

Why Are Homeowners Idiots? - prat
http://www.fool.com/investing/general/2010/01/26/why-are-homeowners-idiots.aspx

======
jerf
One thing I don't feel the article addressed is that there is a range of being
underwater, it's not binary. I bought after _most_ of the deflation of value
had occurred, but not entirely. I'm about 3-5% underwater right now. But
abandoning my house (even if I was not concerned about the ethics) would still
be bad, because percentage fees on getting a new one would eat my "savings"
entirely. To say nothing of the beating my credit rating would take.

To really make it worth walking away you really have to be underwater by a
lot. I don't think that 100% of the people who are underwater are down by 30%
or 40%. Real statistics on that would probably be more helpful.

~~~
ajross
Well, it's obviously true that it's not a step function. But the slope is
_really_ steep. Someone with just a tiny bit of equity can sell their home and
walk away without having to pay anything. Someone with just a tiny bit of
unsecured debt who wants to move loses almost nothing (a beaten credit rating
for someone with income isn't nearly as serious as you think) by walking away,
and saves thousands of dollars in fees (typical real estate fees in the US are
5/6%, and paid by the seller!). That may not be "binary", but it's pretty
close.

The real determining factor in your case, I suspect, isn't financial but one
of convenience. Finding a new home is a hassle, and you don't want to bother
with it. It makes more sense to stay where you are because moving doesn't get
you anything but grief. But if you got a great job in a different city, would
you _really_ be seriously thinking about trying to sell your underwater house?

~~~
liquidben
"The real determining factor... isn't financial but one of convenience"

But convenience is financial as it can be valued. (My statements based upon
extensive research involving 7-11 and getting food delivered)

------
kscaldef
This article is remarkably oversimplified.

First, the obvious: once you ruin your credit rating by defaulting on your
mortgage, it might not be so easy to just waltz right into a lower price
rental. Not to mention that you'll be paying more on any other loans you take
out for the next <strike>10</strike> 7 years, and probably your car insurance.
You might also consider the increasingly common phenomenon of employers
running credit checks on applicants.

There are a variety of legitimate factors in a decision like this which aren't
purely financial: the time, emotional, and social costs of moving. Do you move
your children to another school? Do you take your children away from their
neighborhood friends? Perhaps you like your neighbors as well, or the
neighborhood businesses you frequent. If you move into a rental, you can no
longer make certain changes to your home to suit your needs and desires.

It's naive and insulting to call people "idiots" because they aren't simple
money-maximizing machines, particularly if you're going to pretend that
monthly housing cost is something that exists in a vacuum.

~~~
pyre
> _Not to mention that you'll be paying more on any other loans you take out
> for the next 10 years [...]_

I thought that bankruptcy came off your credit score/rating/listing after 7
years.

~~~
chrisgoodrich
It does. After 7 years a bankruptcy should not show up on your credit report.

~~~
kls
it's 10

------
chrisgoodrich
I generally agree with the sentiment that one is morally obligated to pay
debts. This article makes a good argument that free markets don't work on
morality, instead they are rooted in the assumption that everyone acts in
their personal best interest.

Anytime I think about the morality of abandoning an underwater debt, I
remember that $billion corporations do this every single day.

~~~
CWuestefeld
_This article makes a good argument that free markets don't work on morality,
instead they are rooted in the assumption that everyone acts in their personal
best interest._

I read it with just the opposite meaning. I understood it to say that the
actual, observed behavior in the mortgage market is that howeowners are being
moral. The Fools seem to question _why_ people would act following their
morals rather than purely financials.

And this points to one of my favorite misunderstandings of economics, and one
that I'm surprised an economist would fall for. Economics is NOT about just
money. It's about why people make a choice for one thing, foregoing another.
And it's all tied to what people _value_.

It seems to me that this article validates that people really do value
behaving morally, having a clear conscience. And I'm glad, because I don't
want to live in the world where people take advantage just because they can.

~~~
billjings
Homeowner's opinions will likely change if they begin to perceive their
lenders as taking advantage of that morality.

~~~
dagw
Exactly, I'm all for acting morally and sticking to the spirit of an agreement
even if I can screw my counterpart by abusing some loophole, but only as long
as I feel my counterpart will do me the same courtesy. If I feel my bank is
out to screw me and won't give me a break, then I'll have much less problem
screwing them right back. If on the other hand I feel that my bank has treated
me fairly in the past, and given me a break when they technically didn't have
to, then I'd be far more willing to do the moral thing.

------
njharman
As a recently newly minted homeowner who paid appropriate price in a non-
bubble market I find the title highly offensive and hyperbolic. "Why are
underwater homeowners idiots" is the appropriate title.

Re: article itself.

There's also the small matter of jacking your credit for 7 years. With
uncertain future and no savings many people rely on access to credit for
emergencies. Not saying that is wise or that they should, but that is a fact.

~~~
DenisM
Assuming you took out a mortgage, you are financing consumption by leveraging
up. It's no different than buying a pack of beer on the pay-day-loan money.
Not a financially smart move (unless your loan interest rates is below the
long-term treasury rates).

~~~
njharman
house != pack of beer

tax deductions, appreciation, equity, income(it's a duplex and I rent 1/2),
plus all sorts of small things such as reduced auto insurance as it's rolled
into home owners insurance

------
prat
Its not the morality but the expectation of the housing prices bouncing back
to normal like the rest of the economy that is keeping them from walking away.

But the issue with realestate is that its not as agile a market as stocks or
commodities. the volatility observed in a month in the stock market is
probably going to be observed in a year in real estate market. And I am not
not even talking about the phase lag but the different scales of variation
between the 2 types of markets.

~~~
ars
> Its not the morality but the expectation of the housing prices bouncing back
> to normal like the rest of the economy that is keeping them from walking
> away.

Then they could walk away, and buy a different (cheaper) house, or buy first
then walk away.

~~~
prat
There is cost of walking away, damage to credit. So if they stay, assuming
things will get better and they do, they keep their credit too.

------
andylei
there may also be the issue of credit score. if you file for bankruptcy, it's
harder to get a loan in the future. the prospect of future loans may be more
valuable than the difference between what you owe the bank and the value of
your house. that said, i suspect most people aren't thinking about this

~~~
chrisgoodrich
This is an important point that I think supports the overarching message if
this article and the Paulson quote. The system of credit reporting has been
setup to support this "debt as a moral obligation" assumption. The fear of
poor credit scares people into continuing to pay.

In reality, a bankruptcy only lasts 7 years on your credit report and most
banks will start lending after merely 2-3 years.

Underwater homeowners should look at the longer time horizon and see that it
will take quite a few years for their assets to be above water. That's several
years to re-build their credit with a much lower cost of living.

~~~
kls
It is 10 years and one can get an auto loan in less than a year if they
understand how the mechanisms work. The over-reliance on credit score can be
used to a bankruptcy filers advantage if they are careful. A bankruptcy
usually take a 60 to 100 point hit on ones credit, not at all devastating. The
problem is that most people wait to file after they have missed several
payments which, each take a toll, on an individuals credit score. If one files
at the first sign of trouble, can hold out making payments until the filing
and immediately gets a secured credit card after the fact they can repair the
damage in a little as a year. You will pay at least a point hire interest for
the 10 years it is on your credit.

As well, with so much flight from underwater homes I would not be surprised to
see the government enact some form of credit forgiveness once the wreckage is
cleared and we are recovering. We have to get all of these consumers back to
consuming or our consumer based economy will not survive. Both the
corporations and the government are in favor of happy consumers who are
pacified by their consumption so they will be extremely interested it lighting
that economic "engine" again.

------
colomon
It sounds like a small thing, but I'm glad just to see an article which
doesn't just assume that people who are underwater were foolish or reckless
buying a house in the first place. I bought well within what I could afford in
2001, and routinely paid down extra principal every month. Now that I am
married and have a small child, I'd like to move someplace bigger, nicer, and
closer to the rest of my family.

Only thing is, according to the real estate agents, if I'm really lucky
selling my house will just cover what remains on the mortgage. If I'm not
lucky, selling the house could easily cost us $20,000. Crazily, the most
likely reason for that to happen wouldn't be that we couldn't find someone to
buy the house for what we'd like to sell it for -- it would be that we
couldn't find a lender to appraise it for that much.

Personally, I haven't sussed out the moral implications of just giving the
bank the house instead of paying back the loan. On the one hand, it's hard to
see how the bank could complain: yeah, they might be getting a house valued at
$N in lieu of $N + $20,000, but they also got 8.5 years of interest on it,
too, which probably amounted to around $45,000. On the other hand is the
notion that implicit in our loan contract was the idea that we would pay it
off if humanly possible; that allowed the bank to lend us the money for less
than would have otherwise been possible. I don't know how to balance those two
things.

~~~
chrisgoodrich
In my opinion, you are the prime example of whom this article is discussing.

In my view, the bank will still profit off of your loan. If market value is
about equal to what you owe, but it could only be reasonably sold for $20k but
you have paid $45k in interest thus far, they still profit $25k from your
loan. I have a hard time seeing where the bank could be morally right in
damaging your credit for walking away...

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kylec
Maybe people like the house they're living in? Everyone seems to be talking
about the financial side of things, but isn't it likely that many of the
people still paying their mortgage do so because they like where they're
living and don't want to be foreclosed on?

~~~
chengas123
But you're not going to be living there for the entirety of your 30-year
mortgage in most cases. What happens when 5-6 years from now, you want to
move, but you're underwater and can't pay off the mortgage by selling your
house?

~~~
kls
My personalty belief is that it will be 15 before prices recover to the peak
in some areas, and if I where in a situation where I would need to relocate in
five, I would take the hit now so that I would be on the road to recovery.
Hell if most had did it in 06 they would most likely be able to get a mortgage
(albeit at a higher interest rate) by now.

Specifically, Vegas, Arizona or Florida I would have had to do some soul
searching , if I where not going to be there for over at least 10 years.

------
ams6110
Successful capitalistic democracy requires a moral foundation. Many things
that are arguably "in the best interest" of an individual are not in the best
interest of a functioning economy, and not honoring one's agreements is one of
these. The fact that corporations are not being ethical does not justify on a
moral basis the same behavior by anyone else.

Further, if the coming predictions of high inflation turn out to be correct,
the people who are still holding their mortgages will be paying them back with
cheap dollars vs. people who walk away from their current debts and then need
to borrow again later.

~~~
kls
> The fact that corporations are not being ethical does not justify on a moral
> basis the same behavior by anyone else.

That is the beauty of Morals and ethics, is that groups of people subscribe to
different ones just as you say it does not give them the right. Other
subscribe to an-eye-for-an-eye morality.

I personally think that it does justify it, my moral compass says that if a
cooperation is abusing the people via deception, unethical and immoral
behavior then that corporation should be dissolved and all debts to that
corporation should be terminated. covering it up their appalling nature with a
double ethical standard just emboldens more corporations to engage in
unethical behavior and allows more abuse of the people.

Let me be clear, I am not anti-corporation, i am just anti-double standard.

------
bd_at_rivenhill
One issue the article ignores is the damage to your credit. I would assume
that having a foreclosure on your record would make it very difficult to get
credit at a reasonable interest rate in the future, and that some of the
people who continue to pay on a nonrecourse mortgage are accounting for the
effect on the price of debt they may wish to incur in the future. I expect
that this factor is ignored by economists because it is difficult to quantify.

~~~
prat
If there was someway to manipulate the way credit is damaged by looking at
individuals so that only sub-prime borrowers are punished - that would be a
possible solution. Let the responsible buyers walk away without penalty. But I
understand that this has a potential for regime change and is far fetched in
our situation.

~~~
bd_at_rivenhill
From the perspective of lenders, who are the people that credit scores are
supposed to serve, this would be counter productive. Anyone who fails to pay a
debt, for whatever reason, should be penalized. For large lenders, the
underwriting decision is now almost entirely statistical, which provides them
with lots of operational leverage (but is also one of the reasons that the
bubble was allowed to inflate in the first place). If you want someone to make
an actual underwriting decision, you need to go to a smaller bank or credit
union. You will also find that many of these institutions weren't hit as hard
because they made better decisions about what loans to make, and they sold off
the poor quality loans that the government forced them make to the secondary
market to avoid the hit when they went bad.

------
rleisti
While reading this article, I felt there was as strong connection to this one
(recently posted on hacker news):

[http://www.economist.com/sciencetechnology/displayStory.cfm?...](http://www.economist.com/sciencetechnology/displayStory.cfm?story_id=15328544)

...which basically says that entitled people in positions of power tend to
hold others to a higher moral standard than themselves.

------
tc
This is how societies break down.

An example is set at the top, by those in power, that self-dealing and self-
interest above all ethical standards is standard operating procedure.
Eventually this moral decay 'trickles-down' and people start to realize that
they are chumps if they don't start playing by the same rules.

~~~
pyre
The problem is that they _are_ chumps if they don't play by the same rules.
Which is why the people 'at the top' really need to be used as an example of
_not_ acting in such as self-interested way. If the people at the bottom are
keeping society together by ignoring the example set at the top, then the
people at the top are just plowing over everyone else in a bid to further
their own selfish goals.

~~~
Psyonic
Agreed. Either the common man should play by the same rules, or he needs to
fight to enforce that those at the top don't get to cheat either. Otherwise he
is basically a "chump."

------
dkimball
The Motley Fool seems to have forgotten this, but rational-agent theory is a
useful fiction, not a statement of reality. The best analogy I can think of is
Skinner's behaviorism; rational-agent theory seems to fail in the same kinds
of places as behaviorism does, too.

Look up the "Ultimatum Game" for a particularly effective demonstration of
where it fails -- and the commenter here who points out that rational-agent
theory would destroy civilizations is completely correct. (Mental exercise:
apply "the tragedy of the commons" to a defensive war.)

------
argv_empty
It's interesting to see the norm asymmetry (i.e. homeowners should just sit
and take it) playing out in the Fool comments.

------
petercooper
Why Are People Who Pay For Porn Idiots? Why Are People Who Pay For Music
Idiots? Why Are People Who Don't Sell Drugs To Make Lots Of Money Idiots?

Because some of us have pride and morals.

~~~
pyre
It's not like walking away from a mortgage gets you off scot-free. The entire
point of a mortgage is that it's a contract. If walking away from the contract
and enduring the penalties associated with doing so is less financial pain
than keeping with the contract, then why not?

It's not like these 'underwater' people are going to immediately move to some
island in the Caribbean with bags full of money and sit on the beach in the
sun living the good life until the end of their days while the poor, sickly
bank dies alone and impoverished in a gutter somewhere.

~~~
petercooper
Yes, all technically true, but some people have pride or ethics issues with
breaking contracts (social contracts being an even stronger example than
mortgages..).

------
lucifer
"And let me emphasize, any homeowner who can afford his mortgage payment but
chooses to walk away from an underwater property is simply a speculator -- and
one who is not honoring his obligations." - Paulson

Every time these GoldmanSachs critters open their mouth is yet another oblique
reminder that the masses are brain dead.

~~~
chrisgoodrich
"Do as I say, not as I do." comes to mind.

~~~
simon_
Has Goldman Sachs ever missed an interest payment or otherwise failed to met a
financial obligation?

The ire in Paulson's quote is directed not against speculators generally, but
speculators who don't live up to their agreements when things move against
them.

That's not really something Goldman is guilty of. ...As much as people would
like them and everyone ever associated with them to be guilty of everything.

~~~
steveplace
_Has Goldman Sachs ever missed an interest payment or otherwise failed to met
a financial obligation?_

I'd give Goldman a pass. They really are the best at what they do.

But if we expand it further to the rest of the financial industry, what can we
see?

Back in November, 33 companies skipped their TARP payments.

Just recently, Blackrock walked away from a Manhattan building as they
couldn't refinance the debt.

And that's the problem-- banks and homeowners get into financial, not moral
contracts. If the loss off default is smaller than the loss of staying in the
contract, you stop paying. Companies do it all the time, and homeowners should
view it as an out.

~~~
yummyfajitas
"...any homeowner _who can afford_ his mortgage payment but chooses to walk
away..."

"Just recently, Blackrock walked away from a Manhattan building as they
_couldn't refinance_ the debt."

Were the companies which skipped their TARP payments capable of paying?

There is a difference between being unable and unwilling to pay.

~~~
timmaah
"As of 30 September 2009, BlackRock's assets under management totaled US$3.2
trillion across equity, fixed income, cash management, alternative investment
and real estate strategies"

Sounds like unwilling to me. Just because they couldn't refinance that debt
doesn't mean they are unable to pay it.

~~~
yummyfajitas
I'm not sure why you believe Blackrock can divert assets from one use to
another.

For instance, if Blackrock manages two pension funds (e.g., Target Retirement
2050 and 2040), they can't raid TR2050 to pay for obligations owed by TR2040.

------
axod
Can you put a [US] tag in the title. It's not really relevant in other
countries.

Also a _slightly_ less inflammatory hyperbolic linkbait title would be good.

