Walking away

house by Tony the Misfit

Regarding Caveat Mutuor, I Told You So…
[Via Mike the Mad Biologist]

For a while now, I’ve been arguing that when it comes to lending, caveat mutuor should be a guiding principle. After all, no one held a gun to these guys heads and said, “Make me a shitty loan now!” And these guys were supposed to know how to assess housing loan risk–it’s what they do. Well, I would like to think people listen to me (although I’m sure I have nothing to do with it at all). But this NY Times article suggests that people are starting to do this:


The problem for me with foreclosures and people walking away from houses is the effect on the rest of us – our houses usually end up being worth less. The free market is helping the banks, with government help and with credit defaults swaps. The people walking away can save a years worth of mortgage payments by letting the foreclosure process go through.

I’m not sure what we could do but some smart people might be helpful.

4 thoughts on “Walking away

  1. The minute people started looking upon their houses as an investment instead of a place to have a roof over their head, we were in trouble. Most people have never heard the phrase “cut your coat according to your cloth” (or other similar phrases, and just want instant gratification and then break the contract with the bank. Why not? The government does it all the time.

    1. I don’t understand why the only villains here are the home owner and the government. Do the financial institutions hold no culpability at all? Who taught people that their house was an investment? Who provided loans which presented no moral hazard to the lenders?

      And the investment approach has worked for many. I know people who refinanced their home several times, taking out several hundred thousand dollars from their investment. The value of their home is now below what they owe. They are now making a purely financial decision to walk, keeping the cash they got. Just like the financial institutions made purely financial decisions to provide those loans in the first place, because they could use credit default swaps to remove any moral hazard they had from giving the loans.

      To my mind, it was the removal of moral hazard that was one of the great failures of the housing system. And it will probably be the rest of us that have to deal with the problem, not the lenders nor the borrowers.

  2. “The problem for me with foreclosures and people waling away from houses is the effect on the rest of us – our houses usually end up being worth less.”

    The point is houses should be worth less (but not worthless…). At the height of the bubble, nationally (although it differed from market to market) the ratio of median housing price to median income was around ~5:1, when historically it’s been around 3.0-3.4:1. Housing should have never cost so much in the first place (and had responsible loaning been occurring, it never would have).

    The real issue is that a combination of government policy and corporate propaganda encouraged people to sink large amounts of capital into a single, local investment that is massively over-leveraged 4:1. Then conditions were allowed that led to that class of investments becoming a speculative bubble. This means a lot of people will see the nominal value of their houses drop–and they should (every dollar spent on inflated housing is money that isn’t spent elsewhere).

    1. I don’t disagree. The speculative bubble that was allowed to occur will be one of the major mistakes of the last decade. But then, without that speculative bubble, the economy of the last decade would have been even worse. Or rather, without the housing bubble, the true state of the economy would have been revealed.

      The original article implied that the only people affected by walking away and foreclosures were the home owners and the lending institutions. I was commenting on the societal effects of people walking. It affects all of us, even those without homes at all. As you point out, it should affect all of us. And we all should do something about it to make sure that it never happens again. Which is why when ever I read an article that leaves out the effect of foreclosure on all of us, I want to make a big deal ;-)

      Also, I hate it when my spelling dictionary has a word that fits my misspelled one. I corrected waling to walking ;-)

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