I am quite undecided about this turn of events in the housing market. Banks’ mail jingles as borrowers walk is the headline on a commentary by James Saft. For anyone who hasn’t come across the phrase “jingle mail” yet, it describes the phenomenon of homeowners walking away from a home because the debt owed is greater than its current value—and so, they mail the keys to the lender. The unmistakable signal jingle mail sends is, “I’m done here. The house is yours.”—thus breaking the mortgage contract. Is that wrong? I’ve seen a fair bit of commentary arguing both ways; but none of it has been from a pro-freedom perspective.
The initial impulse would be, I think, to say that yes, it is wrong: just because a contract becomes inconvenient or painful to honor doesn’t mean it can be discarded like soiled toilet paper. However, there’s a good reason why so many subprime, Alt–A, and other mortgages have become known as “liars’ loans”—both parties exhibited significantly less truthiness than used to be the case when seeking or making a loan of such magnitude. Encouraged by Bush’s rhetoric of an “ownership society” and interest rates that were (artificially?) low, many people who previously were viewed as too high-risk to get a mortgage loan were able to do just that. The fact that some of these individuals weren’t called on the gross exaggeration of their assets should have been a warning, but for many who had previously been unable to attain the “American dream” of home ownership, having the opportunity to do so at last possibly outweighed whatever good judgment might have been present. And I can’t begin to explain why a bank or other lending institution would either not do their due diligence on these applications, or not pay attention to the warning flags that surfaced if it was done. One explanation I’ve encountered is that profits from fees peppered throughout the mortgage process were so good that loan repayment became a secondary issue. (Similarly, I expect that visions of refinancing fees danced through the lenders’ heads too.) If accurate, that should have been a telling signal of mania rather than a healthy market, but with everything looking so good, who paid attention?
Well, the mania has ended and the mess is upon us all, and more of us are paying attention. Saft summarizes a few of the issues:
While the law varies from state to state, in many parts of the United States mortgage lenders cannot go after defaulting borrowers' other assets. And even where they can, few lenders take the expensive and low-yielding option of chasing down borrowers who walk away from loans.
The scale of the potential problem is huge.
Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first mortgage holders.
The impact of a new wave of defaults will also be potentially important. Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.
While few might shed tears for banks, this means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.
To give a flavor of the impact, Zandi has estimated that every foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent.
Some scary numbers in there ... but realistically, what else should one expect from a business sector that was allowed—some would say “encouraged”—by federal policies to balloon? Sure, it hurts to see so much human productivity go to waste (or worse, be destroyed), but the fact is that many of these institutions were not accurately portraying the terms of the mortgage loan to prospective home buyers—I daresay it was clear in a number of cases that the customer was barely able to make the teaser-rate payments (that did its job too well, one might say). So what would happen to those home “owners” when the interest rates reset higher, as many did? We’re seeing the answer to that, in waves of foreclosures and bankruptcies. And now that interest rates have dropped, some lending institutions are doing their customers the dubious “service” of allowing them to refinance now, rather than wait for the reset to happen. Why? Because the institution gets immediate cash in the form of refinance fees, and it’s a good bet that the refinance interest rate will be higher than the reset rate. How’s that for servi(ci)ng the customer?
As an individual who considers herself to have strong moral principles, I don’t like to see contracts abandoned. However, as an anarchist and individualist, I see good reasons to consider at least some of these contracts null and void from their inception. The initiation of force and fraud is considered by libertarians to be wrong. I don’t know that anyone could sift through all these loans and authoritatively determine how many were actually fraudulent: but it seems to me that in a larger context, the housing bubble was itself a fraud that sucked in many individuals. Some didn’t know better; others did but their greed got the better of them, perhaps. The federal government and the banking/finance industry created the environment to allow this to happen, not bothering to think about the consequences when the market turned. In their hubris, many didn’t believe the market would turn!
How did a necessity like shelter become such an expensive racket, anyway? When was it first decided that Farmer Paul couldn’t simply sell pieces of his 180 acres to people who wanted their own plots to do with as they wanted? Why does it take the black-box magic of a “developer” to buy “worthless” farm land, do little to substantially improve that land, and turn around and sell parcels of it for astonishing sums of money? (Yes, sometimes developers put in infrastructure, such as hooking up to water, sewer, and power services, but it can be argued whether those are genuine improvements. Besides, why assume every potential buyer wants to suckle on the state’s infrastructure teats?) Is a McMansion really so much better at the job of sheltering a family than a cozy, family-built log cabin?
There’s no escaping the economic fallout of the housing and credit problems, even for individuals like me who do not own a home. I don’t like to dwell on the pain that may be coming down the road, and that may linger on for a very long time as a consequence of what was truly “irrational exuberance” (perhaps the only thing Greenspan got right!) ... but ultimately, the cause of the pain lies at the feet of the institutions of coercive government, along with housing and lending institutions. Thus, I am okay with the phenomenon of “jingle mail”. Perhaps fraud cannot be determined in every case, but there’s fraud shot through these systems. (If you desire proof, I encourage you to make Market Ticker and Mish’s Global Economic Trend Analysis part of your regular reading.) It may be a naïve hope to think that the collapse of these systems will lead to simpler, freer solutions, but I have been called naïve so many times, once more won’t hurt.
So, there’s my long-winded answer to the question. If you’ve a mind to do so, you can weigh in by voting in this poll [now closed] and coming back here to discuss your views, if you like. The poll will run for a week.
Little Sympathy
While I am normally a very empathic person, I find that I have little sympathy for most of the folks involved in this debacle. Both the people who took out loans for houses that they could not possibly afford and the lenders that gave the loans to them deserve whatever happens to them. Both sides in these transactions bet on the impossible: The idea that home prices would go up in a straight line forever. As you said, in many cases both sides of the deal were fraudulent.
I don't understand the whole premise of the mortgage industry anyway. The thirty and forty-year year mortgages are based on the promise that you will pay a certain amount each month over that time. When you sign such an agreement, you are making a promise that you don't have any way of knowing if you can live up to. The days of being able to work for a company for thirty or more years are over. You will have income disruptions, and sometimes they will be long ones. You also cannot promise that you will be healthy enough to earn an income over that length of time.
The mortgage writers know this, but they haven't cared. They were planning on selling the mortgage to someone like Fannie Mae or Freddie Mac within months anyway. Any problems that come up were going to be someone else's problem.
The real victims of this fraud are the taxpayers, who now have to bail out the mess created by these government sponsored boondoggles.
Bail out?
Ah, but “the taxpayers” group is by and large comprised of the same individuals who bought homes under these conditions—plus people like you and me, of course. So we’re in the position of having little sympathy for the homeowners, but under all the “bailout” plans I’ve seen, they’ll be paying for themselves and their neighbors, etc., and we do have sympathy for the taxpayer. (And it appears to me that all a bailout will accomplish is extending the charade for a little longer.)
If there has ever been a more clear example of the redistributionist clusterfuck that is coercive, interfering (regulatory) government, I can’t think of it.
Sympathy for taxpayers who rent
Most of the people I know rent their homes. They will never be able to afford their own homes under the current conditions. They are in the position of subsidizing the homes of higher-income people. I have a great deal of sympathy for those folks who earn enough to pay income tax but cannot afford any of these crazy mortgages.
It's the banks, not the "government" ...
This is not a government creation, it is a bankers' creation. The FED specifically, and all other banks generally. The FED created money out of thin air and a few electrons, then the more minor bankers "lent" this non-existent wealth to people and in the process created, through fractional reserve banking policies, even more fictional wealth. All of this was a fraud to induce the lendees to part with REAL wealth in return payment. I hope that the entire banking industry dies the horrible and painful death that it deserves. Sadly, this will involve pain for all of the rest of us, too, but, pretending in fiction is not the way to resolve real issues. Until fiat currency is destroyed there will be no chance for an equitable relationship between sovereign individuals on an honest basis.
The bankers created it, sold the idea to their thugs with payoffs to act as enforcers, looking to skin the rubes. I hope they choke on it.
- NonE
Banksters and the Gubmint
Unfortunately, I don't think they will choke alone. Many of the "rubes" may also.
Trying to differentiate gubmint creations from bankster creations may start to look like medieval scholastics arguing angels and pins.
Though I may not seem to agree with you, for the most part I do.
Honoring contract
“Jingle mail” is honoring contract. A valid contract must leave a way out (this is why a military enlistment contract is not valid). There is a cost associated with taking that way out, and as long as it is paid, the contract has been honored. Returning a house in liew of continuing to pay the mortgage is perfectly valid.
As for the rest of the mess, there is a lot of analysis available online. NonEntity has a point, it is the banks' fault. But only because they, like many others, managed to co-opt state power to their benefit.
Were interest rates artificially low? We will never know, because there was no market and no money involved (a discussion of why US Dollars, Euros, Yen, etc are not money is out of scope for this post). The Fed and other central banks set interest rates on their fiat currencies for purely political reasons. Given the environment there is no way to tell what the correct interest rate should be.
This mess, like many others, is attributable to state power. Untangling which specific aspects of state policy caused it is worse than try to untie the Gordian Knot.
Walking away . . .
Sometimes the best option . . .
Search
I'm with Jorge
If the loan held the house as collateral then the 'jingle mail' practice seems legit to me. They aren't continuing to use the house, or otherwise unilaterally take advantage of the lender, they're satisfying the contract.
slide show
For anyone who is interested, I have a neat little slideshow (2.5meg) on the subprime loans fiasco - leave yuor email address under this and I can send it to you.
The thing is...
The thing is, should "contracts" with cartelists that are the beneficiaries of government favoritism count as contracts freely entered into? In my view, no. In fact, I would argue that even if there was no mortgage crisis, it would be a virtuous activity (true "privatization", actually) to engage in acts that might be fraud in the eyes of the state's law but not the libertarian non-aggression principle. If the political class wants to use the state to beat you down and subsist off of you parasitically, use your wits and guile to "rip the bastards off" and thereby get some of your own money back from those who have been its unearned recipients.
Specific Performance is Unenforceable
Murray Rothbard came up with a pretty good argument (the inalienability of moral agency) as to why the performance of a promise should be unenforceble if the person changed their mind. Coercing performance would amount to contractual slavery. But he considered defaulting on debt to be a form of fraud at the time of the agreement (an exchange of values including future payment by one party), and therefore believed the payment of debt could be compelled.
IMO blogger "quasibill" at The Bell Tower has made some pretty good arguments, on the same moral agency basis as Rothbard's argument against contractual slavery, as to why a creditor should have no power to compel payment beyond the right to seize assets at the time of default.
http://tinyurl.com/622brg
Since "fraud" requires assumption of a state of mind that is almost impossible to prove, garnishing wages or otherwise coercing payment of the debt amounts to coercing specific performance of a promise. In order to legitimately do so, the lender has the burden of proof to show deliberate deception at the time of agreement. If not, the agreement to pay amounts to just another promise of the kind that Rothbard said was unenforceable.
It is the responsibility of the lender to take adequate care to verify the ability of the borrower to pay, and to take proper precautions (like making sure the loan is adequately secured by collateral) for minimizing loss in the event of default. As quasibill argued in a post to LeftLibertarian2, the actual contract is complete at the time the property changes hands:
"In actuality, a loan agreement involves a transaction whereby lender gives property in exchange for a promise of future performance. The contract is "complete" at that moment. The lender is in complete control of this, BTW - he can refuse to transfer the property until he is subjectively assured of the value of the promise. Some possibilities, including what you have mentioned, are insurance, or bonds, or co-signers..."
The borrower's half of the contract is his promise to pay, coupled with whatever assurances and safeguards he can provide at the time. It is up to the lender to make sure that the safeguards are sufficient before letting the property change hands.
In the case of a mortgage, the lender was protected twice over against default by such safeguards (by the property itself as collateral, and by the high risk premium in the interest rate); if they failed, it's the lender's fault. Normally, in a mortgage, the property itself is considered the collateral against default. If the collapse of an asset bubble (a bubble deliberately inflated by the mortgage brokers themselves) means that this turns out not to be enough, well they can put it on their TS list. In addition, the interest rate the borrowers are paying constitutes another precaution, as part of it amounts to an insurance premium against default. If somebody declares bankruptcy on a 30% credit card debt, the risk of such a default on unsecured debt is precisely what they were paying such high interest for in the first place.
Rothbard Was Dealing With Something More Specific
Namely, agreements where title hadn't transferred. For example, accepting a job but not showing up could only be fraudulent if one had accepted advance payment, in his argument. With a loan, title has transferred and so there's now an obligation. At the very least, the borrower is obliged to return the full amount of the loan.
Correct me if I'm wrong, but...
"With a loan, title has transferred..."
It is my understanding that, just as with auto loans, the mortgage title is not transferred to the borrower; it is held by the lender until the loan is paid off.
Apologies
Sorry Astoria, I meant title in the sense that the lender had transferred the funds to the borrower, thereby putting the agreement into action. It isn't over until the last payment has been made. That is, once property of some kind has changed hands, the contract is in effect activated and now enforceable.
There's been much bamboozlement on both sides...
... of the lending process in recent years.
Uneducated home buyers have been snookered by ridiculous mortgages; lenders have played the roles of the monkeys who see no evil, hear no evil and say no evil when examining potential borrowers. Unfortunately, it's been a turd painted gold that was hailed as the golden Amercian Dream egg; we can smell the stench now.
I voted no to the poll question, but did so with a caveat. If the borrower returns their keys to the real estate in question, as long as the he agrees to make up the difference between the house's current market worth and the remaining, uncovered equity, then he's honored the agreement with the lender.
I have one friend who's a real estate agent. We spoke on the phone today, and she was sharing with me how sad it is to meet people who've been bamboozled and have to tell them the straight up truth that, realistically, they're not going to be able to sell their home to clear the remaining balance on their loan(s). She's had to do that much more as of late, and it breaks her heart. Most of the time it's been families who were too trusting, and overwhelmed at the excitement of purchasing a home they thought they'd never be able to get into.
I don't have much sympathy for the lenders out their and the mortgage brokers who push these disreputable loans. I've witnessed another friend get snookered with a bad loan. She was flat out lied to regarding the terms when she asked questions, and because she trusted the answers she received without having a legal representative look at the paper work for her before signing, she's facing payments she never anticipated. She and I both thought the mortgage broker was an honest business person; the broker prided herself on being the person you could trust and making sure you were in a lending product you could afford. I am still flabbergasted that the terms my friend thought she had, and the terms she does have, it turns out, are so different. "Buyer Beware," is something none of us should forget.
On the flip side, there's buyers out there that willingly played shell tricks with their abilities to pay on a loan, just so they could get into the house they wanted. They've fibbed about their income, hid unsecured debt, bought homes with no down payment using ARMs that balloon way beyond their means. Then they've taken out home equity loans on what little equity was available from the house too soon after the purchase, willfully putting themselves into negative equity peril.