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... are a little more complicated than you portray them.

Essentially, people were being conned into buying a house at a wildly inflated price (or circumstances forced them to buy - e.g. because of a divorce or a childbirth). The immediate beneficiary of this scam is, of course, the seller of the house. But the mortgage lenders come a close second. And it's not like the banks were rubes just in with the 4 o'clock train from Nowhere. They knew perfectly well (or at least had no valid excuse not to know perfectly well) what was going on.

A bank that knowingly lends money to a person for the explicitly stated purpose of placing that money in a pyramid scheme, like the bank that lends money to a dictator in some banana republic, should be neither surprised nor entitled to cry foul when the former client walks away from the whole sorry business.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 05:07:45 PM EST
I have heard those arguments before, but nonetheless, these were grown up adults, how can you force them to buy a house? I just bought one (well, it's currently being built) and it took me over a year to find and I did a lot of calculating, comparing to my current rent of my appartement, rent of a house, income, etc...

Buying a house is not something you do just like that. How can you spend many times your yearly salary without having a good look at that investment?

Having said that, I think financial education definitely needs to be course at school starting in elemetary school all the way to high school...

by crankykarsten (cranky (where?) gmx dot organisation) on Tue Aug 24th, 2010 at 05:31:21 PM EST
[ Parent ]
Whether the rubes were wise to enter into the pyramid scheme or not is beside the point. By originating, purchasing, re-packaging and marketing mortgages that they knew or should have known were fraudulent, the mortgage dealers aided and abetted a pyramid scam. Either knowingly or through gross and wilful negligence in their obligation to carry out due diligence.

The deal between banks and the rest of society is that the banks are permitted to operate as clearing houses under sovereign guarantees in exchange for exercising due diligence. When they so signally abscond from their end of the deal - particularly when their antics end up creating an extremely costly money market panic - they should be told to take a hike.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 05:59:03 PM EST
[ Parent ]
In a sense, financial education might be poor by design. It's already three decades that people are pushed quite shrewdly into stock or real estate markets with the norm of intuitive or herd knowledge. Lay people succeed or fail there more by dumb luck than by their earnest knowledge. Asking (tellingly too late) people to overcome the "uplifting" noise of financial analysts, media cheerleaders and political clowns is like asking all first-grade schoolchildren to learn to play piano or chess without any hints or coaching. Yeah, a few Rahmaninoffs or Kasparovs can do that - but this is not education.

Even at universities, the popular economy or business courses probably prepare (for the crises times) more suckers than really knowledgeable investors. It's not science, but fashionable brainwashing for business cycles. Did you try to take a course on financial derivatives? Goldman Sachs gladly needed you.

And one more thing. Comparing mortgage with borrowing a toy is very unsound. It's more like you borrow a shovel and you are asked to return an excavator.

 

by das monde on Wed Aug 25th, 2010 at 03:00:51 AM EST
[ Parent ]
good point with the financial education, however I think that at least some sense would return to some people. Furthermore, no one could say that they didn't understand what they were doing! Not with buying a house anyway, really complicated structered products is another issue...

with the shovel and excavator example I assume you want to address the issue of interest? While that is indeed something that needs to be considered from an economic perspective, my point was purely from a moral perspective: you burrow something, you have to give it back. That simple...

by crankykarsten (cranky (where?) gmx dot organisation) on Wed Aug 25th, 2010 at 04:10:20 AM EST
[ Parent ]
It's not only the interest. When something is lent in abundance times and claimed back in meager times, you morally get the same shovel/excavator situation.

Besides, banks do not lend anything technically. They do not give something they have and then want that back (plus interest). The money they "lend" is not theirs nor anyone's. It's just money creation "out of thin year" - we discussed that.

What does that mean morally? For one thing, banks are in a privileged position. While everything goes right, banks get profit from the interest on money they did not have. When things get tough... at least for now, banks are the first to get a bailout, while obligations of the others remain the same (or grow).

Obligations is the thing to look in this money alchemy. For someone to earn a million someone has to borrow a million. The urge of lenders can easily be larger than the urge of borrowers. Even if borrowers follow their own will, is the urge of lenders morally impeccable? Or aren't they worse than cash hoarders, as on balance they stockpile money faster?

Say, you are the only millionaire on an isolated island. Is it bad for you if other fellows on the island borrow from you? You actually need borrowers, because otherwise you would have to grow crops and build a hut yourself eventually. That "refraining yourself" from spending the cash is actually evil, as it enslaves others, especially when barbarous interest eventually claims more than the whole island produces.

by das monde on Wed Aug 25th, 2010 at 05:17:01 AM EST
[ Parent ]
das monde:
It's not only the interest. When something is lent in abundance times and claimed back in meager times, you morally get the same shovel/excavator situation.

Lending out snow in January and expecting it back in July to use a (north side of the planet, snow country-centric) playground metaphor.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Aug 25th, 2010 at 02:53:09 PM EST
[ Parent ]
that the banks bear a heavy burden of responsibility and deserve to lose some money, I can't accept the lazy arguments that people were conned into buying houses. They were willing gamblers, and they certainly took the "wins" if they were lucky.

Now, if you are additionally lucky that mortgages are non-recourse to you, there is a very rational argument to default, but it's still a breach of a commitment you took so it does fall into the "cheating" category crankykarsten describes.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Aug 24th, 2010 at 06:16:00 PM EST
[ Parent ]
Unlike gold or equities or the currencies of countries you never plan to actually visit, housing isn't optional, and renting isn't always possible (itself a signal failure of government planning, but that's a different story).

Of course, you could delay buying out your former spouse after a divorce. You could delay moving to a place closer to the job you just got. You could do a lot of things. But is it reasonable to demand it?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Aug 24th, 2010 at 06:26:56 PM EST
[ Parent ]
"Cheating" that any company company incorporated in North America would do. Legally, of course, please refer to bankruptcy law.

Context is everything and all that is said usually in this regard in North America is that at is good for the goose (banks, e.g. corporations) is good for the gander (the rest of us).

In Europe, the rules don't apply quite the same way.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Aug 24th, 2010 at 06:50:53 PM EST
[ Parent ]
Wall Street Journal Sees Parallel Between Commercial and Individual "Strategic Default"" When Solvent Commercial Property Owners Quit Paying? « naked capitalism
I think we all know the answer to the question in the headline, courtesy F. Scott Fitzgerald, "The rich are different than you and me." And the fact that they have more money means their defaults are couched as pure business decisions. But mere homeowners, told to view their house as an investment, are now castigated if they act as any professional would and cut their losses.

The Wall Street Journal article on, ahem, voluntary commercial real estate defaults points out that some of the very biggest names are in the walk-away camp and through the article points out the similarities in decision process between commercial real estate strategic defaulters and their retail kin:

Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans.

Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.



"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Wed Aug 25th, 2010 at 06:21:37 AM EST
[ Parent ]
Another perspective is that jinglemail rules simply confer on homeowners a privilege that stockholders already have, namely limited liability in part of their business ventures. If a company is underwater, the stockholder can (and indeed is expected to) walk out of his commitment for no other reason than the fact that it is underwater. Stockholders are not asked whether they are in actual financial difficulty when they do their equivalent of jinglemail.

I don't think that limited liability is inherently counterproductive in the mortgage market (though the mortgage market itself may well be, because the pwnership society it promotes is counterproductive). Similarly, I don't think that exercising limited liability as a matter of convenience rather than necessity is inherently immoral, whether in the stock market or in the mortgage market.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Aug 26th, 2010 at 07:56:46 AM EST
[ Parent ]
Sorry for being late to the discussion, but I, too, am taking exception on your characterization of "breach of commitment".
I have these interesting tidbits in my bookmarks on this very subject:

First, about "norm asymmetry": I have already posted that snippet before, but it bears repeating:

Economic View - Will More Borrowers Walk Away From Their Mortgages? - NYTimes.com

Some homeowners may keep paying because they think it's immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be "simply a speculator -- and one who is not honoring his obligation." (The irony of a former investment banker denouncing speculation seems to have been lost on him.)

But does this really come down to a question of morality?

A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a "norm asymmetry." In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It's as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.

Note the jab aimed at the "investment banker" calling strategic defaulters "speculators" (no, this was not for you Jerome :-)).

So, shocker #1: The Poor are Honest! (who would have thought?)

Then, this:

Walking Away From Million-Dollar Mortgages - NYTimes.com

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

"The rich are different: they are more ruthless," said Sam Khater, CoreLogic's senior economist.

Shocker #2: "The rich are different than you and me." (F. Scott Fitzgerald quoted by Yves Smith)

And what is my own opinion on this "moral issue"?

To me the one thing that is truly reprehensible, morally and practically, is that famous "norm asymmetry" described by Brent White of the the University of Arizona: the social expectation that the less well-off people keep up their commitment more often (and at greater cost and suffering) than the richer individual or corporations.

Truly, if there is one cause for outrage in my book, this is it.

And I'll note that, in your reaction to strategic defaulting, you definitely are on the same line as the less well-off. Too bad your norms are so asymmetrical...

by Bernard on Thu Aug 26th, 2010 at 11:52:56 AM EST
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