Wednesday, January 30, 2008


A new trend to keep an eye on: businesses based on the premise that growing numbers of people will rather choose to ditch their devalued houses rather than pay their inflated mortgages, which it turns out, were huge bets that such leveraged "investments" would reap mind boggling dividends. Absent this expected if unjustified return on investment, the houses are just now so much worthless detritus to be thrown in oversized trashbins.

One can hardly be surprised at the vulture economy that will spring up as the carcasses begin to putrefy. However, what is most arresting for me in this posting is the growing evidence of shamelessness among our middling debtor class, a vice that can be itself directly traceable to the elites of our society, in particular those quasi-aristocrats who were the trustees and caretakers of our society and its norms. These people of visibility and distinction in settled communities - established businessmen and storekeepers, attorneys and doctors, clergy and civic figures - have reneged their status as responsible keepers of their community and as conveyors and exemplars of its norms, and now ironically are reaping the harvest that they have sown.

Here is an exchange between Steve Croft of Sixty Minutes and a real estate agent who has been witnessing these "walk aways":

Kroft observes to real estate agent Kevin Moran. "There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan," Moran replies. "They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it."

"Just a business decision," Kroft says.

Implicit in this segment is that families are not entitled to make "business decisions." But you know who is entitled? Why, businesses of course. When businesses laid off 1.5 million workers in 2007, it was purely a "business decision." When Wall Street banks "wrote down" more than $100 billion in losses in 2007, it was purely a "business decision."

Look for families to become more comfortable making "business decisions" of their own in 2008.

As the Greeks well knew, the vital ingredient for shame - and, correspondingly, honor - to function in society was immediacy and care for the people in one's polis, their views and opinions, the esteem they bestowed or withheld. Elites were honored in our society to the extent that they were themselves exemplars of the virtues that they both preached and expected of others in turn. The current widespread hostility to all these elites - Wall Street, lawyers, doctors, politicians - reflects the breakdown of a covenant of respect and honor. As our economy has become more abstract and distant, as our "communities" are compared to bedrooms (or perhaps, more aptly, hotel rooms), as our sense of continuity between past and future has been undermined by rampant mobility, impermanence and instability, there can be little wonder that "shamelessness" has spread like a contagion through our society. Such lack of shame and disregard of honor began at the top and now ripples downward through the feeding chain of class and status. Indeed, the idea that one would walk away from a house requires just such a perspective - it's just a house, made of cheap 2x4 studs (that aren't even 2x4 anymore, but a bit smaller) and drywall. We live not in homes, a vital part of a neighborhood, a town, a community - but in cheap structures without inherent worth. Just as our economy has shown us no sense of obligation and concern, so too in return are ordinary people shucking off the social norms or covenants that bound us in communion and fidelity. There is a great unraveling taking place, and at times I do truly fear for the future of this great nation.


FLG said...

This is probably a result of the reduced or eliminated down payment requirements in recent years. A 10-20% down payment, which was common only a decade ago, served two purposes. First, it prevented irresponsible people from buying a house because, barring an unexpected financial windfall, potential home buyers had to manage their finances responsibly and save for many years. Second, it made the cost of simply walking away from the home very high because homeowners would lose their down payment.

Therefore, this phenomenon does not necessarily prove your larger point. In the past, homeowners were responsible people with a self-interest in keeping their homes.

Anonymous said...

This is a bit like music piracy. It seems clear enough that this amounts to some sort of breach but the aggrieved party in the transaction is someone (something, more accurately) I care nothing about. I couldn't care less if some teenager screws Sheryl Crow out of a royalty payment and I don't much care about mortgage lenders either. In other words, I am in the position (almost) of enjoying in practice what I deplore in principle.

I'm really torn about this. Mainly because I agree with the proposition that the other half of the contract (the lender) couldn't give a fig for the borrower. So why should some higher standard apply to the payer? On the other hand, it will certainly be chaos if folks can just walk away from contracts.

Technically, these folks are not exactly walking away from the contract. The contract provides penalties for non-payment (loss of the assett, reduction in credit-worthiness). They have simply concluded that the penalties for non-payment are more advantageous than continuing payment. Isn't that part of the contract, too? That being the case, I'm not certain the issue is morally cut-and-dried in favor of the banks.

In any event, this is the sort of muck we find ourselves in when the large and abstract trumps the small and particular as you rightly observe. But in transactions between faceless entities, it seems unreasonable to expect the borrower to behave as if they are dealing with the Bellows Falls Building and Loan. I probably should be outraged about this but in a way it's amusing to see the consumerist monster the corporations worked so hard to unleash turn on its master.

Sardonicus said...

You do appreciate Mr. Lasch, do you not, Prof. Deneen?

I do as well.

Anonymous said...

This behavior is a mainstream application of the theoretical concept of "efficient breach," whereby a party to a contract wilfully breaches that contract when the economic loss associated with the breach is less than the economic cost of performing the contract.

Legal theorists of the Richard Posner "law and economics" school have advocated the "efficient breach" of contracts for some time as efficiency-maximizing (for the reasons previously stated) and therefore laudable from a policy perspective. (n.b., I attended U. Chicago Law School and have thus endured full indoctrination into Richard Posner's economic theory of law).

Of course, the concepts of morality and virtue are utterly foreign to the calculations of such "conservative" economics, which only considers valuable that which can be monetized. This is, of course, highly problematic for the reasons well stated by Prof. Deneen. The bald cost-benefit calculus of economic theory cannot account for the destructive cultural consequences of unvirtuous behavior on such a large scale.

Black Sea said...

Loyalty, decency, civility, responsibility, professionalism. All of these imply as it were, a two-way street.

Increasingly, one can't help but recognize that these virtuous terms are trotted out by those in power who stand to benefit from shaming those below, but they are rarely cited when those in power must actually sacrifice something in the way of wealth or power to uphold these virtues. It's probably always been thus, so long as one has only a vague awareness of the other party in these relationships.

Anonymous said...

Yes, this does appear to be a new trend. One blog that has been keeping a fixed eye and critical mind on this development is Calculated Risk:

Relevant entries include,

- Flagstar Bancorp: Concerned About Consumers Walking Away
- New Trend: "Intentional Foreclosure"
- More on Homeowners Walking Away

Patrick Deneen said...

FLG's comment is actually further proof of the phenomenon I'm describing. Given that local banks and lenders expected to hold the mortgage for the life of the loan, such lenders retained special responsibility to help ensure that the terms of these loans would be met. While certainly standards were more stringent, we have very good reason to understand why. With the rise of "bundling" and "securitizing" of these loans - making them abstractions, divorcing them from the communities from which they originated - the originators of these loans no longer bore any particular responsibility for the future of these loans. Standards for such loans inevitably fell as a result - ironically undermining the very theory that such securitization would result in an overall reduction of risk. So, the very example provided here further attests to the consequences of the decline of communal norms and observable standards.

And, jawats, yes - Lasch always said it better, but it does bear repeating, even if insufficiently at best...

Dominick said...

Haven't we seen this decline in communal standards and norms in regards to personal relationships as well? In general we have a disposable culture, which rewards or at the very least enables people to ditch commitments with little or no shame or ostracism from the wider community.

Anonymous said...

We have all but forgotten the man who bought with his true ability and with the intention of living in his home. Suddenly, illness, death, job transfer, etc. happens and one finds themselves in a market that has been wrought with thieves. Having to move, holding two mortgages, trying to sell with offers less than the mortgage... Well, it appears that what was written years ago came to fruition...GREED... When you lend money to anyone that was breathing and offer such vehicles as "stated income" on price tags only the few could afford... Come on people, there should be NO BAIL OUT FOR AN INVESTOR, BUT THE INDIVIDUAL WHOSE INTENTION WAS TO LIVE AND SECURE THEIR OWN FUTURE WITH THEIR OWN MEANS.