Home to House

Excellent article by John Leland in the Times that runs with the idea that we have shifted from the idea of home (emotional/moral commitment) to house (investment/legal).

Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.... When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”

“It’s not a moral decision,” Mr. Maddux (founder of "You Walk Away") said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”

This shift in thinking is going to do a considerable amount of damage to communities nation-wide. It will also transform the relationship of the American middle class to debt across an entire range of products (requiring a shift to legal remedies, as in tighter bankruptcy laws, rather than relying on moral commitments). Too bad this potentially existential damage was inflicted for just a relatively low dollar "greater fool" financial scam...

This greater fool scam: Junk loans (essentially, mortgage-based derivatives) attracted consumers by the boatload because of the American "dream" to own a home, the promise of upward mobility, and their attractive teaser rates. Tens of millions responded. In turn, the historical moral commitments of homeowners to pay their mortgages provided the low foreclosure rate data that allowed junk loans to gain a higher rating than they deserved, which in turn allowed them to be packaged/sold as securitized products to ignorant banks in search of low risk investments that fit their charter.

Comments

[Boltonian]

John, I would agree with the point I think you make in that a shift of thinking has enabled folks to take a "just walk away" mentality, but I think it is symptomatic of a larger malaise that has been festering and growing in America for a long time.

I would ask though - where on a continuum of moral responsibility would you place the following groups, in regards to the subprime debacle:
- Homeowners / loan recipients
- small, mid, and large sized mortgage brokers who hustled the loans to consumers,
- folks like Bear Stearns who packed the mortgage debts into CDO's,
- the bond insurers who guaranteed / insured the CDO's,
- banks who bought the CDO's and other mortgage derivatives and financial instruments
- any regulatory agencies who might have been able to detect that this house of cards was in the process of being built - as well as detecting the imminent collapse

Regards,

[John Robb]

None. It was the global marketplace at work. It turns everything into an cost/risk calculation, devoid of moral/ethical/emotional content. The market enabled an arbitrage opportunity -- the delta between the "historical moral/ethical/emotional relationship between and owner and home" and the market reality of the "cost/risk relationship between investor and house." This delta was exploited and will soon be completely eradicated. How can we blame the market for doing what markets do, if we hold it to be the best way to run our society?

[djysrv]

Sorry, but there isn't anything new here. When the bottom fell out of the oil & gas market in the rockies in the late '70s, people who had mortgages on condos in Colorado tossed the keys on coffee table and walked out the door. Today's USAToday tells another grim tale of people paying credit cards before mortgages because it's their "cash flow." There is no moral choice, just people at the end of their rope. If you want something or someone to blame take a look at wage stagnation relative to the cost of living since the Reagan era and there's your answer.

[gmoke]

I remember reading that about half the population moves within every four or five years a decade and more ago. This transitory environment is another driver for the "home" to "house" transition. I would say that another driver has been the glamorization of real estate trading on a number of cable TV networks and shows. At almost any hour of day or night, you can find a house flipping TV show to tell you how to make the most out of your "home" investment.

[JohnG]

Hmmm. As you describe it, Isn't the "greater fool financial scam" a great example of the fallacy of composition?

[D.e.MacH]

People always tend to forget the rating agencies such as Standard & Poor's or Moody's in this whole mess called the subprime crisis.
All the CDO's were rated and their ratings were high, like A or even better in most cases. Many banks would not have bought as many CDO's as they did or even any at all if those things had had the ratings they have now. After various rating updates CDO's lost a huge percentage of their value.
Never the less one should not forget that all those derivates banks are trading in are so complex today it is simply not possible to understand all the risks attached. And as the subprime crisis shows the whole market was unable to see the risks in CDO's.