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Tilting at Windmills

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May 11, 2008
By: Kevin Drum

JINGLE MAIL....Has there been a sea change in the way Americans view the responsibility of paying off their mortgages? Has it become common to simply toss the keys to your house in the mailbox and walk away if you don't feel like making your payments any more? Even if you can afford to? This has recently acquired the status of conventional wisdom, but Michael Hiltzik of the LA Times says there's a problem with this story:

When pressed for the number of borrowers who could afford their mortgage payments, major banks and lender groups could not produce numbers figures.

Nor could the Mortgage Bankers Assn., the leading trade group for housing lenders....Wachovia's [Don] Truslow acknowledged during the bank's conference call April 14 that walkaways were "hard to quantify."....Bank of America spokesman Terry Francisco said the bank had seen indications that some homeowners were taking pains to keep their credit card accounts current at the expense of their mortgage balances....But he said the bank did not have "firm figures" on how many homeowners were unnecessarily defaulting on their mortgages.

....At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing "folklore" about residential walkaways but said that the phenomenon was more likely connected to investors than people who live in their homes, or "owner-occupants."

"The vast majority of borrowers we find have been acting in good faith," she said. "If they get behind, they are interested in working with their lender."

If this is right, there's been no sea change at all. What there's been is a huge increase in houses purchased by speculators and a huge increase in lenders willing to provide them with mortgages. Unsurprisingly, it turns out that speculators are willing to walk away from mortgages if they no longer look like a profitable investment, but this says nothing about the attitudes of ordinary homeowners. What it says is that banks should be careful about loaning money to speculators.

But they weren't, so now they're trying to construct an urban legend about feckless home buyers who are defaulting not because their loans are resetting and they can't afford them, but merely because they feel like it. Hardworking bankers are just the latest victims of a liberal culture that no longer values personal responsibility, you see.

Maybe. But like most self-serving narratives coming from the moneyed class, you might want to ask for evidence beyond a few anecdotes before you believe it. Who knows? Maybe this one is no more real than that mythical family farmer tossed off his land by a cruel and unjust estate tax. We never did get his name either.

Kevin Drum 1:01 PM Permalink | Trackbacks | Comments (37)

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These are the same bullshitters who forced through a major rewrite of the bankruptcy laws based on the ficticious "tidal wave" of people who were charging up huge luxuries on their credit cards with the sole purpose of eventually declaring bankruptcy to get awat scot free. It was, of course, crap. As I suspect this is.

Posted by: Pat on May 11, 2008 at 1:09 PM | PERMALINK

If I'm not mistaken, only recently have originators been so desperate to write mortgages, and so insulated from risk by quick securitization, that these borrowers been able to walk away without penalty (and with no down payment no less).

Posted by: jhm on May 11, 2008 at 1:11 PM | PERMALINK

Beautiful Kevin!

Bravo.

Posted by: Adam on May 11, 2008 at 1:28 PM | PERMALINK

...some homeowners were taking pains to keep their credit card accounts current at the expense of their mortgage balances......

As Pat notes: that is a direct result of the bankruptcy bill ....credit issuers were given a priority spot because they -bribed- err, convinced legislators that there was a crisis.

Posted by: Ed Tracey on May 11, 2008 at 1:34 PM | PERMALINK

We should file this never seen rash of people who simply walk away from their mortgages with other public policy "unicorns" such as the tidal wave of bankruptcy scammers I mention above, the welfare queen driving her new Cadillac to the food stamp office, and the farmer's heir who must sell the family farm to pay the estate tax.

Posted by: Pat on May 11, 2008 at 2:03 PM | PERMALINK

The jingle mail narrative never sounded right to begin with. If people were walking away from a house, just where were they supposed to live? Where were they supposed to put all of their possessions when giving up on the house.

Those were two questions that I had never seen answered in the jingle mail pieces. The two classes of people that could easily benefit from jingle mail were 1) speculators that never lived in the properties and 2) people who were able to secure a house they could afford before mailing in the keys to the place they couldn't.

Posted by: anonymoose on May 11, 2008 at 2:19 PM | PERMALINK

This was, of course, laying the groundwork for regulatory support of the banking industry, permitting them assistance or relief on walkaways. But the narrative doesn't generate much alarm or sympathy if the true walkaways are investors on their second, third, and fourth mortgages.

In point of fact, the banks are free to pursue the assets of these walkaways -- mortgages for houses that are not owner-occupied are what is referred to in the trade as "recourse loans"--the lender is entitled to go after the assets and future earnings of such borrowers.

Of course, if these borrowers don't show much promise of having much in the way of assets or future earnings, it would point the way to a poor business decision to lend them money in the first place. And given this chain of understandings, it's unlikely to move the public (or congressional) opinion that would be necessary to back some legislative "relief."

Thus, they have been pushing the story of the financially able, but unwilling, owner simply mailing their keys back. I'm glad this has finally hit the blogs -- this awareness may save the American taxpayer hundreds of billions in future federal subsidies.

Posted by: Osama Von McIntyre on May 11, 2008 at 2:34 PM | PERMALINK

I know of several[3] walk aways right here in my neighborhood. They kept the cars and credit cards and abandoned the house which were then foreclosed on. Then again, arent all foreclosures people giving up their homes for one reason or another?

Short sales are also another issue that needs a gander, I think.

http://washingtonindependent.com/view/mortgage-crisis17

Posted by: Jet on May 11, 2008 at 2:36 PM | PERMALINK

"Unsurprisingly, it turns out that speculators are willing to walk away from mortgages if they no longer look like a profitable investment, but this says nothing about the attitudes of ordinary homeowners. What it says is that banks should be careful about loaning money to speculators.

But they weren't, so now they're trying to construct an urban legend about feckless home buyers who are defaulting not because their loans are resetting and they can't afford them, but merely because they feel like it. Hardworking bankers are just the latest victims of a liberal culture that no longer values personal responsibility, you see."

If this your view of the "foreclosure crisis" Kevin, then I take it that you wholeheartly approval of Bush's veto threat against the current bill that your Democratic Congress is trying to pass, which is intended to bail out irresponsible bankers and speculators at taxpayer expense.

So when can we expect your posts berating the Dems for doing the bidding of the "moneyed class"?

Posted by: Chicounsel on May 11, 2008 at 2:38 PM | PERMALINK


The motivation for abandoning a home happens when borrowers can no longer afford their mortgage payments and the value of their homes are underwater. By the end of June, Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity. If the mortgage lender is simply going to foreclose on the home anyway, the credit hit from a foreclosure is seen as being less painful than one from bankruptcy.

As a result, a number of websites have popped up in recent months to cash in on this growing number of underwater homeowners by offering services to assist in the walk-away process. According to the owners of these sites, there is no shortage of customers.

"The business is great and we're looking to expand. It's been pretty phenomenal," said Phillip Bellante, co-founder of San Diego-based HomeFreeMe.com.
http://www.portfolio.com/news-markets/top-5/2008/04/29/Questions-on-Rise-in-Abandoned-Homes

Well, apparently there is a market for potential walk-aways.

Posted by: Jet on May 11, 2008 at 2:45 PM | PERMALINK

Jet seems determined to collapse walkaways and foreclosures.

When we speak of walkaways, we are talking about people who are financially able to pay their mortgage, but have chosen not to. Foreclosures are generally (but not exclusively) people who do not have the financial means to continue paying their mortgage payments.

But treating them as equivalent, you are doing the banking industry's work for them.

Posted by: Reader with a clue on May 11, 2008 at 2:50 PM | PERMALINK

But treating them as equivalent, you are doing the banking industry's work for them. -RWAC


Yeah, thats why I posted an alternative method to walking away. Sheesh.

Posted by: Jet on May 11, 2008 at 2:58 PM | PERMALINK

I'd like to give you my own numbers for comparative "affordability":

My mortgage (P+I+T+I: $3198.50 (without tax and insurance, the P+I is about $2400)

Daycare/preschool for two kids : $1450

The sticker shock when I had kids was WAY worse than the sticker shock when I started paying a mortgage.

Posted by: anonymous on May 11, 2008 at 4:01 PM | PERMALINK

P.S. Childcare costs were a bigger shock, because unlike all the mortgage books, websites and magazine articles, there were no hypothetical guides to expenses or affordability calculators or anything. Once we had the first baby we started pricing daycare. (For the second child we have no excuse. We knew it was going to be expensive... So we're counting the days until each one can get into the local public elementary school)

Even so, daycare comes out to about $4.50/hr per kid. Considering the ceiling on numbers of children each daycare provider is allowed to care for, they really don't get paid much.

Posted by: anonymous on May 11, 2008 at 4:11 PM | PERMALINK

It appears our Mr. Unsel is not a particularly astute observer. He is unable to differentiate between the, likely Republican, scammers who are willing to simply walk away, and the hard working schlubs whose reach exceeded their grasp and are now in upside down loans. Bush, working for his based, the truly moneyed, wants to veto anything that might help the needy.

Posted by: the on May 11, 2008 at 4:13 PM | PERMALINK

Check out "this american life" this week...

the online podcast should be available tues:
http://thislife.org/Radio_Episode.aspx?episode=355

excellent show where they talked to mortgage "packagers",,, the people buying the mortgages from the originators and selling them to Wall st.

Posted by: ira glass on May 11, 2008 at 4:14 PM | PERMALINK

Check out "this american life" this week...

the online podcast should be available tues:
http://thislife.org/Radio_Episode.aspx?episode=355

excellent show where they talked to mortgage "packagers",,, the people buying the mortgages from the originators and selling them to Wall st.

Posted by: ira glass on May 11, 2008 at 4:14 PM | PERMALINK

Check out "this american life" this week...

the online podcast should be available tues:
http://thislife.org/Radio_Episode.aspx?episode=355

excellent show where they talked to mortgage "packagers",,, the people buying the mortgages from the originators and selling them to Wall st.

Posted by: ira glass on May 11, 2008 at 4:14 PM | PERMALINK

Attention Democratic candidates: Read Drum, copy, and win.

Posted by: ferd on May 11, 2008 at 5:20 PM | PERMALINK

Well, if your home is no longer your home but an investment, then it's just good business sense to cut you loses when the investment goes bad.

Greed is good, RIGHT?

It's not about LIBERALS, it's about GREEDY REPUBLICANS having to live with their own GREED and VALUES. But hey, don't worry, the Feds will bail out the rich people!

Posted by: Glen on May 11, 2008 at 5:52 PM | PERMALINK

The test is simple, and I'd be willing to bet my own money on it. Does the owner live there? Sure, that lumps those who own a rental property or two with major speculators, but as these things go it's a good test.

And my bet? Not one homeowner in 1,000 who lives in the property walks away willingly.

Posted by: drinkof on May 11, 2008 at 6:08 PM | PERMALINK

This was, of course, laying the groundwork for regulatory support of the banking industry, permitting them assistance or relief on walkaways.

I also think that the banks are worried that some of their potential cash cows like negatively amortizing Pick a Payment™ Option ARMs might end up being banned by new regulation. This way their financial "products" aren't the problem, it's just lending to the "wrong" people. They've already tightened up lending standards to remedy that end of it already, but they still want to be able to push these shitty, but potentially very lucrative loans later on-maybe they can make decent money without the mistakes they made last time. Maybe.

Posted by: Doc at the Radar Station on May 11, 2008 at 6:17 PM | PERMALINK

As if mortgage brokers and banks are going to give out actual numbers on walkaways.

And, I know actual people, not speculators, who have treated 2/28 ARMs as two-year house rentals.

That's not to say speculators aren't a large part, maybe even the major part, of walkaways, but they're the only part.

Again, the first line, though is:

As if mortgage brokers and banks are going to give out actual numbers on walkaways.

Gullibility 1, smart blog posting 0.

Here's the real biggie:

35 percent of subprimes could be in foreclosure by the end of 2009.

Posted by: SocraticGadfly on May 11, 2008 at 6:22 PM | PERMALINK

Whether or not jingle-mail is real, I found this a refreshing perspective:

Implicit in this segment is that families are not entitled to make "business decisions." But you know who is entitled? Why, businesses of course. When businesses laid off 1.5 million workers in 2007, it was purely a "business decision." When Wall Street banks "wrote down" more than $100 billion in losses in 2007, it was purely a "business decision."

Look for families to become more comfortable making "business decisions" of their own in 2008.

Contrast with this:
Now the mortgage company is warning that it may not be able to pay its bills, and has set out to force those who lent money to it to agree to accept only a fraction of what they are owed. It appears that its lenders have little real choice. If they insist on being paid all that they are owed, they will go to the back of the payment line, with the risk they will get nothing.

The mortgage industry has bitterly opposed legislative proposals that bankrupt homeowners be able to ask judges to reduce the amount they owe. But that is what this company hopes to accomplish through the threat of a bankruptcy filing. The lender in trouble is known as ResCap, short for Residential Capital. It is a subsidiary of GMAC...

Posted by: has407 on May 11, 2008 at 9:02 PM | PERMALINK

Two stories I know are real:

1) Homeowner across the street bought at the top of the market with no money down and a teaser rate 2 year. Rate reset, he got creamed, lost the house. House went to REO, went to auction, was bought by somebody and now has new For Sale sign out front. At least the lawn is being mowed again.....

2) Homeowner two doors down bought in 2005, expected to be able to rent spare rooms out to cover mortgage and have her adult kids live with her to also pay. Kids wanted own places to live and bailed. Series of renters was a nightmare requiring regular police activity. Homeowner refinanced the place to the tits, used the cash to purchase house in Victorville, moved and then stopped paying mortgage on the first house. House sold at auction recently and is back for sale again.

Needless to say, I feel bad for homeowner #1 - they were good people and good neighbors, it was a shame we lost them. Homeowner #2 - we were ready to have a block party when the moving truck turned the corner and disappeared.

Posted by: arteclectic on May 11, 2008 at 11:38 PM | PERMALINK

Has: GM is a near-bankrupt car company with a greedy financing company wagging the tail.

Posted by: SocraticGadfly on May 12, 2008 at 12:29 AM | PERMALINK

SocraticGadfly -- Understood. While a significant portion of GMAC's business is still tied to GM, GM became a minority holder in GMAC in 2006; controlling interest is held by an investment group led by Cerberus. Part of their strategy to diversify out of the GM-centric market was what led to the push into mortgage financing. Hard to tell at this point, and as ironic as it may seem, vehicle financing may be what saves GMAC.

Posted by: has407 on May 12, 2008 at 1:05 AM | PERMALINK


Here's the real biggie:
35 percent of subprimes could be in foreclosure by the end of 2009.

That American Life report says it could be close to 50%..

Posted by: Andy on May 12, 2008 at 2:57 AM | PERMALINK

Not precisely on topic but could someone help me out with this: A right wingnut at work claims that the whole subprime crisis is basically the fault of some law passed a few years ago to force lenders to lend to unqualified minorities. Probably something he heard on AM talk radio or something. I think it must be an anti-redlining law, and I'm sure it has been mischaractarized. Behind this, people like this guy I think endorse complete caveat emptor - it's not the nanny state's place to keep capitalists from coercing the consumer into spending themselves into oblivion buying crap they can't afford, it's the responsibility of the individual to figure it out, and let the chips fall where they may.
Anyway, anyone have more info or references about this?

Posted by: emjayay on May 12, 2008 at 8:15 AM | PERMALINK

I happen to know one jingle-mailer, but it is interesting to note that she bought her place in early '06 (peak of bad-loan era?) and lost her job six weeks later. She freelanced for months while looking for steady work and finally was hired but a week later was diagnosed with cancer. She tried numerous times to work out more amenable terms with her mortgage company while she recovered but could never get anywhere with them--no responses to calls, letters, or emails. This person was a first-time buyer who was not the best credit risk, to put it mildly, and who didn't say anything at closing when all the hidden costs of home-ownership were going to take fully 60% of her monthly income.

Over the course of months in which she tried to get help from her mortgage company (about which online complaints and horror stories abound), she was offered a job in another state and walked away. The bank refused TWO short-sale offers from qualified buyers (not speculators) before she went into foreclosure. Apparently they were holding out for the government bail out. Now they and the coop board are stuck with the property. A lawyer told her she makes too much to declare bankruptcy, but so far, the bank hasn't made any move against her, either. What will happen to people who walk away? Will banks be initiating lawsuits against them even though the lenders were making loans?

I agree with Kevin that the myth is being played against people who have genuinely tried to work things out, but it's odd to me that the bank actually refused to consider any remediation in this case.

Posted by: Gaia on May 12, 2008 at 10:56 AM | PERMALINK

That should be "even though the lenders were making bad loans."

Posted by: Gaia on May 12, 2008 at 10:59 AM | PERMALINK

We would never had experienced the incredible run-up in real estate values had it not been for two coincident factors - "easy money" and speculative investment.

Had the demand for housing remained just that, we would not be in this mess.

Posted by: Richard on May 12, 2008 at 11:08 AM | PERMALINK

emjayay - A law was passed that was intended to pressure federally regulated banks into making mortgage loans to poor people with bad credit. It's called the Community Reinvestment Act. That surely contributed in some measure to the current crisis, but it's unclear how much, because a lot of the bad mortgage loans were made by financial institutions that were not subject to that law.

Posted by: DL on May 12, 2008 at 1:05 PM | PERMALINK

The below snippet comes from the New York Post, and illustrates exactly what you mentioned in your article--that it's speculators who are having issues with foreclosures. Apparently there is trouble in the Hamptons paradise.

"This problem didn't even exist before," said John Brady, a broker with Coldwell Banker in East Hampton. "They used to pop up once in a while, and you wouldn't even pay attention. Now you expect to see new ones every week."

A total of 10 East End homes, including a massive Westhampton mansion, were foreclosed outright since the beginning of the year.

In addition, more than 800 East End homeowners - a mix of rich and middle-class people from Riverhead to Montauk - have been flagged by credit-monitoring companies this year for late payments.

Brady said the high-end, delinquent borrowers are finance types, lawyers and speculators who overextended themselves on second homes and investment properties.

Some of the Hampton high rollers feeling the pinch are:

* Janice Becker, a regular on the Southampton village social circuit, is facing foreclosure on her multimillion-dollar Wyandanch Lane property.

* Advertising veteran Ransel Potter is defaulting on a $1.8 million mortgage on an Amagansett parcel.

* Real-estate honcho John Conroy is in lis pendens for a $3.5 million mortgage on a Bridgehampton spread on West Pond Drive.

* Former UBS executive Marc Warren is in lis pendens on a $1 million mortgage for a Mitchells Lane pad in Bridgehampton.

* Investor Roger Thanhauser is trying to sell a home on Main Street in East Hampton village to avoid foreclosure.

Posted by: cyrki on May 12, 2008 at 1:29 PM | PERMALINK

The below snippet comes from the New York Post, and illustrates exactly what you mentioned in your article--that it's speculators who are having issues with foreclosures. Apparently there is trouble in the Hamptons paradise.

"This problem didn't even exist before," said John Brady, a broker with Coldwell Banker in East Hampton. "They used to pop up once in a while, and you wouldn't even pay attention. Now you expect to see new ones every week."

A total of 10 East End homes, including a massive Westhampton mansion, were foreclosed outright since the beginning of the year.

In addition, more than 800 East End homeowners - a mix of rich and middle-class people from Riverhead to Montauk - have been flagged by credit-monitoring companies this year for late payments.

Brady said the high-end, delinquent borrowers are finance types, lawyers and speculators who overextended themselves on second homes and investment properties.

Some of the Hampton high rollers feeling the pinch are:

* Janice Becker, a regular on the Southampton village social circuit, is facing foreclosure on her multimillion-dollar Wyandanch Lane property.

* Advertising veteran Ransel Potter is defaulting on a $1.8 million mortgage on an Amagansett parcel.

* Real-estate honcho John Conroy is in lis pendens for a $3.5 million mortgage on a Bridgehampton spread on West Pond Drive.

* Former UBS executive Marc Warren is in lis pendens on a $1 million mortgage for a Mitchells Lane pad in Bridgehampton.

* Investor Roger Thanhauser is trying to sell a home on Main Street in East Hampton village to avoid foreclosure.

Posted by: cyrki on May 12, 2008 at 1:29 PM | PERMALINK

Home owners are people who own homes. I haven't seen any articles that suggest only strawmen are walking away from mortgages, but maybe I missed something.

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