Government Spending

Jingle Mail Jangles Nerves

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The face of strategic default.

Is there really a plague of strategic mortgage defaults poised to ravage what's left of America?

Beantown's own David A. Smith says strategic default is just "a myth seeking anecdotes" and hips us to his fisking of a recent jinglemail jeremiad in City Journal.

Smith, writing for the Affordable Housing Institute ("Developing Affordable Housing Ecosystems World Wide"), scores some good points against economist Luigi Zingales. His post, a sort of photo-text proem, has some of the disjointed pleasure of high modernist experimental writing. Smith notes that one of the big pieces of evidence Zingales uses is actually a measure of sentiment about strategic default by others, not first-person evidence of the phenomenon.

He's on less sure ground with this blanket assertion about causes of default:

Most people default because they have payment problems, not because they theoretically believe their home to be worth less than its value.

This is at odds with data from the Federal Housing Finance Agency and a private analyst, who conclude that negative equity is the largest single determinant of default probability.

Smith is very shrewd about how your perception of jingle mailing is colored by your own prejudices against your friends and neighbors. But I can say for certain—not through reified rumor but having walked people through the catechism—that I know at least five strategic defaulters. These are people of my own class: cosmopolitan ignoreducated morally vacuous coastal parasites. I love them. But the fact is they have chosen to stop paying their mortgages even though they could—in some cases only through radical lifestyle reductions—continue to pay.

A message more people need to hear.

Where I differ from Zingales, and probably from Smith, is that I don't think this will "undermine our financial system" or destroy some "social norm." Default undermines a bank's balance sheet and a borrower's credit record, as it should. It also allows both parties to get out of a bad situation and on with their lives.

Like all the best high modernist experimental writers, Smith ends up calling for a holocaust. "People have an enormous capacity to conclude that anything goes if 'it's not my fault,'" he writes, "and the observant herd will rapidly notice if defaulters are not dismembered."

Well, we have several years' worth of evidence, and by this point it's pretty clear that the consequences of going deadbeat are less than life threatening. You get to stay in the house rent-free indefinitely while the bank ignores your phone calls. Eventually you have to find a rental place and move out. Your credit rating goes down. And you're done. It's about as painless a solution as you can imagine.

Yet with 24 percent of mortgages underwater nationwide, the actual delinquency rate hovered around 10 percent after the 2008 credit unwind, and it is now at 9.85 percent, according the Mortgage Bankers Association.

Nevertheless, Zingales is so humid about the possibility that that second number might creep up that he suggests the following:

We envision a reform of the bankruptcy code that, in areas where house prices have dropped precipitously, would require lenders to give homeowners the option of resetting their mortgages to the current value of their houses. In exchange, the lenders would get 50 percent of the houses' future appreciation. To keep homeowners honest—that is, to prevent them from doing minimal upkeep in the knowledge that they stood to gain less from a home-price increase—the capital gain would be measured based on an average of houses selling in the area, rather than on the change in the value of the actual house.

Now how's that for undermining social norms? (And by the way, how come I never get consulted when they're making up these social norms?) You signed a contract in which the terms of failure were clearly explained. But instead of letting the contract go bad the way our ancestors designed, government apparatchiks and policy wonks are now going to force you and the bank into a whole new deal that requires the bank to take a direct financial hit in exchange for a future-value pig in a poke, while you get chained, company-store-style, to a house you no longer wish to pay for.

Why are farkakte solutions like this even being considered? The government has been trying to solve the jingle mail problem for almost three years now. It has borrowed and spent hundreds of billions of dollars trying to keep people in their borrowed homes. And it has achieved nothing except to drag out the problem. If Obushma had allowed nature to take its course we'd already be on the other side of the real estate correction. Strategic default happens. But the first step toward sobriety is to admit we don't have a problem.

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  1. Duct tape – it’s a dessert topping AND a babysitter!

    1. It’s also great for getting lint off black pants. But we digress. We always digress.

      1. No, no, no. Duct tape leaves a residue. For lint, you must use blue masking tape. Please make a note of it.

        1. That is the most mesmerizing piece of child abuse I have ever seen. I cannot take my eyes off of it and my self loathing is doubled every minute I cannot look away. WTF? I mean, really.

          1. I think we now know where Max is when he is not posting.

          2. Abuse? the kid looks happy.

  2. We’ve had a few go-rounds here about the moral and ethical implications of mortgage contracts and strategic defaults. I don’t want to repeat those here, but will take the opportunity to start a different discussion:

    “The avalanche of anti-strategic-default coverage in the media is not based on any coherent moral theory, but is just one more aspect of the desperate attempt to prop up housing prices. Discuss.”

    Seriously, I don’t think this is a stretch. The real reason elite opinion is angry about strategic default is that since the real estate crisis began they’ve been dead set against housing price deflation, and willing to do whatever it took to will prices higher.

    Simply pulling the trigger system-wide on defaults and foreclosures – ripping the band-aid off all at once, as it were – would crater asset prices, and this is the one option that elite opinion has refused to consider all along.

    1. I agree.

      If they would only let housing price return to fair market value.

    2. The real reason elite opinion is angry about strategic default is that since the real estate crisis began they’ve been dead set against housing price deflation, and willing to do whatever it took to will prices higher.

      That’s because the “elites” see their property values dropping and they suddenly realize that their self-perception of their elite status was based solely on the price they paid for their house and not the actual value of the property.

      It’s the same attitude as the whiny bankers who fucked up royally. They want someone else to pay for their fuck up. That’s why David A. Shit’s “solution” winds up helping the bank instead of the debt slave. If this elitist asshole loses his bullshit job, he’ll realize that he needs to get the fuck out of his mortgage contract and eat the loss. Instead, since he can still afford his mortgage payment, he wants to throw good money after bad, especially if the some of the good money isn’t his own.

  3. This happens all the time in the commercial real estate market. I may have mentioned this on another thread once or twice but…The fromer owner of The Pier Shops at Caesars, Taubman, just defaulted on a $135 mil loan with BoA. the property is currently valued at about $54 mil. Yes, that’s a 250% LTV. Taubman walks away with no liability. In fact Reggie Middleton showed that all of their properties are at least over the “high-water-mark” of 80% with at least 2 other properties close to 240%. In fact, they will be paying dividends to shareholders on the 15th of this month, and preferred shareholders on the 30th. Is this the future of residential mortgages?

  4. Very very said.

  5. I always liked Richard Pryor’s take on how a black man would have handled The Amnityville Horror

    Rich: Oh man! What a great house!

    GET OUT!!!

    Rich: Too bad we can’t stay.

    1. This.

      Also, the difference between a white man and a black man when confronted with a snake…classic.

  6. Who you calling morally vacuous? You talkin’ to me?

  7. Most people default because they have payment problems, not because they theoretically believe their home to be worth less than its value.

    How does this shit for brains think Detroit became what it is? You can own your house free and clear, but if the property values start dropping like a rock, you aren’t going to put much money if any into it. You wouldn’t put 8,000 worth of repairs into a Yugo.

    So WHY THE FUCK would it make any difference whether you had free and clear title versus a mortgage? IDIOTS!

  8. I don’t think it’s all that controversial to say that few homeowners do a strategic default in the absence of financial distress. However, Mr. Smith is wrong to separate “strategic default” from financial distress.

    What if I were a dumbshit who took out a liar’s loan without thinking about whether I could really afford to make the payments after the introductory period and couldn’t flip the house like all the “experts” said I could? Do I really want to eat nothing but Top Ramen for the next 30 years so that I can pay 60% of my income as a mortgage payment, even if I keep my job?

    “Financial distress” can exist short of a total catastrophe. Strategic default is a viable option for these people, who can barely afford the payments but who have little hope of advancing beyond that.

    Moral questions rarely enter into it for a person in that situation. They may even rationalize that it’s “not really their fault.”

  9. “…..are less than life threatening. You get to stay in the house rent-free indefinitely while the bank ignores your phone calls. Eventually you have to find a rental place and move out. Your credit rating goes down. And you’re done. It’s about as painless a solution as you can imagine”

    Hello, McFly? Ever heard of something called a deficiency judgment? Right now the banks aren’t going after the money owed due to enough bad PR already, but just wait a year or two. The collection depts are already gearing up. If you think they’re going to let people walk with 50-200K you’re wrong. The collection agencies will be hounding these folks for decades.

  10. My family owns rental properties and we have several people who have walked away. None because they couldn’t pay their mortgage but because they didn’t want to pay $400,000 for a house that is now only worth $150,000.

    1. Wow, you must know the guy who owned my house before me. (Public records indicate he paid exactly $400k in late 2005; I paid exactly $150k last May.)

  11. Ever heard of something called a deficiency judgment?

    Ever hear of no-recourse loans?

    “Financial distress” can exist short of a total catastrophe.

    For a lot of people, financial distress arrives when they max out their third credit card and don’t have the cash to cover their $100/month smartphone dataplan, their $150/month superultramega Platinum cable bill, their $600/month car lease, their health club membership, eating out 5 nights a week, etc. etc.

    So, to them, I say, boo fucking hoo.

  12. Dashing down the streets
    In a four-room moving van
    O’er the water we go
    Laughing cause we can — ha ha ha!
    Bells on the phone ring
    Message light is bright
    What fun it is to laugh and sing
    A deadbeat song tonight. Oh!

    |: Jingle mail, jingle mail,
    Take this house away;
    Oh! what fun it is to have
    no mortgage left to pay. Hey!
    Jingle mail, jingle mail,
    Take this house away;
    Oh! what fun it is to have
    no mortgage left to pay.:|

  13. I don’t know what ‘jingle mail’ means.

    1. Strategic default. As in, you mail the bank the keys to your house (which jingle, being keys) and walk away from it.

    2. Neither did I a few hours ago. Luckily, I’m skilled in the use of a certain obscure web resource with which you might want to familiarize yourself to avoid asking stupid questions in the future.

  14. The government has been trying to solve the jingle mail problem for almost three years now. It has borrowed and spent hundreds of billions of dollars trying to keep people in their borrowed homes. And it has achieved nothing except to drag out the problem.

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