February 3, 2010

More on Strategic Defaults

Filed under: Civil Disobedience, Land Reform — Tags: — Russ @ 7:19 am


According to new research cited by the NYT, there’s some movement in the willingness of underwater homeowners to walk away:

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

This would be an advance over previous research, which found that even where underwater by hundreds of thousands of dollars, only a minority of homeowners would seriously think about walking away.
The article describes a typical borrower:

With prices now down by about 30 percent, underwater borrowers fall into two groups. Some have owned their homes for many years and got in trouble because they used the house as a cash machine. Others, like Mr. Koellmann in Miami Beach, made only one mistake: they bought as the boom was cresting.

It was April 2006, a moment when the perpetual rise of real estate was considered practically a law of physics. Mr. Koellmann was 23, a management consultant new to Miami.

Financially cautious by nature, he bought a small, plain one-bedroom apartment for $215,000, much less than his agent told him he could afford. He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Most people who are underwater became so in this fashion. You come of age, you have the financial wherewithal, you’re ready to buy a home, all your life you’ve been pumped full of propaganda about the American Dream, and how the core of the American Dream is to own a home. Under those circumstances, very few people stop to think, “this is a housing bubble, these prices are unsupportable, the bubble will have to burst soon, so we better just rent for now and see what happens.”
Although the liars of government and the market fundamentalist think tanks now say people should have been thinking that way, at the time they were all saying the exact opposite. The last thing they ever want anyone to do is think. Just as they don’t want anyone to think now, about what’s happened, who is to blame, and what people should now be doing.

The United States Treasury falls into the skeptical camp.

“The overwhelming bulk of people who have negative equity stay in their homes and keep paying,” said Michael S. Barr, assistant Treasury secretary for financial institutions.

They also want to propagate this theme that no one’s thinking about this, no one’s doing it. A core goal of government and MSM propaganda is to make the thinking person feel isolated, atomized, alien.
But it’s a lie.
If you read the article you’ll see how, just like with every other such article, they can’t find any independent voice to argue the “con” position, just bank and Treasury flacks.
Of course the government refuses to do the only two things which could help, demand permanent mods based on writedowns of principal, and empowering bankruptcy judges to impose cramdowns.
Similarly, the banks absolutely refuse to negotiate in good faith:

Mr. Koellmann applied last fall to Bank of America for a modification, noting that his income had slipped. But the lender came back a few weeks ago with a plan that added more restrictive terms while keeping the payments about the same.

“That may have been the last straw,” Mr. Koellmann said.

But people still burden themselves with scruples they know the banks don’t share:

Most of all, though, he struggles with the ethical question.

“I took a loan on an asset that I didn’t see was overvalued,” he said. “As much as I would like my bank to pay for that mistake, why should it?”

Why should it? Because it’s a gang of con men. Because it was a participant in a massive swindle. You bought at a bubble price way beyond what any real economy would have justified. That bubble was blown up by the banks, including your bank. Why shouldn’t it have to eat the loss now that prices are returning to reality?
The extent of the brainwashing is amazing. It’s just like American factory workers who say “The owner has a right to fire us, shut down the factory and move it overseas. That’s capitalism.” (Some actually think that.)
It’s like the old philosophical question, Why do people believe in free will? It’s obviously false, and often counterproductive. The answer is that some want to use the idea as a weapon on behalf of vested interests, while others, among the downtrodden, want to cling at all costs to the illusion of agency, as the only way to maintain their dignity. But rather than find their belief in freedom through fighting back against the oppressor, they find it in the easier, lazier, less dangerous path of identifying with him and pretending they support the oppression even when they’re its victims.
We can see this the way this manifests ideologically where it comes to economic issues. The racket ideologue says, “the borrower knew what he was doing, he’s at fault.” Meanwhile the borrower, rather than admit he was had, sides with the bank. That way he can vicariously join in the warm glow of the bank’s successful con job, even though he’s the mark, and it’s at his continuing financial expense.
(Though I really can’t see how the captured factory worker gets even that out of it, since by no stretch of the imagination can he blame himself, can he? What’s he supposed to say – “It’s my fault for demanding a living wage and safe work conditions”?)
But hopefully things are changing. If this research is correct, we’re moving in the right direction.
Here’s another underwater homeowner:

“It doesn’t seem right that I can rent a place somewhere for half of what I’m paying,” he said. “I told my bank, ‘Just take a little bite out of what I owe. That would ease me up. Isn’t that why the president gave you all this money?’ ”

Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse other than walking away. “I don’t believe this is the right thing to do,” he said, “but I’ve got to survive.”

It sounds like he’s not all the way there yet, but he’s coming round to seeing that it is the right thing to do. 


  1. The brainwashing you describe has all the tell tale signs of the hoary handiwork of Edward Bernays and Walter Lippman. In the meantime, the nation is, as you suggest, chock full of folks who appear to be experiencing a kind of kinder, gentler form of The Stockholm Syndrome.

    How else do we explain the fact that the entire Federal Government has not yet come under full scale assault, or, alternatively, that large segments of the populace have not simply “gone off grid” “opted out”, etc. etc?

    It best explains why the vast majority of people continually ping pong back and forth between those ultimate actors of the good cop bad cops routine, the Democrats and Republicans. What we have here, sir, is a national neurosis, a well cultivated and pernicious repetition compulsion.

    The citizenry, in the main, simply can not even imagine, let alone fathom, another way. And so collectively we lurch toward a point where another-almost certainly unpleasant- way will ineluctably manifest, by hook or by crook, as a result of the massive abuses perpetrated by the system’s operators, and our collective lack of an appropriate response to said abuses.

    Perhaps, as per the latest news from the NY Times, about upside down mortgage holders finally deciding to get out from under, the ice damn that in which the national mindset is trapped is beginning to thaw. Could Spring really only be six weeks away?

    Comment by Edwardo — February 3, 2010 @ 8:43 am

  2. Ha ha, the old ice metaphor! I was trying to convince myself the ice was melting back in the 90s.

    Not so much back then.

    But things really have changed, no doubt about it.

    The people recognized the Bailout for what it was, right from the start. And now we have this short twilight stage where TPTB are propping up the zombie. But that can’t continue. The banks are insolvent, the Western consumer horde is moribund, there won’t be any great Chinese consumer horde to replace it, and only the Fed’s printing press is still holding everything together.

    Once they lose their grip once and for all, Spring will be here, however stormy, however cruel a month of April…

    Comment by Russ — February 3, 2010 @ 10:53 am

  3. You might find this of interest.


    Comment by Edwardo — February 3, 2010 @ 11:07 am

  4. Interesting piece. The final paragraph correctly places the issue within the broad context of the whole pathology of exponential debt/”growth”, which is the very thing which cannot continue, but which the existing system must struggle to continue at all costs.

    I wrote in one of those strat default pieces how the government cannot support any of the measures which could actually help with the negative equity problem, since such measures would be in the direction of real price discovery for houses and mortgages, when TPTB have staked everything on reflating that bubble.

    Comment by Russ — February 3, 2010 @ 11:34 am

  5. Hello

    I’ve recently uploaded two rare interviews with the Catholic activist Dorothy Day. One was made for the Christophers [1971]–i.e., Christopher Closeup– and the other for WCVB-TV Boston [1974].

    Day had begun her service to the poor in New York City during the Depression with Peter Maurin, and it continued until her death in 1980. Their dedication to administering to the homeless, elderly, and disenfranchised continues with Catholic Worker homes in many parts of the world.

    Please post or announce the availability of these videos for those who may be interested in hearing this remarkable lay minister.

    They may be located here:


    Thank you

    Dean Taylor

    Comment by 4854derrida — February 9, 2010 @ 8:00 pm

  6. […] lame program to suffice. The market’s still melting down, delinquencies are still rising, and new data indicates that we may be reaching a tipping point on the willingness of people to walk away.   Historically, even those who are deeply underwater […]

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