Legal Stealing: Strategic Walkaways
First, there were reports of people simply walking away from mortgages when the value of their houses dropped below what they owed. Now, apparently, some people are simply refusing to pay their mortgages and continuing to live in their homes for free.
David Streitfeld begins his NYT report with the requisite anecdote:
For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of. Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.
“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”
So, we’re talking about dirtbags here. The sort of scum who take out a loan and then refuse to pay it in order to finance a pretty posh lifestyle. Got it.
A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.
This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.
Having taken out several mortgages over the years, there’s no mistaking what you’re doing. There are reams of papers to sign and the overall process typically takes weeks. This isn’t a slick salesman coming to the door.
“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”
It’s not clear to me why being sick creates an obligation on the bank to let you live in their house for free, much less renders them “crooks” for insisting you live up to your freely undertaken obligation. But, yeah, cancer does at least make your situation more sympathetic than the scumbags using the money saved by stealing from the bank and using it to buy lousy steaks and take joy rides in their luxury watercraft.
Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.
The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.
While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.
This is a giant systemic problem with no real short-term solution. And the law is ridiculously overweighted in favor of the deadbeats rather than the mortgage holder.
Thankfully, most of the blogospheric commenters on this matter at least agree that those taking advantage of the system are low-lifes. See, for example, Brad Tuttle, Daniel Foster, and 3Wood.
Barry Ritholtz thinks the excuses these people are giving to the NYT are weak but thinks there are economically sound reasons to walk away. He says he’d like to see them tell the truth:
“I’ve done the math, and it doesn’t make sense to pay the mortgage. I can rent the same house a block over for half of what I am paying. I am so far underwater that if I stay here, struggle, and make all the payments, in 10 years, I will merely be back to break even. Why bother?
Like all the big banks have all done, I’ve made the calculation that it is financially beneficial to default on the loan — so that is what I am doing. As Sonny was told in the Godfather, “This is business, not personal…”
But others think this is not only smart behavior, but even heroic.
Duncan Black (aka Atrios):
I hope it’s finally penetrated the public consciousness that it’s perfectly acceptable to make cold-hearted morality free financial decisions when dealing with actors that are making cold-hearted morality free financial decisions. For too long we’ve heard bleatings from the press painting walking away as some sort of moral and ethical issue, placing ethical obligations on people that aren’t put on businesses in similar situations. If it makes financial sense for you, walk away.
Now, if we’re simply talking about deciding that taking a 7-year hit to your credit rating is worth getting out of a bad loan, I’d agree. That’s simply a matter of living up to the terms of the contract and returning the collateral. But these people are exploiting the system’s inability to quickly foreclose to bilk free rent out of the other part. A different thing entirely.
FDL’s David Dayen:
Lenders actually know this is one of the risks when they settle on a house. They probably took a bonus by putting people into mortgages they couldn’t afford that would reset at unreasonable rates, or any number of other predatory schemes. They don’t really have a profile that engenders sympathy. So if some people facing foreclosure have gone the Peter Gibbons route and decided just not to pay anymore, well, more power to them.
Did these people make bad decisions? Some of them. Many were just caught up in a bad economy and happened to buy their home at the top of the market. Now they’re punished for their bad timing. But the original sin here is the securitization of their mortgages and the global savings glut and all the other factors we know played into the inflation and then popping of the housing bubble. Anyway, the smart people on Wall Street told everyone it didn’t matter if these homes went into foreclosure, since they sliced and diced them so finely that no investor would take a hit. Well, consider these folks as beta testers for your risk spread theories.
Jessica Pressler of New York‘s Daily Intel blog writes, apparently without irony, a post titled “Homeowners Who Refuse to Pay Mortgages May Be First Genuine Heroes of the Recession.” What makes them heroic is unclear from the post, which includes such sterling logic as,
At least these people are putting their money into something good — the economy, which, after all, needs it far more than the banks do.
Sometimes, I don’t know whether to laugh or cry.
The original put Ritholtz in the camp questioning the morality of the free riders. I’ve corrected the post to more accurately reflect his position.
I own my humble condo free and clear. I don’t have a dog in this fight.
That said, I think the argument Felix Salmon and others make, that homeowners are just ruthlessly following the terms of their contracts, as WS has done, has some merit.
Just skimming, multitasking, but did you include links to where banks have themselves defaulted and walked away from large apartment complexes and developments they own? “Stealing” as well?
(Possibly the dog I have in this fight I that I want markets to clear, and for my next home to be less expensive.)
Self correcting problem. Eventually the bank/mortgage holder and the courts will get around to dealing with them and they will find out how bad it is to be a squatter. The longer they hold out the worse it is likely to be. I doubt they will get much sympathy at that point (not that they won’t try.)
As for people that call them heroic, I would say it is a great measure of that person’s character and seriousness, wouldn’t you?
Again, I think there are two different situations being conflated here:
– People whose home values have plummeted in the crash who decide that it just doesn’t make sense to pay off a million dollar loan for a half million dollar house. Turning in your keys and returning the well-maintained collateral to the collateral. I deem this morally reasonable.
– People, for whatever reason, deciding to refuse to pay their mortgage and living in their houses free while waiting for the system to force them out. This is stealing, pure and simple.
We’ll certainly see more conservative LTVs going forward.
You completely misunderstood my comments. I noted, this is not a moral decision, but a financial one. If Goldman Sachs and Mrgan Stanley can walk away from purchases that no longer make sense, than so can anyone sense.
What I wrote is that I wish people would be honest about it, and stop making up excuses. This is what i want to read who walks away saying:
What do you think about the banks that walk away from their loans, and then show a profit?
I missed Barry’s comment as I typed mine. I think he’s got one of two consistent positions:
1) banks and people, following the same rules, should default when advantageous
2) banks and people, following the same rules, should never default when they can avoid it
Probably option 2 is a little idealistic.
In fairness, the banks are not without recourse here. Most mortgages allow the bank to appoint a receiver immediately upon default and kick squatters out. If the banks are slow on the uptake, it’s a decision they’ve made (or failed to make), not a flaw in the system. Deadbeat borrowers are simply taking advantage of the current economic climate; they’ll sing a different tune when they have a half a million dollar deficiency judgment entered against them and they can’t even get an apartment.
This will fix itself, and the deadbeats will get what they deserve. They (and the bloggers calling them heroes) just don’t realize it yet.
I agree with you on this point, and I’d think some fraud is evident–and thus actionable. And Barry, I don’t think you and James have an argument on the issue you present. He did write:
But, as he and I read the situation, that’s really not what these folks are doing.
I stopped paying my mortgage seven years ago… but I guess I did it the dumb way.
I agree that Pemberton and Reboyras are pretty scummy – they’re sitting in a house in default, and yet they have this giant luxury boat that they’d probably have to get rid of upon eviction anyways? Why not sell or rent the boat? This especially pisses me off because there are a lot of struggling people out there who really do want to be able to pay their mortgage, and are doing their best to work with their creditor and bank to get arrangements set up so they can at least pay something until things perk up for them (like some of my relatives).
That said, I can understand why someone might do this. It’s a hell of a thing, losing your house, particularly if you’ve burned all your savings trying to keep up with the payments and other bills, and you’re faced with either trying to sell it in a “down” market, or letting the bank take it (along with your home equity, if any). And especially, of course, if you have children.
The biggest moral problem here is, as it often is, the unintended consequences of this behavior. Unfortuantely, this behavior doesn’t harm the banks and lenders so much as it harms future borrowers. Interest rates will necessarily increase as part of doing business to make of these shortfalls. Certainly the banks won’t eat it.
The true question underscoring the post is whether people should make financial decisions based purely on finances, or whether there should be a moral component. If you believe there is a moral component to these decisions, then one must consider not only the bank, but also other potential borrowers, making it less seemly to hold out as the couple above is doing.
Steve — I understand why you would talk about the moral component to these decisions, but from what I’ve seen that moral component only applies to those who borrow from banks, not the banks themselves. The large corporations feel free to walk away from massive properties when it’s financially advantageous, often leaving broad swaths of destruction in their path, either literal — as in buildings that have been knocked down but not replaced — or metaphorical.
So while I do feel some sympathy towards the idea of a moral component to financial decisions, it’ sbecoming clear that “finalncial morality” has become yet another sucker’s game rigged towards the rich and powerful. The poor are obligated to be moral actors, now matter how much suffering it causes, while the rich transcend such concerns by invoking the sacred glory of the free market.
“Unfortuantely, this behavior doesn’t harm the banks and lenders so much as it harms future borrowers.”
And their neighbors too. I live in an underwater house, mostly thanks to both neighbors going all “motivated seller” on me and selling out to speculators/slum lords for a huge loss. Now I have renters on either side AND negative equity.
Walk away? No way! I’m paying extra principal every chance I get.
That was a bubble Herb.
I’m not trying to single you out. We all briefly enjoyed prices beyond reason. I’m down 40% myself.
HA! Moral, schmoral.
All this talk about what is moral coming from a defense contractor is about the funniest bit I’ve ever seen on a blog!
It’s. So. Hilarious!
And to have all the comments written by people who are in on the joke this way,
I think I’m going to bust my gut!
I mean, come on. You can’t be real, can you?
You aren’t really serious, are you?
I mean, this is the way the scam has always been played at the corporate level, make all the promises you want, pensions, 401k’s, run up the debt, take as much money for yourself from the company till and then say, oops, we have to reorganize and you have to take $.10 on the dollar…and you only get that if you can survive long enough.
That the “little people” have figured out the rules and are playing by them can’t be immoral, not unless the corporations playing the game are immoral, too.
You can’t be serious.
If it wasn’t for those darn defaulters my tulips would still be worth 2000 florins!
“That was a bubble Herb.”
No doubt, although both of my neighbors got out long after the bubble popped. Which is why they sold for a HUGE loss…
Sucks right now, but I figure they’re hurting much more than me. After all, someday my mortgage will be paid off. And they’ll never get their house back.
Yeah, Herb, they won’t have their house. However, they will be paying considerably less in rent than you are paying on your mortgage, etc, save the extra, and buy a cheaper house a few years down the road. Plus, they can move anytime, if they tire of where they live.
You, on the other hand, will be paying out the nose to live between renters in a house that may never get back to the value it had when you bought it (especially if you figure in the interest, insurance and taxes).
Yeah, Herb, you are sure showing them.
You don’t know the future either Mark. It all depends on how people value houses, say, 5 years from now.
Gotta disagree with you James. Once these people have defaulted, the banks have a process to kick them out almost immediately. The fact that they’re NOT doing this is not the fault of the buyers. Once one party has defaulted on a contract, it is the responsibility of the aggrieved party to seek their remedies. You can’t expect the breaching party to help the aggrieved party out and implement the remedies against themselves. Whenever you have a contract breach, the breaching party will stay in breach as long as they’re allowed. That’s not even immoral, that’s how business (and contract law) works.
When corporations push some of their costs of doing business on to the public, they refer to those costs as “externalities,” and no one seems to consider this very common behavior as inherently wrong. Why is “don’t pay anything you don’t absolutely have to” only wrong when private individuals do it? Wait! I think I have it!
When capitalism’s flaws enrich the rich this is the way things are.
When capitalism’s flaws cut a scumbag a break this is outrageously immoral!
Profit knows no morality, so hoist one for the scumbags.
I don’t think there is anything wrong with that postion, I think James would agree and shares your view. For example he writes,
In other words, it is theft. So for you to talk about him misunderstanding your point when you yourself make such a gross mistake is…well ironic to say the least.
Welcome to my world. I’m the guy who actually does evict these people — usually after the foreclosure has gone through and a new buyer has picked up the property, paying cash on the barrelhead for a house that they cannot take possession of, because the former owner is still living in it for free.
Inevitably, these trespassers claim that the house was foreclosed upon “wrongfully.” Often there is a story about a loan modification going through at some stage of approval when the bank pulled the rug out from under them. Then, they demand move-out money, also known as “cash for keys,” and sixty to ninety days of continued rent-free existence so that they can locate a suitable place to live again (as if they didn’t know that an eviction was coming at all). Of course, they want the money up front so that they can pay their moving expenses.
Here’s the really disgusting part — it often makes financial sense for my clients to give these people more or less what they’re asking for rather than fight it out in court. Since we’re dealing with people who lack morals and principles anyway, who think they’re somehow being Robin Hood by continuing to steal a house one month at a time for as long as possible, they have no qualms at all using whatever spurious procedural claims available to make it as time-consuming and expensive as possible to go through the eviction. Insisting on a jury trial is their favorite tactic. And here’s the REALLY disgusting part — there are “public interest” lawyers who will help these people steal from my clients, and not charge the trespassers a dime for their services.
This is what I do with about half of my professional time these days. For this I went to three years of law school.
Depends on the situation, I guess. If I had rented my house instead of buying it, my monthly rent would be about the same as my monthly mortgage payment, so I’m not paying out my nose monthly.
I am taking a bath in interest, however, but that’s what happens when you take out a loan with a term of 30 years. The solution isn’t to avoid all that interest by renting. It’s to pay extra principal.
The way I’m going, I’m going to have this thing paid off in ten years. My house may not have the same value it had when I bought it, but it will still have some value. If I rented for the next ten years, I wouldn’t even have that.
I’ll be 43, living in a paid-off home with no mortgage payment, no interest, no rent, just taxes and utilities. And these bozos will still be paying rent because you and I know they won’t “save the extra.”
But at least they can move anytime right?
Steve, I’m not sure if you misread James or if you misread Barry.
There is a lot of space between “walking away is theft” and “If Goldman Sachs and Mrgan Stanley can walk away from purchases that no longer make sense, than so can anyone sense.”
That one is theft. Definitely.
Right. But I explicitly reject the first and agree with the second.
Again, I’ve got no problem with turning one’s keys in and turning the collateral back to the lender under terms of the contract. That’s business. Staying in the house for free for months on end, exploiting the fact that it’s very hard to foreclose and convict, is theft. Especially when one is able bodied and using the savings to go to dinner and joy ride.
Indeed, I think Barry, Steve, you, and I are essentially in the same place on this one.
I am thinking that a lot of this is just the banks letting them stay so that they dont have an unoccupied house. If they are supposed to be out and are bilking money out of a new owner, then they are crooks. Ultimately, I suspect this is not all that common, despite the above commenter, given that banks are back to near record profits.
You are going to be barking up the wrong tree if you think anyone is going to feel sorry for either the banks or the vultures swooping in to buy these foreclosed properties that (they should know) still have people living in them.
And, transplanted lawyer, your indignation rings hollow as we all know you are billing by the hour, so you are well compensated, especially if the case gets taken to court. My guess is that you are just mad that the previous owners are getting move-out money that you feel should go to you for continued legal expenses.
It isn’t personal, it’s just business to get what you can by using all the legal avenues you have. I just get the feeling that you guys just want to stop the “average joes” from gaming the system the way the wealthy always have. I mean “Who do they think they are, us?”
Here’s one that you’ll love.
A woman was under-water in her home and the value was dropping daily. She found another house bigger and, now, less expensive. She found a mortgage broker to lend her the dough to buy the new house, bought it, moved, and turned in the keys on the original house. Her mortgage on the new place was just over half of what the mortgage on old place was.
Ah, America, I love you.
OK James, then I misread you. Maybe. I still see a difference between people who stay until asked to leave, and people who refuse to leave when asked.
It is kind of shocking that banks are leaving people a year without asking, but apparently it is happening.
Looking at the pic that accompanies this piece, looks like Alex Pemberton IS NOT HAPPY about the situation. Maybe even has scruples that what they are “advertising doing” is wrong, morally AND ethically, if not also legally. On the other hand, Ms. Susan Reboyras, she’s grinning like it’s a big joke, to be bankrupt, morally and ethically. I would not want her as a friend or an employee.
I dunno, maybe this is all her idea of how to “get-over” doing the hard work that needs to be done.
Clowns like these are what is causing people like my husband and I extra heart burn, because we are trying to do the right thing and are only getting screwed in the process. We put $100,000 down on the house we bought, and got one WELL UNDER THE LOAN LIMIT that we had… even so, we have lost our equity and are getting the run around about trying to refinance to a fixed rate.
We still have high credit scores, have savings and made all our payments,
It is really tempting to consider, really tempting, that’s probably why it is also WRONG.
Oh the moral outrage, god on a scale of what i have seen go down in so-called legitimate business this doesn’t even rate. As an independent contractor I have had major corporations tell me basically that they were not going to pay on a contract that i completed. Their line was they would give me work down the road and think about paying me for work already completed and if I tried to take it to court I would never get any business from them or anyone they do business with. This is actually not all that uncommon, they do it simply because they can get away with it.
So for all your outrage the only “morality” in American business is the morality they have made, which is do whatever you can get away with.
Stephen Taylor: “But others think this is not only smart behavior, but even heroic.”
Stephen’s quote from Atrios:
“I hope it’s finally penetrated the public consciousness that it’s perfectly acceptable to make cold-hearted morality free financial decisions when dealing with actors that are making cold-hearted morality free financial decisions. For too long we’ve heard bleatings from the press painting walking away as some sort of moral and ethical issue, placing ethical obligations on people that aren’t put on businesses in similar situations. If it makes financial sense for you, walk away.”
Stephen, please go over to your English department, and take reading comprehension classes. He’s not calling them heroic. It’s more of a ‘tit for tat’ comment.
And if you have a problem with that, that time has loooooooooooooong since passed.
Aghhhhhhh – maybe *I* should take the reading comprehension classes. Stephen, I’m sorry for attributing James’ none to well thought out thoughts to you.
I was referring to this, later in the post: