Rich Deadbeats

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Remember all the silly talking points about "how the government made," forced, the big banks into giving out loans to "people who could not afford to pay them back?" Barney Frank was the main culprit in this instance for the FOX and Fiends media attack dogs. Well, it turns out that the "rich" are far worse than the average homeowner in paying the monthly mortgage. This is no surprise for some of us:

Certainly the rich are not to blame for the economic meltdown and I'm not suggesting that - The meltdown isn't about class warfare. Only that there is always a degree of risk in the lending business because it draws in a lot of potential investors, not just homeowners, who are going to manage the debt [investment] differently. Blaming "the government" for the failure of business to manage its risk is meaningless and this data, at least in part, proves it.

http://www.msnbc.msn.com/id/38158763/ns/business-real_estate/

 

I'm strapped for time, so I'll just drop by to add a thought which is partly related.

One of my parent's friends (who now works as a cleaner) used to own a small business along with her husband. It went bust not because they weren't making a profit, but because they didn't have any cash. People outright *refused* to pay for the services that the business provided, and as such it was no longer sustainable.

She made the rather astute observation that it was the rich individuals who often refused to pay their debts. Conversely, the poor were more likely to honour their debts.

This sort of ties back to what you are saying, Chandros. Perhaps the rich aren't rich because they are harder working, more upstanding citizens. Instead, they manage to accumulate wealth because they don't honour their debts, giving everyone else the shaft in the process.

 

As a CPA who has many wealthy clients I feel the need to comment. Building on what Mordea said, having a lot of income does not always translate into having a lot of cash. Many people with significant income fall into the trap of assuming they will always be able to make money, when that isn't necessarily the truth.

Physicians are the classic case. They tend to spend every penny they can get their hands on. They are normaly mortgaged to the hilt on everything. I will not deal with physicians unless they agree to two requirements. One they must maximize their retirement plans and two they must have sufficient disability plans for many of them are only a couple of months from disaster.

I'm picking on doctors, but there are many other examples. During the last NBA strike the players had to capitulate because they were out of money. The next labor negotiations between the NBA and the union will be interesting as the NBA knows the players don't have the resources to sit out for very long.

Expensive homes being high on the default category makes a lot of sense from a common sense approach. People with high incomes easilty qualify for mortgages. Expensive homes have the most to lose when the market decreases. High incomes are not easy or quick to replace.

Now if it was Gates or Buffett that were just dumping investments I would have a problem with that as they presumably have the resources to make the payments. Seeing people giving up on their second homes isn't quite as nefarious as it sounds. I'm sure many of them are trying to keep their primary homes.

I'm not quite sure I would call them "deadbeats".

 

Maybe the western world will finally learn that the motto of the 80's, "Greed is good", is a bad way to live. I don't think we really ever got that one out of our system. Maybe this will finally do it for us. I kind of doubt it, but maybe.

Although I'm also wondering if someone may be playing with statistics. The housing crisis has been going on for quite a while now. Could it be that many of the poor who had houses too expensive for them lost them a year or more ago? Thus, they aren't 'delinquent' anymore, so much as 'foreclosed'.

 

Who is playing with the statistics? The numbers are what they are.

The poor have a pretty good record of repayment. The "housing crisis" was caused by lenders giving credit to people with bad credit, which included all income levels. When you extend credit to people who don't pay their bills, they tend to do just that - not pay their bills. As I commented this is not about class warfare. It is about how lenders managed their risk. Of course many of those lenders passed that risk off to Wall Street who failed to manage their end of the risk and had to be bailed out by the taxpayers.

Places like Florida, California and Nevada had overheated housing markets to begin with and a lot of middle-class families got stuck with homes that are now underwater (worth far less than they paid for them).

The thing I found interesting about this article is that most people "generally assume" that the rich are good credit risks, and as Mordea and Snook have pointed out as well, that is not always true. One just can't generalize about income level and risk. That's the part that I found interesting. I was not trying to pick on the rich or elevate the poor, only point out that those distictions are not that important in managing lending practices, unless the borrower or client really can't afford the loan. But that's the easy part to manage because all a lender has to do is look at a sliding table to determine what a client can afford. The credit/banks/mortgage companies can now use your FICO score, from credit reporting companies to track income to debt ratios - even "better" than you can (which I think is complete BS).

http://articles.moneycentral.msn.co...uide/tell-congress-no-more-secret-scores.aspx

 

That is definitely true. I can use my own family as an example. I have a better credit score than my brother, even though he is a doctor and has an annual income a few times larger than mine. (AFAIK, my brother is not late on any repayments, but the point is that having more money does not necessarily mean you are a better credit risk.

 

Surely if you don't repay your mortgage, nobody sane will ever lend you money again?

 

Well, assuming you file for bankruptcy, you're basically hosed for the next 7 years. You won't even be able to get a credit card.

 

It cuts about 150 points off your overall score. That's just the mortgage. A lot of people are not filing for protection, but just walking away from their mortgages. Here in Texas a foreclosure is a fast process (about 90 days) but in some places it could take as long as a year. A long process can have advantages because people are sometimes able to find work or come up with the money given enough time. In Texas, if you don't pay, they just throw you out into the street. They don't care.

http://www.msnbc.msn.com/id/38205674/ns/business-personal_finance/

 

Not really. Anyone who's ever declared bankruptcy can tell you that the credit card offers start coming within days of its finalization, and it won't stop you from getting a mortgage, either. According to my copy of personal finance for dummies, you can reasonably expect to qualify for a mortgage after 3 years with a good payment history post-bankruptcy. The bankruptcy ends up costing you about half a point.

 

Chandos, this was actually very much my point. The article pointed out that the rich are more likely to be behind on payments, and my response was that maybe those among the poor who were similar bad credit risks already lost theirs and, as such, aren't 'behind on payments' anymore. That kind of thing is often called 'playing with statistics'. Remember what (I think) P. T. Barnum said, "There's lies, there's damn lies, and then there are statistics".

 

If you say so....

By whom? That makes no sense.

So are you disputing the article or agreeing with it? What is your point?

Sorry, I don't think much of him, nor of his comment, so I don't think I need to remember it. But you can if you find it useful. I take it that you don't much like the statistics?

 

Chandos, come on! You know that statistics can be massaged and presented in such a way as to be 100% accurate and yet highly misleading.

An example lies in a former PM of Canada. Under his administration, the threshold for being considered poor (IIRC, it's called the poverty line) was lowered significantly. This resulted in fewer people qualifying to be called "in poverty". His party's spin on it? "Under this administration, poverty in Canada has been reduced!" The people who were in the new bracket were still struggling, he hadn't helped a single effing person, yet the statistic was technically true! I'm sure that several examples from our good friend President Bush could be easily found. I'm sure that more vile examples could be found with a little research, but it's not worth it to demonstrate such a comonly acknowledged idea.

I agree that the numbers "are what they are", but the presentation of those numbers can be easily spun. Now whether or not they are in the case of the foreclosures and such that are currently under discussion, I don't have access to the raw data and wouldn't bother if I did, but the possibility of someone fiddling with the numbers is not that radical an idea, and is a fair question to ask.

 

So are you disputing the article? Is that your point?

Show me in the article where they have been "spun."

Why because you don't like the results? And there is no way to prove the statistics, other than that they have been printed? That's your idea of "fair?" We use statistics on this board all the time. So now the conservative chorus line wishes to invalidate the use of statistics over data? Fine. Don't use statistics if they bother you. How is that for "fair?"

 

I am not disputing the article, Chandos, nor am I merely closing my eyes to some statistics that possibly contradict a position I may hold (difficult, as I don't really have a well informed position on this issue, and I am well aware of that.) What I am saying is that when presented with statistics, there is nothing wrong with questioning the presentation of said statistics.

A search for possible bias is not the same as intellectual heresy. That's my point. You seemed to be making NOG's comment out to be some sort of smear or slur, and it wasn't. It was an honest conjecture as to the possibility of spin. He didn't claim that there definitely WAS spin, and neither am I. But a little scepticism never hurt anyone.

 

First you accuse me of being "unfair" and now this? Why don't you be "intellectually" man enough to point out which specific points in my comments you wish me to answer to your satisfaction? I would be more than happy to do so. I wish there was a specific point that either of you were trying to make (such as where in the article there may be spin), especially since these have been widely published on many news services including FOX - yes, that's right, FOX. Is anyone disputing the validity of these statistics that you know of? Personally I believe that you are the one (including NOG) who is full of "spin" on this topic. I say that because you seem to be "spinning" the results of the CoreLogic statistics with nothing but hot air into what "might" be a mistake (misinformation?) in the numbers. Did you read the article in question before you commented on it? I suspect that neither of you have.

 

I'll take a stab at it.

In the article you linked to it said that 1 in 7 people with mortgages over $1,000,000 (the rich) are delinquent. It then says that 1 in 12 people with mortgages under $1,000,000 are delinquent (the poor).

The spin of the article and the title of this thread is that the poor are more likely to pay their bills and they are using the above statistics to justify this theory. What I believe NOG and LKD were trying to point out is that these statistics could be grossly misinterpreted for it doesn't say if these numbers are as of a point in time (meaning the date of the article) or if they are a period of time (the beginning of the mortgage disaster to the present). If it is the 1st then all of the "poor" who already lost their houses are not included in the 1 in 12 and that distorts the number. If it is the 2nd then I agree it does make "the rich" look bad.

The quote you highlighted in the original post clearly shows that the spin is the rich are bad and the poor are saintly, but I would expect nothing less from the NYT and MSNBC

 

Let's take this one piece at a time, Snook: How is that (a mortgage under $1,000,000) representative of "the poor?"

I'll leave you to guess what FOX's take (spin?) on it was.

 

That is why I put it into quotes as the population clearly isn't stratified into multiple levels. This makes the data even more suspect. I would love to see this as a graph with an axis using $100,000 mortgage breaks to see what level of debt people just don't walk away from. Also doing this as of a point in time doesn't make any sense, it would have to be done over the entire mortgage crisis.

I agree using $1,000,000 as a threshold is ridiculous, but I didn't have any other option to use.

 

Really

Really? That sounds pretty multi-leveled to me. Was it that they did not include the specific incomes in dollar amounts? You can look at the graphs in the article that shows the dates. Believe it or not the actual graphs are there.

If it pains you to look at the MSNBC article you can find it also on FOX, with their spin on it.

"Only the middle class pay mortgages." How's that for "spin," Snook?

http://www.foxbusiness.com/personal-finance/2010/07/09/wealthy-walk-away-mortgages/

So why did you label it the "poor," rather than just "the rest of the population?" I'm not putting you down for using "the poor" in anyway for it - just curious.