The Loss of Morality

August 11, 2010

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

By DAVID STREITFELD

PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”

John Collins Rudolf contributed reporting.

10 Simple Steps to Pay Your Debts and Become Debt Free

Our current economic crises has at its roots the massive increase in consumer (and business) debt over the past decade. And most people have now realized that in order to obtain financial security, they have to reduce or eliminate their personal debt.

Is it possible to pay off thousands of dollars of credit card debt, auto loans, and mortgages? It can't be done overnight, but it can be done. This simple program will work for almost anyone.

Americans Get Religion

U.S. consumer credit falls sharply in February
Tue Apr 7, 2009 3:33pm EDT

WASHINGTON (Reuters) - U.S. consumer borrowing fell more steeply than expected in February as credit and charge card use dropped by the most on record, a Federal Reserve report showed on Tuesday.

February's consumer credit dropped $7.48 billion, or at an annual rate of 3.5 percent, after advancing at a rate of 3.8 percent or an upwardly revised $8.14 billion the prior month, previously reported as a $1.8 billion rise.

Analysts polled by Reuters were expecting a $1 billion drop in consumer borrowing for February.

Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college educations and holidays, rose $313 million, or at a 0.2 percent rate.

However, revolving credit, made up of credit and charge cards, plunged at a 9.7 percent rate, or $7.79 billion in February, the largest dollar drop since the Fed started tracking the series in 1968.

In percentage terms, the 9.7 percent decline was the biggest since January 1978, when it dropped 15.7 percent.

(Reporting by Lucia Mutikani; Editing by Dan Grebler)
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A Return to Traditional Values?

From the New York Times:

March 10, 2009
Extravagance Has Its Limits as Belt-Tightening Trickles Up
By SHAILA DEWAN

ATLANTA — It is a sign of the times when Sacha Taylor, a fixture on the charity circuit in this gala-happy city, digs out a 10-year-old dress to wear to a recent society party.

Or when Jennifer Riley, a corporate lawyer, starts patronizing restaurants that take coupons.

Or when Ethel Knox, the wife of a pediatrician, cleans out her home and her storage unit, gives away an old car to a needy friend and cancels the family Christmas. “I just feel so decadent with all the stuff I’ve got,” she explained.

In just the seven months since the stock market began to plummet, the recession has aimed its death ray not just at the credit market, the Dow and Detroit, but at the very ethos of conspicuous consumption. Even those with a regular income are reassessing their spending habits, perhaps for the long term. They are shopping their closets, downscaling their vacations and holding off on trading in their cars. If the race to have the latest fashions and gadgets was like an endless, ever-faster video game, then someone has pushed the reset button.

“I think this economy was a good way to cure my compulsive shopping habit,” Maxine Frankel, 59, a high school teacher from Skokie, Ill., said as she longingly stroked a diaphanous black shawl at a shop in the nearby Chicago suburb of Glenview. “It’s kind of funny, but I feel much more satisfied with the things money can’t buy, like the well-being of my family. I’m just not seeking happiness from material things anymore.”

To many, the adjustment feels less like a temporary, emergency response than a permanent recalibration, one they view in terms of ethics rather than expediency.

“It’s kind of like we all went overboard,” said Ms. Taylor, 33. “And we’re trying to get back to where we should have been.”

Not everyone thinks the new restraint will last. Ms. Riley, 37, who lives in Atlanta, said she doubted it would extend beyond the recession.

“I do think that maybe now it’s a little bit chic or something to save money, or to be pinching pennies,” she said.

Just as she stopped carpooling when gas prices went down, Ms. Riley said, she predicted that people would start buying again when the economy rebounded. “That’s just my own, maybe, cynical belief,” she said.

Still, economists point out that the Great Depression created a generation of cautious savers. The longer the downturn this time, they say, the more likely it is to change financial habits permanently.

Holly Moreno, 30, a part-time Web site manager in the Dallas suburb of Rowlett, Tex., whose husband is a business analyst, said she had been taking their 2-year-old son to indoor playgrounds at the mall and free story-times at the library instead of paying to get into the children’s museum, their favorite wintertime haunt.

“Even though we’re secure with our jobs, you’ve still got to plan for just-in-case,” Ms. Moreno said, “especially because we have a kid.”

As many economists have noted, cutting spending is the worst thing people with means can do for the economy right now. But that argument seems to have little traction, especially because even those with steady paychecks and no fear of losing their job have seen their net worth decline and their retirement savings evaporate.

“I don’t think there’s been any other period in modern history where appeals to people to spend the economy back into health have worked,” said Ethan S. Harris, a co-chief of United States economics research at Barclays Capital. “The only time I’ve ever seen where that kind of urging people to spend worked was after 9/11, and I did think at the time that there was some patriotic buying going on.”

After the attacks of Sept. 11, though, President George W. Bush urged Americans to go shopping. President Obama has taken a different tack, issuing a budget whose very title, “A New Era of Responsibility,” strives for an austere tone. On Inauguration Day, the first daughters, Sasha and Malia, dressed not in designer labels but clothing from J. Crew. On television, the insurance giant Allstate is running a sepia-toned “back to basics” advertising campaign, and in Target’s “new day” commercials, the “new pedicure” is administered by a spouse and the “new vacation glow” comes from a spray bottle.

“Though the recession was always talked about in economic terms, we felt really strongly that, in fact, it was a crisis of culture,” said Tracy Johnson, research director for the Context-Based Research Group, a market research firm in Baltimore that views the recession as a rite-of-passage that will reorder consumer priorities.

Ms. Johnson has advised clients to focus on quality rather than quantity. Malls redecorated in screaming red “sale” signs are not the way to go, she said, because “if you just give people the opportunity to buy more, you’re not matching up to where their minds are.”

Carol Morgan, who teaches law at the University of Georgia and whose husband has a private law practice, said she felt a responsibility to cut needless spending. “That is probably something that is a prudent thing to do in any event, but particularly now I see it as the right thing, as the moral thing to do,” she said, adding that she also hoped to increase her charitable giving. “Before, extravagance and opulence was the aspiration, and if we can replace that with a desire to live more simply — replace that with time with family, or time for spirituality — what a positive outcome to a very negative situation.”

Kim Gatlin, a novelist who lives in Park Cities, in the Dallas area, said some of her friends had urged their husbands not to give them jewelry over the holidays. “They were like, you know, ‘There’s nothing I’m dying for right now — let’s just wait,’ ” she said. “It makes them feel like they’re participating, although they don’t contribute to the income stream.”

Even some of the very affluent said they were reluctant to be conspicuous in their spending.

“It’s disrespectful to the people who don’t have much to flaunt your wealth,” said Monica Dioda Hagedorn, 40, a lawyer in Atlanta who is married to an heir of the Scotts Miracle-Gro fortune. “I have plenty of dresses to last me 10 years.”

Ms. Hagedorn said she did not hold herself apart from the rest of society because of her money. “Everyone’s going to pull through together, or everyone’s going to sink together,” she said.

Fear and uncertainty have paralyzed even the most insulated clients, said Jack Sawyer Jr., who manages money for some of Atlanta’s wealthiest families. “I have clients who have $20 million, young grandparents, and they’re concerned about whether they can continue to pay tuition for their grandchildren. It’s not a rational process.”

Any sharp decline in consumer spending will feed on itself, said Juliet B. Schor, an economist at Boston College and the author of “The Overspent American: Upscaling, Downshifting and the New Consumer” (Basic Books, 1998). Typically, people spend when those around them are spending, but in a downturn, the need to compete evaporates. “You can stay right where you are without falling behind,” Ms. Schor said.

Consumers’ focus may have shifted, she said, from striving to catch up to those above them to contemplating the fates of those below them.

Craig Robinson, 34, a manager at a real estate investment firm in Atlanta, agreed, saying that he was not tempted to join those who were scooping up deals at department stores. “There’s one guy to the right of me showing me this great deal he got on his tie,” he said, “and there’s four guys to the left of me who got laid off and can’t find a job.”

Karen Ann Cullotta contributed reporting from Chicago, Gretel C. Kovach from Dallas, and Rebecca Cathcart from Los Angeles.

So Is All Debt Evil?

Not necessarily. All debt carries with it a certain amount of financial risk, but no life is completely risk-free. The best guidelines on "acceptable" debt come from Elder Marvin J. Ashton in an address delivered on April 5, 1975 which was later republished in pamphlet form (One For the Money: A Guide to Family Finances) and continues to be available from the Distribution Center. Here is the gist of his counsel:

"With the exception of buying a home, paying for education, or making other vital investments, avoid debt and the resulting finance charges. Buy consumer durables and vacations with cash. Avoid installment credit, and be careful with your use of credit cards... Buy used items until you have saved sufficiently to purchase quality new items."

So these are the exceptions:
1. Buying a home;
2. Paying for an education;
3. Making other vital investments.

What are other vital investments? President N. Eldon Tanner, a former member of the First Presidency, stated that such “investment debt should be fully secured so as not to encumber a family’s security.”

Some simple questions may help us determine if it is appropriate to borrow to make a purchase (including purchases made using credit cards):

1. Will the item for which I am borrowing still be usable after I have finished making the payments?

2. Have I discussed this purchase with my spouse? Asking this question will eliminate most impulse purchases.

3. Does the purchase qualify as a “vital investment;” and could it be sold at any time to pay off the full amount of the indebtedness if our situation changes?

4. Who am I fooling? If this isn’t a house or an education then it is probably a “consumer durable” (such as a car, appliance, or furniture) and should be purchased with cash, not credit. Buy a used one or do without until you save enough to purchase a new one.

Elder Ashton adds this final thought:

"Please listen carefully to this—and if it makes some of you feel uncomfortable, it is on purpose: Latter-day Saints who ignore or avoid their creditors are entitled to feel the inner frustrations that such conduct merits, and they are not living as Latter-day Saints should! Bankruptcy should be avoided, except only under the most unique and irreversible circumstances, and then utilized only after prayerful thought and thorough legal and financial consultation."

Coming up next: how to pay off all your debts in ten easy steps. Really.

Personal Debt (Part 2)

The Prophetic Injunction
The repeated counsel of the brethren for well over a century has been to pay our debts and avoid further indebtedness.


Brigham Young said, “Pay your debts…do not run into debt any more.”

Joseph F. Smith gave this advice in 1911: "If there is anyone here who is in debt, I would advise that when he goes home, and when I go home, too, that we will begin with a determination that we will pay our debts and meet all of our obligations just as quickly as the Lord will enable us to do it."

Gordon B. Hinckley counseled, “I urge you as members of this Church to get free of debt.”

President Thomas S. Monson recently taught that debt can “crush our self-esteem, ruin relationships, and leave us in desperate circumstances.” He noted that “yesterday’s luxuries have become today’s necessities.” And then added that, like in Pharaoh’s dream, "changes occur: people become ill or incapacitated, companies fail or downsize, jobs are lost, natural disasters befall us. For many reasons, payments on large amounts of debt can no longer be made.”

The Provident Living website at www.LDS.org states, “Honor your debts. We are a people of integrity. We believe in honoring our debts and being honest in our dealings with our fellow men.”

The First Presidency in "All is Safely Gathered In": "We urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt. Pay off debt as quickly as you can, and free yourselves from bondage. Save a little money regularly to gradually build a financial reserve. If you have paid your debts and have a financial reserve, even though it be small, you and your family will feel more secure and enjoy greater peace in your hearts.

In a letter to be read in sacrament meeting, issued in 2008, The First Presidency stated, "We are concerned that some Church members ignore the oft-repeated direction to ... avoid consumer debt."

The counsel of the Brethren has been simple, consistent, and in conformity with scriptural mandates. It is to pay our debts and avoid future debt.

Personal Debt

The Scriptural Injunction

I was reading the account of King Benjamin's speech the other morning, and was struck by this verse:

"And I would that ye should remember, that whosoever among you borroweth of his neighbor should return the thing that he borroweth, according as he doth agree, or else thou shalt commit sin." (Mosiah 4:28)

Several aspects of this instruction jumped out at me.

First, King Benjamin makes it clear that we should return what we borrow in accordance with the agreement we have made.

Second, to not do so is a sin.

And third, the footnote on this verse refers the reader to three topics in the Topical Guide: Borrowing, Debt, and Honesty.

We live in an era in which personal bankruptcy has lost much of its stigma. A common objective seems to be to borrow as much as possible, and when a financial reversal comes (as it invariably does), negotiate with the lender to reduce our debt in way that the lender will accept partial repayment and preserve the our credit score to enable future borrowing.

But the scriptural mandate seems clear. When we fail to pay our obligations "according as [we] doth agree," we "commit sin."

When Martin Harris and Joseph Smith were struggling to pay the debt to the printer for the printing of the Book of Mormon, the Lord gave very simple instructions:

"Pay the debt thou hast contracted with the printer. Release thyself from bondage." (D&C 19:35)

This was hard counsel - Martin had to sell a portion of his farm to pay off the debt. His wife was not happy about it; she ultimately left him. But apparently the Lord takes this business of paying back "according as he doth agree" very seriously. Note that in the revelation to Martin Harris the Lord includes the fact that Martin had "contracted" with the printer.

In the early days of the Church, it seems that the Saints had almost as many challenges meeting their debt obligations as we do today. In 1831 the Lord reminded the elders that "it is said in my laws, or forbidden, to get in debt with thine enemies." (D&C 64:27) In 1834, He again reminded the Saints, "It is my will that you shall pay all your debts." (D&C 104:78)

Faithful members of the Church, sometimes express suprise that we have worked to become debt free, yet none of these people are suprised that we don't smoke. But both commandments - "ye shall pay all your debts" and "tobacco is not for the body" - are contained in the scriptures.