Earlier this year, Yves Smith wrote:
A good Washington DC contact told me that a public relations/media push to demonize those who decide to walk away from mortgages they can still afford to pay (aka “strategic defaulters”) is underway. Expect to see a good bit of moral fervor as those who choose to cut their losses are attacked as immoral, irresponsible, and abusive.
There is a wee problem with the “blame the ruthless borrower” narrative. Banks who acted in a ruthless manner have trained their customers to behave the same way. This shift in prevailing attitudes is the logical and inevitable result of financial firms taking an increasingly predatory posture toward their customers. Borrowers are responding in kind, by taking a cold-blooded and legalistic look at their agreements with lenders.
In retrospect, that was a huge understatement. Oh yeah, there was the line about “the recovery” too:
Here’s a provocative thought: what if ‘extend and pretend’ within our nation’s troubled mortgage markets is actually providing a lift to consumer spending? It’s not as far-fetched as the idea might initially sound, and it might help explain some interesting data we’ve seen as of late — and it also might explain why the statistical recovery we’re seeing now doesn’t really feel like a recovery to most Americans.
And, if I’m right, it also explains why we may very well slip right back into the throes of recession all over again as we head into 2011.
So the story went that people were leaving their houses to go on a shopping spree or something. I never said it was reasonable, just that it was out there. The peak was a column titled: “Honey, I Lost the House. Let’s Party”
“What a relief, Marge, not to have that huge mortgage payment hanging over our head anymore.”
“You can say that again, Harry. Let’s celebrate. Maybe take a nice vacation. Or buy a new car.”
“What if the bank forecloses on our house? We could be living on the street next year.”
“Exactly. Which is why we need a new car. Maybe something roomy like a Chevy Suburban.”
By now you’ve probably seen the analysis, if you can call it that, on how mortgage defaults are driving consumer spending.
Yes, you read that correctly. Those deadbeat homeowners, facing possible eviction and in some cases unemployed, are throwing caution to the wind — and money at retailers.
Yeah, the problem was that it wasn’t something that could be defined, let alone actually requiring scrutiny. The Federal Reserve even did a study that concluded:
After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home’s value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the “double-trigger” theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.
“Negative equity” meaning underwater, paying more than the home was even worth and “income shock” meaning unemployment. In other words, mostly people losing their jobs and homes at the same time. There was another study that was going to be used to come up with a technical definition to punish people, but concluded that only 20 percent of the defaults were attributable to people not putting all their income into their mortgage payments and whatever else was apparently to be budgeted for them by the financial sector. Then, the New York Times commissioned another study, discovering that people with the most income above their capacity to pay their mortgages probably just had higher incomes. The whole thing was really disgraceful, especially considering the fact that there were a lot of cases where they didn’t even know who owned which properties because they were pumping up the housing bubble so fast they had to contract other companies to try to track all of the little tiny mortgage bits scattered across the four corners of the earth and seize them back for the Bank Collective.
All that may have died, but it’s pretty strange to reflect on now that they’ve been caught just saying they owned the property anyways. A contract is a contract and all of that.
Virtually everyone has had the experience of being forced to pay a late fee or a bank penalty because of some fine-print provision that we overlooked. Sometimes, begging by good customers can win forbearance, but usually we are held to the written terms of the contract, no matter how buried or convoluted the clause in question may be.
That is the way it works for the rest of us, but apparently this is not the way the banks do business, at least when those at the other end of the contract are ordinary homeowners. As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.
It gets even better:
GMAC, the former financing arm of General Motors and now called Ally Financial, has become the poster-child for these sorts of practices. Jeffrey Stephan, a leader of one of its foreclosure units, acknowledged that he had signed thousands of affidavits claiming that he had reviewed documents he had never seen.
In addition to being a major sub-prime lender during the heyday of the housing bubble, Ally Financial also has the notoriety of being primarily owned by the federal government following its collapse last year. This fact may ensure greater accountability at Ally, but there is no reason to believe that its practices are qualitatively different than those of other servicers carrying through foreclosures.
And Fanny Mae, the GSE the financial sector occasionally uses to either blame or attempt to punish poor people depending on the circumstances, is at their service on this one as well:
“We are disturbed by the increasing reports of predatory ‘foreclosure mills’ in Florida working for Fannie Mae servicers,” Frank, D-Mass, wrote in a letter also signed by Grayson and Brown. “Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?”
And lastly, here’s a video of some jackass pining for the days of debtors’ prisons for you.