Does Identity of Lender Matter to Borrowers?
In markets where housing has fallen the most — Miami, Las Vegas, San Diego, etc. — many borrowers who are “upside down” on their homes (they owe more than the home is worth) apparently are behaving differently this downturn than previous ones. A generation ago, beleaguered borrowers did whatever they could to stay current on their mortgages and keep their homes. They got second (or third) jobs, curtailed almost all other spending, cut up their credit cards, etc.
Now, lenders are reporting that many borrowers are simply mailing in the keys, oblivious (or numb) to the credit-wrecking consequences of surrendering their home.
There are undoubtedly many reasons for this. Many of these defaulting borrowers had little equity to begin with, and therefore have little (besides their credit) to lose. They see making exorbitant payments on a house that has fallen in value as throwing good money after bad. Other “upside down” borrowers aren’t making any moral choices, they literally just don’t have the money — either because their adjustable rate loan re-set to an astronomical amount and/or due to health issues, job loss, divorce, etc.
However, there may very well be another factor that is exacerbating borrower defaults: the impersonal, convoluted nature of today’s mortgage market.
Six Degrees of Separation
Today’s borrowers don’t borrow from George Bailey, the conscientious local banker at the center of the movie classic, “It’s a Wonderful Life.” They deal with Potter Capital, the modern-day successor to the cross-town bank run by Bailey’s vile nemesis, Henry Potter.
More specifically, they deal with a lowly minion of Potter Capital. There is no personal relationship, no sense of duty or obligation between borrower and lender, no relationship of any kind, really, besides an abstract, contractual one. And that contract isn’t something they ever understood very well in the first place.
So defaulting borrowers don’t think their actions really hurt anyone — at least not anyone they care about.
Potter Capital is just a big, anonymous corporation to whom any one mortgage is just peanuts, anyway. More likely, Potter Capital isn’t even the ultimate loser; it’s Mega Capital Corp, the even bigger and more anonymous corporation that bought the securitized loan from Potter. Even then, that’s not the end of the daisy chain: if Mega Capital Corp is truly big enough and it’s losses are staggering enough, it’s losses will be passed to . . . the Federal Reserve (in other words, all of us).
Psychologists have long known that anonymity can make people behave badly. It should not be a surprise that financial anonymity can encourage borrowers to behave irresponsibly, too.