Yesterday's post Emails from Housing Hypocrites about Ethics generated an unusually high number of responses. Let's take a look at some of them.
Mike From NYC Writes:
Calculated Risk has a post titled CRE: Office Building Owners Walk Away"Little Joe" on Silicon Investor writes:
In this story, the building owners are "transferring their ownership interest to their financiers". Well, that's one way of putting it!
One thing I have noticed, and you mentioned a similar thing to me in an email not too long ago, is that when a company makes a business decision to pay or not, for a mortgage or other business deal, no one makes a big moral issue out of it.
But when individuals do it, it's like they are breaking an eleventh commandment or something, like they are exposing some huge moral failing.
I'm just really sick of everyone making a huge moral case against people who are in most cases already in trouble, and those same critics never show up to tar corporate defaulters with the same brush.
Mike From NYC
This is how I see it.Mark Writes:
It was the bank's outright fraud that brought the country to its knees and in reality caused these properties to go upside down.
The values would never have gotten as high as they did but for the banks' fraud.
The consumers debt was significantly increased because inflated prices were paid for the home. We would not have this precipitous drop without the banks' fraud.
Then the banks get bailed out and some guy or gal who bought a home paid 20% down took payments they could afford finds him/her self paying for a home that is worth less than they paid for it.
The government has made no attempt whatsoever to bring the banksters to justice. They are rewarded with bail outs and bonuses.
So when you sum up:
Bank Fraud causes the problem.
Bank gets bailed out CEO's get big bonuses.
Consumer got to pay an inflated value for their home and watch its value decline to less than the mortgage balance.
To add insult to injury consumers other assets dropped.
To add further insult to injury consumer has a taxpayer gets to pay for the mess.
Bankers don't get prosecuted.
When I put that together I think balance of justice is on the side of the consumer who bailed out.
While I agree with the majority of your assertions in your recent post "Email from Housing Hypocrites about Ethics", I find myself disagreeing with your implication that it is somehow immoral to "dump garbage on someone else at an inflated value." I don't understand how it could be immoral to sell one's property at any price the market will bear. This is, of course, assuming that the seller did not commit any sort of fraud in his attempts to maximize the selling price of his property.In a similar fashion Rob Writes:
I do, however, agree that HH's accusations of hypocrisy on your part are unfounded and inappropriate.
Hi Mish:Reply to Mark and Rob
Why is this person selling his home when real estate was overvalued amoral?
I sold my MSFT position because i thought the shares had run way too far into
the earnings report and considering the economic environment I assumed earnings
might not be strong. I obviously sold this MSFF stock to a buyer who took losses the following day.
I don't see what he did as amoral... selling his home because it was overvalued?
What "HH" did was arguably amoral by his standards not mine. He is the one who brought ethics into the equation not me.
I am quite perplexed how people could possibly misconstrue my application of HH's ethics against his own position for me personally thinking HH did something wrong by selling.
For the record, I have no qualms about people, including" HH", who sell assets for what they can get for them as long as there is no misrepresentation of those assets. Nor do I have a problem with someone executing their legal right to walk away and pay the prescribed penalties. Both are free-market concepts.
However, I do have a problem with HH's "Holier Than Thou" attitude based on his own misguided sense of ethics, as well as his application of those ethics where it should not apply at all.
Most readers understood the difference, Rob and Mark (and several others too) missed the boat. Here are responses from two people that understand the ethics issue for what it really is.
The original transaction was a legal event between two consenting parties."HD" Hits The Nail On The Head:
What is unethical is for the government to bail out the party overpaying for the house (either directly or indirectly by bailing out the bank that suffers the loan loss) and then imposing the cost of that bailout (via taxation, inflation or the like) on me (not a party to the original transaction) and my children.
The bailout (and its ultimate cost to me and my children) is an involuntary event imposed on me by a government gone far beyond its constitutional limits of authority.
It's "HD" here, your friendly neighborhood anonymous East Bay realtor/lawyer.
As both a lawyer and real estate broker, I always get a kick out of some people arguing that other people should commit financial hari-kari by continuing to pay a mortgage that, even if they could pay it, would swallow all their money, and leave them totally without any savings during their old age.
Mortgages are not ethical documents, they are legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower two options: pay on time and in full, and keep paper title to the house, and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or, stop making payments, and hand the keys back to the lender.
Morality and ethics don't even enter the equation. Either option is perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the four corners of the pages of the mortgage contract.
Remember, it was lenders who totally abandoned traditional prudent underwriting standards. Moreover, they were fully aware of the contracts they signed and that borrowers could indeed walk away. So whose fault is it, when borrowers do walk away?
For borrowers putting 0% down at the peak, there are very few cases where it makes sense for the borrower to continue to pay.
Indeed, the ethical thing to do, is for each borrower who is underwater to look without blinders at their family's financial situation, not just now, but over the long term.
If paying off a mortgage for $750,000 on a house now worth $450,000 at best, would result in no money left over for the kids' education or the parents retirement income and healthcare needs, then the moral thing to do is bite the bullet now, take the hit to one's credit record, find housing that can be had for no more than 30% of the family's income (which could very well be the foreclosed house, rented to them affordably, and then sold off by the FDIC to an investor at a reasonable capitalization rate), and get frugal everywhere else in the household budget, so that they can build some savings for the time in their lives when regular work might not be possible.
In regards to individual homeowners, if there is an ethics issue at all it would be for the homeowners to make sure their families are protected from harm rather than accepting financial ruin for themselves and their family because of someone else's misguided sense of ethics.
In regards to financial institutions, the free-market should be our guiding light, not government manipulation, intervention, and taxpayer sponsored bailouts.
In regards to both, my position is and has been consistent.
Bear in mind I have no problem with someone who for sake of their own ethics, refuses to walk away from a mortgage. The problem arises when some self-appointed, anti-free-market ethics-gods think their sense of ethics is the only way to do business.
Here is one more email for the road.
The "Earl of Huntingdon" Writes:
Dear Mish:Thanks for sharing "EH".
I want to respond to the “Emails from Housing Hypocrites about Ethics” article and your retort.
I made a decision to move to the Chicago suburbs in late 2007. Since my ex-wife was getting married and moving there, I made this decision to reduce the distance between parents for our children; we share joint custody, along with 50-50 placement, and it would be unfair to reduce their time with either parent. I found a unit that had depreciated 30% in value at the time. I was assured by my realtor and my lender that the worst-case predictions were calling for perhaps a 5-10% further decline; but, since I was building those assumptions into my offering price and willing to hold onto the property for more than 5 years, I would have no problem getting back to break-even in due time. Since I took ownership, the property value has plummeted another 33%.
I am quite embarrassed and ashamed with my situation. I bought the unit with little money down, but the unit had ‘equity’ as the appraisal indicated $15K of value more than what I offered. I realized with my salary, that I would struggle financially for a certain amount of time; I believed the duration would have been about 12-15 months to return to a point where I didn’t have to worry as much. I assumed that as time marched on, a raise and bonus here-and-there along with trimming of expenses would allow for limited opportunities to see a reasonably-priced local concert, a night out and activities with the children. I take full responsibility for putting myself in a situation where, although I could afford the home, I would have to make some sacrifices; heck, I was raised in worse conditions. This was something I needed to do for the sake of raising well-adjusted children. Besides, the Fed assured the American public that the banking system was sound and the financial future was stable, although the future was a bit unclear.
I also accept full responsibility for not accounting for unplanned expenses. Those expenses quickly started to pile up; far more than what could be imagined.
I’m now in a position where I’ve cut back on groceries (significantly), eliminated cable tv and eliminated external activities unless they’re free and close to home. I know there are others who are in worse shape. I’ve struggled with a decision to call ‘You Walk Away;’ I accept my role in this mess and that’s what is preventing me from acting.
Quite frankly, I don’t know what I’m going to do with my financial situation just yet. I may decide to walk away knowing that a similar sized unit can be rented for half of what I pay in combined mortgage payments and condo association fees (an opportunity that did not exist when I bought); if you do the math, renting will allow me to pay back my other bills and return to a better financial condition in a much, much shorter time. Then again, I may decide to fight my way through. Perhaps, I could find a part-time job to help make ends meet. Either way, it will be my decision and I will deal with the consequences.
There are so many wrongs in this situation. It was wrong for investors, speculators and buyers to have driven prices so high. It was wrong for Realtors and agents to have advised their clients to proceed with the lofty purchase prices. It was wrong for lenders to approve the values of these properties. It was wrong for the government not to act to help stem the wild ride in the housing market. It was wrong for me to believe that owning property is always to be viewed as an investment. And, it was wrong for me to have followed the bad investment available in the media and not to have been aware of the economic advice that warned of a changing financial climate.
If I stay and struggle through my situation, I will not do so quietly. Overall, we (Americans) still lack accountability. We continue to blame those at the end of the chain instead of those who initiated and contributed the greatest to the demise. If I stay, I will lead the local voice in demanding that those in a position of power and control be held accountable for their actions. I have questions that need to be answered. Why do we continue to allow the likes of Ken Lewis to remain in power at the heart of the financial system? Why do we not demand that the executives and managers at each of the offending financial institutions, investment firms and insurance firms return their pay increases and bonuses from the past 8 years? Why do we not demand that the banks, investment firms and insurance companies not only reimburse the TARP money but all of the profits they made over the past 8 years (along with the pay and bonuses)? Yes, I realize they money is gone, but they need to reimburse us for all the wealth they took. And finally, why do we not demand that the Federal Reserve be abolished or greatly reduced in function? Somebody, please do something other than maintain the status quo and allow the Sheriffs of Nottingham to continue to pillage this country.
EH (Earl of Huntingdon)
My personal advice to "EH" is to run, not simply walk, away from this mess.
That said, my take is that whatever "EH" does is correct. He is the one who has to live with his decision. Clearly "EH" made some bad choices and he and his family are suffering for it. No one should be judging "EH" for what he does in his situation at this point going forward.
History as to how and why "EH" is in this mess does not really matter. Being underwater in a mortgage is a sunken cost, and sunken costs are irrelevant in deciding how to proceed. The term "Don't throw good money after bad applies."
However, if ethics prevent "EH" from walking away, who am I to judge? If "EH" does walk away, who is "HH" to judge? The problem is one of us is judging (on the basis of ethics) and one of us is not judging at all (for the simple reason ethics has no bearing).
At the heart of this issue are two irrefutable facts:
1) "Mortgages are not ethical documents, they are legal contracts." Those contracts stipulate the penalties for breakage. Both parties signed and agreed to the penalties for breakage. If one side did not set the penalty high enough, that party and that party alone is responsible for the consequences.
2) In a free market system, failed institutions should be resolved in bankruptcy court not via taxpayer bailouts mandated by government bureaucrats. Furthermore, there is no legal or moral justification for the Fed, Congress, or the Treasury to be picking winners and losers at taxpayer expense. Repetitive propping up of private institutions is not only a moral hazard that invites more reckless behavior, it is theft perpetrated against US citizens via cheapening of the US dollar (or tax hikes), for the sole benefit of those hand-picked private institutions.
Those like "HH", blaming people like "EH" have their fingers pointed in the wrong direction. The fingers ought to be pointed at the Fed, Congress, the Treasury, President Bush, and President Obama.
Good luck to you "EH", whatever you decide. Just make sure the decision you make is based on how you feel, not how someone else thinks you should feel.
Mike "Mish" Shedlock
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