Psychological Manipulation of Debt Slaves

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Cloudfire's picture
Cloudfire
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Psychological Manipulation of Debt Slaves

This is an excellent analysis of the forces at play in keeping Americans with underwater mortgages paying up, contrary to their best interest. 

Here's the abstract, but it doesn't hint at how much meat is in this casserole:

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse. 

Brent T. White does a fascinating analysis of how our social institutions are used to psychologically manipulate the behaviors of persons with underwater mortgages, to the advantage of the banks.  He also dissects the legal assymetry in risk exposure taken by the lender and borrower in most loans . . . It's not what you think . . . He asserts that, contrary to conventional wisdom, it is the borrower who assumes more risk in most contracts. 

This well-annotated article confirms many of my gut suspicions about how the psychology of debt works.  It is well worth a read for everyone, and mandatory reading for anyone with significant debt.

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Re: Psychological Manipulation of Debt Slaves

the first person to walk away from debt and declare bankruptcy would be a banker/lender.  then they would be open for business again a year or two later with no guilt.  Don't feel any guilt about walking away from those leeches.

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Re: Psychological Manipulation of Debt Slaves

Unforunately this goes very very deep. Just this evening BBC Radio 4 in UK had scientific proof that credit card payment people did not understand percentages (no surprises there then), but, . . . .  when it came to displaying minimum payments on statements then people would feel 'comforted', 'advised' that the minimum payment is 'recommended'.

For example, ask a person £10,000 in debt on credit card what they should pay back and yes they want it wiped out so an average of x% ask the same question when a minimum payment is shown then the minimum payment is OK and that is what they will do. The x% is always greater than the minimum payment - by design? I would guess a fortuitous discovery that will be continued.

Don't know about the states but I have seen a minimum payment for credit cards that does not cover the interest charged - the debt will increase and never be paid off, . ..  . I need to check that ,  .. .. .

http://www2.warwick.ac.uk/newsandevents/pressreleases/research_finds_cus...

covers what was on radio 4 here in UK

 

Regards to all.

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Re: Psychological Manipulation of Debt Slaves

To give you an idea of how fragile this perception of our responsibility to repay debt to the fraudsters is, consider the following:

Normally, I pay my Visa balance in full, every month.  Paying most expenses with my credit card usually gets me, as a side benefit, two first class upgraded flights to Hawaii, annually.  Recently, I neglected to pay the bill on time.  I became aware of this when, after placing several online orders, I received a spate of "card declined" notices in my email box.  I was really miffed that the bank's way of notifying me of their demand for payment was to inconvenience me and a number of vendors by simply "turning off" my card.

Well, after having to deal with the vendors emails, I was in no mettle to talk with a scripted foreign teleoperator at Visa . . . In a weak moment, I went into a tirade about how I was tempted to stiff them for the balance, saying something like, "What? . . . Am I supposed to be worried that you're going to ruin my credit rating? . . . I never truly use credit anyway! . . . and, in any case the banks aren't lending . . . So . . . Go ahead . . . Make my day!"

Well, I'm not proud of that sort of behavior, but I was completely shocked when the operator handed me over to a higher level person who, without any prompting from me, removed all of my late charges . . . They know that the whole house of cards is predicated on a fragile sense that we morally must pay. 

Now, of course, I paid my bill, in full, as usual . . . But my little outburst revealed a pretty interesting vulnerability in the system . . .

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Re: Psychological Manipulation of Debt Slaves

Mish also wrote about this report.  This is an excerpt from his newsletter.  It's an email from a Maryland mortgage consultant, in response to the "Should I walk away?" question:

Mish,

I wanted to let you know that I deeply appreciate your post on strategic defaults. I get people calling me all of the time looking to refinance and when I find out how underwater they are I tell them it might be wise to walk away from the property.

I also tell them the consequences of walking away. Like the article said, a foreclosure will stay on your credit report for 10 years. However, if you walk away it will only be 3 years before you can buy a home again. (It used to be 2 years but Fannie, Freddie, and the FHA made it longer to discourage people from walking away.)

I tell them if they choose to walk away they need to make sure they have a decent car, and at least one credit card. The reason for the car is that it may be hard to get a decent rate on a car loan for a while if they have a recent foreclosure, and the credit card is needed to help you re-establish your credit after the foreclosure. One of the biggest mistakes people make after a bankruptcy or foreclosure is not re-establishing their credit.

I do believe that in the future the guidelines will be changed to allow people who have re-established their credit to purchase a home 2 years after a foreclosure. This because there will be thousands such potential borrowers and it would be stupid to prevent them from re-entering the market.

The other night I meet some friends for dinner. When a got there a lady I used to work with came up to me and told me her situation. In 2007 she bought a condo in Arlington, Va. for $300,000 and its value had dropped to $200,000. She still owed $295,000 on it. She told me she could afford the payment, but was considering walking away. I asked her what was her mortgage payment and condo fees were. It came to $2,300/month. Then I asked how much would it cost to rent a similar apartment. Her answer was $1,200-1,300.

I said the answer was easy, walk away. In fact, I told her I would stop paying the mortgage and see how long it took them to foreclose. She might be able to live there 6 months or more rent free.

Her fiancé was there and he didn't agree with my answer. He said that her credit would be ruined for ten years and that the value would come back. I responded that a foreclosure would stay on a credit report for 10 years, but if you work hard at re-establishing your credit, the score can come back in a year or two.

I have seen people plenty of people with credit scores over 700 within one year of a bankruptcy or foreclosure. As far as the value coming back, I told him that it would take 10 years or more before that value comes back.

More people need to know that foreclosure is not the end of the world and that their credit can come back in a couple of years or sooner, especially if they take the right steps prior to the foreclosure.

Thanks for the post, and keep up the good work.

Michael Becker

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Re: Psychological Manipulation of Debt Slaves

And here's a lawyerly response to the same issues, with respect to Florida law:

Mr. Shedlock,

I read your page every day, and appreciate your take on our economy. I wanted to warn you about blanket advice from a mortgage broker that you highlighted in your most recent post. In particular, the advice for homeowners to just walk away from their homes and take a credit hit could be very very risky for homeowners, depending on the state they live in.

For example, please consider the state of Florida, where my wife and I practice foreclosure defense law. A homeowner absolutely SHOULD NOT just walk away from a home in Florida. Florida is a judicial foreclosure state, with very few mandatory protections for defaulting homeowners. Most importantly, in Florida the homeowner’s promissory note is not extinguished in foreclosure in Florida. This means that a bank can foreclose on the property and then pursue the ex-homeowner for the deficiency. Just walking away is the worst thing a homeowner can do in Florida, and in many other states across the nation.

Blanket advice is very dangerous advice to be giving to anyone, particularly in a state like Florida. In Florida, the bank would foreclose on the property, and they would then have the right to pursue her for the $100,000 deficiency. I will grant that not all banks do pursue deficiencies right now, but the kicker is this: the banks have years in which they can wait and choose to pursue a deficiency. These debts can be sat on, or sold, and the ex-homeowner may find the debt weighing over their heads for decades.

The correct advice from Mr. Becker should have been “Please Go Talk To A Lawyer.” Only someone familiar with both real estate foreclosure law AND collections law should be giving out advice, especially in the current environment.

I admit that I am not familiar with the laws of the state of Virginia, but if that woman was from Florida, just walking away could make things much worse.

In the spirit of full disclosure, my law practice is primarily focused on foreclosure defense. We work hard to provide Florida homeowners with real solutions to their mortgage debt, and in most cases are able to get negotiated releases for homeowners.

Many people walk into our office thinking that “walking away” is a viable option. However, homeowners who don’t know their rights AND the lender's rights as well, should only be steered in one direction…towards a competent lawyer who understands foreclosure and collection laws in their states.

If you have any questions on this matter, or anything related to foreclosures, please let me know.

Respectfully,
Dan McKillop, J.D.
555 S. Osprey Ave
SARASOTA, FL 34236

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Re: Psychological Manipulation of Debt Slaves

Thanks Cloudfire.

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Re: Psychological Manipulation of Debt Slaves

Interesting...

My experience of "walking away" was quite ironic from a interaction perspective.

"they" - Aurora Loan wanted me to pay my debt using credit cards. My lawyer told me under no circumstances should I do so, since in WA state there is a non-Judicial and a Judicial foreclosure.

When speaking with the loan people, they do rely on peoples "moral" imperative to pay their debts, when I explained that robbing Peter to pay Paul (Credit card to pay back Mortgage), I was just transferring debt, and that they could have the security, which was of course their prerogative in lieu of payments as defined in the contract, and that as a business I was writing off the loss of the property as a bad debt. They were very confused, even higher up the chain.

As an aside we had an excess in Escrow, which Aurora wanted to take, again the lawyer said categorically, leave it there, do not sign the form that allows them to clear the account. When we refused they, again, were confused. Seems like they believe that all your money and credit is theres, and when you explain to them that no, that is not the case, they get very uppity. At one time I did explain to them that I had indeed paid my mortgage when the Federal Bailouts to the financial institutions used my tax dollars to bankroll them. That one went down well I can tell you, you could hear crickets chirping at the other end of the line, and a sea of confusion.

Ah, well, logic was never the strong point of most human interactions.

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Re: Psychological Manipulation of Debt Slaves
Gungnir wrote:

Interesting...

My experience of "walking away" was quite ironic from a interaction perspective.

"they" - Aurora Loan wanted me to pay my debt using credit cards. My lawyer told me under no circumstances should I do so, since in WA state there is a non-Judicial and a Judicial foreclosure.

When speaking with the loan people, they do rely on peoples "moral" imperative to pay their debts, when I explained that robbing Peter to pay Paul (Credit card to pay back Mortgage), I was just transferring debt, and that they could have the security, which was of course their prerogative in lieu of payments as defined in the contract, and that as a business I was writing off the loss of the property as a bad debt. They were very confused, even higher up the chain.

As an aside we had an excess in Escrow, which Aurora wanted to take, again the lawyer said categorically, leave it there, do not sign the form that allows them to clear the account. When we refused they, again, were confused. Seems like they believe that all your money and credit is theres, and when you explain to them that no, that is not the case, they get very uppity. At one time I did explain to them that I had indeed paid my mortgage when the Federal Bailouts to the financial institutions used my tax dollars to bankroll them. That one went down well I can tell you, you could hear crickets chirping at the other end of the line, and a sea of confusion.

Ah, well, logic was never the strong point of most human interactions.

Great story, and well told, Gungnir . . . I only wish I was there to appreciate the silence at the other end of the line . . .

 

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Re: Psychological Manipulation of Debt Slaves

Aw... shucks Cloud. Embarassed

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Re: Psychological Manipulation of Debt Slaves

Gungnir,

Seems like they believe that all your money and credit is theres

That's because those numbers DO belong to the banking system and only to the banking system.  They only loan those numbers into circulation(retain ownership) and never spend (transfer ownership) those numbers.

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Re: Psychological Manipulation of Debt Slaves

In the first approximation you're correct the numbers do belong to the bank.

In the second approximation the labor that I need to supply to earn those numbers and pay off that debt does not belong to the bank, should this be the case then I was technically a slave. Incidentally the bank now has the real property (or shortly will) therefore the contract is fulfilled and there should no longer be that debt and thus lien on my life and endeavors.

 

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Re: Psychological Manipulation of Debt Slaves

In the second approximation the labor that I need to supply to earn those numbers and pay off that debt does not belong to the bank, should this be the case then I was technically a slave. Incidentally the bank now has the real property (or shortly will) therefore the contract is fulfilled and there should no longer be that debt and thus lien on my life and endeavors.

When a bank has you sign a mortgage your labor and equity does not account for anything, only the bankers equity accounts for anything.  Take it into any court in America and you'll find out, or do it the easier way and read about people who found out the hard way.  The only way we are going to get out of debt to these bankers is to put money into circulation that is free from debt and can be earned into circulation, not borrowed into circulation.

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Re: Psychological Manipulation of Debt Slaves

Thanks Thomas, for explaining to me what I'm already going through.

My current situation is Mortage lender taking non-Judicial Foreclosure, which in the State of Washington means that they cannot sue me subsequently for any shortfalls. The bank got back their equity as defined in the Mortgage contract so screw them, since they opted for the non-Judicial foreclosure then under Washington State law they cannot pursue me for that shortfall, nor pursue a Judicial foreclosure subsequently.

However I think that the travesty of this whole discussion is that "YOU" are expected under moral expectations to pay for a a debt whether or not it is now financially sensible to to so, and in such a way that induces you to greater levels of debt and therefore a greater lien on your labor. Isn't this the absolute definition of usury? Or to be more accurate indentured slavery? The system however continues because people don't decide that morals be damned it's just nonsensical to try to pay for something that no longer has the value that makes sense to continue to "throw good money after bad", and assume the entire cost of a joint purchase with a lender, where the lender has attempted to legally enforce that you own that risk. Surely morally they assume the same degree of risk. However that is not the way that the system is set up, it's heads the lender wins, tails the borrower loses.

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Re: Psychological Manipulation of Debt Slaves

I believe the translation from latin of "mortgage" is "death pledge".  I'm thankful that mine is paid off.  Now it's just me and the taxing "authority".  Hmmm, death and taxes......Aloha, Steve.

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Re: Psychological Manipulation of Debt Slaves

Gungnir,

I'm sorry to hear that the bank is stealing all of your property.  Make no mistake it's absolute theft by deception.  You're correct in your slavery comment.  We are all slaves to a perpetual growing indebtiness, BUT we can change this.  All we have to do is pass legislation like the MTA to put money into circulation that is free from debt so we can break free from this debt and still have a meduim of exchange.  The amazing this is almost everyone attacks me for wanting to be free from debt.  Almost all of these people think it's ok for someone else to be holding the debt so they can have some money but when I ask them to take a huge loan out for my benifit the conversations usually go blank after that.  This is the part that bothers me the most.  I come onto CM.com and get attacked regularly by almost everyone for offering a solution to this financial problem.  This debt problem isn't going away.  It's only going to get worse until we excersize our collective power and get at least one state to pass the Minnesota Transporation Act.  The MTA is only a first step, but we have to take that first step by putting debt free money into circulation.  Then start dismantling the debt machine by passing one law at time.

There is no more effective tool to steal all of the property from all of the people all the time than the creation of the medium of exchange as interest bearing loans.

If you want to learn what you can do to make sure this doesn't happen to you, or anyone else, ever again, I highly recommend you get a copy of Modern Money Secrets.

What is happening to Gungnir needs to stop and they only way we are going to make that happen is by passing legislation to reform our monetary system from an evidence of indebtiness to an evidence of wealth.  I'll say it again.  It's all about honest - vs - fraud.....I own - vs - I owe.  Wealth - vs - Debt.  Freedom - vs- Slavery. 

The only issue in America is monetary reform because every other issue we face is a direct consequence of our monetary system.  What kind of a future are we leaving our future prodigy?

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Re: Psychological Manipulation of Debt Slaves

The law is commonly applied as a one way street to benefit the establishment at the expense of the individual.  For example, under international law, "odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, such as wars of aggression, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion" (from Wiki).

 

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Re: Psychological Manipulation of Debt Slaves

Oh don't worry about me, the banksters are not taking it all, just the property which they're welcome to and legally it's their right, I did my homework before I chose to default. Fortunately though this is because of the state that I live in, rather than anything magical about me, although I do suspect that the same rules that protected my assets could also be leveraged by a lender to their own advantage had the situation been different.

Larry mentioned "odious debt" I know that in the UK there is the legal concept of a "unfair contract" that can be applied to any legal contract where for example only one side garners all of the risks and the other side garners all of the benefits. This appears to be how a US mortgage can be written and enforced depending on the local laws.

Anyway for me I'm well out of it, I squeeked out of it, with nary a scratch except to my credit rating. Overall I suspect that of the 3E's economy will gradually become less of an issue in the coming years as the other two become more prevalent.

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Re: Psychological Manipulation of Debt Slaves
Gungnir wrote:

Oh don't worry about me, the banksters are not taking it all, just the property which they're welcome to and legally it's their right, I did my homework before I chose to default. Fortunately though this is because of the state that I live in, rather than anything magical about me, although I do suspect that the same rules that protected my assets could also be leveraged by a lender to their own advantage had the situation been different.

Larry mentioned "odious debt" I know that in the UK there is the legal concept of a "unfair contract" that can be applied to any legal contract where for example only one side garners all of the risks and the other side garners all of the benefits. This appears to be how a US mortgage can be written and enforced depending on the local laws.

Anyway for me I'm well out of it, I squeeked out of it, with nary a scratch except to my credit rating. Overall I suspect that of the 3E's economy will gradually become less of an issue in the coming years as the other two become more prevalent.

Glad to hear that worked out for you, Gungnir . . .

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