Jerks Like These

My personal take on the collapse of the housing sector of our economy is that we have wasted way too much time trying to place blame on our own perceived bogeymen.  It's human nature: when something goes wrong the first thing we want to do is figure out whose fault it is and then yell for them to be punished severely. 

The problem with assigning blame in the housing meltdown is that there are so many people and institutions to blame, and just about everybody is picking their own bad guy based on their own preconceptions. If you're somebody who sees people who use social services as leeches on the rest of us then you're quite likely to lay the blame at all the people who took out loans they couldn't pay, and you may not even consider that when people took out those loans they could pay them but then lost a job and the situation changed.  If you're somebody who sees the world through a "the Man is out to screw all of us" lens then you're likely to lay the blame at the feet of all the corrupt banksters who are funding their corporate jets by defrauding regular ol' working slobs like you and me.  If you're someone who thinks all government is bad then you're likely to blame the entire fiasco on Fannie and Freddie. Funny thing is, you're all right.

So it would seem that assigning blame doesn't help us much because the entire system has been corrupted, but without at least trying to hold people accountable we set ourselves up to do this all over again. We need to make sure that when we do find people behaving badly that we do whatever we can to make sure they don't do it again and that we let the rest of society know that if they behave in the same way then truly painful consequences await them.  For this reason I don't think it's enough to reach financial settlements with institutions that packaged toxic loans and sold them as if they weren't the crap they really were; I think you have to go after the people who made those decisions and punish them individually.  Of course it will be difficult, but until you hit people where they live you aren't going to do much to prevent it from happening again. 

Probably the biggest mistake we could make would be treating this as a purely legal issue, because until we instill ethical and moral societal norms we will have done nothing to deal with our systemic problems. People who behave ethically do not make loans to people they are almost certain will eventually default, nor do ethical people walk away from a mortgage when their bet on the property value doesn't pan out.  That's why I find people like this guy profiled in today's Wall Street Journal to be our society's true jerks:

When Chris Hanson bought his $875,000 luxury condominium in Scottsdale, Ariz., four years ago, he could afford the $90,000 down payment.

He said he had no difficulty paying the $5,000 monthly mortgage on the three-bedroom unit, which has floor-to-ceiling windows and views of Camelback Mountain. The condo is in a gated complex with a gym and pool.

And, true to his word, he didn't miss a single payment—until last month. Concluding that the home, now worth about half of what he paid, won't recover its value for at least 10 years, Mr. Hanson decided to walk away.

"It's a no-brainer once you do the math," said the 27-year-old real-estate investor.

He plans to let the lender foreclose on the home and rent an even nicer unit in either the same complex or one nearby, which he figures will cost less than half of his monthly mortgage payment…

Mr. Hanson runs an investment firm that buys up foreclosed properties and resells them. He said the company buys two to three homes a week at prices ranging from $15,000 to $1 million; they've recently expanded into distressed multifamily homes. He said he realized months ago his home would take years to recover its value but decided only six weeks ago to stop making payments.

He worried that wrecking his sterling 800 credit score would make it harder to run his business. But, in the end, he said he decided it was worth the risk.

To make my point, Mr. Hanson should have to worry about more than his credit score as a consequence of his behavior.  Part of me would love to see him go to jail, but more than anything I'd like to live in a society that would make his public shame so great that he'd never even consider walking away. Of course as long as man has inhabited the Earth we've had bad apples, but somehow I think our society has enabled far more of them than is even remotely acceptable.

3 thoughts on “Jerks Like These

  1. Curt

    This guy has paid in $330,000 that he will now get nothing for. I think there are bigger jerks out there in the banks and the government. There is now a racket in place to make some banks a fortune by getting PAID by the government to gobble up the toxic loans. I actually see this guys move as a business decision to cut his losses and move on. The other down side, besides losing the 330K, is the destruction of his credit score.

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  2. Jon Lowder

    I still think its unethical and I have a real hard time with people breaking contractual agreements simply because they can.  I look at it this way: if the real estate market hadnt crashed and he had realized a $330,000 gain on the property do you think he would have called the mortgage company and said Hey, heres your cut?  Or put another way wouldnt it be good business for the mortgage company to renegotiate the terms and say, When we loaned you this money we did it under the assumption that the property was worth $875,000, but now that its worth $1,000,000 that will be the amount you owe us.  Of course thats ridiculous, but I dont see any difference between that action and what this guys doing. When he signed the mortgage he made a deal with the bank: you give me this much money now and in return I agree to pay you that much money over the next ___ years. I seriously doubt that the terms, unless of course I made a bad decision on this property and I dont feel like paying you back because its not worth what I thought it was.  To me its not about good or bad business, its about things like honor and ethics and sticking to your word.  What the banks did could be seen as good business decisions, but it doesnt make their actions right.
    Of course if this guy had lost his job and literally didnt have the wherewithal to pay Id be more sympathetic, but hes literally walking away from it because he doesnt feel like paying what he owes.  I just cant look past that.

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  3. Jim Caserta

    This guy is acting like a corporation. Corporations that we idolize and attach special legal privilege to. As unsavory as that guy’s decision might seem, it’s the way business is done. Think about where that guy’s down payment came from. The banks knew he was a RE investor, and they loaned him the money. The problem was that they completely abandoned any due diligence as to the quality of the collateral backing his loan.
    I know of a builder foreclosure in the area. One among many, but it is illustrative of how things are different here because the final sale price was more than the original amount loaned to the builder. The bank lost some money in unpaid interest during the period the loan was delinquent, but it will see nowhere near the loss that this guy’s lender will see. The problem is that the bank assumed that the price of his home would continue to rise at high single-digit or double-digit rates. That was the assumption built into the most toxic mortgage backed securities that inflated the housing bubble. Home prices never saw double-digit per-year appreciation here, so it was never baked into mortgage pricing. While this guy is making what can be seen as an unacceptable decision, the decision that should have seemed unacceptable to us was the decision to lend out at or near (or even greater than with the pay-option loans that killed Wachovia via its Golden West acquisition) 100% financing.
    Businesses make decisions like this guy all the time, and business still goes on. It was the crowing about there being no risk and how this time was different that really caused the problem.

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