admonition since the early days of the mortgage crisis, where
homeowners have sought relief under a myriad of state and federal
consumer protection statutes and the Bankruptcy Code. Yet, with a
proper measure of disquiet and chagrin, the Court now must retreat
from this position, as Gordon A. Washington (“the Debtor”) has
presented a convincing argument for entitlement to such
relief. So, with figurative hand holding the nose, the Court,
for the reasons set forth below, will grant Debtor’s motion for
summary judgment.
Edit 2: The lawyers for the bank seem like complete neanderthals?! The statue of limitations is 6 years from the date of maturity, which was accelerated, so debtor claims it's been 6 years since the accelerated date. But the statue specifically says the bank can extend the date of maturity by written instrument. So... write a note de-accelerating the acceleration by 1 year, and re-file the foreclosure.
It's also not even clear the statue in question was effective in this case. The judge assumes that based on a prior statue which did say it was to be effective for all foreclosures filed after that date, but the law in question says no such thing.
And a final closing remark, as I just got to the last sentence in the PDF:
"The Court will proceed to gargle in an effort to remove the
lingering bad taste."
It's hard to stomach any actor in the court system who whines about gargling to remove the bad taste when the law works out to a homeowner's advantage but doesn't bring up how any large bank is treated with kid gloves by the sec. They're never prosecuted, they're given fine after fine after fine and allowed to treat it as a cost of doing business with no real consequences, etc. There's voluminous coverage, but just a bit:
That court sounds like it is anything but impartial.
Language like that favouring one party in a dispute where the court apparently has no other way out than to come down in favour of the other party should be ground for a pretty strict reading during a performance review or whatever is the local equivalent. Disgusting, and I'm saying that even though I am neutral about the case (not having a dog in the fight).
Such language simply has no place in a ruling and suggests extreme partiality on the part of the court, something that should be avoided at all costs.
The expectation (of the court, and the bank) was you get 6 years on the note, and 20 years on the mortgage. Now we have a novel theory where the court is finding it's actually a 6 years limit for the note and the mortgage.
The homeowner never made a single monthly payment on the mortgage, from the very first month they were in default. And now, the mortgage is effectively discharged. There's no question as to fact here, the homeowner is stealing the home.
The question is, is it lawful? It's appropriate for the court to express disgust when the law leads to blatantly bad outcomes.
> It's appropriate for the court to express disgust when the law leads to blatantly bad outcomes.
Then they should find different jobs. The law working 'bad' happens quite frequently and I have yet to see such a blatant preference for one side over the other in official court documents.
It degrades the court.
The homehowner is not 'stealing the home', the homeowner has found a legal loophole in a situation that could have turned against them quite easily and the court had to confirm that the loophole is indeed legal. Liking or disliking doesn't enter into it. The bank probably had ample opportunity to avoid this happening but in the end trusted too much in the judge siding with them because of the fundamental unreasonableness of the request, forgetting that it was the legality that mattered.
If it there is any doubt about this being legal then you can be sure the case will be appealed.
Contractual law is usually dealt with quite strictly when the tables are turned, for once it is the homeowner that ends up with an advantage, it's a foregone conclusion that future contracts will be re-written to rule this possibility out so the damage is limited and that the bank(s) will be much more careful about letting things get even close to the statute of limitations.
I wonder how many homeowners are in a position to continue to exploit this given the fact that the banks are now warned.
Apparently it's not uncommon, although anecdote is not data, so I stress apparently. I forwarded this story around, and my brother knows a woman in Florida who has done this. Twice. She calls the trick "quiet title". I guess you could think of it as a form of welfare, and another example of the war on the middle class.
Homeowners, the most blessèd of all debtors. It's not enough that the government massively subsidies the interest rate and allows interest to be deductible. No, the government also has to sponsor all sorts of modification programs to shield borrowers from the horror of thier supposed-to-be one way bet going wrong. Heaven forbid someone pay a mortgage on a house that's underwater, why that'd be like expecting a college dropout to pay back his student loans!
Part of there problem is these programs incentivize financial bad behavior and punish those who are financially responsible with higher taxes to pay for it.
This seems to be a growing trend with government intervention. Likely it is a byproduct of ill informed decisions that given perverse incentives. Consider workers who actually reject pay raises because they would lose more in benefits than the pay raise would give them.
Similar to how some families have to actively avoid making too much money, lest they jump into a higher tax bracket and end up losing more than they gained (while the next-next bracket remains a distant dream).
That is a common misconception, a raise will never cost you more in that way. Sometimes a raise will send you out of an income range that qualifies for State assistance though, like the GP said, with the assistance being worth more than the raise.
Except that in that one case, at least in the US, only the income inside the new tax bracket is taxed at the higher rate. The tax brackets are actually something they have right (I'm not saying I agree with the tax rates, only that earning a dollar more in income will never cost you a dollar or more in tax).
Many parts of the curve are net negative marginal income. It's not just higher tax rates on the additional dollars, it's decreasing subsidies, and phased-out deductions; the 3 forces work in concert to make earning more actually (literally) taking home less.
Don't forget pay raises that come with promotion often include more responsibilities. So then if the raise is net negative or even, are the increased responsibilities (and possible time committments) worth less?
I've found that businesses will give you the responsibilities regardless and denying the raise won't change your increased responsibilities. Granted, the US's work culture does appear more toxic than in other places in regards to how employees are treated.
But reading this, I can't help but think that doing so simply makes me look like a chump.