The upside of jingle mail

By Felix Salmon
November 9, 2011

Most of the time, I consider it ludicrous that any member of the media ever bothers to interview the chief economist of the National Association of Realtors. It’s a paid-shill job, as its former occupant, David Lereah, now admits, and nothing coming out of the officeholder has ever been worth taking seriously.

On the other hand, sometimes the NAR’s chief economist says something so gorgeously and absurdly insane that it would be wrong of the media not to report it. And today is one of those days.

“Our members believe tinkering with the mortgage interest deduction at the high end will trickle down,” said Lawrence Yun, chief economist of the National Association of Realtors. “People view this as part of the social contract, as something that represents the American dream,” Mr. Yun said. “Therefore any changes are changes to the property rights of homeowners.”

Yes, he really said that: according to Yun, if we tweak or abolish the mortgage interest tax deduction, we’re directly attacking the property rights of homeowners.

Frankly, rather than making bonkers and obviously false statements about the mortgage-interest deduction, Yun should be much more worried about the future of jingle mail, or walking away. The same NYT section featuring Yun’s quote has two big articles about people who walked away from underwater mortgages: Carl Richard’s first-person account, and Tess Vigeland’s reported piece about homeowners who used to do just that. All of them are much happier and financially healthier as a result of their action — and in fact I can’t think of a single article about someone who walked away from their mortgage and regretted doing so.

Homeowners and their self-appointed representatives, of course, hate the idea that other homeowners would act in such a way: it hurts their own property values. In fact, they hate the idea right up until the point at which they do it themselves, at which point they wonder why they waited so long to get this burden off their backs.

Walking away is a peculiarly American phenomenon, linked to the fact that many huge states, including California, have non-recourse mortgages. In Ireland, where many people are much deeper underwater, the default rate on mortgages has stayed surprisingly low, partly for social reasons and partly because all mortgages are recourse.

But the fact is that walking away makes perfect sense for millions of underwater homeowners, and that the banks are being incredibly short-sighted if they refuse to do principal reductions on the grounds that those homeowners will happily continue to pay their mortgage even when they have no equity in their homes and little prospect of ever regaining any. Because as the stories of walking away percolate in articles like these, the stigma will go away. And Americans will start actually doing, en masse, what has always been in their best interest.


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As noted in the FAQ of the site you mentioned, youwalkaway, there are only 8 pure non-recourse states. Accordingly, I don’t think people with state walking away en masse. There is a real risk of a getting hit with a deficiency lawsuit down the road. Keep in mind that the statutes of limitations are typically 5-7 years. Someone who might not have the assets to warrant such a lawsuit at the time of walking away might very well have sufficient assets 5 years later. The WSJ had a recent article regarding the steady rise in deficiency lawsuits. This WSJ article also mentioned the fact that the right to pursue such a deficiency judgement can be sold to a debt collectors that might have more experience and patience than banks. 053111904060604576572532029526792.html

The idea of walking away has been well publicized for the last few years now. Rather than stigma, it is possible that underwater borrowers in the 42 states that are not pure non-recourse states have made a strategic decision that the benefit of walking away does not exceed the future risk of a deficiency judgement.

Posted by patentguy | Report as abusive

As a lawyer who works in this field, I have always been puzzled by the idea that walking away from an upside down mortgage tends to be some sort of carefully crafted strategy. In most cases, stuff just happens in this post-bubble, 100%-financing era, and the point comes where the homeowner simply has no other plausible choice. At that point the key remaining question is how bad the financial damage will be; bankruptcy is common. There are better and worse strategies, for which good professional advice is extremely useful and all too rarely obtained. Also, laws differ greatly by state, and what makes great sense one place may make none at all in another.

Posted by kenjd | Report as abusive

Shheesh! I thought that “trickle down” was a good thing for us at the bottom. Isn’t that how we are supposed to get our gruel and stale bread?

Posted by FixedCarbon | Report as abusive

“Our members believe tinkering with the mortgage interest deduction at the high end will trickle down,” said Lawrence Yun, chief economist of the National Association of Realtors.

Uh, your members =should= know that the MortInt deduction is capped at $1MM in principal. Which certainly didn’t trickle down recently.

(For the record, Felix, you’re being an idiot in pushing for taxing MortInt. Houses are, as Brad DeLong was admitting a month or so ago when he was buying one again, a forced savings plan with side benefits–and at least a 3% higher p.a. cost over renting, independent of C-S ratios.

(The area that needs reform is 401(k) contributions–where you can find a semi-legitimate middle ground in making all contributions Federally taxable [several states, including NJ, already tax them] AND allowing some or full deductability of realized capital losses.)

Posted by klhoughton | Report as abusive

I would agree with the main thesis here, that the nature of non recourse mortgages certainly does lower the lost to the borrower for default, but I would draw one distinction on the comparison to Ireland or any other European country, all of which are full recourse. The nature of delinquent mortgages in the US is starkly contrasted to European mortgages in one significant way: Europeans continue to pay mortgages even once they go delinquent. The shift from 1 month delinquent to 2 months and eventually to the point where the bank begins foreclosure proceedings is not at all assured. In fact, it’s quite common for borrowers 3+ months delinquent to still be making payments. It is possible to argue that these borrowers may still be making payments for fear of full recourse pursuit, but as someone who is intimately involved in the European mortgage market across jurisdictions, I can assure you that the expected value of the residual claims over and above the value of the home are di minimus (think five cents on the dollar or less). I would further add that most European countries also won’t allow a bank to foreclose on a home until every possible modification has been attempted.

One more thing related to your Ireland observation, the default rate in Ireland is low because borrowers do not have fear of foreclosure since the moratorium began in 2009. Since the most recent incarnation of the Irish crisis last year, delinquencies are skyrocketing. Irish subprime mortgages, called “nonconforming”, are more than 50% delinquent. Prime mortgages are becoming seriously delinquent at a rate of 30-50bps more PER MONTH.

Posted by jakethesnake | Report as abusive

It is amusing that he is worried about the mortgage interest rate deduction impacting property rights.

Once potentially defective titles from foreclosed homes begin to cause problems with closings and title insurance, the realtors will understand that they have been had by the banks.

Posted by ErnieD | Report as abusive

Felix, do you understand the concept of “selection bias”?

“I can’t think of a single article about someone who walked away from their mortgage and regretted doing so.”

Maybe that is because the people who WOULD regret doing so have chosen NOT to walk away?

“And Americans will start actually doing, en masse, what has always been in their best interest.”

Last I heard, just 11 million homes were underwater, just 10% of the households in the country. And most of them are not seriously underwater (thus there is a reasonable expectation of having positive equity ten years from now). Be careful generalizing too broadly.

Posted by TFF | Report as abusive

Felix, you rascal. I always enjoy reading your op-eds but this incessant talk of haircuts and writing down principle really makes me wonder.

Have you considered moving to Portugal? Just for a few months, to let your inner socialist see how redistribution of wealth from worker to parasite actually plays out in the real world.

I bet you’d be back post-haste young man, and singing a different tune entirely.

Posted by CaptnCrunch | Report as abusive

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