Why Banks Try to Make Borrowers Feel Like Sinners When They Can't Pay off Their Mortgages

More than three years into one of the worst housing crashes in economic history, Americans remain wedded to a dysfunctional ideology that leaves citizens perpetually at the mercy of predatory bankers. Even after witnessing a gigantic wave of abusive lending drown the life savings of millions, most citizens still believe that borrowers, not bankers, are to blame for unaffordable loans, while a staggering majority believes it is morally wrong for troubled borrowers to walk away from their mortgages—even amid conditions of financial distress.

These figures and plenty of other distressing data come from a little-noticed survey published in April by mortgage giant Freddie Mac (in addition to serving as bonus factories for reckless executives, Freddie and its sister company Fannie Mae produce some of the most reliable housing data available, particularly on consumer sentiments). The reason for the survey's relatively small splash is easy to understand—almost nothing about consumer attitudes toward housing has changed since 2003, right before the eruption of the subprime boom.

Let's start with the worst news—blame for bad loans. Despite all of the stories proliferated about fraud (80 percent of which is committed by lenders, according to the FBI) and other forms of banker abuse, a full 53 percent of Americans believe that borrowers are responsible for taking out unaffordable loans, not the lenders who push the loans. This simply does not make sense. Let's imagine the best-case scenario for the lender, in which both the borrower and the lender have an educated, sober view of housing options, and nobody is being defrauded. This view is essentially presented by J.P. Morgan Chase Chief Economist James Glassman in a recent note to clients:

Folks may like to hear that someone else is to blame for the mistakes they made, but everyone knows--including those who bought houses far beyond what they could afford and then walked . . . that Wall Street isn't the only culprit in the housing debacle.

Glassman's best defense of the banks is, in essence, that it takes two to tango. But unlike the borrower, the banker is supposed to be a professional—it's the banker's job to make sure that he isn't extending loans that cannot be repaid, and he gets paid very well to exercise this judgment. Personal responsibility is all well and good, but it's absurd to argue that it only extends to one party in a transaction—especially the party who isn't getting paid.

This belief that personal responsibility does not extend to bankers creates an unfair and irrational moral burden on borrowers who find themselves in over their heads. A full 80 percent of the general population believes that it is not acceptable for a borrower to stop paying his or her mortgage, even under conditions of financial distress. Even more astonishing, 61 percent of borrowers who have already missed payments on their mortgage believe the same thing.

Bankers intentionally propagate this insane ideology in order to profit from it. That's why high-ranking people like Glassman publish "research notes" castigating his bank's own customers. The Wall Street bonus machine feeds on irrational borrower guilt. If you're stuck in a mortgage you can't afford, refusing to pay is your only real defense against that machine.

Buying a home is usually not a very good investment. According to economist Dean Baker, co-Director of the Center for Economic Policy and Research, it costs about 15 percent more to buy a home than it does to rent it. That extra 15 percent is a direct gift to the banks at the expense of consumers. It means that homeowners are getting a lousy return even when house prices are not plummeting thanks to Wall Street excess.

What can refusing to pay get you? A lot more than you're likely to get from trying to haggle with your bank. J.P. Morgan has publicly rejected the idea of renegotiating how much borrowers owe on their mortgages, but their efforts to keep borrowers in their homes are par for the course under President Barack Obama's Making Home Affordable Modification Program (HAMP). J.P. Morgan has steered 16 percent of eligible borrowers into loan modifications since February 2009, slightly under the 17 percent industry average.

The trouble is, with a few exceptions, HAMP modifications don't really help borrowers. Instead of reducing how much borrowers actually owe on their mortgages, HAMP modifications focus on reducing their monthly payment. This payment reduction can be accomplished by extending the life of the loan or lowering the interest rate, but the overall debt burden usually remains unchanged. Even with a HAMP modification, borrowers who have seen the value of their home plummet by 30 to 40 percent in the past few years can still end up paying out hundreds of thousands of dollars more than their home is worth over the life of their loan. What's worse, the bank that is refusing to cut you a break on that debt burden is the direct beneficiary of that payout.

So if you simply stop paying your unaffordable mortgage, you save the money you would have lost in the housing plunge, you avoid paying a 15 percent ownership premium, and you stop funneling free, unearned money to the bankers who wrecked the economy. But it actually gets even better. Right now, banks are dealing with so many foreclosures that it takes an average of more than 14 months to actually kick somebody out of he home once she stops paying, according to data from LPS Analytics cited by The New York Times. Not only do you save lots of money over the long-term, you get to live rent-free for over a year.

The financial calculus is pretty clear. But from a moral standpoint, the rationale should be just as obvious. The bank was not doing you a favor when it extended you a loan. It was trying to make money off of you. If that effort doesn't work out for the bank, it's not your fault. The contract is very clear about what happens if you can't pay the loan—the bank gets the house. If the bank can't takeover your house quickly because their business is clunky and cumbersome, that is also not your fault. Banks themselves walk away from real estate deals when they do not appear profitable. There is no shame you making the same choice.

Some borrowers are making this choice. But the public at large still believes the bank lobby when it says that lots and lots of homeownership is good for the economy. It isn't. Even when house prices are stable, that 15 percent ownership premium is money you could be spending on something else. By spending that money on furniture, cars, food, vacations, whatever, you'd actually be stimulating the economy. Instead, that money is being converted into bank bonuses.

Unfortunately, according to the Freddie Mac survey, 85 percent of the public believes that owning a home is preferable to renting, while 70 percent think that owning a home is a "safe" investment. That last figure is down slightly from the 2003 level of 83 percent, but the housing collapse should have made abundantly clear to everyone that owning a home is not a good way to invest your money—plenty of people have seen their life savings decimated by the decline in home prices over the past three years. For more than two-thirds of society to still believe this pipe dream is truly a testament to success of the propaganda banks have been pushing in recent decades (propaganda that received no shortage of help from many in the public sector in both political parties, it should be added). These figures persist, despite the fact that more than half of all homeowners say they are "sacrificing" financially in order to own their home—itself a gift to the banks.

You also gain negotiation leverage by refusing to pay your mortgage. If banks realize that you actually might just walk away, they're more likely to actually engage you in talks about reducing how much you owe. If you're thinking about walking away, you should talk to a credit counselor first—there may be better options for specific borrowers, depending on their situation. But everyone, renters and owners alike, needs to rethink the crazy belief that borrowers bear a moral burden for taking out a mortgage. The banks are profiting from that belief, and they know it.


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