Comments on: The Paradox of Strategic Defaults

By: Siddhi

Siddhi — Wed, 01 Jul 2009 01:21:33 +0000

Yeah, mortgage was about 40K for 36 months.

By: Matchoo09

Matchoo09 — Tue, 30 Jun 2009 21:57:12 +0000

We’re talking about strategic defaults, not those caused by true inability to pay. Please read the post and comments more carefully before spouting off.

By: Paul

Paul — Tue, 30 Jun 2009 21:18:18 +0000

In looking at the data, I think we should consider normal patterns for home ownership. People will sell their house when they move, often for employment related reasons. These things take time to develop, so we could be severely underestimating the amount of strategic foreclosure. The marginal cost of holding onto a property which is relatively low since you realize the vast majority of the loss upon the sale of the home. If people are moving anyway for job reasons, the social and transition costs diminish and there would be reason to default in anticipation of the move.

With prices likely to remain depressed, I would expect elevated foreclosures to remain high. It takes a while to dig your way out of large negative equity.

By: Paul

Paul — Tue, 30 Jun 2009 21:00:42 +0000

What’s the honor in a starving family? If you can’t pay for the mortgage, you can’t pay for the mortgage. You give the house to the bank and you rent something you can afford.

If you are unemployed, the virtue of humility is as important as the virtue of honor.

By: Paul

Paul — Tue, 30 Jun 2009 20:56:50 +0000

I assume you also paid mortgage for those 36 months. That 36k is approximately equivalent to your mortgage payments, so I’m thinking you really did lose the whole 4k

By: Min

Min — Tue, 30 Jun 2009 18:18:48 +0000

I brought up the specter of the sociopath to emphasize that it’s not really a question of rationality.

As anon pointed out, walking away from the house is an option in the contract, and the lender cannot force payment under the original terms. Neither walking away nor holding someone to their contract, even to their detriment, is sociopathic, per se. Sociopaths are not just selfish, they are dishonest and without conscience.

By: c smith

c smith — Tue, 30 Jun 2009 17:06:13 +0000

As a lender, is it less “sociopathic” to make someone perform on a contract (which is obviously detrimental to that person) than, as a borrower, walking away from that contract?

By: Matchoo09

Matchoo09 — Tue, 30 Jun 2009 14:01:36 +0000

This is rationalization at its worst. The name of the “f*&%ing mortgage contract” you’re discussing is the “Promissory Note.” It is, at its core, a promise to pay back the loan. The fact that the lender has contractual rights in the event that you don’t pay the loan back was never intended to be a put option on the value of the house, and you know it.

I’m not talking about what is legal. I’m talking about what’s right. Too many people now can’t even tell the difference.

Personal integrity doesn’t rely on the integrity of counterparties. In any event, in the case of a mortgage, the lender essentially lived up to their end of the deal by providing the cash in the first place.

By: Min

Min — Tue, 30 Jun 2009 06:24:36 +0000

Bayard: “The last line is what really makes economics, and especially forecasting, so treacherous: The broad public cannot be counted on to make (mathematically) rational decisions.”

There is a group of people who rationally calculate what’s in it for them in all aspects of life: sociopaths. Perhaps economic forecasting would work out better if we only had more sociopaths in society. ;)

By: Min

Min — Tue, 30 Jun 2009 06:13:51 +0000

StatsGuy: “I think more Americans would be sympathetic to this argument if the corporation (e.g. the legal corpus) was held to this same sense of honor and integrity as individuals.”

The corporation is designed on purpose to have limited liability and, hence, limited responsibility. It is a powerful, amoral entity, granted the full rights of personhood, for which a fine is just the cost of doing business.

“In other words, in contracting with a large corporation, most Americans are willing to show that company exactly as much honor as it shows to them.”

I. e., zip.

“Which is precisely as much honor as is in their legal self-interest to display. If you want people to behave ethically, then stop supporting a system which encourages people to behave in their narrow legal self-interest.”

We do need to rethink the idea of the corporation.

By: orlando

orlando — Tue, 30 Jun 2009 04:12:32 +0000

It is not ‘just’ economic rationality; I feel I made a promise to the bank to pay x per month for n months; and it would be reneging on my promise; as long as I can pay (especially since I have a fixed-rate, and still have my job :) I’ll keep paying my mortgage, regardless

By: Bayard

Bayard — Tue, 30 Jun 2009 02:19:23 +0000

The last line is what really makes economics, and especially forecasting, so treacherous: The broad public cannot be counted on to make (mathematically) rational decisions. Come on, James, you know this. Even at the level of a well informed Congress, rational decisions are rarely made. This is why, although I have questions about him, I believe that the President is the single most rational, pragmatic politician that we have seen in some time.

By: anon

anon — Mon, 29 Jun 2009 20:56:39 +0000

What a ridiculously tired line of reasoning- it always seems to come up in a discussion of strategic defaults, and it is always wrong.

My suggestion: read a f*&%ing mortgage contract sometime before moralizing. Any such contract will clearly state that you have two options: 1) Continue making payments and continue to occupy the house. 2) Stop making payments and return the house to the lender.

In case you haven’t gotten it yet: defaulting and returning the property is part of the damn contract…

End of rant.

By: Jeff in Indy

Jeff in Indy — Mon, 29 Jun 2009 20:41:43 +0000

i, too, am not advocating “jingle mail;” however, when we the people forgave (more like gave) $17.5B (yes, that’s BILLION) of Chrysler’s obligation, i suspect some folks equate walking to getting their piece of the action. even if we have to pay for the rest of our lives. . .

By: StatsGuy

StatsGuy — Mon, 29 Jun 2009 19:31:35 +0000

One should also take into account the option value of holding onto the home at a possibly low 30 year interest rate.