While the political class waits for the economic crisis to resolve itself, homeowners have started to show considerably more initiative. It’s making the titans of finance very edgy.
Cross posted from Pruning Shears.
No Associated Press content was harmed in the writing of this post
On Tuesday Shahien Nasiripour wrote about the growing problem of strategic defaults, where homeowners who are able to pay their mortgages instead let them go into foreclosure. Generally the homes are worth substantially less than the principal, and if there was a relatively small down payment it can make a lot more sense to just walk away. Why spend ten years paying a mortgage just to get to break even? That is a lot of money that could be used for other things, and in fact there is some evidence that’s what is happening.
Nasiripour’s article states “the threat posed by strategic defaults has gotten so large that a top executive at taxpayer-supported Freddie Mac posted a note on the firm’s website pleading with homeowners to not intentionally walk away from their homes.” The executive claims defaulting is not “good social policy,” which seems like a laughably quaint notion coming from one of the big players in the housing meltdown. In the last generation large institutions have taught consumers some hard lessons, and are now finding out to their chagrin that consumers learned them all too well.
The death throes of the old way of thinking were highlighted by Megan McArdle in a fabulously hypocritical pair of posts just six weeks apart. First she wrote homeowners who default on residential real estate loans are a “New Breed of Deadbeat,” then that a speculator who defaults on a commercial real estate loan “turns the keys” over to the bank (think of the old Mad Magazine “When you’re poor/When you’re rich” article).
There have always been different rules for the wealthy and powerful, but in the last few years it has become nakedly obvious. Efforts to allow judges to modify the terms of mortgages repeatedly fail, yet money has been lavished on financial institutions that drove the economic meltdown in the first place. News of their paying it back gets trumpeted, while the many other forms (via) of assistance used to prop them up are politely ignored.
(I like Zachary Roth and maybe this post was just a quick exercise in contrarian wankery, but claiming our comprehensive financial welfare program is a rousing success because one part of it – TARP – will at best lose tens of billions of dollars has a really strong whiff of catapulted propaganda.)
Furthermore, the transformed environment for the largest players is so outrageously tilted in their favor that it is nearly impossible for them to lose, and evidence of that is taken not as a sign of a fundamentally compromised system but as proof of magnificent management skills. The New York Times characterized the unbroken string of profitable days by the four largest banks as the “equivalent of a perfect game of baseball,” leading John Cole to tartly reply, “They didn’t play a perfect game. They played a rigged game.”
The public response to Washington’s inability or unwillingness to crack down on the worst abuses – finger wagging scoldings in brightly lit committee hearings do not count, thanks – has been an especially hot anger towards incumbents of both parties. The government flooded the banks with money, but from there it has only trickled out – and no one seems bothered enough to do anything about it.
Unemployment remains near double digits, yet there seems to be no sense of urgency by the president or Congress. Barack Obama says it is unacceptably high, but not what he proposes to do about it. Tom Coburn gravely intones on the risks of extending unemployment benefits even though demand for entire skill sets has nearly vanished. How exactly do you find a job as an administrative assistant when that job description is disappearing? And of course the hostility to extending them is exquisitely myopic considering they are also among the most stimulative uses of public money. All in all, the paralysis on economic policy foreshadows a rough November for anyone standing for re-election.
But the public response towards those they are doing business with seems, if anything, cooly rational. It used to be shameful to default on a loan. Maybe there was more stigma attached before loans were securitized, bundled and shipped off to investors – when you might actually bump into one of the employees at the bank whose loan you had stopped paying. There may be more to it, though. We have gotten a good long look at the audacity of shamelessness, and seen how well it worked out for those who dared try it. It is entirely logical for anyone who has been paying attention to think, why not try a little of this myself?