Speaking of the little guy, I missed this yesterday but it’s worth a read:
Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.
[…]By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.
“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.
This should come as no surprise if you’ve ever read the Irving Housing Blog.
Keith G
But…but…the CRA *caused* the meltdown. I know cuz my brother said so.
PeakVT
“The rich are different: they are more ruthless, said Sam Khater”
That’s partially it, but I would say that the main reason is that the rich are simply more informed. They are more likely to have access to people and tools that can advise them on financial matters.
Comrade Javamanphil
If I didn’t have kids I’d be rooting for the Mayans to be correct.
Jordan
Not ruthlessness, it’s just that the rich have options. Non-millionaires who are underwater on their primary residence are likely to keep making payments, because finding another home and/or job is financially out of the question. The costs of relocating are prohibitive. Whereas the rich can more easily afford to buy new or rent, handle moving expenses, longer commutes, job changes if they even have/need a job, etc. But if you have one home and no job, even dropping the mortgage might not be enough to float you through extended unemployment *and* moving.
And of course the second home/summer house/investment property thing explains itself.
Keith G
@Comrade Javamanphil:
I don’t, so I am. Sorry.
Balloon-Juice Platinum Member
bubbleinfo.com is better, everyone in Jim the Realtor’s neighborhood has to have at least $600K to play, and that’s cash.
He’s documented all the hidden inventory and realtor scams being played in SoCal.
jon
The Irvine Housing Blog is filled with stories of greed, ruthlessness, and people who figured out that the housing bubble was going to pop and acted rationally. And by “rationally”, I mean: invested little, got deep in debt, cashed in, and ran away like rats off a ship. The lenders (responsible and irresponsible) and the responsible investors were the losers in this bubble, while greed made few investors act in a responsible manner.
Extra homes are like jobs: they’re only kept as long as something is to be gained by those who own them. The rich don’t see them as places to live or people who are to be cared for but as investments that either pay off or don’t. Right now, investments aren’t paying off, and the drain makes that giant sucking sound Ross Perot talked about all those years ago. But it’s not Mexico stealing the jobs: it’s our greed.
(Mexico will still be blamed, however.)
El Cid
If the rich walk away from mortgage contracts with the attendant negative contract implications, they’re simply making rational market decisions.
If poor and middle class elements do the same, they’re troublesome and irresponsible societal elements.
Zifnab
I am shocked! Shocked to discover that the guy with TWO houses is more likely to default on a second than the guy who only owns one.
Doesn’t one-house guy know that a house is merely an investment and not a place to raise a family and build a life? Silly poor people. If things got really bad, they could always go live on their yachts.
Punchy
So now Blacks are buying million dollar crack houses? Also, ACORN and NASA, too.
toujoursdan
Completely off topic: Evidently the U.S. is about to invade Costa Rica with 7,000 Marines and 46 warships but there is nothing in the domestic media about this. WTF?
Costa Rica News: United States Invades Costa Rica
Inside Costa Rica: Many Costa Ricans Are Angry, Scared And Confused Over U.S. War Ships
Wag
Well, yeah. And your point is?
Face
Hard to prove? Really?
1) These rich fucks have enough money to pay
2) But they’re not paying
3) It’s hard to prove, but it appears as though they’re not paying on purpose, because they can, but they wont.
The MSM as brain-dead as ever.
El Cid
@Wag: My point is that we need to punish poor and middle class folk who walk away from sacred, holy mortgage contracts, perhaps through
tortureenhanced negative feedback.Brian J
@PeakVT:
I agree. As much as I like the idea, in theory at least, of people trying to honor a contract and pay what they can, there really isn’t any point for someone to continue to pay down a mortgage if they are only going to be able to do it for just a little while longer before they go bust. The rich, and big businesses, seem to understand this. This is why I’d like to see a sample of people who work in a banking or finance related field who are going through something similar. My guess is, they defaulted at far higher rates than other groups, because they know it is, overall, the right move.
Dork
@Face: Also equally difficult to prove: that my poop this morning came from what I ate yesterday, despite the presence of corn in the tirds and empty ears of corn in my kitchen trash can.
rachel
We should have expected something else? The rich don’t become rich by throwing good money after bad.
Ahasuerus
@toujoursdan: I did a quick Google search for “costa rica marines” and all the references I found were on what I would consider fringe conspiracy sites. The best one insisted that the UN had commanded the US marines (???) to Costa Rica because the oil leak in the Gulf was going to cause a rupture in the local tectonic plate rift. Sorry, but I’m filing this under “Lunatic Conspiracy Nutjobs” until I see reportage from a more responsible source.
As for the current topic – supposedly the mortgage crisis is far worse for commercial property than for housing, meaning that a) the whole nonsense about poor people causing the mortgage crisis is simply a venal lie; and b) those with means (“the rich”) do indeed view real estate as just another investment, to be managed appropriately.
Kryptik
And yet we have people bleating on Fox and CNBC and everywhere how it’s unfair to have the rich pay more taxes in percentage than folks living check by check. Damned if they’re ENTITLED to being about to abandon projects and debts and mortgages without consequence, they paid for it dammit!…with their highly-paid accountants looking for loopholes to cut their effective tax rate down to 15%, and million dollar lawsuits to fight a $7000 fine levied by OSHA for workplace safety infractions.
Waynski
Didn’t you guys have a post on this last Friday when the article ran? Maybe I saw it somewhere else but I thought it was here. Perhaps the Douchebaggery was of a scale that it merited a double post, but I don’t think it was missed Mistermix.
toujoursdan
@Ahasuerus:
Just type in Costa Rica in Google and look in the news section. You’ll find articles in several international sites. It’s not fringe. It’s evidently part of the war on drugs.
You’ll find even more in Spanish, including this one in Costa Rica’s national newspaper La Nacion:
Congreso autorizó ingreso de 46 buques de guerra, 200 helicópteros y 7.000 marines
EE. UU. aumenta flota militar en aguas ticas para combatir narco”>La Nacion: Congreso autorizó ingreso de 46 buques de guerra, 200 helicópteros y 7.000 marines: EE. UU. aumenta flota militar en aguas ticas para combatir narco
Hugin & Munin
El Cid@14: Debtor’s prison + house arrest + ankle bracelet monitoring = WIN!
artem1s
@PeakVT:
It’s called gaming the system or welfare but only if you are poor, urban, brown or female. Otherwise its called being shrewd and business savvy.
malraux
@Brian J: My only objection to that wording is that the contract as written specifically allows one to give up the collateral to discharge the debt. It isn’t breaking the contract to follow the wording of the contract.
If banks don’t want people to do this, then they should either change the contract wording or not loan 100% of the collateral in a bubble condition.
Sheila
One can always count on the rich to live down to one’s expectations.
Stefan
The lenders (responsible and irresponsible) and the responsible investors were the losers in this bubble, while greed made few investors act in a responsible manner.
Well, how do you define “responsible” when it comes to an investor? I’d argue that the person who walked away from an underperforming asset was the the one who acted responsibly when it came to his fiscal situation, while the person who stayed in their home and kept making the payments on an underwater mortgage that was never going to surface was actually the irresponsible — or at least irrational — one.
Stefan
As much as I like the idea, in theory at least, of people trying to honor a contract and pay what they can,
Someone who walks away but surrenders the property is honoring the contract — the contract includes an explicit remedy for default, which is that if you stop paying the bank gets the house back. The person who walks away but surrenders the collateral is actually following the contractual terms. You’d only not be honoring the contract if you stopped paying and tried to keep the house.
And moreover, there’s no “honor” in a contract — in fact, if everyone was honorable you wouldn’t need a contract in the first place. It’s a business transaction, but the banks try to shame and guilt their customers into continuing to pay by using this sort of obfuscatory language that they would never apply to their own business dealings.
Ahasuerus
@toujoursdan:
I followed your suggestion and was still unable to find any credible evidence that this move constitutes an invasion. I will agree, however, that this may indeed be a part of the “war on drugs”. Unfortunately I am illiterate in Spanish, so I am unable to evaluate the information in the local publications.
Martin
Everyone should read the Irvine Housing Blog. You will not find my house profiled there, but they’ve done a great job of breaking down what’s motivated a lot of people in this real-estate market. The only defense I can give my city is that the older areas of town (like where I live) have relatively little turnover of homes and aren’t nearly as impacted as the many, many new communities that popped up during the bubble.
But the stories told in IRB aren’t outliers. I’ve met all of those people at one time or another.
Stefan
Unfortunately I am illiterate in Spanish, so I am unable to evaluate the information in the local publications.
I can read Spanish — it’s all nonsense. The Marines and Navy are arriving as part of an agreement with the Costa Rican government as part of the “war on [some] drugs.” The article mentions the explicit conditions the government placed on the presence of US forces. There is no “invasion.”
Ahasuerus
@Stefan:
Gracias, amigo!
jon
@Stefan: I’d define “responsible” as actions that benefit many, and say that most of the actions in a bubble economy other than staying put are not responsible. Participation in a bubble is not a responsible act, even if greed can lead to good things.
Personal responsibility is something different. Keeping a roof over the head motivates middle class people to keep paying while a rich person with an investment home doesn’t have that motivation. It’s personally irresponsible to pay a mortgage that isn’t affordable, but it’s a damn good thing people are doing it or things would be worse than they already are.
In other words: it’s a sucker’s game, but it’s based on there being an endless supply of suckers. No one likes to think about that, and we like to pretend that that cock is really a teat from a generous cow, but there’s no getting around the fact that too many of us have to get in debt to get ahead and we have to stay in debt to keep up. Realizing this is the first step toward getting angry at a financial system that expects us to suck its dick and pay for the privilege.
Stefan
@Stefan: I’d define “responsible” as actions that benefit many, and say that most of the actions in a bubble economy other than staying put are not responsible.
The second that “many” people start paying my rent and contributing to my retirement portfolio, then I’ll take my financial actions with a view to their benefit as well. But as long as I’m the only one on the hook, then the responsible thing for me to do for my and my family’s sake is to take actions that will protect us financially rather than wiping us out. Ethics would not require me to beggar myself out of a general obligation to society at large.
Stefan
I’d define “responsible” as actions that benefit many, and say that most of the actions in a bubble economy other than staying put are not responsible.
But what if staying put just makes you poorer and poorer? Why is it responsible for these people to continue skidding downhill towards bankruptcy when they could get out and save themselves?
The counterparty to this transaction — the bank — would never think of acting this way. If the shoe was on the other foot, a bank official who said “well, we’re losing money lending to this guy, but we made a commitment to do it so we’re going to continue lending even if it wipes us out” would be looked at as a lunatic. If the bank finds itself on the losing side of a bad deal it simply takes the write-off and moves on to find the next sucker.
Stefan
It’s personally irresponsible to pay a mortgage that isn’t affordable, but it’s a damn good thing people are doing it or things would be worse than they already are.
[Yosarian:] “I don’t want to be in the war any more.”
“Would you like to see our country lose?” Major Major asked.
“We won’t lose. We’ve got more men, more money and more material. There are ten million men in uniform who could replace me. Some people are getting killed and a lot more are making money and having fun. Let somebody else get killed.”
“But suppose everybody on our side felt that way.”
“Then I’d certainly be a damned fool to feel any other way. Wouldn’t I?”
— Joseph Heller, “Catch-22”
Litlebritdifrnt
Strangely enough I was in court this morning when the Judge granted summary judgment for BOA against the estate of a dead real estate investor for the tidy sum of 1.7 million, and that was just the deficiency left over after the bank had foreclosed and sold all the properties, AND given the estate some additional credits. The principle alone was 1.4 million. Kind of blew my mind.
ET
I had to take a break from IHB ’cause I was just so tired of the stupid.
LikeableInMyOwnWay
Why shouldn’t they? The lenders treat the borrowers as prey, basically. This is a game played with real money and real self-interest on both sides. Why should the lender have all the rules in his favor, and have the only flexible game plan?
This situation is a little like bemoaning something like the Iraq war. What’s the point? We elected the governments that built this arena and structured the games. A little late to sit around now and whine about the outcomes and look to blame people and institutions for doing exactly what we set the games up for.
Clean up the mess, fix the government, restructure the rules, solve the problem. Start by voting out Republicans.
(blockquoted parens, mine)
jon
@Stefan:
Staying put, in this case meaning “not personally doing anything to promote the bubble”, isn’t going to bankrupt anyone. Getting the hell out, not “staying put”, in a house someone can’t afford, is a good idea. Bad for the many, damn good for the few.
I’m not saying the enlightened self interest rules all, since the self interest is pretty damn persuasive at times. It’s just a balance people need to figure out for themselves, and they really need to understand when such things are a rhetorical device used to attack the poor. We’re all in this together, but it’s important to know how much we each have in stake and what it means as a result. People who are convinced that their spending habits or investments drive the economy make different decisions than others, are rewarded differently, and get screwed in different ways.
Stefan
Staying put, in this case meaning “not personally doing anything to promote the bubble”, isn’t going to bankrupt anyone.
Just to be clear, the above quote was not mine, but was something I was responding to. As I said, staying put may actually bankrupt people if by staying put they continue to pay on a mortgage they may no longer be able to afford, rather than dumping the property and buying or renting something cheaper elsewhere.
And the more I think about it, the more I think you could make the argument that those who continue to pay on underwater mortgages are actually those who are continuing to inflate the bubble, while those who walk away are the ones doing their best to deflate it. Most of these properties are not worth what the banks and the mortgage holders are pretending they are worth, but by the holders continuing to pay both parties are able to maintain the fiction of prices higher than the market will actually bear. If more people walked away, the banks would be force to take write-downs on the properties rather than marking them as performing loans on their books, and gradually real estate prices would come down to their natural level.
But what we have right now is, say, a $500k house that the bank and the homeowner both pretend is worth $1mm, and it’s only by the homeowners continuing to pay the $1mm mortgage that the bank is able to mark a $1mm performing loan on its books. If the homeowner walked away, the bank would no longer be able to continue the charade and would have to dump the house back into the open market, and the homeowner would crawl out from having to pay a dollar for something that’s worth only fifty cents.
jon
The problem, Stefan, is that houses and cars, once signed for, are to poorer people more than investments. For a rich guy, it’s not a big deal if his transportation or roof is taken away since he’s got a backup (or three.)
The housing bubble will forever be a slower process to deflate, since it isn’t like other products that deteriorate in value quickly. Repossessing a car isn’t a waiting game for the market to catch up, while getting a house is something a lender can afford to wait on a long time. Unless there’s some chance that a jubilee will be declared and all debts forgiven, there isn’t much of a chance that the housing bubble will ever go away completely. So no, there really is no chance that this bubble will completely go away. It will just be a new “floor” value to work from, with some homes being bargains for a while and the lenders holding on to many properties. They have enough control still, and they will use patience if they have to. Right now, they have to.