San Diego Housing Bubble News and Analysis

People have to do what they have to do for their own financial well being.

You said it perfectly well right there. 

But I don't understand your responsibility argument.  A contract is a contract.  If the contract has a "walk" clause, why not exercise it?   It's just like a stock option or an employment contract.   Is it "responsible" for the CEO of Citibank to leave with a golden parchute after causing such loses for the shareholders?   

Da Counselor had a clean, crisp view of the whole situation.  If you can, and it's spelled out in the contract, then it's perfectly fine. 

Another thing, the foreclosure (walk) clause of a mortgage is to protect the lender. But there are certain unintended consequences to everything.

The lenders were stupid to lend too much. They just need to take their licks and not make the same mistakes again.

SD it would be interesting to put your solution to the test and look at other countries where mortgage debt is recourse. Does anyone know of examples? I know New Zealand has a nice bubble going, and mortgages there are recourse.

"What has to change? Well I believe there should be no more distinction between recourse and non recourse money. If people are simply not going to comprehend that home ownership is a different vehicle then an investment then ultimate responsibility must be incurred in a default unless it can be a well proven hardship."

I agree with you completely Adam.

My wife and I were just discussing this topic as a result of the other thread. We think it is likely to change. She thought it should be part or loan modification. I thought it would be unfair, as those consumers are somewhat under duress.

Patientlywaiting, thanks for reminding me that it is there to protect the lender as well.

the bank understands perfectly what they're getting themselves into - they WROTE the contract. If the contract includes the "walk" clause, then why shouldn't the borrower use it?
the bank has no problem charging 15% interest b/c they're looking out for #1. the consumer should adopt the same mindset.

I agree with Bobby and Patiently, and disagree that the “intent” of a nonrecourse loan is to provide the buyer an out only in the event of hardship or catastrophic event. Legally, a nonrecourse loan provides the debtor the choice of either paying off the debt or forfeiting the property. Thus, at all times, a nonrecourse transaction provides the obligor the option to return the property to the creditor in total satisfaction of the obligation. This is not an amorphous concept that applies only in certain circumstances, nor is it any secret in the banking/mortgage industry.

Thus, in a nonrecourse situation, it is entirely incumbent upon the creditor to ensure that the collateral protecting the obligation is sufficient. While it certainly may be foolhardy to purchase property beyond one’s means, from a legal perspective the sole responsibility for loss falls upon the party loaning money without adequate security. The person walking away from a nonrecourse loan that has gone upside down is merely exercising his/her legal rights under the contract.

What has to change is people's attitudes. If you enter into an obligation honor it, do not look for loopholes to weasel out of it. As a midwesterner by birth, it is something I see time and time again having lived in CA now for 26 years. Be it a wife, a dog, a kid, as soon as something falls out of favor on a short term basis too many look for the exits. Why not return to a time when a man's handshake meant something. I personally would be the first person to continue to pay my mortgage even if there was a way out during a huge value drop, why? Because that is the agreement I made at the time for a 30 yr commitment. It is not my neighbors fault, the lenders fault, George Bush's fault, if my house drops in value. IT IT MINE even though I do not care. Daytrading houses has never been a long term viable business and never will be.

I do not look to blame someone else for my decisions EVER. Anyone who does should be ashamed of themselves. I would also venture to guess there are few who do that who ever become wealthy, it is just a mindset. Focus on being successful at what you do, not on how to take advantage of someone else. Root for good things to happen to others, not bad things to make you feel better about your own situation.

Surely there have been situations where lenders have done some terrible things, and I have no sympathy for them either. However, you have to accept that the PPT is doing what they are doing for the overall good, and a few scoundrels are going to be saved. Do not spend negative energy on this, it is how the world has always worked, and will always work in the future.

I have several good friends with 7 figure new worths, and not one of them would try and take advantage of a bank in this fashion. They do utilize tax and other business loopholes etc.. but that is far different than walking away from a mortgage you are fully capable of paying, because your poor little condo has lost value, you are just never going to get anywhere if that is how you look at things. Maybe many people here just cannot afford to buy homes, so they hope for this horrible crisis to accomodate that. I would bet my life that the crisis you root for will ruin your life if it happens financially regardlesss of whether you are renting or are an owner. Unemployed people don't buy homes no matter how cheap they are.

One last thought as an example of the mindset I refer to. I recently gave someone some money to help them pay their bills, because it was the right thing to do. It was not a loan. I did not root for them to get foreclosed so I could buy their house out from under them for a firesale price. Help someone occasionally who needs it, don't root against them to elevate yourself. It will make you feel better than rooting for your neighbors house to decline 28%, if it doesn't go see a doctor.

I am sure the boos for this post have already started.

Good comments by all...

PW I guess I didn't illustrate my point well... and yes Counselor did present a clean clear view which he does pretty much in all his posts and yes as you said the foreclosure clause is to protect the lender.

I guess the responsibility that I was trying to allude to is that there is (or should be) an inherent responsibility in home ownership that is not present or needed for simple ownership of assets. I think in order to reform the system to help prevent rampant speculation we need to up the ante for people who want to play.

Should there be any different treatment from Joe imbecile who was awarded a 600k loan on his meager 50k salary and he has to walk because of his loan resetting verses Shiela the educated homeowner who has an 600k loan and she is going to walk simply because she is tired of paying money for a depreciating asset?

No there should be no treatment. However, if Joe would have known that he will FOREVER BE A SLAVE to that loan UNLESS he had some major event that prevented him from being able to pay, then perhaps he would have never taken the risk.

I guess what I am trying to say is that I think that real reform would help really keep prices in check but that reform has to be pretty heavy handed in order to wipe out or severely minimize speculation. That the reform is possible through being heavy handed with the buyers.

Lenders will ALWAYS have short memories. I do not think it is reliable that they will remember the licks they take.

SD Realtor

If I could say it any better than Chris, Adam (SD R) or Rustico I would but they have it pretty much covered.

Whenever I hear statements like the OP, I always think back to Juraisic park. The fact that you can do something doesnt mean that you should.

Wall said savedbypigs. The lender can protect themselves in multiple ways: they can chop the appraisal, they can go back to demanding 20% down, they can charge a higher interest rate, etc, etc.

I think it is naive to think the housing bubble wouldn't have happened if loans were recourse. Most homebuyers have no idea what is in the mortgage contract. They just want to buy the most expensive house that the lender will let them buy. It's the lender's responsiblity to make sure that the lender is protected.

Mish had a great article on what really enabled the housing bubble the other day. Basically, until sometime in the 1970s, the rating agencies worked for the buyers of loans. Then, the federal government passed some law giving a few rating agencies a monopoly and requiring the seller of the loan to pay them. Well, it took a while, but eventually the rating agenices totally sold out to the folks that were paying them (loan sellers). If they were paid enough, the rating agencies would put a AAA rating on anything.

Several bond funds, pension funds, etc are restricted in what they can buy based on ratings. Because the rating agencies sold out and rated every POS they could get their hands on AAA, the market for this crap balooned. If the ratings agences were still working for the funds, it is unlikely that the MBS market would have supported a housing bubble.

Another change I would like to see is the GSEs only guaranteeing loans where the home buyer puts 20% down. 0-down loans were another "innovation" that helped create the housing bubble.

If the ratings agencies went back to working for the loan buyers and 20%-down loans came back in vogue, we wouldn't be seeing any housing bubbles for a long, long time.

savedbypigs and others,

Fair enough about the intent of the nonrecourse loan. I can easily admit I am (or may be incorrect) about the intent of a non recourse loan.

However inherent in that definition of the nonrecourse loan is the catalyst for creating a mindset that will indeed reduce the obligation that is inherent in owning a home. Look I am an engineer. If one line of code is screwed up in an ASIC design that can cost my company 6 figures. They may have to run a new mask set, it will delay production, it will affect other people. There is a pride that comes with doing the job and being AFRAID of screwing it up. If I didn't have that fear, if the ramifications were not as they were, I would perform in a sloppier manner.

I know the above is a poor analogy however my point is that the existence of the non recourse loan creates a hierarchy of trust that can and has failed. As noted above it is incumbent upon the creditor to ensure that the collateral protecting the obligation is sufficient.

Geez!

They don't even have a clue of the net worth of many of these CDO bundles. They run simulations and models to guesstimate it. The ratings agencies, underwriting standards, appraisal processes... the entire structure with which is needed and the LENDERS RELY ON to "ensure the collateral protecting the obligation" has withered in the face of a rampant speculative bubble.

When we have well educated people posting on the internet that they will do much better by simply walking away from the loan, then to me that is a harbinger that perhaps the next time around we need to redesign the process. Yes he is exercising his legal right but maybe the next time around, if that right didn't exist then maybe he would not have jumped into the game to begin with.

SD Realtor

"When we have well educated people posting on the internet that they will do much better by simply walking away from the loan, then to me that is a harbinger that perhaps the next time around we need to redesign the process. Yes he is exercising his legal right but maybe the next time around, if that right didn't exist then maybe he would not have jumped into the game to begin with."

the bank WROTE the contract. the bank could simply change the wording. adding more laws isn't needed.
I thought you're a realtor.

I disagree with the morality card being played by some here. My first reaction is to chuckle heartily, with no offense to anyone, as I recall my own history in the world of commercial and residential finance as well as my dear longtime friends' experience in the mortgage industry. You want to talk about morals, you better start by putting that entire idustry under the microscope. There are plenty of intelligent folks on this board, so I don't think I need to tell you what you will see. 'Nuff said there.

And that's not to say that just because the lending industry is, ahem, imperfect, that it gives the consumer carte blanche to act in an "immoral" fashion. I simply think that interjecting morality into the equation is absolutely unecessary so long as the letter of the contract aka mortgage agreement is followed. I'm not inclined to beat a dead horse here - I've stated my position on this topic before. I will just add that to question the morality of a borrower who opts to act in his/her best interest, within the clear parameters of a written contract, with the full knowledge and understanding of the party that drafted the contract and which party is in the very business of entering into such deals and very well knows the risks and rewards...aah, you see where I am going.

How wonderful for some 7 figure net worth folks, that they would not elect to pursue a completely legal, contractually enumerated option available to them in order to avoid a potentially massive decrease in net worth and who knows what additional consequential damages. The simple fact of the matter is that most folks' economic picture would be substantially impacted by a few thousand dollars a month savings in rent versus mortgage payment. Substantially. So instead of building a rainy day fund, taking out a disability insurance policy ($$), funding one's children's education, etc, etc, one should adhere to a deal that they have no obligation to do so in the name of "morality"?? Hmm, given what could be accomplished with the $$ saved, I would suspect that some may argue that it would be "immoral" to NOT mail in the keys. But I digress, as I just don't agree with the morality card being played, not in this game. Rant off.

SD, I meant no offense. All I am saying is, from a legal standpoint at least, the responsibility for the bad line of code has been placed in the hands of the lender. So I don’t think it’s fair to impose perceived moral or ethical obligations upon people that did not assume them in the first instance.

If we want to change the nature of home loans in the future, that is a proposition I haven’t fully considered, although I’m not really sure that $50,000 income Joe with the $600,000 loan would really have cared if the loan was recourse or nonrecourse because he presumably has no assets. Sensible Sheila, who can afford the loan, would obviously have cared, but isn’t our current state of affairs more the result of the Joes, and not the Sheilas? And is it really too much to ask that lenders get a clue before they start throwing their money around in the expectation of repayment?

SDR I appreciate you desire to have changes that would produce stable market and enforce personal and institutional responsibility. If we could skip the gold rush mentality every decade by installing better checks and balances there would be no real big winners and losers and the economy wouldn't convulse over something as basic as shelter. Smart people could still progress with Re investment. I also think commission structures could stabilize with the market to where people didn't feel,appropriately in my opinion, like they were getting ripped off.
I think the editorial mish wrote explains a lot of it too. Poster claiming that abiding by a contract is just, are making good points.I certainly don't think that invalidates what you are putting on the table.

Morality has nothing to do with it.
Emotion should have nothing to do with it.
A contract is a contract.
The lender's lawyers writes the contracts. The buyer must sign the lender's contract or walk away from the deal. If the lender is in total control of the language in the contract and the buyer quits paying, the bank gets the property back which is exactly what their lawyer's wrote in the contract.
Where's the rub?

I've never been late on any bill in my 59 years. For the last 20 years, I have owned (free & clear) the homes that I have lived in so I am not exactly what you would call an advocate for deadbeats...............but, this is a pure & simple business deal and it's incumbent on the bank to know the value and risks associated with properties where they are the mortgage holder.

This is all going to come down to can you afford the situation you are in? If you can, the moral high road is to ride out the depreciation long enough so values recover, and think of your home as an expense, not an investment. If you can't afford it then you have to walk away. I can tell you, in the latter case, if you are a moral, responsible person you WILL experience some guilt from this decision. If you're not, then hopefully there are few of you, and you won't destroy our financial system.

Unfortunately, I think we have a large number of people in that latter category who cannot sell, cannot refinance, and to add insult to injury, can no longer afford their monthly payments. I feel a little bad for these people, but they disregarded the fundamentals and bet their financial future on never-ending depreciation. I think the root of the problem is in our country's financial literacy, and how the fundamentals are not taught to the average person. I have a relative in 4S with a $1.5 million property who was wondering when I was going to buy a house like that. They looked at me funny when and I simply stated I couldn't afford it on my physician's salary, and I know I can document a much higher income than they can. They will learn the fundamentals the hard way, which is effective, and I find the retention tends to be much better.

I do believe SDR may have a point, and that eliminating non-recourse debt is the future, but with our current situation, making all the banks the bagholders is not the answer, as they cannot possibly absorb the numbers involved and survive. I have no idea how this is going to resolve itself, but a long hard recession seems like the best cure, and unfortunately, I think the taxpayers are going to have to absorb some of it. Remember the S&L's? Why do you think it can't happen again?

They do utilize tax and other business loopholes etc..

Ok, Chris, so rich executives use tax loopholes, violate the spirit of the law and "steal" from society.   That's better than abiding to the letter of a contract between two private parties? 

Executives deducts things such as corporate condos, beach houses, jet travel, hair cuts, jewelry, hotel suites, car for their wives, salaries for their children, etc... much of it not very business related.  They take family on seminars and conferences that amount to private holidays.  I've worked as an executive for many years and I've seen it all.  

How about setting up overseas companies to lower the net income of a US-based related company? 

There are things that are much worse than strickly fullfilling the terms of a contract with a mortgage company (which walking on a house is). 

I don't see the moral high-ground you are talking about here.   

I guess I'm old-fashioned if I believe you have a moral obligation to pay back the money you borrowed to purchase a home. Maybe that feeling is destined for extinction, but I don't want to live in a society where people think they can get out of obligations that are simply too "inconvenient".

Also, getting back to the theme of the thread, certainly the banks were enablers, but imagine a lender who didn't use similar lending guidelines in the bubble market. There is no way they would have survived. It's kind of nice to assign blame one way or the other, but this whole situation is much too complicated for that.

Good lively postings.... of course I am right and you guys are all poo poo heads!

Seriously though, I am not by any means challenging the legality of the contracts nor that they do lie at the hands of the lender.

If I may be more constructive then... if we look forward rather then backwards, how then can we implement some sort of reform such that it will then reduce rampant speculation, as well as further obligate those who undertake the risk of buying a home so that we can

a) reduce fraud, speculation, and other ugly artifacts of what we have seen occur in this runup
b) much more important in my book, further delineate home ownership from asset investment

My belief is not that eradicating non recourse will solve the problem and my apologies for not conveying it properly. However I feel that it would be a helpful step. No doubt adding curbs, regulation to the lending and institutional side of the equation will be most helpful.

SD Realtor

I do still hold my ground that more responsibility should be bourne by the buyer but I am just being a stubborn cuss and adding this in to get the last word

Also, getting back to the theme of the thread, certainly the banks were enablers, but imagine a lender who didn't use similar lending guidelines in the bubble market. There is no way they would have survived.

LOL! Do you think Countrywide, Wamu, Citi, Fannie, and Freddi are going to be able to survive now without some type of government bailout?

Yours is the most ridiculous housing bubble justification I have heard yet. Basically your trying to find a justification for having a bank implode in spectacular fashion after the bubble bursts as opposed to a slow bleed (and maybe a failure) during the bubble.

By the way, I recently read an article about a locally-owned bank (in Ohio I think) that didn't do any subprime or alt-a mortgages during the bubble. I think they had to tighten their belts a bit during the bubble, but they pulled through and today are doing good business lending to well qualified people that otherwise couldn't get loans. If I can find the article again I'll post it.

I am amazed at how many people on this board (supposedly a board full of intelligent people who are well-versed in the ways of the housing bubble) are willing to give the lending establishment a free pass here. Unbelievable.

"I personally would be the first person to continue to pay my mortgage even if there was a way out during a huge value drop, why? Because that is the agreement I made at the time for a 30 yr commitment."

Perhaps this is the distinction being missed by the morality folks. The agreement you made was NOT that you would pay for 30 years. The agreement you made was that you would pay for 30 years, OR you would return the property, your option.

-or you would pay the debt down early, potentially.

I have more of a beef with the lenders than the borrowers. This is an underwriting problem more than a morality issue.

I don't think this ends until the ones at the center of this mess - the investment banks and even some money center banks like Citi - are truly brought to task for their actions. I don't think this ends until we see some bankruptcies and some consolidation, and I ain't talking about E-Trade.

"LOL! Do you think Countrywide, Wamu, Citi, Fannie, and Freddi are going to be able to survive now without some type of government bailout?"

No, I absolutely don't believe they will survive, a point I made in the earlier post. Whether it's ridiculous or not, it doesn't change the fact that the banks were doing irresponsible lending to stay competitive. I completely agree with you that they were lemmings running off the cliff, but a lender would not have kept their doors open if they weren't generating the kind of returns (false) that their competitors were.

"I have more of a beef with the lenders than the borrowers. This is an underwriting problem more than a morality issue."

I am right there with you and those saying such things. This topic,which went in interesting directions, got started by a guy blaming everyone but himself for being faced with an uncomfortable financial dilema. I think compared to the lenders the fault of any buyers is small...I dislike hearing someone say they are a victim and not part of the problem.
I just got off the phone with a man in a similar situation. He said he knew what he was getting into...that's all it takes. I don't think he would stay there for free as part of his exit strategy or take the cabinets and plumbing with him because he was suffered some wrong.
We have had more responsible posters come in here and explain the same dilema, they didn't stir up a hornets nest because they accepted part of the blame.Most of those who posted tried to help them.

You are all missing the point; even if you kept your nose clean and only made loans to people with 800 credit scores with 20% down, the underlying value of the assets that you lent on have been severely affected by your competitors.

As a bank, you may think that the $400,000 that you lent on a $500,000 home is still safe until Countrywide forforecloses (because they lent 125% of the appraised value) on the house next door and puts it back on the market for $350,000. In fact, as the lender, you may be required by the loan provisions that your Loan to Value doesn't exceed 90%. By law, you may have to go back and tell the homeowner that they need to put another $85,000 down payment to get the loan in conformance.

I think this is an interesting thread and felt I could contribute. Sorry it got so long.

I RESPECTFULLY have to disagree with anyone who tries to paint a homeowner who lives up to the mortgage contract that they signed as immoral. Immoral would be trying to weasel out of the loan payments while trying to keep the house because someone noticed that an i was not dotted properly by a secretary when setting up the contract. One who takes advantage of a contract that explicitly says, the money borrower can forfeit the house in lieu of repayment is in my opinion 100% living up to their agreement if they walk away and leave the keys. Absolutely nothing even remotely immoral about it.

Think of it this way - the value of the house has no bearing on anything after the document is signed. The contract says Joe will pay X dollars for X months and in the end Joe will own this house. (this is true if the house is then worth $1 million or $1). If Joe doesn't pay, Joe loses the house, no matter what the value is. This is the agreement!

Imagine a world for one minute where for whatever reason, Joe's home was being foreclosed upon and it was worth more than he owed. (just to illustrate a point - I know it couldn't happen) You think the bank would refund the difference to Joe? No way, they'd live up their agreement and happily take Joe's house instead of the money. Would there be anything immoral about it? No. The money renter (Joe) and money loaner (bank) agreed to this in the contract. It goes both ways.

Bottom line = there's nothing wrong with a man's handshake saying that he'll live up to an agreement. If more people on this planet lived that way, it'd be a better place. I think it's wrong to interpret that handshake to mean he'll live up to something more.

That said, absolutely nothing wrong with helping a friend in need, if you have the means to do it. I have several friends who own several properties - I hope they all weather this storm OK. If I had the capacity to help any of them without jeopardizing my own financial future, I'd do it in a second. If they lose it all and end up renting a crappy apartment in a crappy part of town, they'll still be my friends. I'll feel for their families who have to live that way, but life will go on. These are very bright people who will probably come back with a roar in some other bull market. In many ways I envy the risks my friends took a few years ago. I just was not in a position to do so or I probably would have too. And had they timed things better, they might all be retired now - nothing immoral about that either...

The folks I feel for are those who were truly taken advantage of in one way or another. Either because they were too stupid to know better or they were in the wrong place at the wrong time. I feel bad about starving kids in Africa too, unfortunately anything I do (and I do what I can) is just a drop in the bucket...

I've learned a lot from many of the threads on this board and make these comments in only the most respectful manner.

Sandiego.
I think the hypothetical controls would be industry wide. They didn't exist when you threw the dice. To this degree, yes the industry has contributed to your problem. On that point you make an interesting case.

Actually, if a property is foreclosed on and someone buys it on the Courthouse steps for more than is owed on the loans (plus costs to collect), the homeowner would get the difference. Lenders are not allowed to profit from foreclosures.

If no one bids on it at the Courthouse steps and the foreclosure is perfected, the house can be put on the market with a clean title. If it sells for more at this point, the lender would get all of the proceeds.

All of these morality talk and honoring of mortgage contracts got me giggle for a second. American should be one of the last people to talk about honoring of contract when time gets tough or when things are not favorable. The reason I say this is because at least 1/2 of us don't honor the contract most of us signed or will sign, which is, the marriage license. When things gets tough or when things don't go our way, we get divorced. How is that any different than walking from a mortgage loan?