Friday, July 09, 2010

The Rich Are...

Today is Friday, 9 July 2010.

F. Scott Fitzgerald once remarked to Ernest Hemingway, “The rich are different”. Hemingway replied, “Yes, they have more money”.

And in the current America, they’re also more likely to default on residential mortgages.

“More than one in seven homeowners with loans in excess of a million dollars is seriously delinquent” (missing 3 or more successive payments). (According to data compiled by CoreLogic for The New York Times. Citation below.)

By contrast, among residential mortgages of less than a million dollars, about one in twelve is seriously delinquent.

14.2% versus 8.3%. (This pattern is repeated in mortgages for both second homes and investment homes at the same price point.)

One must presume that those who can afford more expensive housing are of the judgment that walking away from a mortgage ("strategic defaulting") is their best financial option, regardless of the harm it frequently does to their communities.

All this is hardly surprising: in all known societies, the rich assume they deserve the privileges they enjoy, and act accordingly.

Of more interest to me: why did many people with marginal resources to become homeowners, take on mortgages which now prove to be crushing burdens?

One of the central American dreams is to own one’s own home. And it’s not just a dream: it’s usually presented as a moral imperative – every good person should own a home for themselves and their family. The problem is, under our present economic system, many people will never be able to afford home ownership. During the days of easy mortgages, the combination of the social pressure of the moral imperative plus high-pressure, and frequently deceptive, sales techniques lured many people into financial responsibilities which they could meet only if everything continued to perpetually come up roses, an absurdity on its face. “This is the best of all possible worlds”.



Blogger weinerdogzrule said...

Perhaps the reason that some of these higher-end mortgages are in trouble is that: a) the housing bubble has burst (taking the financial markets with it); and b) the more affluent homeowners have experienced wide-spread, and devastating, lay-offs, cut-backs, down-sizing, etc. Their income simply does not even approach what it once was and, even with both spouses working, they are unable to afford the payments that once were a small percentage of their income. Many, many people relied on their incomes to remain the same, or increase, in coming years and just do not have the resources to save a multi-million dollar property at a time when their income is severely compromised.

Further, as the NYT article notes, the more successful "(m)ay be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest." In other words, the rich do not fall prey to the guilt and bullying tactics that government agencies, banks and mortgagees employ to keep homeowners in a situation that is not in their best interest.

I believe that most homeowners want to own, rather than rent, just for the pride of ownership (freedom to "make it your own"), as well as to enjoy the many financial advantages afforded by home ownership (building equity, tax benefits, etc.). Haven't heard the "moral imperative" argument - every "good person" must own a home/you must own a home to be a "good person" - but that doesn't seem nearly as persuasive as availing oneself of the financial advantages inherent in owning a home.

5:12 PM  
Anonymous rtr said...


I think you unintentionally reinforce the fundamental point that HH is trying to make. The financial best interests of the elite fiscal class are borne on the backs of a citizenry whose social contract find such a debt transference to be morally abhorrent.

Middle Eastern saying "Money has no smell."

If money is indeed a symbol of the value of societal service/production that an individual has created. Then credit is a promise of deferred service/production and default is a breach of that promise. If the breach is strategic then, the defaulter has salvaged his/her financial health on the basis of a willful lie.

American myth - a (wo)man is only as good as (her)his word.

From that perspective, the person isn't worth a shit - and that stinks.

12:03 AM  
Blogger weinerdogzrule said...

I see the problem with the “strategic defaults” in the housing market as being far more complex than what you and HH have outlined. And I certainly take issue with your statement that the “financial best interests of the elite fiscal class are borne on the backs of a citizenry whose social contract find such a debt transference to be morally abhorrent.“ I will agree that money is a symbol of societal reward for service/production (tied to education, risk, responsibility, etc.), that credit is a deferred promise to pay monies owed in exchange for goods and/or services purchased today, and that default is a breach of the promise - a broken contract. There are, however, any number of causes giving rise to the default - including illness, disability, death of the family income-earner, loss of employment/underemployment, etc. - and they can occur in low, middle and upper income families. The default (the inability to pay) itself is RARELY willful - individuals do not typically intend, at the time the debt is made, to breach the terms of their obligation or agreement. THAT would constitute a willful lie. Those conditions (partially enumerated above) arising later oblige them to default on the mortgage indebtedness. Those adverse conditions occurring during the life of the debt are certainly NOT willful - and oftentimes are not something from which a debtor can recover.

It should be noted here, too, that the mortgagee is not left simply “holding the bag.” Prior to the granting of the loan, the Bank, or other lending institution, assessed the creditworthiness of the loan applicant, appraised the value of the property, required and received adequate security for repayment of the loan. In essence, then, the Bank and the debtor/homeowner are partners of a sort in the debt/loan - that is, each believed that with the given circumstances, present at the time and for the foreseeable future, the debtor would be able to repay and, in the unfortunate event of a default, the home’s value would be sufficient collateral for repayment of the debt. When those circumstances change, due to no fault on the part of the debtor, why should he bear the total brunt of the adverse effects? Especially while we’re bailing out Goldman Sachs, and paying their executives millions in bonuses for their “astute administration” of the company? Even the rich, as well as well as those in the middle and lower-income group, have their problems and foibles. The more successful lost much in the recent stock market crash (401(K)s, retirement accounts, etc.) - assets and resources they relied on for financial security. Moreover, many found themselves unemployed when their employers went out of business or bankrupt.

I’ve met very few debtors who awaken each morning and think “I’m going to screw my creditors today.” Many of them rob Peter to pay Paul for months, make monumental sacrifices, sell everything they own, borrow from family members and friends, and yet remain unable to meet financial obligations. They have no choice but to walk away from an underwater property (the debt far exceeds the value), try to salvage something from a bad situation, and attempt to regain some financial stability. Of course, the mortgagee forecloses its security interest in the property, and obtains a judgment for any remaining deficiency, which the debtor is legally obligated to pay. The debtor/homeowner is often obliged to file bankruptcy, and his credit is severely impaired. I think an analysis of this problem requires more than an “us vs. them” mentality.

11:27 AM  
Blogger weinerdogzrule said...

Without belaboring the point, I believe that even the wisest and most fiscally conservative among us (rich, poor and everyone in-between) can miscalculate, misjudge, and make serious financial errors and blunders. All in good faith. And I don't believe that our citizenry regards doing what is legal, and in one's own best financial interest, as "morally abhorrent."

Although our society has eliminated debtor's prisons, it seems that many are unwilling to grant "moral" clemency to those who have made financial missteps. Especially if they are (or were) rich, and their missteps involve bigger numbers and more zeros. Just easier to point the blame at "them", because they have so much more, they're not struggling hard enough (as are we) to do what's right... Right?

3:58 PM  
Anonymous Anonymous said...

Please define 'rich'(in $), HH.

3:22 PM  
Blogger HH said...

Giving this request the answer it deserves will require more than Comment space. Tomorrow's column topic is already determined by an historical anniversary, so it will be a few days.

5:05 PM  

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