Economics

Deadbeating Without Shame

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'Tis something, nothing; 'Twas mine, 'tis his, and has been slave to thousands.

Get ready for a new round of scolding news stories about how the generation raised on sexting and rainbow parties has reached a new level of shamelessness. There may be actual evidence that it's becoming cool to default on your mortgage.

Calculated Risk rounds up recent coverage of what one investor calls a new "badge of honor"—the scarlet D you get when you walk away from your underwater loan.

The stigma against default is fading at the same time support is growing for an expansion of the Home Affordable Modification Program (HAMP) to allow principal-reduction modifications for defaulting borrowers. James R. Hagerty at the Wall Street Journal's "Developments" blog cites many supporters of principal reduction schemes, and even proposes cockamamie fabtraptions like this one:

Here's one formula: The lender or other owner of the mortgage sells it at a big discount to an investor. That investor then reduces the loan balance and refinances the borrower into a mortgage insured by the Federal Housing Administration. Now Uncle Sam is holding the bag on a loan that (we all hope) might be sustainable.

When you combine easy principal reduction with fewer obstacles to default, you have a large group of home borrowers with a strong incentive to stop paying their mortgages. This recent New York Fed study [pdf] tracks redefaults of mortgages that have received steep principal haircuts (on average reducing principal by 20 percent). The study contains no surprises for regular Hit & Run readers, but it's nicely written and includes an interesting statistic on social acceptance of default:

A growing concern is that the "stigma" to a borrower from a default may be reduced in areas experiencing a severe shock to the local housing market. If several houses along a street are in foreclosure, then neighbors may not be surprised to hear about another neighbor defaulting on their mortgage, and may ascribe the decision to general problems in the housing market rather than any specific issues with their neighbor. In addition, neighbors who have defaulted themselves or who know someone who has defaulted may urge their friends to do the same if they are facing either payment problems or are in a negative equity situation. Fear of what will happen to a borrower if he/she defaults may be mitigated from conversations from friends or neighbors who have already gone through the process. To check for this in the data, we include the percent of subprime mortgages in the MSA that currently are 90 days or more delinquent. The data indicate that a 10 percentage point increase in the area delinquency rate raises the redefault risk by 8.2 percentage points.

The widespread principal-reduction and second-lien modifications proposed by Obama Administration officials would greatly inflate that figure—far more than would any popular acceptance of deadbeating. The popularity of strategic default has been growing for several years now. I know plenty of strategic defaulters, and they are not people inclined to worry about social niceties. And no matter what your friends and neighbors may think, there is still a penalty attached to defaulting—though not nearly as stiff a penalty as there should be: The Fed study describes a "roughly 200 point reduction in credit scores associated with a mortgage default." To put that in perspective, my credit score went down almost 100 points when I was late on a $90 phone bill. Giving up on a mortgage is the most severe debt default the average American is even capable of. If a 200-point drop is the worst you have to fear, why is anybody still making mortgage payments?

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  1. The popularity of strategic default has been growing for several years now.

    Cool.

  2. Making them default is racist. They should be given the homes they cannot pay for. See how generous I am (with other people’s money)? That’s because I am the result of thousands of years of human moral progress. Kneel before me and worship me as a living god, bitches.

    1. That’s what we’ve been saying, Johnny!

  3. why is anybody still making mortgage payments?

    I’ve been asking myself the same question lately. The only answer i can come up with is that i’m a decent human being who believes in keeping promises, but i’m not sure that’s enough.

    1. +1

      The number of people that feel that way seems to be dwindling.

    2. “Decent human being” is just a fancy term for “sucker.”

    3. The promise was pay and keep the house, quit paying and forfeit the house. The bank can have my house back.

      1. I wonder what happened to that Obama supporter who was sure he would pay her mortgage and put gas in her car…

      2. Mike Shedlock has done great work on this. The same banks who want to shame underwater mortgage-payers into giving them back every last dime, routinely make strategic business decisions to default on their own obligations.

        Give the bank their collateral back and you’ve done right by them. It’s their fault if they failed to accurate assess its value when they extended the loan in the first place.

    4. I pay my mortgage on time. Of course, I paid $150k last May for a house somebody paid $400k for three and a half years earlier. (IMHO, the house is worth somewhere between those two figures.)

    5. why is anybody still making mortgage payments?

      Because not everyone is underwater — or enjoys moving if they are close to break even.

      Don’t get people who owe way more than the house is worth staying in it, though …

      1. And, if like me, you are totally debt-free, and own your houses outright, this is kind of a moot point.

    6. Most of these people are probably betting on a reversal and fortune and a return of the bull market in housing prices to save their hides.

      Good luck with that.

      1. Aaarrrghhh, reversal IN fortune

  4. Time to bring back Debtors’ Prisons.

  5. The data indicate that a 10 percentage point increase in the area delinquency rate raises the redefault risk by 8.2 percentage points.

    This tells us nothing. 1) correlation does not imply causation 2) if delinquencies are rising by 10%, this implies there are underlying issues (ie dying economy or neg HPA) that will also contribute to redefault.

    1. Not true. They compare a bunch of other economic indicators, such as local unemployment (and found, as regular H&R readers already know, that unemployment does not appear to be a major contributor to defaults). No other local-economy factor had as close a correlation as local defaults.

      As you note, correlation does not imply causation. I used to think it did, but then I took a statistics course. I think the course helped, but I can’t be sure.

      1. No other local-economy factor had as close a correlation as local defaults.

        Local defaults correlate with local defaults.
        Wow great reporting Tim. If you had not told me that I never would have made that connection. Now if only we can connect how an event caused itself to happen we can really get down to how it all works.

      2. GREAT stat joke!! (I thought it deserved some love, anyway)

    2. I assume that they controlled for local economic conditions, but then again I didn’t RTFA.

  6. I don’t doubt that there are those who will cynically manipulate the system to cut the amount they owe by using this system, even though they could pay it. And schmucks like me, who actually plan to keep paying, are left holding the bag.

  7. But if the government didn’t do this, and it can do anything it wants because it’s the government, society would crumble and nobody would behave like a human. Only mortgage haircuts are keeping the barbarians from the gate.

  8. People don’t seem to realize that banks don’t lend their own money–they lend their deposits. People screwing over banks are screwing over the people with money in those banks.

    1. The FDIC makes sure to spread that out over all depositors, as well as putting the full faith and credit of the US Dept of Debt. Wow, I think I’m becoming a Fed Conspiracy theorist.

    2. I doubt this would make a difference to the people who are purposely defaulting.

    3. It’s insane to keep your money in the banking system these days. It pays zero interest and the only thing backing it is the FDIC’s promise to print enough to fill the huge hole being left by these defaults.

      The depositors who were lulled into complacency by the FDIC and couldn’t be bothered to look at the loans their money was backing were part of the cause of the crisis. If they lose some of the money they couldn’t be bothered to keep an eye on in the first place then fuck ’em.

  9. 200 Points? That’s it? It’s not small, but FFS, if you default on your mortgage, you shouldn’t get enough credit to buy a cup of coffee.

    1. People buy coffee on credit? That is depressing.

      1. George Carlin mentioned something similar in one of his acts.

        I always thought it was more of an absurd funny until I actually witnessed some guy buy a pack of Skittles with his credit card simply because he didn’t want to pull out the dollar bill. I don’t remember what he said but it was something like “I don’t feel like searching for a one.” or something.

        I don’t want to give anyone shit for no good reason, but that’s always stuck with me. To each their own though I suppose.

        1. I use my credit card to pay for everything, including a pack of Skittles. I pay it off in full every month and get 2% back. So why should I bother with cash?

          1. Since you pay off your balance every month you shouldn’t bother with cash. My first exposure to credit was basically seeing idiotic family members abusing it and then getting in trouble because they treated it as a “free lunch”.

            My school of thought is only break out the cards when it’s something big. Emergency or the like.

            Your way makes more sense though. I’m just simple I guess.

            1. Except that “they” can’t trace your movements when you only use cash.

              1. IMO, we’re moving towards a cashless society, which would make virtually all transactions a matter of public record and thus trackable by Big Nanny.

                Look at the supposedly “non-counterfeitable” paper money we’ve been issued over the past few years – and we STILL have counterfeit money floating around.

        2. Perhaps it was a debit card.

          1. Debit cards make the most sense. Problem is, you don’t get any change, especially those handy laundry quarters. Another less-evident issue is the added transaction expense for the merchant, who must then decide whether to raise prices to compensate for lower margins, or risk losing customers by denying or limiting credit- and debit-card use.

  10. If you think of a house as nothing more than a put option (and I do not), then I suppose if your calculations lead you to believe it will never be in the money you should just throw it on the floor and walk away.

    I don’t know how many people really think that way (like, you know, “economists”).

  11. Ever occur to anyone that maybe TARP would reduce the stigma of defaulting? Seriously, I have a hard time feeling guilty sticking it to a bank that got bailed out with mine and my children’ tax money.

    1. How do you know the mortgage is held by one of the failing banks and not a solid bank that didn’t play games? Or if the bank paid back the bailout with interest, then you – as taxpayer – didn’t lose on that particular transaction. Restitution should be made by the actual wrongdoers, not by any and everyone who resembles the wrongdoer in some way.

      1. I agree with you. But once the moral rot starts it is really hard to stop. More than a few people who would normally feel a sense of obligation are likely to say “screw it, the banks got bailed out why the hell should I live in poverty to pay off this mortgage?”

        1. Or owned by private investors or pension funds?

          1. Or foriegn governments?

  12. WTF???

    1. Thank you very much. and I mean that most sincerely.

      1. Indeed.

        I give you fuckers $10 a month. $2 of that goes towards a Morning Links thread damnit!

        1. It’s morning until 12:00 PM.

          1. Your logic and correct assessment are unwelcome here.

            1. Don’t hate me. Sometimes I eat breakfast sausage for supper.

              1. And summer sausage in the winter. Someone stop this crazy man!

  13. Am I reading this right? The buyer defaults and gets a govt re-fi at the current value of the home? Thereby evaporating the amount he’s upside down?
    If this is the case, I would think that people would be lining up to get a deal like that.

    1. The government should just nationalize all mortgages and apply the adjustment across the board to everyone, even those who have paid off their mortgages: If your house is worth more than your original mortgage value, you now owe the difference between the market value and the original value. Just think of all the revenue the government could use to do good things, and there’s no such thing as property rights unless the government says so, so who are we to complain?

    2. principal forgiveness isn’t part of any active gov’t programs.

  14. I think the course helped, but I can’t be sure.

    Did it cure you of the desire to dress up in a tuxedo and play roulette?

  15. I have a report of a Morning Links sighting. Am waiting confirmation.

  16. This is the end game is it not. The rot starts at the top. If bankers can corrupt the living daylights out of the financial system, and the government and the politicians back them up and screw the taxpayer, there are no principles left. Its Hobbesian with every man’s hand against every other man.

  17. This is the end game is it not. The rot starts at the top. If bankers can corrupt the living daylights out of the financial system, and the government and the politicians back them up and screw the taxpayer, there are no principles left. Its Hobbesian with every man’s hand against every other man.

  18. A 200 point deduction is a lot worse than you might think. I am a commercial loan underwriter and anything under 650 is considered well below average, despite what these sites might tell you. Anything under 600 is real bad. I rarely see over 800.

    So say you have a 750 score. That is excellent and you will be able to get credit anywhere. If you drop to 550, you are going to be buying cars at JD Byrider and I doubt you’d have a credit card.

    So 200 points really is enough to destroy your credit.

  19. What depresses the hell out of me (is it too early to start drinking?), is how many people are surprised by this. Especially people that should have known better. I mean three years ago, the housing and mortgage markets were so hot people were being pushed into homes. “Here, buy this house with no money down. For the first year you’ll pay less per month that it would cost you to rent it. Sure the rate will go up, but then you can sell it at a profit.” How hard is it to complete that thought “and if you can’t sell it, you can walk away from it.”

    1. How hard is it to complete that thought “and if you can’t sell it, you can walk away from it.”

      They did complete the thought. During the bubble years there was an acronym on Wall Street, IBGYBG (“I’ll Be Gone, You’ll Be Gone”).

  20. The real problem with houses is that a lot of stupid people believed they’d get a meal ticket when they were older. I agree having something that can be sold if your in a bind is nice but your house is only and asset if your not living in it. If your living in it, its a liability. And second some of these people who are defaulting on their notes didn’t put any money down to loose if they were to put 20 percent down i would doubt they would easily walk away. And as for banks if the government would stop bailing them out they may be willing to renegotiate with the home owners instead of letting the home owners dump the house on the bank and then selling the house at a loss and getting what ever money they can back from the government at the end of the year.

  21. No self responsibility, as they are defaulting on their mortgage,they are eating out every night, driving their Navigator and shopping til they drop. They can always move back to Mom’s and Pop’s house. Thanks Barney F. & Maxine W. for giving everyone loan’s. http://www.suckitupcrybaby.com

    1. Banks do share some responsibility.

  22. Chad said in another thread that anyone not paying ten grand a year in taxes, is a deadbeat. Men, women, toddlers, whatever age bracket.

    THAT is the kind of thinking that is going to get us in trouble. But people keep listening to them…

  23. The decision of whether or not to default should be a business decision only.

    If you benefit more by defaulting than you lose, you should default.

    If pretending you will default induces your note holder to give you a principal haircut, you should pretend to default.

    This is how borrowers would act with a commercial mortgage, so there’s no reason to act any differently with a residential mortgage.

    And on the subject of principal reductions: it is very, very common on the commercial side, and in business debt in general, for principal to be modified down in times of economic stress. Generally this happens because the holder of the debt isn’t the original holder, but acquired it at a discount, and will make a greater profit by negotiating the principal down and keeping a payment stream going than they would by foreclosing. This process would have occurred on the residential debt in question if the debt-holding institutions in question had been allowed to collapse as they deserved to collapse. New holders would have acquired all these mortgages at ten cents on the dollar. Since the government prevented this kind of creative liquidation from taking place, I really don’t feel bad for the parasitical institutions the government saved if their borrowers start bailing on them rather than continue to pay debt when it’s economically irrational to do so.

    1. Very Very well said!

      This idea that you have to pay your mortgage regardless of what the circumstances around you are is ludicrous. In the business world if you took that attitude, you’d be fired in a heartbeat.

      Contracts are renegotiated all the time. The bottom line is it’s a business decision and there should be no emotion or pride or feelings of honor involved at all. Each party should be doing what is the best for them economically. If that means walking away from a home — even if you can pay the mortgage — because you think it’s a money pit, so be it.

      A mortgage is a contract that has an out. If you don’t pay, you give up the house. That’s the deal. Now some people are trying to shame those who want to exercise that part of their contract???

      If the banks don’t like that deal they should have done a better job underwriting their loans and evaluating what a house is worth. They should have made sure that the borrower had his skin in the game (like 10-20 % down payment). It’s not the borrowers fault that the bank didn’t do a good job of risk assessment and underwriting.

  24. I sat out the housing bubble and am currently sans debt, so I have no sympathy for “victims” who took on more debt than they could afford to pay off. But I have no sympathy for the banks either. Old conventional wisdom said mortgages were one of the best kinds of loans to make — hey, if the borrower defaults, you get to keep his down payment AND his house, right? If the banks chose to piss away this advantage by not requiring down payments, or by making ridiculous loans a.k.a. $500,000 to buy a little crackerbox plywood ranch house in a town where the median household income was only $50,000, that’s their problem.

    In summation: to the allegedly victimized home “owners,” all y’all can go fuck yourselves. To the allegedly victimized banks: all y’all can go fuck yourselves too. In fact, EVERYONE who got involved with this housin’ bubble bullshit can kiss mah magnolia-whahte ass … damn. You KNOW I’m pissed off when the southern drawl creeps back into my voice. Oops.

  25. Banks and businesses make this kind of decision all the time. I’m not saying it’s the right thing to do, but when people feel like they’ve been screwed by the banks, the desire to screw back is strong. I suspect that has as much to do with the growing trend of jingle mail as anything else.

    1. Banks and businesses default on their loans all the time? Or are you talking about them going after people that didn’t fulfill their promise to repay them in a timely manner?

      1. Banks and businesses negotiate over the terms of outstanding contracts all the time.

        If you as a debtor think that your creditor is panicking and will accept less than 100 cents on the dollar to pay off your note if you just call them up and play hardball, you should do it. It is no morally different than buying a stock that is artificially depressed in price because other people are panicking and selling.

      2. Banks and businesses default on their loans all the time? Or are you talking about them going after people that didn’t fulfill their promise to repay them in a timely manner?

        Actually most of the banks got in trouble because they couldn’t refinance their own very short-dated liabilities.

  26. PM770 –

    A 650 score is real bad until strategic default is so common that the average score drops, and a large chunk of the credit-acquiring demographics have such defaults on their histories.

    The banks cannot survive unless they issue credit. Obama may think that banks have a big pile of money and are twirling their moustaches laughing about how they won’t give any of it out, but nothing could be farther from the truth. Banks fight each other to make loans. If the pool of customers who have strategically defaulted grows large enough, they will invent credit products designed for customers with that profile.

    1. Fluffy is right on.

  27. Businesses default all of the time.

    Credit Card companies make you (the consumer or card holder) sign an agreement that you will NEVER TAKE THEM TO COURT.

    You miss two payments, there will be a COURT-ORDERED JUDGEMENT AGAINST YOU faster than you can say ‘keep-dope-alive’.

  28. You have to ask yourself:

    “Self, what is more valuable to me and the BEST interest of me and my family?

    A> My credit score
    B> My $150,000+

    Don’t let morallity play into this. GM defaulted, stopped paying pensions,and is still profitting from making cars.

    1. They did a bit more than default. And are they making profits?

    2. Morality plays into everything if you’re a decent person.

  29. “And no matter what your friends and neighbors may think, there is still a penalty attached to defaulting — though not nearly as stiff a penalty as there should be…”

    How can a libertarian can write that sentence? “Should”? A credit score is a tool for the market pricing of debt. It’s not a moral judgment. If a bank decides that it’s willing to lend to someone who defaulted (which happens regularly in corporate situations), that’s their call… they have all the information they need to make the decision.

    In fact, that’s exactly why the market exists: to determine what the risk is and to allow companies to use their own judgment in allocating their money accordingly.

    1. Agreed

  30. Firstly most mortgages were securitized and sold off to investors so the people being screwed are those who bought those securities (mostly pension funds) and not the banks.

    Second: No one who thinks walking away from a contract should be able to consider himself/herself a libertarian.

    1. This is idiotic.

      Contracts contain penalties for walking away. Particularly mortgages.

      If you’re willing to accept the penalty for walking away, it is not a moral issue to walk away from the contract.

      If you attempted to evade the terms of the contract by burning your house down, or by going down to the county records office and recording a fake Release of the lien, that would contradict the way libertarians are “supposed” to feel about contracts. Defaulting? Nope.

      1. People break contracts in business all the time. It is a perfectly acceptable thing to do. Let’s say I am a construction contractor and I am under contract to you to build a building. And our contract has a liquidated damages clause of X dollars. Then before I start on your building, Episiarch offers me the job of building his new gay bath house that allows me to make more money than I would building your building even after paying you the liquidated damages. At that point, I am perfectly within my rights to pay you your liquidated damages and go build Epi’s new bath house. There is nothing immoral about it.

  31. Or maybe people will start to realize that credit scores — at least as figured now — are largely bullshit. Let’s see: cancel a credit card because you never use it, or because the company changed the policy to something you don’t like, and what happens to your credit score? It goes down on the theory this is somehow “irresponsible” behavior.

    Or look at the example Tim gave here — being late on a utility bill of less than $100 gives him a hundred-point ding? Yeah, fine, he deserves to pay a couple bucks in interest and late fees, but who would seriously claim “Gee, can’t trust him with a mortgage now, even if he has a decent income and money in the bank?”

    The problem with current credit scores is they don’t really say anything about whether or not you can pay back a big loan. If I want to loan somebody $150,000 for a mortgage, I’d say the guy who makes $50,000 a year and puts 20 percent down — even if he has on occasion been late with a phone bill — is a better bet than the guy making $20,000 a year with no money in savings, but by-God every single phone and electric bill he’s had has been paid on time. Yet the $20K guy will likely have a better credit score.

    1. Banks are run incredibly stupidly. And Credit scores are some of the worst examples. I have run up and paid off tens of thousands of dollars in debt in my life time. Taken and paid off student loans, two cars, and run and completely paid off my credit cards three separate times.

      I now have no credit card debt. Last spring one of my credit cards had an automatic subscription to the Wall Street Journal charged to it. I hadn’t used the card in over a year and they still had my old address. So I wound up being 60 days late on a $100 charge. When I started looking to buy a house every banker I talked to brought up that one rinkydink late payment. The fact that I had paid off all that other debt over the years and had no consumer debt and my wife and I had a pretty high income meant nothing. All they could focus on was that one late payment. They actually told us that it would be significantly better off if we had ten or twenty thousand dollars in credit card debt at our income and not have any late payments. What the hell kind of sense does that make?

      1. John is pointing our the irony. Credit scores are scams. Used only to charge higher intrest. Stay off crack ! No credit card debt please.

      2. I recently bought a new car and had a car loan rejected by my credit union. When I received the letter of explanation as to why, I was a bit confounded. I asked the girl who works across from me, who had worked with this kind of thing before, what the deal was. She said that the problem was that I only had a few credit cards and that the cards were too close to the limit. Her advice was “Call the banks whose cards you have and ask for an increase”. Apparently you are better off having multiple cards and balances that you would never be able to pay off if you ran them up rather than just having a few cards that you fully utilize. Weird.

        The dealership gave me much better financing anyway. So it worked out.

        1. This is because one sign people are about to begin defaulting on credit is their credit utilization rate. People who are close to maxed out are more likely to be about to go into the can.

          So it’s trying to measure something that’s a valid data point – it just creates a lot of Huh? moments in doing so. For example, it’s better for your credit score to pay an account down to 0 and then leave it open then it is for you to pay it down to 0 and then close it. Why? Credit utilization rate. So it helps your credit score if you screw yourself with an annual fee you don’t need, or leave yourself the temptation to use a credit account you could have closed.

  32. “If a 200-point drop is the worst you have to fear, why is anybody still making mortgage payments?”

    Well, I am because I like having a place to live. Mr. Cavanaugh seems to think that people should be punished for complying with the terms of a contract they signed–“I agreed either to make monthly payments for thirty years or surrender ownership of the house. OK, here’s the house.”

    Isn’t “the market” supposed to take of this? Poor Mr. Cavanaugh seems to be afraid that the market won’t punish these wicked people as severely as it ought to. Perhaps because the market doesn’t give a damn.

  33. If you’re willing to accept the penalty for walking away, it is not a moral issue to walk away from the contract.

    I’m with Fluffy on this; if you move out of the house when you stop making the payments, you are still fulfilling the terms of the contract.

    If you believe, for who-knows-what-deranged-reason, the bank should let you “have” the house, even though you cannot or will not pay for it, you are then in breach of your contract.

  34. There are *real* costs involved in walking away from your mortgage, and not just a hit to your credit score. Those costs might be worth paying.

    And my heart will not bleed for anybody who later discovers he cannot get a mortgage without putting down a twenty five per cent down payment.

    1. Since that is very nearly the definition of responsible borrowing/lending, my heart won’t bleed either. If banks had continued to require that kind of down payment for a mortgage and not been pressured by lawyers in Congress to ease those restrictions, we might not be in this mess to begin with.

      1. Sadly it is too late for that. They have driven housing prices so high, that if you required a 20% down payment, you would make owning a house unattainable for anyone who doesn’t already own one and have equity. It many markets, it take $300 or $400K to even buy in at the low end. Twenty percent of that is over $60,000, which in this economy and tax rates is not achievable for anyone who doesn’t already have equity.

        1. That simply goes to show the market still needs to drop more. I remember a comment I made here around 2005 or 2006: either there’s a housing bubble or we’ve reached a new stage of American history where only the top five or ten percent of wealthy people can afford to buy a house.

          And no, I do NOT think the latter clause is true. If average people can’t afford an average-priced house with a 20 percent down payment, that simply means houses are still priced far too high.

          1. Very true. But, the economic pain of repricing them is going to be immense. They really fucked us good with the housing bubble.

  35. At the end of the road of breaching every contract that you think you can get away with breaching lies much higher transaction costs and reduced opportunities.

    So, although I hear what Fluffy et al. are saying about defaulting on anything and everything when it will put you a nickel ahead, when society as a whole operates on that premise it will be poorer, economically and otherwise, than one that treats a man’s word as his bond.

    1. Bullshit. If you don’t want your contract broken, write in a more drastic penalty for breaking it. Businesses make the rational decision of breaking contracts and paying the damages all of the time. Breaking and not paying anything, is fraud. But breaking and paying the damages is perfectly acceptable and even economically desirable in some cases.

      1. If you don’t want your contract broken, write in a more drastic penalty for breaking it.

        I’m with John here. And I am quite surprised to see such a comment from R C Dean. Sounds like someone is losing faith in contracts.

        Exercising a valid out of a contract isn’t going back on your word. Mortgages have a penalty for non-payment. They take your house and any equity you’ve built up.

        When housing prices were on the upswing and when lenders wanted higher down payments, everything was peachy keen.

        Now all of a sudden the market is going in a different direction, and the bankers might be on the short end of the default stick, and it becomes the end of the world as we know it?

        Too Bad…So Sad. Next time write better contracts or have better underwriting practices.

    2. So, although I hear what Fluffy et al. are saying about defaulting on anything and everything when it will put you a nickel ahead, when society as a whole operates on that premise it will be poorer, economically and otherwise, than one that treats a man’s word as his bond.

      I would argue the housing bubble itself, which is the proximate cause of all these defaults, was the sign that this transformation was already largely complete.

      There was rampant fraud on the part of both lenders and borrowers. Neither of them was concerned about maintaining a culture or personal habits of fair dealing.

  36. I am one of those defaulters. I could care less about my credit score. My concern is whether I am going to be living under a bridge. I’ve been unemployed for 15 months. When you don’t have a home, a car, or can’t see your kids, the calculus of your fellow human being’s assertaion of your credit worthiness pales in comparison.

    I certainly don’t feel like a victim. I got myself in this mess. I knowingly stepped away from a cush goverment job to start my own firm.
    But it is infuriating to watch Geinter not pay his taxes and become Head of Treasury; to watch AIG employees run the organization into the ground, get public money, then pay out millions in bonueses; to watch GM get billions to continue to build shitty cars that no one wants.

    I completely understand that I will never own a home. But you know what? you NEVER own a home. Not free and clear. This computer that I am writing on, is mine. I have to answer to no one ever again. HOuses aren’t like that, you never own them. You pay rent in the form of property taxes. Don’t pay your rent and the government takes your house. I never have to answer to the government ever again for my computer. You can argue about the semantics of “rent,” but not ownership.

    1. Hopefully your luck will change. But you make a good point. Life is about priorities. If it comes down to paying my child support or breaking my moral obligation as a debtor, the choice is pretty easy.

    2. Hell – in Chicago the rent you pay to the government is a substantial percentage of what you’d have to pay to a landlord for a comparable number of square feet.

    3. Agree 100%

  37. If you don’t want your contract broken, write in a more drastic penalty for breaking it.

    I suspect that was exactly the point R C was making; costs will rise, and credit will be more difficult to obtain.

    NTTAWWT

    1. He is still dead wrong to think that breaking contracts can’t be an economic good. To consider my example above. If Episiarch is values my services in building his gay bath house more than fluffy does in building his building, we want me building Epi’s gay bath house. My resources are being under utilized working for fluffy. It is strictly business not morality.

  38. If you don’t want your contract broken, write in a more drastic penalty for breaking it.

    There is already a drastic penalty for breaking a mortgage contract: you lose your house, and you lose any down payment you made on it. If the banks were too dumbshit to ask for a down payment, and furthermore were dumbshit enough to loan sums far more than the house was worth (as determined by average income to average home price ratios), that’s the bank’s problem, nobody else’s.

    1. Exactly. The banks were making a bet to. They made a loan on a house with no down payment thinking the house will rise in value. If the house doesn’t, the banks just lost their bet. Again, it is business not morality.

  39. I’ve got an 800+ FICA, I could lose 200 points and still qualify for a mortgage.

    1. So do I (800+).

      However, your FICA will drop 200 points AND YOU GET A PUBLIC RECORD that last seven years.

      You’ll effectively not be able to buy (rates would be over 10%) and require sometimes 50% downpmt. Or, go with private investors.

      BIG DEAL, rent.

      1. I was joking. Sheesh.

  40. A foreclosure is worth 200 points off a FICO? I understand that mortgage modifications, short sales, anything not constituting payment as agreed will also cost points off your FICO. Personally, I will pay my mortgage until my income forces me to make some choices. I have an 80% LTV conventional loan with collateral now worth only 40% of the loan balance. I would have no problem cutting this thing loose if push comes to shove and I won’t entertain for one second participating in the great-goat-rope that the loan servicers / lenders put folks through to get a modification.

  41. This computer that I am writing on, is mine. I have to answer to no one ever again. HOuses aren’t like that, you never own them. You pay rent in the form of property taxes. Don’t pay your rent and the government takes your house. I never have to answer to the government ever again for my computer.

    Want to be as depressed as if you’d just read a Balko article? Look up the phrase “Personal Property Tax” as implemented in Virginia and other states.

    Don’t say I didn’t warn you.

    Sic Semper Tyrannis indeed.

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