Stimulus

No Sympathy for the Deadbeat: Most Americans Reject Walking Away

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Just walk away.

Is socially acceptable mortgage default another fake trend story? We've heard a lot about how deadbeating has become stylish in 2010, but a substantial majority of Americans still reject the notion of walking away on a loan.

Catherine Rampell of the New York Times notes that 59 percent of respondents in a recent Pew Research Center poll defined walking away from a mortgage as "unacceptable" behavior. Nineteen percent considered strategic default acceptable and another 17 percent said it depends on circumstances. Pew does not appear to have any history on this question, so it's impossible to say whether this represents a shift up or down in public perception of mortgage default.

The Pew findings are broken out by financial and homeownership circumstances as well as ethnic lines, but the results are remarkably consistent across most categories. The only big deviation is the difference in point of view between owners and renters: A much higher percentage of renters think strategic default is A-OK.

So much for the Angry Renter? Maybe, but drawing a bright line between acceptable and unacceptable default is silly—as is Fannie Mae's misguided and probably illegal new plan to sue strategic defaulters for the balance of their mortgages. You can believe defaulting on a loan is a less-than-honorable action but still accept it as an outcome.

Mortgage papers don't just put you on the hook to pay back your loan. They also provide for the bank to retake possession of the property if you fail to hold up your end of the bargain. That's not the preferred outcome for the bank, and it probably isn't yours either, but it's right there in the deal. And unlike the ruinous and failed efforts to keep borrowers in their homes through an endless flood of taxpayer dollars, it limits the damage to the two parties that signed the contract.

The question shouldn't be whether strategic default is acceptable but whether 300 million innocent people should be made to pay nearly a trillion dollars to keep bad borrowers and stupid bankers from enduring the consequences of their own decision. And based on the evidence visible in polls, election results and street theater since 2008, most Americans find that unacceptable. But maybe that just makes them devoted libertarians who are so disengaged from political reality that they don't want a hunky strongman president to save the economy from a total financial meltdown.

NEXT: Andrew Sullivan Defends TARP, Criticizes Libertarians for "utter disengagement" with "political reality" (Like That's a Bad Thing)

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  1. I’m employed, but hate my job/boss and am “this close” to walking away on my mortgage.

    President Obama has shown that personal irresponsibility is all the rage. Why should I miss out on all the fun?

    1. One thing that annoys the piss out me right now is that both car I own and the mortgage I have were obtained in the last five years without any government assistance/tax relief/refund check/etc (yes, I know -please hold your applause). Recently I’ve seen many of my friends and co-workers buying houses and cars and getting big fat checks from taxpayers just for doing so, but I certainly don’t blame them. I wouldn’t have turned down the check either.

      However, I am getting a little tired of watching people get new types of freebies or kick backs or “loan modifications” because “the economy is so bad”. This is only going to drive me further towards whichever party stops the gravy train first. And I know I’m not alone.

      Rick was right.

      1. One thing that annoys the piss out me right now is that both car I own and the mortgage I have were obtained in the last five years without any government assistance/tax relief/refund check/etc

        It’s irresponsible people like you, living within their means, that have caused the bubble to collapse and people to lose money. You should be ashamed of yourself! Go out and spend 3 times what you earn! If you all go out and borrow and spend without limit, the economy will be just fine.

        /Paul Krugman mode

        😉

      2. …whichever party stops the gravy train first.

        HA!It may be that my Halloween party is your best bet. I’ll let you know if we stop the gravy train.

        1. I agree with you that neither party is in any danger of letting this happen anytime soon, but I tend to remain optimistic that come November “It’s the Spending, Stupid” will become more of a mantra worth adhering to if one wants to keep their job in DC.

  2. I’m fine with people walking away. They signed a contract with the bank. The contract clearly defined what would happen in case of a default. Let it happen.

    Why can corporations routinely make business decisions to default on obligations, and those are accepted as business decisions, while the same decisions done by individuals are looked down upon?

    At least in many states, the bank has legal recourse to still come after the person. Then either the person makes good, or he declares bankruptcy, and that bankruptcy personally follows him.

    Compare that to when corporations declare bankruptcy, and the corporation “dies”, but all the owners of the corporation can go their merry way free from further repercussions.

    Strategic *corporate* default is the real license to steal.

    1. Why can corporations routinely make business decisions to default on obligations, and those are accepted as business decisions, while the same decisions done by individuals are looked down upon?

      Corporations do break deals but, unless they are under bankruptcy protection, they do have to pay the penalties in the contracts.

      The problem is the contracts themselves. As a libertarian, I do like the notion of a freely agreed upon contract, but the simple fact is that the contracts for almost any service are written for the benefit of the provider, not the purchaser, and are generally incomprehensible to the latter.

      I particularly detest the parts of contracts require the purchaser to waive his right to sue and seek arbitration through a arbitration service chosen by the vendor.

      If I could make one change in contract law, I would outlaw any contract that made waiving one’s right to sue as a condition of the sale. (I may have just forfeited my decoder ring here.)

      1. I think it’s reasonable for a practical libertarian to be concerned about the outcome of complex contracts — they almost always benefit providers, especially larger providers, who write one incomprehensible contract for all their customers and can easily front the legal cost to do so. Each of their customers has to individually incur a similar amount of cost to disentangle the thing, which is infeasible, so rather than forgo whatever service they wanted to acquire (since it is either true or assumed to be true that all companies will have such contracts) they go into the contract and hope that it won’t screw them.

        It would be nice if all people boycotted everything that had a complex contract, but to some extent those contracts were an immune response to ambulance chasers rather than an excuse to screw customers (contracts can’t protect you from a shitty business reputation, after all), so companies that don’t have long, complicated contracts are unfit for survival in the market regardless of boycotts.

        One free market possibility would be a sort of Walmart law firm that would sell inexpensive mass-produced contracts to consumers to bring to providers, creating a de facto consumer-empowering set of contract standards — providers could still reject contracts (and would have the legal expertise to do so in an informed manner), but if the middlemen was established and had a reputation for fairness, consumers might be wary of any such rejection.

        The main problem would be breaking into the status quo. Do any resident lawyers think such a company would be feasible? Hell, could Walmart itself be the Walmart of lawyering?

        1. I think a legal Wal-Mart sort of firm could be a good idea. Don’t they already have something similar for divorces? (I’ve never been divorced, but I’ve seen ads on TV for firms that do them cheaply– and supposedly fairly– for couples that aren’t fighting over any details.)

          1. Smith & Wesson offers quick and cheap divorce. So does Black Flag.

            The fairness of such divorces is disputed.

            😉

        2. sounds like you just outlined a business plan you might try to implement and become insanely wealthy if you succeed.

          1. Neither a lawyer nor an entrepreneur. Just the thought that I might one day have to take over running the business I work for (the owner is close to retirement age) is scary as hell.

      2. As a libertarian, I do like the notion of a freely agreed upon contract, but the simple fact is that the contracts for almost any service are written for the benefit of the provider, not the purchaser, and are generally incomprehensible to the latter.

        And purchasers are within their right to default, and take the consequences. If they don’t understand the consequences, that’s their problem. But why should it be considered immoral for an individual to default and not for a corporation? Since when does morality pertain in any way to contract law?

        And why would it be anyone else’s business but that of the lender and borrower anyway? Oh, that’s right, because the government decided to get in the middle with our stolen tax dollars. Thanks, government!!

    2. In non-recourse states, the (relavent) contents of the contract are not determined by the parties, but by the state.

  3. I don’t think it’s unethical in the abstract. This is why we have credit ratings, after all.

    But in practical terms, we’ve made it a bit too easy to walk away — iirc 7 years is still as long as that decision can haunt you, and certain asset classes are exempt. So, naturally, there are a few people out there who are running up six-figure debts every 7 years and then walking away. That seems unethical.

    Remove the reward for unethical behavior and walking away is ethically untroublesome.

  4. “But in practical terms, we’ve made it a bit too easy to walk away”

    Consider though: It’s probably too easy to walk IN as well…

    1. Entirely too easy – from both sides.

      When lenders could eliminate the risk cost from loans by offloading them to Freddie and Fannie, they had no incentive to either 1) Evaluate the risk or 2) Price the loans according to risk.

      Similarly, borrowers had no incentive to make themselves a more attractive (= lower) risk because they would not be charged a risk premium.

  5. I’ll tell you disengaged from reality. It’s not realizing that the consequences of bad loans and stupid bankers can go far beyond them and sink the whole fucking economy. In right-wing la-la land, the market sorts everything out, but in the real world, the state sometimes has to intervene. You tidy little libertarian dogma has about the value of dog turd in the real world, asshole.

    1. ARF ARF ARF ARF ARF!

      Bad dorg! Hush!

      * Whaps dorg’s nose with newspaper. *

    2. The stupidest bankers were the ones running the GSE’s. You know, the government loan agencies. Gotta love self-hating liberals.

  6. I also agree with you that neither party is in any danger of letting this happen anytime soon !thanks for the cool share. It is really interesting.

  7. Don’t have a job, can’t qualify for a loan modifacation, can’t get a job, kbow one is hiring, nho state assistance…out of money. So, with no job, no income… we’re mailing the Key on Oct 01, and the Bank can have our house.

    We’re not dead beats, just dead broke.
    -And I didn’t get any assistance to buy our home, in fact, I paid 10g up front. My truck was free and clear until it was totaled. No insurance, cause got no job. So Now I really am a country western song, lost my job, lost my house, lost my truck, have sold everything I own,a and moving back to California to help out family, or vice verses as the case may be.

    Sometimes you don’t have a choice…did I mention we paid 200,000$ for a condo that according to the state auditor in April is now worth 100,000$…

    Can’t sell it, can’t rent it, can’t eat it, so F it. The banks got big fat loans from my tax dollars, they can sit on the house.

    1. I agree with you

  8. I have no problem with people walking away from mortgages, I only wish it would punish the banks, but it doesn’t. Because of the bailouts, it punishes everybody.

    My original loaner got bought by Bank of America. They cooked the books so bad that Bank of America tried to back out of the deal before the deal was done.

    The government would not allow them to back out of the deal. And the government sweetened the deal beyond recognition.

    So, my house that I owe 300k on, was once worth 465k, it is now worth somewhere in the low 200s. I am paying my mortgage, even though I really don’t live in the house much. I am overseas most of the time.

    Dealing with the bank is a nightmare. Because of government conditions, they have no incentive at all to government service.

    I was angry talking to one of the employees who couldn’t find paperwork that I had sent in, and kept transferring me to some other person, and had no idea who I had talked to last even though I had their employee id number. So I said to the dude, that they could have my fucking house if they really wanted it. They won’t get on the market even close to what they are getting from me, so deal with me or come and get the house.

    But that wasn’t really a threat. If I default on the house, they get the full amount of what someone once pretended it was worth from the government. So they really could give a fuck if I paid my mortgage or not.
    So why offer any form of customer service?

    If it were a free market BOA homeloans would have a lot better customer service because they would be interested in making it easy for me to pay my bills.

    I wish all the people who get fed up and default on their loans were a clear signal to
    the bank and the government to fix what is wrong, unfortunately it is probably going to be a signal to further socialize, regulate and fix what isn’t wrong.

    1. Companies like Bank of America are why some people think capitalism is evil. They are more bureaucratic than most governmental agencies.

  9. I think most people make a moral distinction between strategic defaulting and normal defaulting. If a person has lost their job and has no way to pay the mortgage and the house is worth less than they paid for it and is impossible to sell, they really have no choice.

  10. I believe the strategic default is legal and amoral.

    My house is worth $200k less than what I paid. I put $100k down for a $500k house 20% and got a regular mortgage in 2005 at 6.5%.

    I have to move because the schools suck and I have two little girls.

    Now, should I strategically default? Two things I would need to take under consideration.

    A> Does it make financial sense?
    I can stop making the payments and face foreclosure two years from now (that’s how long it’s taking them to foreclose). During that time, I would have saved the $3,000/month payment. That is $72,000+ that I would have recovered from the $100,000 I put down. Sounds enticing and the right business decision to do.

    B> Can I live with the consequence of the foreclosure?

    I really can’t strategically default because I work in Banking. I may need to work for the Bank that holds my mortgage. And, I can’t make the top-dollar I make in banking in another industry. So, this makes Strategic Default not an option for me. If I were in another industry, I’d do it in a New York-minute.

    So you guys are safe with me, I’m eating this loss.

    1. A couple of factual errors:

      1. It sounds like you bought a 300k house, not a 500k house, you just paid 500k for it.

      2. I see no reasons you “have to move”.

      1. Oh yea, I did pay $500k for a $300k house. And I have the Bank Appraisers to thank for that and the speculation that went on in real estate that inflated the values.

        I’m becoming real critical of speculators in the Residential Real Estate and Stock market.

        In Real Estate, speculators inflate values beyond what people already living in the neighborhood can afford. This also affects rent you know.

        In stocks, well, what does a PE of 25 mean anyway. Stocks are so out of wack with the actual value of the company. Is google really worth $168B?

        I do have to move. The schools here suck. And, private school would be expensive for two kids. I’m just gonna rent this out and rent in a good district and use the public schools there. I’m not going to default. My credit is real good and as I mentioned I work for a bank.

        1. Bank Appraisers

          You got the term correctly. I dont even know why purchasers get to see the appraisal, the purpose of the appraisal is to verify for the bank that the property has the proper value to justify the loan (which failed in this case).

          If you want an appraisal that represents you, hire your own damn appraiser (and, yes, I realize you paid for the bank appraisal, but that is change who they work for).

          1. You know, don’t know your experience with purchasing residential property (particularly in the NY Metro area) however, the purchaser has no control in the appraisal process. In fact, the lending bank claims that the appraisal is their property and don’t want to share with the purchaser at times. You are right. I could have gone out and dropped a mere $350 and done my own appraisal.

            But in all fairness to the appraiser, the complimentary sale prices in the neighborhood that I purchased at the time were showing that houses were selling for $500k. That I blame on:
            1. the speculators than ran the price up.
            2. Bill Clinton for removing the Capital Gains tax on residential properties which created speculators out of regular residential real estate purchasers and regular home homeowners.
            3. GWB for pushing that EVERYONE should own a home and lowering lending standards.
            4. A collection of crooks like mortgage broker and synthetic securitization architects.
            5. And last but not least, my stupid ass for purchasing a house at the all time high in a neighborhood that I never intended of living in for the long term.

        2. I do have to move. The schools here suck.

          You prefer to move. And that is understandable. You dont have to move.

    2. And another thing, people and banks expecting 20% down to cover fluctuations when the market is 40-100% overpriced is insanity.

  11. In my county outside of Philly, things have gotten so bad that people don’t even need to walk away in a hurry. I have a friend who, in the last two years, has been hit with the triple-whammy of health, job, and marital catastrophes. Last week she was served with Sheriff Sale papers – but the guy serving her said he was giving out HUNDREDS of those each week in her area (all rowhomes), and that no one wants to buy these houses. The bank doesn’t want them; buyers don’t want them either. And even if it does sell, she still has another six months in which to move. So she’s probably going to be in the house for a while, and just walk away from it when she’s ready to move.

  12. I wonder how closely the 19% who view strategic default as acceptable correlates with the 20% calling themselves liberal?

    1. I question this correlation. Remember, people that Strategically Default are people with money and are financially savy. Generally speaking (and I am generalizing…not making a factual statement), wealthier people tend to have more fiscal conservative values and would do what is financially right for themselves.

  13. Why is this postworthy? Judging by the people elected to public office, we ALREADY KNOW that most Americans think it makes sense to throw away good money after bad.

  14. Wisconsin forces landlords to pay when tenants don’t pay the tenant’s own contracted-for utilities. I’m surprised when my tenants do NOT strategically welsh on their bill. But some don’t, god bless em.

  15. In this current climate one must overcome sentimentality and morality to survive. If it is in my self-interest to walk away from this mortgage I will fight my conscience and my integrity and do the right thing. The banksters can go to hell. What little they lose from my default they’ve made back in spades from their fellow crooks in government using my tax money. F’em all.

  16. People who are OK with defaulting on their mortgages think of it as a victimless crime, or at worst, sticking it to the mean ol’ bank. I’ve seen a different side of the coin.

    I bought a small townhouse (it was what I could afford) in a building with six units that is part of a small HOA. One of my neighbors deserted her house and mortgage and ran off to another state. Didn’t tell the bank. Left the windows open, food in the house, all utilities on and appliances running. Found out later that she collected for months afterward some kind of govt assistance payments meant to help struggling owners to stay in their homes.

    Meanwhile, its a long, snowy winter. Lacking her and a few others’ dues payments (for various reasons) the HOA is broke from snow removal costs by the end of December. Who has to pony up extra money to cover this? The modest-income owners of the other townhouses of course.

    By Spring, my building was in desperate need of a new roof, thanks to defective shingles used by a dishonest company a decade ago. One unit took severe water damage because of the bad roof. Who gets has to cough up the extra money to cover the deadbeat’s share of the new roof? That would be us simpletons who continue to pay our mortgages. And the cost of repairing the water-damaged unit was borne by that homeowner.

    This woman had money to flash around before she disappeared. She’s selfish, irresponsible, and a thief who should do jail time. She caused alot of stress and financial hardship to her neighbors.

    There’s lots of sympathy for the deadbeats but none for the responsible people that have to clean up their mess.

  17. So 59% of people believe in personal integrity, that a man’s word ought to be as good as gold.

    FSM bless these people, but I think that number needs to be higher.

    And that 19% can go get fucked.

    The 22% that say depends or don’t know need to get their shit together.

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