The New York Times has an infuriating article this morning about the many Americans who have stopped paying their mortgages — and are loving every minute of it. In this Bailout Land, foreclosure is more abstraction than reality, and the road from delinquency to eviction and repossession passes through a grindingly slow legal process and lenders beset by both an unwieldy glut of defaulters and heavy federal regulatory pressure to keep people in their homes. As a result, many delinquent borrowers are in the driver’s seat, and living rent free:
From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.
These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”
But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.
“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”
Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.
Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.
“I need another year,” he said, “and I’m going to be pretty comfortable.”
The full story is well worth reading, if only as a sort of personal litmus test. Banks with dollar signs in their eyes who made loans to un-credit-worthy clients at the top of the bubble hardly arouse sympathy. But does your fellow-feeling for American families facing foreclosure in the midst of a recession outweigh your rage at their ability to continue to live beyond their means while avoiding the consequences of their risky behavior?
UPDATE: A reader sends along his woeful tale:
Dear Mr. Foster: as a long-time (charter?) reader of NRO, I certainly appreciate the timeliness and force of your commentary…but on this story, and similar types, I see little written about my circumstances, which can hardly be unusual.
I moved out of my house in Colorado in June 2008 to accept a job on the east coast (I retired from the military in June 08)–stopped paying the mortgage in August 2008 because I simply could not afford to do so, as the east coast rents absorbed a full 30% of my take-home pay.
Lest you classify me as a poor risk, as an avatar of moral hazard: I put down nearly 30% on the Colorado house, and applied for the loan with an 800 credit score; when I took out the second mortgages to improve the property, I made sure I had a cushion of 25% equity. When things started to go south, I tried to work with my first and second mortgage holders, had three contracts (including two short sales) collapse, and exhausted every last nickle of my savings (and then some: I had to use my credit card, my last line of credit) to get a lien release from the second holder, but that holder still pledges to “go after” me. I have tried to work with my primary holder , tried a deed in lieu, but they just don’t respond; the second holder refused outright to negotiate.
I’ve given up. Why should I beggar my family at this point? The house is effectually abandoned, the foreclosure date keeps slipping–I’m never told of this–no response from the bank, re: deed in lieu. My 800 credit score has melted into lord only knows what, I have no more savings, and no prospect of buying a home anytime soon. At this point, the market seems not to be functioning, and was built upon an apparently substantial amount of fraud. So I was bilked out of my life savings by the irresponsibility of the banking industry. Their responsibility as an underwriter of the loans is to represent in good faith that my house was worth what they said it was. I’m not the expert; they are. Yet I have been the one who has paid the price. I lost 100% of my savings, as well as my good credit score. What have they lost? A paltry sum; both banks will get something back (even in foreclosure the first holder will get something like 95% of the loan balance). The second holder received 30%.
I ended up ruined. Never again will I trust bankers, mortgage servicers, realty professionals, etc. I will pay 50% or more for a house at some point, then borrow the rest on a four year note. But that’s a long time in the future.
Do you think I have acted irresponsibly at this point?
No sir, I surely don’t.
UPDATE II: I’ve had much reader e-mail about my correspondent’s “woeful tale,” some of it sympathetic, some of it chastising, most of it a little of both. I maintain that, on the whole, my correspondent’s plight is not the fruit of his irresponsibility. In so far as he was a free and equal party to his original mortgage, and insofar as he chose to move out of an underwater house and into a more expensive market without first selling said house, my correspondent is responsible for his fate. But he also made the kind of decision — to pick up and move to where the better job was — that we as individualist free marketers and fans of labor-mobility should applaud. And the context of that decision — the glut of defaulting homeowners and the resulting overreaction by lenders and underwriters, and the naive and pernicious federal regulatory structure that continues to promote the “ownership society” above all else — contributed materially to his problems by putting pressure on the sale process at every point.
We should also take care that our standard for what my correspondent is “responsible for” doesn’t ask him to be omnipotent. Generally, I think it is fair to say that an individual is responsible for doing what is reasonable — that is, for what a reasonable person in the same situation would do. And what’s “reasonable” depends an awful lot on context. There are far more able economists here, so I will leave most of this to them, but remember: bubbles wouldn’t get to be bubbles if most — or even many — market participants were acting soberly and under good information.
That being said, here’s another reader with a dissent:
(full disclosure, I am a former member of the financial industry who dealt extensively with subprime mortgages; I was not an appraiser or underwriter)
It is not clear from the story whether actual fraud was involved in the housing valuation that was part of the purchase process. Regardless, it is explicitly NOT the bank’s responsibility to represent TO THE BORROWER that the house is worth a particular amount. The valuation is there to help the lender only – namely the bank or the entity to whom the loan is later sold.
In addition, regardless of whether there was fraud in the valuation process, at least some of the decline in value seems (from his telling) to have happened as a result of the real estate market going down. The bank is not in any way responsible for this, and did not have the responsibility to represent to the borrower that the market would behave in any particular way. That is not the bank’s fault. Your reader certainly seems to want someone to blame, but sometimes there is no one to blame. He doesn’t have the legal or moral right to believe otherwise on this particular point.
It’s entirely possible that the lenders are being “unreasonable” – he did not give enough detail to judge the situation, and it certainly seems like he tried to reach out. That said, three points need to be made:
a) as we free marketeers know, lenders are not obliged to “be reasonable” – they are obliged to get as much money as possible out of the deal. Sometimes foreclosure is the way to do that.
b) Lenders typically strongly prefer to avoid foreclosure, since it involves significant legal costs, uncertainty, and time (and time means lost interest payments, money that goes out the door for funding costs, etc.) – So if there were a “reasonable” alternative, the lienholders would be highly motivated to take it.
c) The lenders don’t actually “get” all the money back that he mentioned, since they have to use that to pay legal fees, brokers fees, lost interest on the loan, carrying cost until they can sell the property, overdue property taxes, and costs to clean up the property and put it in a condition to be sold. That last cost seems non-trivial, since by the reader’s admission it’s been unoccupied for nearly two years (though it’s not clear how far in the past this all happened).
UPDATE III: Another skeptical, and informative, reply:
I read the story of the one reader who got caught without a chair when the music stopped. I am a court appointed process server in Florida where a great many homes are in foreclosure and would offer the following points.
1) I serve foreclosure papers all the time on people who have a boat in the side yard and a jet ski or Harley in the garage. If it were me, all those things would be gone and so would everything not riveted to the floor before I would give up my home in foreclosure. Maybe it’s just the Irish in me, but my home is first on the ledger.
2) I’m doing a lot of foreclosures on investors who have 10,20,30 or in one case 500 properties. A few shrewd investors took enough cash out of each purchase to buy one really nice home with cash. So, 10,20,30 and even 500 properties are being foreclosed on(with taxpayers on the hook) and the investor is left with a real nifty a 5,000 square foot dream home on the water that he owns outright. There is something wrong with that.
3) I’ve served foreclosures on many people who are losing their vacation home, not because they can’t afford it, but because it has devalued and they don’t want to wait it out.
4) I’ve seen Chinese drywall used as a pretext for people to default on their loans. I’ve seen an entire 40 unit condo building do that because one pallet of Chinese drywall was used on the building. A 2500 sq ft unit might have one sheet of that playwood in their unit or none, people just walked away from their mortgages anyway.
5) The individual in question may have bought his home right, but he did not leave it right. He takes a job on the East Coast, rents a place there and lets his home in Colorado go fallow two months later because the rents on the East coast were eating 30% of his take home pay? Let me say it again, in only two months he stops paying his mortgage in Colorado because the rent on the apartment on the East Coast was too high. That reasoning is enough to set off every moral hazard alarm in my body.
Part of the moral hazard problem in this country is that so many people lack the ability to morally reason with any kind of clarity. I think the writer in question falls into that catagory of faulty moral reasoning. He’s just a victim of circumstances, powerless over his own fate. We are asked to believe that he never dreamed in a millions years that the rents would be so high on the east coast that he could not pay his mortgage in Colorado. It all just caught him completely by surprise and unprepared. Sorry, I don’t buy it.