Mises Daily Articles
"I don't think people can stay stupid forever," says Richard Plaster, president of Las Vegas homebuilding company Signature Homes, and a leading advocate for people to walk away from their homes. He thinks more people will walk away as home prices continue to fall. "People who keep paying on their mortgage are going to lose."
And plenty will lose if A. Gary Shilling is right. He points out that normally the housing inventory is 2.5 million units. Currently it's 4 million, but that's not all, writes Shilling,
As foreclosures keep mounting, a "shadow" inventory of as many as 500,000 additional homes will become visible as many more Americans choose to sell rather than endure further price declines.
Because of this overhang, Shilling sees prices dropping another 20 percent from here, leaving prices nationally 45 percent below their April 2006 peak.
The latest data aren't promising. US home sales declined in May to their lowest level in six months, with the median pricing falling to 4.6 percent below its level a year ago.
But why do some people still keep paying into this losing proposition? Economically and emotionally it just doesn't make sense. Are these people saying, "a contract is a contract; I'll pay no matter what. I'm resigned to committing financial hara-kiri on my mortgage sword?"
After all, a mortgage is like the marriage contract: "To honor, love, and cherish till death do us part. For richer, for poorer, in sickness and in health."
Plenty of spouses stay in marriages gone bad. There is no honoring or love, just sickness and hate. But some couples stay together for the kids or because their religious beliefs forbid divorce or because of family pressure.
And in the extreme of one spouse battering the other, why on earth does the battered spouse stay — wearing sunglasses to hide black eyes and making up phony excuses for broken limbs and bruises? Why does anyone stay in that sort of relationship? It's just plain irrational.
"Because you took those wedding vows to honor, love …."
Lenore Walker is the pioneer in the field of battered-spouse syndrome, with her book The Battered Woman. She believes that experiencing the repeated cycles of violence can result in a spouse developing "learned helplessness," a psychological state identified by psychologist Martin Seligman. The abused believe they lack control over their situation and are convinced escape is impossible. Their motivation to escape diminishes as they become increasingly passive.
Walker explains that the constant cycles of violence and reconciliation result in the following beliefs:
- believes that the violence was his or her fault,
- has an inability to place the responsibility for violence elsewhere,
- fears for his/her life and/or the lives of his/her children, and
- has an irrational belief that the abuser is omnipresent and omniscient.
These beliefs are strikingly similar to what underwater homeowners feel.
The abused believes that the violence was his or her fault. "It was my own fault for buying a house at the top of the market in the first place and borrowing too much money to do it." "I made my bed, now I must sleep in it, no matter how much financial pain it causes me."
The abused has an inability to place the responsibility for violence elsewhere. "It's nobody's fault but my own," say people with 20/20 hindsight. "Nobody made me sign the mortgage. I'm so stupid. The bank doesn't have to negotiate with me."
The abused fears for his/her life and/or the lives of his/her children. "My credit will be ruined. I won't be able to rent an apartment. My low credit score may keep me from getting a job. I don't want to uproot the kids and have to admit that daddy and mommy made a financial mistake."
The abused has an irrational belief that the abuser is omnipresent and omniscient. The abuser in this case is the lender or owner of the mortgage. The borrower fears that these lenders can take everything they have, leave them with nothing, and make their lives miserable forever.
At the same time, default moralizers reinforce these feelings. They have no sympathy for those making a poor housing and mortgage choice. A person must suffer the consequences of their actions, it's claimed.
Battered-person syndrome was first known as battered-woman syndrome (BWS), and according to Lauren Fernandez, "every jurisdiction accepts expert testimony on Battered Woman Syndrome to support claims of self-defense. In fact, several states have codified its use by statute."
However, as BWS has increasingly been used in expert testimony, the theory comes under criticism for painting victims as one-dimensional. When the victims, who have killed their abusers, testify to struggling emotionally and physically with their situation, their behavior show "signs of initiative and agency that are inconsistent with [BWS]," writes Katherine Baker.
Strategic defaulters also struggle emotionally with their decision to walk away. These aren't people who bought a house and never made a payment. They sell assets, cut back, and do everything possible to pay their note. Eventually they seek out their lender to negotiate a compromise but are most times rebuffed.
Dayna and Scott Merritt bought their 2,000-square-foot home in North Las Vegas, Nevada, for $385,000, but five years later it will only fetch $180,000 and the couple is wondering if they should keep paying for a house that may never be a (net) asset.
"We've stuck it out. But there's been no 'attaboy,'" Dayna Merritt, 43, a substitute teacher told the USA Today. "We're paying on something that seems like it won't work out for us."
The Merritts put $80,000 down, and still Scott's father has calculated that the couple will remain underwater until 2020. "Every month," Dayna Merritt says, "I ask myself, 'Why are we paying this?'"
After starting the loan-modification process two years ago, the Merritts dropped it, "as reports of others' failed attempts flew through the neighborhood and the news media."
The Merritts' friends across the street, Rachael, 41, and Joseph Stewart, 46, likewise have run out of patience with their mortgage and have stopped paying in hopes that their lender will alter their loan.
The Stewarts have cut expenses and even tried to clean up the front yards of vacant houses in the neighborhood. But, when a law-enforcement officer came to their door looking for a neighbor who was renting a house similar to theirs for much less, that was the last straw. The neighborhood originally barred rentals.
Belinda and William Haag put $82,000 down on their North Las Vegas home. The couple pays over $2,000 a month on the mortgage, but could rent the same house for half that. The Haags hope to short sell, but will walk if the lender won't cooperate.
Some analysts believe that the number of strategic defaults has peaked, but these stories reveal the truth. Those who have been paying are wearing down — financially, mentally, and emotionally.
Real-estate service Zillow says 85 percent of Las Vegas homeowners are underwater. CoreLogic believes 66 percent of Nevada homeowners owe more than their homes are worth. The percentage nationally is 23 percent.
"I do have concern because as the prices go down further, it might provide more incentive for people to strategically default," Nasser Daneshvary, director of the Lied Institute for Real Estate Studies at UNLV told VEGAS INC. "They still owe the same amount of money to the banks, but I think it's getting bad enough that the ethical issues become less important to people."
And as the market continues to worsen, Las Vegas broker Frank Nason worries,
Friends and associates that would have never considered walking away a year ago to 18 months ago are. It's about the dismal outlook going forward. They see it's going to take a decade before there is any daylight in their house.
There are those who pass judgment on spouses who leave a bad marriage as well as those who choose to stay. It's immoral in one person's eyes to leave even the most abusive relationship, because of those wedding vows. At the same time, many people can't understand why a battered spouse doesn't just leave, thinking it's stupid to jeopardize life and health.
Libertarians might jump in and say that if a spouse has been aggressed against, the law-enforcement provider will step in to protect the battered from the batterer. The batterer would be punished and the battered would be compensated.
But that's not how the criminal-justice system works. Batterers were protected in the past and are still hard to prosecute. And if the batterer had friends down at the police station, worked there, or had pull at city hall, the state protected the batterer. "The marriage license in our society also seems to serve as a license to violence," Walker writes.
In the case of the mortgage mess, the federal government is protecting the lenders and mortgage owners. Fannie and Freddie are the government, and the other big mortgage holders have many friends in Washington. Instead of being allowed to go broke — with these undercollateralized mortgages sold in a bankruptcy auction to fresh buyers who in all likelihood would negotiate with borrowers — the mortgage holders, who often can't prove they own the mortgages, refuse to deal with borrowers until a payment default gets the lender's attention. In the rare case of a modification being consummated, it only adjusts payment terms. But it's the principle amount of the note that must be lowered.
Libertarians will say, "Wait a minute. Homeowners knew what they were getting into when they signed the documents. The terms of the deal didn't change. Banks haven't turned into batterers. Besides," they claim, "your analogy doesn't work because no woman would marry a man who displayed violent tendencies."
But of course that's not true. One victim, whose story is told in The Battered Woman, asserts,
I had no idea that he was physically violent until six months into our marriage. Before we were married, he had threatened to burn down my house and kidnap me if I didn't marry him. He also threatened to kill my parents.
That didn't stop "Anne" from marrying this abusive man. When he had said those things, she says, in a way she believed him and in a way she didn't.
Well, she asked for it, some would claim. She better stick it out and hope for the best. But it's hard to imagine even those people believing that if the victim were their own sister or daughter. Similarly, people who know someone who has strategically defaulted are 82 percent more likely to at least declare their willingness to strategically default, according to the research of Luigi Guiso, Paola Sapienza, and Luigi Zingales. "Social considerations are directly affected by the frequency of foreclosures and the probability that somebody knows somebody else who strategically defaulted," write the three researchers.
Even though the note or mortgage terms didn't change, the perception of those terms does change. Paying $2,000 a month for a 2,000 square foot house in North Las Vegas was fine in the boom. But if the same house can be had for half that now, being forced to pay double each month for nothing is a financial beating.
The borrower feels trapped and helpless. And when the other side of the transaction refuses to negotiate, does not communicate, drags their feet, or gives mixed signals, the lender (backed by government force) is seen by the borrower as abusive.
So while you may see those who walk away from underwater mortgages as morally wrong for breaking their mortgage vows, others see those who stay for the financial beating as stupid. No matter. As prices continue to fall, millions more will make a run for it.