Lenders created a culture of Ponzis and delinquents

When I grew up, I watched my parents work hard and pay their bills. Their house payment was the largest of of their bills, but they sacrificed to pay down their mortgage to eventually become payment free. This was the experience of most Americans, a collective lesson we learned about responsibility and deferred gratification. Lenders destroyed that and replaced it with a culture of Ponzi borrowing and a series of poisonous beliefs that turned responsible homeowners into reckless and irresponsible loanowners.

How sweet it is…

It wasn’t enough to merely give millions of Ponzis billions in free-money loans. That alone would have irreparably harmed out culture. No, lenders didn’t stop there. When the ATM benefits ran out, they allowed the Ponzis to remain in the houses they could not afford for years without making any payments.

Think about the experience of many people over the last fifteen years. While most of us were working and paying for our housing costs through rent or steady mortgage payments, a large cohort was converting the appreciation of their properties to spending income. Rather than the house being a monthly expense, it was actually a source of income, and many came to depend on this income as a way of life. When that income dried up, these same people were not asked to pay for their housing. For a big portion of their adult lives, housing has not been an expense. Think of the shock and horror when the foreclosure finally happens and they have to pay rent. After fifteen years of HELOC dependency and squatting, such a change will be quite disturbing. It will be rough on them when they have to learn to live like the rest of us.

This problem was created entirely by lenders. They created a generation of Ponzis who view free housing money as an entitlement. And now with assistance of the government and federal reserve, they are forcing the rest of us to pay for their mistakes with bailouts and reduced interest income on our savings. As the final insult, we must watch as banks allow these people to squat in what should be our homes so they can prop prices up and make us pay more for what should be our houses.

Does Florida Have A ‘Culture Of Delinquency’?

August 23, 2012, 6:10 PM — By Robbie Whelan

Not all of the “sand states” are equal when it comes to the share of borrowers who are behind on their mortgage loans.

A new report out Thursday from real estate services provider Zillow found that while Florida is not the worst state for negative equity, the Sunshine State’s borrowers have disproportionately high delinquency rates on their loans.

In Miami-Ft. Lauderdale, 43.7% of borrowers are underwater, while 24.9% of them have missed at least three months of payments. In Tampa, where 46.6% are underwater, 17.6% haven’t made payments for three months. In Orlando, it’s 51.9% underwater and 18.2% delinquent.

Those are very high numbers. Apparently the word got out that if you quit paying, the banks would not foreclose. Strategic default is a wise course of action under those circumstances. Why pay when you can have the house for nothing? In fact, I would go as far as to say anyone who is underwater in Florida — or Nevada for that matter — is foolish to pay their mortgage.

Compare that with Phoenix, where 51.6% of borrowers are underwater, but only 8% are seriously delinquent, or Atlanta, where 54.4% are underwater, but only 7.8% are seriously delinquent. Even lowly Las Vegas, where a whopping 68.5% of borrowers owe more than their home is worth, only 13.6% are 90-days delinquent. (Zillow’s delinquency figures — which come from credit rating firm TransUnion – jibe with the Mortgage Bankers Association’s figures.) So what is it about Florida? Why are so many more of the state’s borrowers delinquent on their home loans when fewer of them are underwater?

In non-judicial foreclosure states, lenders have done a better job of randomly foreclosing on enough borrowers to create uncertainty in the herd. It’s a terrorist tactic of random violence, but it works. If the individuals in the herd do not know if they will be executed or spared, fewer are willing to take the risk. In Florida, borrowers know they can quit paying and stay for free. With little uncertainty, there is little risk, so everyone does it.

Part of the answer could lie in foreclosure timelines. Florida is the only one of the four notorious “sand states” (the others are California, Nevada and Arizona) that has an exclusively court-based foreclosure process, and the state’s courts have been jammed with thousands of cases. As a result, the foreclosure process is taking longer than ever – an average of 861 days in April – from start to finish.

The average foreclosure takes nearly two and a half years. How long does it take if people fight or game the system?

So even if Florida has a similar rate of default to that of most other states, defaulters stay delinquent longer, so at any given time, there are more of them.

“There are a lot of people hanging out in that pipeline,” says Stan Humphries, Zillow’s chief economist.

Borrowers could also be encouraged to default by others whom defaulting has benefited – if you can live two and a half years rent-free, before they kick you out, why not, right?

“If you’ve been around people who’ve defaulted, you’re much more likely to default yourself,” Mr. Humphires said.

Plus, it makes economic sense for these people to strategically default. They will likely not obtain home equity in their lifetime.

Ponzis are the only deterrent to irresponsible lending

It’s easy to get upset about the behavior of Ponzis when we are being asked to pay their bills. When it was merely a private contract between a lender and a Ponzi, whether or not the borrower repaid the debt was none of my concern, it was between the two private parties. It was when these parties to a private transaction were rewarded for their foolishness with taxpayer money that it became an issue everyone should be concerned about.

In the end, the moral hazards of the bailouts will create more Ponzis as lenders are emboldened to make more bad loans. Ponzis are like a virus to banks. If they proliferate out of control, the losses these borrowers generate will wipe out the banking system. This latest round of Ponzi creation caused an international banking crisis and nearly crashed the world’s financial system. The bailouts will likely create more. How bad will the next crisis be?

The only way to prevent banks from further damaging our culture by creating another generation of debt dependent losers is to force the banks to absorb these losses. Alas, that is not what we did. Lenders created a culture of dependency and delinquency in America, and we will suffer from this for another generation. I wish I could point to some legislative act or some enlightened policies of the federal reserve as evidence that we learned our lesson. I can’t. We haven’t learned out lesson. I think we are doomed to repeat this mistake, and next time, it might even be worse. I worry for our children.

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Proprietary Irvine Housing News home purchase analysis

70 West YALE #15 Irvine, CA 92604

$658,800 …….. Asking Price
$282,500 ………. Purchase Price
6/2/1992 ………. Purchase Date

$376,300 ………. Gross Gain (Loss)
($22,600) ………… Commissions and Costs at 8%
============================================
$353,700 ………. Net Gain (Loss)
============================================
133.2% ………. Gross Percent Change
125.2% ………. Net Percent Change
4.1% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$658,800 …….. Asking Price
$131,760 ………… 20% Down Conventional
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$527,040 …….. Mortgage
$136,539 ………. Income Requirement

$2,370 ………… Monthly Mortgage Payment
$571 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$165 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$422 ………… Homeowners Association Fees
============================================
$3,527 ………. Monthly Cash Outlays

($370) ………. Tax Savings
($828) ………. Equity Hidden in Payment
$147 ………….. Lost Income to Down Payment
$102 ………….. Maintenance and Replacement Reserves
============================================
$2,579 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$8,088 ………… Furnishing and Move In at 1% + $1,500
$8,088 ………… Closing Costs at 1% + $1,500
$5,270 ………… Interest Points
$131,760 ………… Down Payment
============================================
$153,206 ………. Total Cash Costs
$39,500 ………. Emergency Cash Reserves
============================================
$192,706 ………. Total Savings Needed

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