Financial Times: Walking Away becoming "culturally acceptable"
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CalculatedRisk on Thu, 01/31/2008 - 11:50pm (112 comments)
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Centex (CTX) could have been BK already if it wasn't for the "waiver":
Expired
In the last reopot their cash reserve is about $0.48/Share
For those interested, I discussed (as a lawyer) California's laws protecting homeowners who give their house bank to their bank.
It is at
Page not found « Greg’s Law & Economics Blog
Greg:
So 2nd mortgage is not considered non-recourse in California and the lender of the 2nd can come after the borrower, right?
wawawa:
It depends on what the 2nd mortgage was for. A lot of people did what are called 80/20 loans, where they'd get a normal mortgage at a prime rate for 80% of the price and a 2nd mortgage for the remaining 20% at a subprime rate, and a few other similar variations.
In that case, the law is non-recourse on both the 1st and the 2nd. On the other hand, if the 2nd came later, the loan is only non-recourse under a non-judicial foreclosure.
Interesting the other factors NOT discussed in the article.
Saw a woman on TV tonight whose mortgage was about to reset at 16%!!!!
Now if she owed $300,000 (conservative in that this was California and other homes they were talking about were in the 500k range)that would mean that interest payments alone would be $4000 a month! Add in some principal and she is paying 5k or more to live in a place that is now worth 30 to 40% less than she owes and you have complete disaster.
Add in the fact that people more knowledgeable than she were assuring her that A) Home prices always go up and B) That before the reset she would be able to refinance.
That leaves you with a consumer that finally realizes that they have been sold a pig in a poke - conned. They have been at best, misled. At worst, thay have been ruthlessly defrauded. They can't afford to pay in the first place and in the second, they have no legal recourse.
And the anonymous agents who set up the scam by providing the cash and not looking too close or outright encouraging the fraud? They're nowhere to be seen - but another group of their agents stand by to collect the payments - and expect the pigeons to sit around and allow themselves to be economically raped on a monthly basis. When absolutely no morality was shown by the lender, Joe Schmoe is expected to stand up and "do the right thing."
Good luck on that.
BTW, I cannot believe the stock market is going up. We are seeing the tip of the iceberg here. It's just about time to head for the hills.
Perhaps the banks ought to turn the loans over to my cousin Vinny. No living person has ever failed to pay him. And yes, 16 % is very high. Vinny only charges 2 % (per week).
What is seems is that with the same mortgage, home equity, credit cards, auto loan, etc. as in the past, that over extended borrowers are now paying their debts with a different priority. Any good source comparing the old bankruptcy laws and the new, and how that effects debtor payment priority?
Yep, I couldn't believe it when I saw this. Wow!
Saw this which might be of interest as well. MBIA is not out of the woods.
"...Standard & Poors put MBIAs credit rating on review for a down-grade after the markets closed last night, despite strenuous assurances earlier in the day from Gary Dunton, the chief executive of the group, that it had more than enough capital to maintain its top rating..."
MBIA fights to keep its triple-A rating after $2.3bn loss - Times Online
It's possible the markets were up yesterday based on Dunton's assurances and optimism that the monlines would be bailed / okay. I guess we'll see.
Hmmm, lenders throw money at anyone who has a pulse (or looks like they do), home prices are artificially driven up by the buying frenzy and when the whole scheme collapses the banks are shocked to see that people are willing to walk away from the mess when they end up owing more than the property is worth.
From the tone of the article it almost sounds like the bankers knew the whole thing was a scam but they expected the suckers to stay and pay out of the nose no matter how bad it got. Now that things are not working out as planned, they are trying to figure out why.
Maybe people are learning that what is good for the goose is good for the gander. If a house is going to be treated as an investment maybe people are thinking that like any investment that goes bad, there comes a time to cut your losses and walk away.
There is some truth in the old line 'there is safety in numbers'. The bankers sound like cops who are watching California style rush hour traffic congestion, but everyone is speeding along at 120 MPH. Who do they pull over? Everyone?
"The credit crunch and subprime crises has eaten away an estimated $1.5 trillion from global institutional pension fund assets since the start of this year, according to a report from consulting firm Watson Wyatt."
The resource cannot be found.
"The world according to quant funds is topsy-turvy right now, as quant funds have been rocked for the second time in six months, this time by wrong bets in their price-momentum investments. According to Dow Jones Newswires, funds following that strategy suffered its worse losses in more than 57 years last Wednesday, precipitated by the revelation that a rogue trader had caused the loss of more than $7 billion at Société Générale and a sudden Federal Reserve cut. Certainly, those arent the only things to go wrong. In fact, says DJN, several stocks didnt behave as the price-momentum quants had predicted "
Institutional Investor
I guess I'm amazed that people are amazed at the behavior of the borrowers walking away. They are making what is for them, a rational economic decision.
Just as the mortgage broker steered people into high-cost loans because he made more money on them; as the lender didn't care about people's ability to pay, because they were going to sell the loan; as the loan pooler didn't care about due diligence; and the securitizer got their fees; as did the rating agency giving their customer (securitizer) the rating they paid for. All along the line, people acted in their own best economic interests.
Why are we surprised that the borrower is now doing the same? Adam Smith would not be proud.
A credit card can be canceled, a car can be repossessed -- but it's going to take them six months to get me out of the house. What should I do?
watson wyatt-
"Roger Urwin, global head of investment consulting at Watson Wyatt, said: While assets growth of previous years has been encouraging, events of this month will serve to remind investors of the value of risk management and the benefits of diversification. With average allocation to equities at 56%, global pension fund assets could have diminished by between 1 and 1½ trillion dollars since the beginning of the year.
Watson Wyatt - News | Press Releases
As has been said many times here, it's just business. We have been trained by our corporate managers to single-mindedly and pathologically pursue profits at any cost. Even safety and quality initiatives are justified as "good for business" as opposed to the "right thing to do".
The beauty of American capitalism is that everyone gets another chance even when they mess up. Our bankruptcy laws are designed not to punish the debtor, but to get them back in business as soon as possible. It's the American way.
The banks should understand this behavior - they perfected it.
It's just a bad 'investment' (they may not have any of their own equity in it), nothing more. Cut your losses, the same as you'd do if you owned stock.
Bwahahaha! I love it. McDaniel and his rich Wall Street pals assumed that J6P was stupid enough to keep paying on an underwater mortgage No Matter What. Surprise! Can they really be deluded enough to think that no one lower down on the economic ladder has noticed how they treat employees? It's just business-nothing personal-hope you find a new job soon. Well, it appears the Wall Street ethic has soaked into the American people through and through. The only thing that surprises me is that McDaniel et al are surprised by this.
... borrowers and lenders used to know each other personally. However, over time, the lenders have shifted from the local banker to big impersonal multinationals that are less likely to have a personal relationship with the borrowers, and make their business decisions accordingly. Not surprisingly, borrowers are starting to make decisions on the same basis.
This repeats a phenomenon we've seen elsewhere in the economy - businesses started treating employees as replaceable commodities, firing at will, and then, surprise, surprise, some years later, discovered that employees no longer had much loyalty to them either. And I wonder what this means in the long run. In the short run, when businesses first begin to treat their customers or borrowers or employees as opponents, they had an advantage over their customers or borrowers or employees and even their other competitors who hadn't yet begun acting in the same way.
This is because their customers or borrowers or employees didn't expect them to be acting in this way, and continued treating them as if the old paradigm, the "we're all in this together" approach, still applied. When one side plays dirty and the other doesn't even realize the other side is playing dirty, the side that plays dirty wins. In economic parlance, the dirty side extracts the other side's surplus. We see that in the shift in the distribution of income from Joe Sixpack to the corporate profits over the past few decades.
But what happens when the other side starts playing the same way? Well, the big guys still have some advantage over the little guys, but there are enough big guys that they can be made to dance sometimes too. The ability to extract some surplus from the customers or borrowers or employees starts to go away as they begin to treat the big guys the same way the big guys treat them - as opponents to be taken advantage of if the opportunity presents itself. And maybe you start to see a slow shift back to a distribution of income similar to the one of days past. Not all the way back - the big guys have too many advantages for that, but there are a lot of pissed off little people.
But there is another change that we can expect in this world of "capitalism" big business has created, and its not a good one for anyone. That change is the shrinking of the proverbial pie. See, when two sides know and trust each other, it isn't necessary to waste resources preparing for all the galaxy of contingencies made up of all the possible ways each side can be screwed by the other. And there many such ways, from pushing for changes in the law (think bankruptcy reform) to outright fraud.
The big boys - the big banks and the big corporations - have demonstrated over and over that the individuals with whom they deal, be they customers or borrowers or employees, are nothing more than numbers, unworthy of compassion or loyalty or justice if it interferes in any way with profit. And over time, the customers and borrowers have started reciprocating. The cooperation between the two sides that used to exist, the cooperation between the two sides that used to create value - is dying. And we will all be poorer as a result.
Macklowes walk too according to The Wall Street Journal. Harry turns the keys over to Deutsche Bank on seven Manhattan office buildings he acquired less than a year ago for $7.2 billion. Now that is jingle keys on a grand scale.
And Merrill bought back CDO's from Springfield Mass that were almost worthless.
How many more CDO buy backs and jingle keys from commercial real estate owners are ahead? More than anyone dare admit.
Before, the l/s quant unwind has reversed pretty fast. So, look for big drops in HBs, financials, REITs and small-caps coming.
This just in:
Microsoft makes hostile bid for Yahoo. Offers $31 per share for a stock that closed at $18.
Futures go through the roof suddenly.
In the past, when pension funds underperformed actuarial assumptions, they could take a long time to hit the income statement. Under Pension Protection Act '06, the cost of funding losses must be amortized over not more than 7 years.
Big losses on pension funds = big hits to earnings going forward.
Pension funds have been hit by: CDOs, equities and hedge fund losses.
I guess Mr Softy decided that buying Yahoo is a better use for their cash than T bills at 2 % or crappy CDOs. Maybe not so dumb... Look for other cash-rich players (like pharmas) to go shopping.
One process to get back to the 30's 'pay cash mentality' is to be BK and not able to get a loan.
If one is going to have to become responsible it may as well be because one cannot borrow any more.
BK is a 'clean slate' and really easier than paying an upside down mortgage for 10 or 12 years before you break even again.
I have discussed this hypothetical with one '50 something' I know and the feeling I get is when you retire 'why borrow anyway'.
Will a lot of boomers walk?
No need for leverage..............
Banker, Borrower
Goose, Gander
Anonymous makes a great point about the loss of trust and the risk of shrinking the economic pie. This is game theory being played out in our economics. The big corporations have been exposed as cheaters and reciprocal altruism has been temporarily suspended. It will take time to reestablish the trust needed in this complex interaction. The distance between the players makes punishment of the cheaters difficult, but some seem to have found a way. Good for them. We should support those who walk away and get them back on their feet ASAP. They were (mostly) playing by the rules and got burned.
Vinny says too bad there aren't enough rivers in California; not like in Jersey
the whole non-recourse thing is amazing. i still don't know why anyone would lend money at at or near 100% LTV on any asset on this basis.
in the UK, mortgage lending is recourse, and you can be pretty sure that if you start missing payments you'll get the bailifs round to take your tv and sofa etc....kinda an incentive to keep paying!
this is why some housing markets outside the US, even though they went up further, faster and to even more unaffordable levels, will pop slower than the US did.
Oh, and I agree with UnEasyOne, I can't believe equities keep going up. This is looking like the shorting oportunity of a lifetime. Or the final chance to save your pension funds.
A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.
Mark Twain
US humorist, novelist, short story author, & wit (1835 - 1910)
ISLM wrote: "BK is a 'clean slate' and really easier than paying an upside down mortgage for 10 or 12 years before you break even again."
I am no expert on BK law, but my understanding is that now (thanks to the recent "reform") the clean slate is pretty much a thing of the past. When you leave the court, unless you are completely destitute and unemployable, you leave with a court ordered payment plan.
Please don't hesitate to correct me if I am wrong.
"BTW, I cannot believe the stock market is going up."
The dollar falling like a rock on it's way to toilet paper, bond yields suck and if the FED wants another bubble may as damn well give it to the bastards!
GOLD AT NEW ALL TIME HIGH AGAIN
I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Fortune's always hiding,
I've looked everywhere,
I'm forever blowing bubbles,
Pretty bubbles in the air.
I'm dreaming dreams, I'm scheming schemes,
I'm building castles high.
They're born anew, their days are few,
Just like a sweet butterfly.
And as the daylight is dawning,
They come again in the morning!
I thought most of the bankruptcy changes were related to credit card losses. As we see from these articles, the banks did not ever anticipate anyone would walk away from their homes. They reformed the BK laws by making it harder to walk away from CC debt. Hence, people are paying the CC debt and moving. I too could be wrong on this, but this is my impression.
One other point, we need these people to default in order to bring back the trust. We cannot always count on our legal system to discover and punish unethical behavior. We need to transfer the social stigma from the upside down borrower to the predatory lender. This is the only way to reestablish trust.
World Banks to group together for Bond Insurer bail-out ...
I'm not a lawyer, but I play one on TV. I suspect that non-recourse would be out the window if the borrower made material mis-representations when they got the loan. Banks may not have the time or inclination to persue this, but I expect we will see a whole industry of folks who will persue this in exchange for a cut of what can be obtained from the deadbeats' other assets. Could be a whole new growth area, no?
Is it really a change in social norms, or just the the AMOUNT that people are upside down? If you're upside down 10% on a $240,000 you're only upside down 24k or ~1/2 of your annual income. If they like there house, and rent costs about the same, most will stick it out. Much of that is transaction cost that you lost the day you moved in. If you're upside down 20% on a $750,000 house, we're talking about 150K in losses. That's more than most people make in a year. If renting costs 1/2 as much a month, the incentive to walk away is much greater.
I thought the most interesting thing in the original FT piece was that paragraph that said defaults did not correlate with resets.
That flies in the face of public explanations for this mess, and yes reinforces all of your social/behavioral comments above.
Here's the link on the Microsoft offer for Yahoo:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a91cYDn1wHy4&refer=home
Finally someone is noticing the role of law firms that made billions from this new securitization gimmic. About four NY firms did this type of work for residential and commercial property and I know an attorney that was writing this stuff for one of these firm that thought it was a joke and laughed about anyone buying it. I don't know if all the firms were the same, but I'm sure they will all be making loads on litigation for a mess they helped create. Small Law Firm at Center of Loan Universe - NY Times
It's a shock to Kenneth Lewis to see people walking away from their homes, while maintaining credit card payments. As I see it, they are just choosing between WHICH UNSECURED loan to leave.
i find all of this pearl-clutching about the walk-aways quite entertaining.
perhaps the reason people no longer feel compelled to pay off their debts is because they've been watching corporate america walk away from their responsibilities these past several years. bankruptcy filings that void pension plans; massive payouts to failing corporate ceos; etc.
now there's your trickle down theory in practice...
something tells me this employment report is going to be a humdinger!
It boggles the mind that lenders "don't understand" why someone would walk away from a bad investment. Staying with a poor investment to support the fools that you invested in (mortgage broker, packager of CDO's, monolines, ....) is lunacy.
It's simple math/invest logic... dump a poor investment, which in this case is an over-valued property.
The solution is also appalling clear... reset the loans to some reasonable value so the consumer doesn't feel like they've been screwed by the lending chain (that's a visual!) and maybe they'll feel some compunction about staying with property.
I'm sure this is Lear railing against the wind...
It is now official:
Arizona has entered a recession:
State financial outlook is grim as tax take falls $84 mil short
3.4% decline YOY for december retail sales tax.
Whose next?
Someday this war's gonna end...
I think the social change is a symptom rather than a root cause.
Older (i.e., responsible and reasonable) mortgage underwriting standards included the need for a fairly hefty downpayment. In order to make the downpayment, most people had to work hard, save and sacrifice. Even before putting money down, such a borrower is emotionally invested in the purchase. Losing the house is thus tied to failing in a very large undertaking in the borrower's life.
By substantially reducing the downpayment, borrowers have less skin in the game financially, but even more importantly, they are less emotionally invested in the purchase. The borrower just walks out of an apartment and into a house without having to make the purchase a significant goal in his life. Such borrowers are far more likely to view home ownership as simply an investment, and if you hold a non-recourse investment that is under water, it makes perfect sense to walk away.
In the end, people value what they work for far more than something given to them. Skin in the game is more than just a financial concept.
There is also probably an element of natural selection at work here. By eliminating the need to make a significant effort to purchase a home, you include in the population of borrowers those who never would have purchased a home because they lacked the commitment to save for a downpayment. Certainly such borrowers are more likely to default.
The shame is gone because of a growing awareness of rot at the top and the quid pro quo reponse that it engenders.
I am a consumer bankruptcy attorney.
The changes to the bankruptcy law have been greatly exaggerated. The law is a lot more complicated now- and it's harder for higher income folks to qualify for a Chapter 7- but most 'middle-class' people that I see coming into my office qualify.
During the bubble my clients would have sold a kidney to save their house- now people are relieved to walk away.
Most people I meet are giving up homes because they can't make the payments- the only way they were able to hang on was by borrowing more money, working 2 jobs, going without health insurance, etc. It's less common when I meet people that can comfortably pay their mortgage- but are tired of throwing their money away on a mortgage.
News this morning:
A coven of banks will provide capital to bond insurers.
Beazer is out of the home mortgage market, now going through CFC.
linda writes:
i find all of this pearl-clutching about the walk-aways quite entertaining.
Yes! There is an inherent asymmetry in how our system treats "wrongdoings." What we need is a "walk-aways lobby" that can convince congress that running away from an upside down mortgage is as patriotic as stopping payments on a pension/medical plan that a worker may have contributed to for thirty years of his life while rewarding handsomely the CEOs responsible for the failure of the compony.
It's less common when I meet people that can comfortably pay their mortgage- but are tired of throwing their money away on a mortgage.
How many of these people that can "comfortably pay" -- and, I presume, continue to do so -- have negative equity or live in areas where prices are declining? And: What is their average IQ?
Your comment sort of implies that people who 'walk away' do so for vague and undefinable reasons -- they just became "tired" of paying. Which is ridiculous.
bZb - Mad as Heck and I'm not gonna take it anymore!
Well, let's not get crazy.
Wall Street is shocked, shocked that people are walking away from their mortgage commitment.
JC Flowers walks away from Sallie Mae.
Blackstone walks away from Alliance Data.
Cerebus walks away from United Rentals and Affiliated Computer Services.
Thomas H. Lee walks away from Home Depot.
KKR walks away from Harman International.
Joe Sixpack walks away from his underwater home. Shocking.
Lehman Brothers Russo demands more government intervention in an interview in Davos:
http://tinyurl.com/35udow
Thanks Creative D. I had a hunch that lots of these file-ees are people who cannot truly "afford to stay in the home," as lenders might have us believe. And that other factors -- like health care costs -- play a role.
Look a little beyond the "what's good for the goose" argument and you see a bigger problem: The gander walks (but likely takes a hit to his credit, future ability to own - making the gander a potential drain on society) -- the goose gets a bailout - making it a definite drain on society. So we all pay the price for their scheme, while the govt sidesteps any action that would dis-incentivize their doing the same thing all over again.
The entire Basel II, which is soon to be implemented is written with certain credit risk standards and they assign a very small risk to real estate -- the idea is that anyone who buys RE really does all they can not to foreclose. Wonder how this is effecting Basel II.
I like the litany of corporate defaults from Brian. Put's it in perspective.
Crowman, you speak sanity and reason. That's your problem.
You fail to understand that the law of gravity has been repealed and the Red Queen rules.
"Deficits don't matter. Reagan proved that."
Some very smart guys have figured out a new scam, taken everybody for a ride and it has to play out.
When Greenspan cut interest rates to 1% as the dollar collapsed and told the banks to engage in "creative financing" to get people into houses, my hair stood on end - but who am I?
When mortgage interest rates fell to the lowest level in my lifetime and millions bought houses on adjustable rates, I screamed at the TV "Don't you know that rates CAN ONLY GO UP from here?"
They weren't listening (probably still annoyed about my ravings over "internet tulips" from the 90s).
Now I'm screaming about massive rate cuts while the dollar collapses.
They're still not listening - what the hell do we know?
They have all the fancy degrees - not me. Sure wish I had one of those fancy MBAs - maybe I could understand how these smart guys are gonna fix this for us.
Speaking of Reagan - what would he think of this problem? From his first inaugural address:
You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we're not bound by that same limitation? We must act today in order to preserve tomorrow. And let there be no misunderstanding: We are going to begin to act, beginning today.
The economic ills we suffer have come upon us over several decades. They will not go away in days, weeks, or months, but they will go away. They will go away because we as Americans have the capacity now, as we've had in the past, to do whatever needs to be done to preserve this last and greatest bastion of freedom.
In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.
One more Reagan moment I missed in the cut and paste:
We hear much of special interest groups. Well, our concern must be for a special interest group that has been too long neglected. It knows no sectional boundaries or ethnic and racial divisions, and it crosses political party lines. It is made up of men and women who raise our food, patrol our streets, man our mines and factories, teach our children, keep our homes, and heal us when we're sick - professionals, industrialists, shopkeepers, clerks, cabbies, and truck drivers. They are, in short, "we the people," this breed called Americans.
And of course we CAN expect pushback in the form of deficiancy judgements. In normal times, with sane mortgages, few people walk out on their mortgages if they have the ability to pay. This means that there's really no point for a lender to pursue a judicial foreclosure to try to get blood from a stone. But if a significant number of FBs who are walking DO have assets, I predict that somebody will make a living going after them. It may well be specialists, like collection agencies, buying the mortgages for pennies on the dollar, but they will exist. Relying on the historic disinclination of banks to try and get deficiency jusgements is like relying on the historic disinclination of upside down borrowers to default when they could still make the payments. Once the incentives change enough, behavior will follow.
Paul-That's wonderful words. Of course, no one added more to the debt as a percentage of GDP than Reagan. Bush has been running hard to catch up though.
told ya-
-17,000
Paul, actions speak louder than words.
futures doing nothing on the back of that number...even creeping up a bit!!
Jim a - Yes they do. It's interesting to me to see this contrast between the lofty rhetoric of the Reaganites (McCain?) and the reality of their policies.
Fed to the rescue!
Anonymous, I am truely impressed. Very few people understand that the reason for globalization is that banks were not needed as much anymore because vendors knew their customers and could make direct deals. Some of Microsoft's vendors were even taking MSFT stock in payment for goods instead of money. Globalization was a move, predicated by banks, back towards merchantilism because the Chinese and the US firms/people did not trust each other and needed moderators -- banks.
"2and20 writes:
futures doing nothing on the back of that number...even creeping up a bit!!"
Why not? It opens the door for more rate cuts. FFR at 1.5% by November?? Who knows - but it looks increasingly like that's they path we are headed down.
The jump risk in these markets is crazy - GOOG down almost 50pts afterhours - YHOO up almost 10 pre-market.
Volatility is back with a vengence and there won't be a "reversion to the historic mean" in a while...
Dashing down the street
In a beat up Chevrolet
The mortgage got us beat
So well no longer pay!
Our option ARM reset
Making payments tight
In the end twas too much debt
So we must flee tonight
Oh, jingle mail, jingle mail
Jingle all the way
In the end twas too much debt
Let the bankers pay
Oh, jingle mail, jingle mail
Jingle all the way
In the end twas too much debt
Let the bankers pay
Nonfarm payrolls fell 17,000 in January, the Labor Department said Friday, the first drop since August 2003, when payrolls slid 42,000.
Friday's data also included benchmark revisions to 2007 employment data reflecting changes in industry classification, new seasonal adjustments and estimates of new business creation. Based on changes to the establishment survey, the total level of nonfarm employment in December 2007 was 376,000 lower than first thought on a seasonannly-adjusted basis, at just over 138 million. Revisions to a separate survey of households showed downward revisions to both employment and the size of the labor force.
Why are we (well, the "we" not reading this blog) surprised that there is a change in borrower attitudes about foreclosure?
The change is just a reflection of the change in borrower and lender attitudes about home purchases.
In many cases, lenders and borrowers were both entering a transaction that was bound to go bad if home prices didn't keep rising. It was obvious in many cases that the borrowers could not afford the payments if home prices fell back toward historical norms, making it impossible to refinance into another ARM or option ARM.
The lenders made a big gamble. It isn't paying off.
"One possible explanation is that it has become culturally more acceptable this decade for people to walk away"??? HELLO McFLY! It's not a matter of social acceptance. I dare say they should look at who they gave mortgages to in this round of real estate insanity...a much different class of borrower. When you play at the margin, you get the marginal. Big friggin Duh...ya know? Sheesh
This comes less than 24 hours after the story about the New York real estate dude mailing in the keys on a $7 billion loan (big box of keys that)? "Become socially acceptable"? If corporations claim to be artificial persons why in the universe would they be surprised when individual human persons act just as rationally and ruthlessly as they do?
Cranky
People walking on mortgages does not surprise me. In my opinion, the change in attitude is not confined to mortgages; it is social and it is related to the increasing class disparity in US society. Middle-class is increasing seen as meaning 'stuck' and people are well aware that real-dollar wages are not increasing, but that the monied class is doing better all the time. Things are too good in the US for this to boil over in the streets as it might have years ago, but it will come out in subtle, but certain, ways.
Perhaps in future, mortgages, like LBO's, will come with a reverse breakup feature??
When two people are equally educated, equally intelligent, and equally hard working and suddenly one is allowed to make a few thousand percent in salary than the other in order to augment globalization, things turn sour. Conventional wisdom spreads despite anything written in media to hide or rationalize the changes.
One possible explanation is that it has become culturally more acceptable this decade for people to abandon houses or stop paying in the hope of renegotiating their home loans.
This is such a load of $hit. If bankers were mindless enough to give people no-money-down mortgages with deceptive initial payments in the late 1970s, there would have been millions of people walking away from them in the recession of the early 1980s. What changed is that it was somehow fiscally acceptable to write absurdly risky mortgages. The borrowers are the only ones acting rationally.
Suppose a state changes the rules from non-recourse to recourse. Somebody mails in his keys. Do the new rules apply, or the ones in force at the time of the mortgage?
Anonymous - who wrote earlier, hit on the larger trend, I think. "Business has no loyalty, so why should we ?", is the conclusion people have been slowly coming to the last 20 years , or so. When pensions have been gutted time and time again, and promises reneged, then don't expect the little guy/gal to have any loyalty either.
I think some folks are underestimating the genuine shock, shock felt by these lender CEOs.
Please remember, corporate CEOs live in bubbles of their own creation. Since the Telecommunications of Act of 1996, those bubbles now extend to the major corporate media. During the price run up, no one was allowed to tell these emperors they had no clothes, not their own staff, not the lower-level grinds who smelled something rotten, and certainly not the blow-dried hairdos sitting behind the anchor desk on a corporate payroll. In today's America, almost every voice you hear is talking their book.
That's why the CEOs attribute walkaways to vague, mysterious changes in social mores. No one has ever told them this was a natural economic consequence of their own reckless lending behavior.
Please remember, corporate CEOs live in bubbles of their own creation. Yeah, until last August they thought that the economy was doing well. They didn't realize the extant to which doing VERY well for them does not equal doing well for most people. As well as the extant that the economy DEPENDS on "most people."
Bob_in_MA - EXACTLY. If there is any change in social attitudes, it's because so very many people have been granted mortgages they had no chance of paying and have to go. When you see foreclosures all around you, you are not going to fight to the last breath to keep your own house.
Apparently the CEOs expected that everyone would lose their cars and max out their CCs before conceding. If the situation had not become so dramatically obvious, I'm sure more people would do just that. Bizarre lending created this and created the social incentive for people to walk away. In areas in which empty houses don't dominate the landscape, borrowers are following a more traditional approach.
You can't fund a wildly speculative bubble and then not expect those in the middle of it to react to hopelessness of their situation once it turns. In some of these places, it's not even ruthlessness. It's surrender. If you become aware that you will lose the house eventually, giving it back to the lender now is probably the best thing to do for creditor as well as yourself. In most of these places, there's a good ways further down to go.
Billy Hill writes:
Suppose a state changes the rules from non-recourse to recourse. Somebody mails in his keys. Do the new rules apply, or the ones in force at the time of the mortgage?
I would think that the change would be unconstitutional - "Congress shall make no ex post facto laws," - if applied to existing mortgages. In any case, most laws are written such that they don't change the existent rules at the time a contract is made.
"The state housing agencies that are already offering mortgage refinancing options are turning away so many applicants that they've had no need to raise funds. Since New York said it would commit $100 million in July, three of the 500 loans envisioned have been made. Massachusetts extended four loans under a $250 million program started in August, and Ohio made just 36 of the thousands anticipated by Governor Ted Strickland."
http://tinyurl.com/24myzs
deficiency judgements have a very poor recovery rate at agencies.If the debtor has assets,they go bk,if they have a job at mickeyD's and if you garnish wages,they walk.As far as ch7,most with mortgages will meet the insolvency rule,and be discharged.
perhaps the reason people no longer feel compelled to pay off their debts is because they've been watching corporate america walk away from their responsibilities these past several years. bankruptcy filings that void pension plans; massive payouts to failing corporate ceos; etc.
now there's your trickle down theory in practice...
I like your reasoning Linda....
Exactly!
Work hard for years, but the CEO needs a bigger weekend yacht? Well, it's "right-sizing" time! Tough luck! Have an education and looking for a job? Oops - we sent all those overseas. Here's a mop and enjoy working at Wal-mart, if you're lucky! Retiring from the grind? Oh, wait - your idiot executives ran the company into the ground, so lose your pension while they get $100 million golden parachutes for their "leadership."
Gee, why is it if you keep screwing somebody over, they eventually screw you over in return? That's what we seeing here, and I am happy to see it. A society can only function when people play by the rules - if the would-be feudal masters don't, why should the peons?
I wonder how many soldiers fighting in Iraq are losing their homes?
Tanta
This was my point yesterday...
"In particular, it seems that mathematical models used to predict future default rates, based on past patterns of losses, have gone wrong because they did not adjust to reflect shifts in household behaviour"
J6P has common sense. He may not get into the finer financial points, but he gets the big picture and the psy of the situation. How long is the average length of ownership in the US? Not 10 years I bet. Now jobs may become more scarce and people may need to relocate. Staying in a house leaving them 100Ksss under water is probably not an option. They signed to mortgage the house not their future. No one expects wages to sky-rocket. Yes usually J6P usually thinks in terms of can I make the monthly payments rather than seeing the bottom line of the entire deal may be not this time. People have brought up pride. But in this case what pride are we talking about? May be pride of not being conned buy the RE brokers-Wall Street and the rest of the machinery. Was that the psy analysis that Wall Street made : that people would not walk away because it is home, and pride? Well it seems J6P is more intellectually flexible than they are, may be because his situation is more precarious than theirs and for him things can change from one day to another so he does not think in terms of things have always turned out that way before it fact for him what has always happened before is J6P being conned by Wall Street.
So far this crisis is unfolding just as logic according to humans did predict. People will return the keys, and clearly you can expect a snow-ball effect and conversely not much enthusiasm for buying in the near futures
In the last 5 years or so, the real estate complex went from selling houses as a place to live and a long-term investment, to selling houses as a get rich quick scheme.
By 05-06, people were buying because (a) housing prices always go up (b) everyone who owned a house was getting rich from MEW (c) if you didn't buy now you'd be priced out forever (d), because of all this, you should buy the biggest house possible - the greater the leverage the greater the gains.
Now it is becoming clear that homeowners didn't receive the benefits that inspired them to purchase. Their house values went down, the cannot finance their lifestyles with MEW, the would have gotten a better deal if they waited, and all they have to show for it is a mortgage payment that keeps getting bigger.
When homeownership was a hard-won symbol of true stability, people hated to give it up. But when it degraded into a get rich scheme, it should be no surprise that people aren't willing to 'tough it out.' Who 'toughs it out' in a get rich quick scheme? The whole point of a get rich quick scheme is that it doesn't require toughing it out.
IMO people are walking away because people increasingly view their properties as houses and not homes. Reasons:
-speculative mentality during the boom
-shift in values from community and neighborhood to material items and new media and entertainment forms
-homogenous urban/suburban/exurban sprawl
-career path uncertainty
-corporate bankruptcy now treated simply as a strategic option and this management-style thinking common in middle-class america
As much as I loathe the practice of walking away from a mortgage, I understand why people do it.
What's most unfortunate, is that this is a viral phenomenon that will spread to other areas of financial interest. ,
i.e., "I made a bet, you won, f-you, I'm walking away because my financial interests trump the honor of fulfilling an obligation."
I'm not siding with either the lender or the borrower in this circumstance, but the fallout of this attitude will result in lenders demanding 20-30% down and at higher rates. Part of the risk to the lender has been abated by two things:
1) Enforcibility of the contract
2) Incentive of the borrower to meet the obligation based on the threat of credit damage and the matter of personal integrity.
Since the fear of credit damage has been outweighed by severe equity loss, personal integrity is no longer a factor. If this becomes the prevalent attitude, lenders will have to start pricing risk at much higher levels.
Long story short, the housing market is going to be dead for many MANY years to come.
Joseph, I think you nailed it. Culturally speaking, the distancing of families and extended families has made transiency the norm instead of setting down roots and binding oneself to a community.
I think it goes hand in hand with my previous post regarding personal integrity. Reputation becomes increasingly less important the more impersonal our lives become. Thus, the stigma of getting foreclosed on, or, walking away, has no bite left. It's downright fashionable to send out some jingle mail!
Regardless of bailouts, legislation, market moves, etc., there is a seismic shift taking place in our attitudes toward "obligation". The result will be a society that no longer trusts the counterparty, and that leads to disintegration.
Hi, this is a comment on the comments so far on this post: so perceptive!
We commentators are not all saying the same things, but the things we're saying are interesting. Good signal-to-noise ratio on this blog's comments.
Tanta and CR, you've got such a good stable of regular readers. So nice. Probably part of why your blog keeps being good -- if over the last two years you had had very few commenters, or mostly inane commenters, would your posts these days be as good as they are? Are you just using us to sharpen your thinking? Or was your thinking already pretty damn sharp, and the comments just help you understand what points to clarify for us?
One would have to be a complete imbecile to to believe that the charlatans that created this speculative bubble with such "creative" accounting schemes as interest only loans, etc. had no inkling that this was a mere good old fashioned Ponzi scheme waiting to collapse. Please stop the clap trap about "computer risk modeling" and give us a break!
If the pendulum swings too far and too fast in the opposite direction, and borrowers will be expected to plunk down 10-20%, who in the hell will be able to buy a house?
Borrowers have been conditioned to expect that a dp is optional at best- really your worst option.
And, with savings rates so low, finding a downstroke would have been impossible for J6p, in any case.
Supposing we do return to the "Golden Days" of mortgage lending, it will be a good, long time before we see demand for housing.
The cable was disconnected. The telephone was disconnected. Then they moved out of the house and turned the heat down to live with relatives. Family income approximately $70000 a year. A family tragedy and then several months without a job. That is what has caused it. I expect that is the reason given. There is the camper on a lot. There is a boat in a garage. House is about $75000. Mortgage unknown.
Something is happening in main street America. It is not just sub-prime or the mortgage pig.
Nightmare: people dying in debt (no problem since eventually they will stop having kids since they can no longer afford to) after having lived all their lives in houses they were only paying interest on... same with their cars, except that with cars since their roll the up-side down money on the next car they end up driving a Ford Taurus while paying for a Jag... The only limit to such an economy seems to be just people's life span. Life insurance policies become mandatory... so after death the banks get paid. They securitize the life insurance policies of course.
Okay so these "walk aways" are being rational and perhaps even smart. The lenders and investors will take it in the shorts with little recourse. Although I would definitely stress the volunteer defaulters out by demanding to see documentation for their stated income with the implied threat of fraud detection. No profit in pushing the issue but a form letter mailing would cheap and vengeful.
But the real issue is the lender and investors will be rational. No more easy money. Back to 20% down, full doc and your first born to get a mortgage. And I for one don't want to hear these deadbeats whining about not being able to get a loan or having to pay sub-sub-prime rates in the future.
Suppose a state changes the rules from non-recourse to recourse. Somebody mails in his keys. Do the new rules apply, or the ones in force at the time of the mortgage?
According to the constitution, a state is prohibited from changing a contract. Congress does not have such a prohibition. However, I'll bet most mortgage contracts implicitly rely on the state's recourse system. In that case the state could change it any way it pleased as long as the decision only affect future defaults.
Change? The only thing that changed was that RE stopped going up. Get real. Our "culture" hasn't changed.
When has anyone ever been allowed to buy $500K worth of anything with zero down?
People are not different, and never were.
What changed is the shift FROM depending on hard money down TO shame.
Shame sounds suspiciously like hope,
which is known to be a crappy hedge.
What are they teaching in business schools nowadays? OPM Fee Income 101?
Down payments serve as a regulating factor on leverage. Lever all you want constrained by the down payment, which has to accumulate out of current income (or family income)....no down payment, no touchy lever.
Zero down payments?
I'd like a lever.
Would you like that Supersized?
Uh, sure, why not.
Crowman said:
lawn grass writes:
Just a lack of commitment, huh, Crowman? That's got a smell of "they're just too lazy" to it that I find offensive. Lots of people don't lack commitment, they just lacked a large downpayment. And it's not for the lack of work, education, skills, or frivolous spending.
Lawn grass is on to something.
I'm college educated, work hard, and live frugally. Very little c.c. debt. My wife's the same. But you just don't get rich teaching school, in my wife's case, or in my case as a salaried tech guy, especially during the early 00's. I'd gotten laid off twice in as many years during that dotcom bomb. Guess the market was telling me I wasn't smart enough or talented enough or had enough drive, right?
I took took any jobs I could get, temping, or part-time, and some freelancing tech stuff, but no bennies, naturally. My health insurance was a private policy, and that was very expensive (even though I don't smoke, no pre-existing conditions, in my 30s and in excellent health). Car payment was a necessity as this society does not believe in mass transit. Our student loan payments that almost equaled the rent payment -- and I'd gotten some money in scholarship grants. Retirement saving? A luxury that was unaffordable. Starting a family? Get real.
What this all means is, you have to have money first in order to be able to save it for a downpayment on a house. Commitment or lack of it doesn't matter if you've got very little to save to begin with.
It also means good job or no, effort or not you're one disaster away from bankruptcy.
We knew we could afford a modest mortgage payment but didn't qualify because we didn't have enough down.
Through all those tough times we struggled to save for a home. And finally, after 7 years of effort we had a whopping 5 grand to put down.
Fortunately, a number of banks had "eliminated the need to make a significant effort" so of course we just skated into homeownership with no more effort or commitment than checking into a Motel 6.
We "bought" a 1,000 square foot 40-year-old ranch in 2003 for $170,000. Not exactly extravagant in anyone's book. We did have a kid after we moved in. Go ahead, count that as an extravagance, one that us un-committed types of marginal economic station should know better than to indulge in.
And with the bottoming out of home values, I'd hazard a guess that we've lost any of that "magic equity" we gained by the market rising every year, and doubtlessly by the time this fiasco is over we will owe more than the house is worth.
I wanna tell you how many people told me to get one of those ARMs, where the rate can go up. Co-workers, even bank loan people told me I could do the ARM and then refinance when the rates rose.
But it was our first (and only) home, and I was very unhip. And stubborn. So I didn't understand all that ARM stuff and think it was the 'new thing to do', but I understood a fixed (but higher) rate for 30 years. I was lucky, not smart. I went against expert advice. And my wife and I looked at the house as a home. We looked at it as a home we could live in for 20 years, not shortterm investment.
But if I had succumbed to the ARM sales pitch, and if we looked at it as investment, and if we found ourselves owing thousands every month (which we don't even have) -- well, hell, yes we'd consider walking.
And I wouldn't feel one damn bit of guilt about it.
No corporate bigshot felt remorse when I was laid off -- once by email, even -- and I too have noted how the 'rules' have been one-sided. Someone upthread had a great list of corporate walk-aways.
The last 25 years have been corporate walkaways and government bailouts. With guys like me find themselves underwater, its because of lack of significant effort and commitment. When corporations tank, it's merely a problem of liquidity or capital or solvency, and if severe enough the government will help. When Joe Sixpack or Tina Twoliter get money from the government it's called a handout. Corporations get money it's called a bailout. Some people insist Joe and Tina think welfare is their due, that the government owes them; corporations and the rich insist tax relief is their due, it's what the government owes them.
You know, if I or my wife lost our job or were diagnosed with cancer or hit by a car and disabled -- we'd be smack in that situation you diss all those people for, Crowman, those lazy irresponsible types. You know, poor people. Because God knows those lazy suckers of the government teat got no morals, no shame and no willingness to work or save and that's why they are poor. It's their own damn fault. They just don't want to better themselves.
Sure, dude.
But Lawn grass, I think, knows better.
Yeah, Lawn grass, something is happening in main street America. And it's not just sub-prime or the mortgage pig. It has something to do with income distribution and wages over the past 25 years. It has something to do with people struggling to keep their heads above water, even when working hard and not spending carelessly. There's lots of people on the edge, people with decent jobs and willingness to work. But all it takes is one big setback, or one medical emergency, or one disability to put them over the edge.
It was called the ownership society, but it was really an attempt at re-establishing feudalism. The wealthy and connected own everything, and the rest are just one setback away from finding themselves owned.
How can a ceo swindle so many, do so much shady unethical stuff, look the other way so often, and create billions in losses for his company, and then walk away with millions and millions of dollars in rewards?
That's the real walkaway -- that's the real lack of commitment you should be shaking your finger at, Crowman. The plebs are just learning to play their own game back at them.
I would say a not inconsiderable factor would be the predatory practices on the mortgage lender's parts. This attitude may well fuel people's feelings that they were taken advantage of, and when something is seen as fundamentally unfair, walking away from it is seen as one of several reasonable responses to it.
Shorter version: if you're an ass, those around you will be too. Maybe the loan companies are simply reaping what they've sown: a bad attitude.
It is completely unfair, 20years, to attack Crowman for what he did not say.
You quote: By eliminating the need to make a significant effort to purchase a home, you include in the population of borrowers those who never would have purchased a home because they lacked the commitment to save for a downpayment. Certainly such borrowers are more likely to default.
Are you denying that "...includ(ed) in the population (are) those who would never have purchased a home because they lacked the commitment to save for a downpayment?"
The hard fact is that if one is unable (for whatever reason) to save enough for a down payment, they are less likely to be able to continue making payments over time.
You chose to interpret Crowman's remarks as a personal attack or as a judgment rendered on people who are having trouble with their loans. then you go out of your way to explain how responsible you were (live frugally, saved five grand and avoided ARM).
I have seen very little criticism on this thread for the poor suckers who were conned into one of these horrible deals - it has mostly been directed at the irresponsible (or even criminal) lenders.
Let's face it - anyone who buys a nothing down home with an ARM at a teaser rate, in the best of cases, is trusting their economic life to the vagueries of the interest rate market - whether they are aware of it or not.
It is (pick one) ignorant, stupid or insane to build a house at the water's edge at low tide. Getting an ARM when interest rates are at historic lows is no smarter. That is harsh reality. One can empathize with the sad individuals who - for one reason or another - got trapped into, misled into, lied into these mortgages, but it isn't appropriate to give em a genius award.
As far as the banks are concerned, they knew better and they asked for it. As far as the investors are concerned, they were conned too. We are just beginning to see the fallout as far as pension funds are concerned - more innocents harmed. The rating agencies? Incompetent at best, usless and criminal at worst.
I feel very out of place. In B-school we learned about the risk-reward curve. More reward, more risk. People invest in RE for the higher profits but now they want to be excused from the risks. Yes, corporations have done the same, but since when is that a justification? I have kids who want to go on trips "because everyone else is" and that's a short conversation.
I do agree with posters who went against the flow and anachronistically chose a fixed mortgage; it's all I've ever considered. If I can't pay the reset rate now, how do I plan to pay it later? Well the value if the house will go up, you say? Who is going to be able to afford to buy it, if the only way I can afford it now is to start at a 2% rate, and the rate goes up and the price goes up, too? And if no one can afford the higher price, I won't be able to sell, will I?
Buy a house you can afford at a fixed rate and live in it. Anyting else seems crazy.
94121 writes:
I feel very out of place. In B-school we learned about the risk-reward curve.
I very strongly doubt that a significant percentage of these borrowers attended "B-school." Some of em can barely balance a checkbook. These loans were designed by very smart people to suck in the unwary.
I regularly watch business news. At the height of the home buying frenzy, I never - not one time - heard one of the "financial experts" caution that the historically low rates could only go up, that rising interest rates would mean drastic increases in mortgage payments, that if housing prices fell, one could wind up owing substantially more than the house was worth. That interest only, 110% financing and other exotic packages were lousy ideas.
Instead I heard that the low rates were an "amazing, once-in-a-lifetime opportunity," that "values" were rising so fast that hesitation could result in being priced out of the market. I heard of the amazing profits home sellers and flippers were making. I heard that resets occurred after a rise in income and that home prices always rise.
Discerning a borrower's ability to pay is the sole responsibility of the lender. Sometimes - even with the best of standards things go wrong. With the collapse of housing prices in some areas, layoffs, the absence of universal health care - things are gonna go wrong sometimes anyway. This is greatly compounded by outright predatory and criminal lending.
20 years says, "the rest are just one setback away from finding themselves owned."
Don't get me wrong. Economic disparity in the US is appalling and even Greenspan admits that the "bimodal distribution" of income here is a problem. However, there are far too many people who overextended for the McMansion, junk to fill the McMansion, toys for big boys, toys for big girls, pseudo status cars, etc. who, if prudent, would not be "one setback away."
The real problem is reflected in Greenspan's bimodal distribution, where real income in the lowest percentiles has decreased for the past decade or more (so much for the trickle-down theory) and grown exponentially in the highest percentiles.
Nothing stopped the Xbox 360, the HD DVDs, the eating out, the driving to unnecessary shopping trips 50+ miles away. Turn the heat down. Move in with the relatives.
I am shocked... actually shocked that anyone is surprized that people are walking away. When an investment is down 100K and you only put in 5K, the correct decision is to walk away if the investment is expected to continue to drop. You write off your loss as a sunk cost and walk away.
Uneasy:
Nope.
Yes, but Crowman didn't say it that way, did he?
That interpretation did not seem unreasonable. Anybody who talks about "natural selection" in the same breath as "population" and negative traits is on thin ice with me.
My explanation was intended to demonstrat that there are people who never would have purchased a home who did not lack commitment to save. What irked me was what seemed to be an assumption that a lack of a certain sized downpayment indicated a lack of a commitment to save. And if that is what was there, yes, I do take that personal.
I also want to ask you what kind of a downpayment do you think will create commitment? Someone mentioned 20% down. Um, lessee... on those California houses -- those modest ranches that were priced at $300k plus, that'd be 60 or 70 grand. For my house that would've been 34 grand.
Did you ever consider how few people in this country have that much in savings? How few even save anything? Do you really honestly believe it's because so most of us lack commitment to saving -- because we're all foolish materialist gotta-have consumers?
That long story of mine was to show that even when people try to do this, people with decent jobs, it is still impossible to save $35k. We were lucky to save 20% of that magical 20%.
So go back to that 20% standard and who, exactly, gets to live in their own home? And when, when 7 -10 years isn't enough time to save that much.
Most of America are going to need better paying jobs to save what amounts to a year or more of their before-expenses take-home (and that's from a very good middle class income). Forgetaboutit if you get laid off or have a medical emergency.
I tried to suggest that may be why a big chunk of america can't really afford their homes.
And no, Lawn grass, I don't think the blame can be laid exclusively on Xbox 360, the HD DVDs, the eating out, etc.
You have a point that many here do not criticize the suckers who were conned, but surely you have noticed that that is not typical. And so I jumped when I thought I smelled a whiff of it.
My apologies to Crowman if I took that the wrong way.
Oh, and even with 20% down, if your mortgage payment goes way up you may simply not have the money to pay no matter what. And it may be that coupled with a large decrease in home value -- so you now owe way more than the house it worth -- it may STILL make sense to some to walkaway.
How can one pay what one doesn't have? You lose your 20% -- and your house. Commitment in the form more money down didn't help one bit.
First thing I want to say, 20years, is that if you have read all my comments from the beginning of the thread, you know that we're essentially on the same side. I only responded to you because I happened to agree with Crowman and I felt that you had unfairly characterized his remarks.
Your point about saving enough to plop 20% down on a 300k home is well taken. Hard for most folks to do - especially before they're old and gray. Still, even at 5% fixed interest alone on the 240k balance is $12,000 a year. Add taxes, upkeep and principal and that house is gonna be hard for most people to pay for. Now imagine that same house - but with nothing down and an ARM reset to 10%. Now the interest alone is 30k a year. Three years of that extra payment - $18,000 a year -(with interest)would have almost covered the down payment. If they can't do one, they won't be able to do the other.
Another point: What would that 300k home have cost if several people who couldn't afford to pay for it in the first place hadn't been enabled to bid on it?
The surge in home prices was entirely caused by the flood of cash in the hot little hands of people who could never afford to pay it back. Some buyer/borrowers borrowed 110% and actually got cash back at closing! They were competing in the market with you and driving prices up beyond the reach of the middle class in many areas. People were convinced that they could count on future pay increases to make the payments - not to mention perpetual appreciation and the availability of easy credit to reset.
Without that flood of easy credit and unprepared buyers, houses would have stayed more reasonably priced.
If you paid 20% down and got an ARM for the low price instead of a fixed rate, you were gambling - and making a very bad bet. Gamblers often lose.
I read Crowman's comment differently than you do "There is also probably an element of natural selection at work here. By eliminating the need to make a significant effort to purchase a home, you include in the population of borrowers those who never would have purchased a home because they lacked the commitment to save for a downpayment. Certainly such borrowers are more likely to default."
A "population of borrowers" is not the same as the population.
I think we would agree that 99% of this problem was caused by irresponsible lenders. The fact is, responsible lenders have always had some pretty basic requirements.
Sufficient income and a significant down payment are the traditional requirements - along with mortgage insurance. Lending is a pretty conservative profession in sane circumstances. I am open to the notion that other means of qualifying buyers who will stick are concievable - but I am unaware of any such formula.