Hawaii tops the list of the states with the highest percentage of borrowers who refuse to pay their mortgages for three years or more. A free house in Hawaii handsomely rewards bad behavior, doesn’t it?

Millions of Americans borrowed money under unstable loan terms during the housing mania of the 00s. When these loans reset or recast to higher payments, millions of borrowers stopped paying, which precipitated the 2008 recession, causing millions more to stop paying their mortgages. The downward spiral lead to over six million foreclosures nationally.

Once these borrowers failed to make payments, banks foreclosed on them — at least at first. By late 2008, it became apparent that foreclosing on all these delinquent loans at once and reselling the properties on the open market would push prices down so far that lenders wouldn’t recover their original loan capital. Lenders responded by offering loan modifications, but many borrowers refused to pay even with more generous terms. Since lenders weren’t in a position to foreclose, and since borrowers refused to pay, millions of borrowers simply lived in the property without paying anything: they became delinquent mortgage squatters.

When faced with the prospect of living without any housing costs indefinitely or moving out to a less-comfortable rental and spending money on housing, it should surprise no one that many people chose to squat and live for free. The lingering uncertainty as to when the lender would eventually foreclose causes people emotional distress, but eliminating a monthly bill that consumes 30% to 50% of a family’s income more than makes up for it.

Most borrowers in default don’t move into a rental and move on with their lives. Those borrowers game the system for as long as possible to obtain free housing. These delinquent mortgage squatters are the legacy of stupid lending in The Great Housing Bubble.

Top 10 states for long-term delinquent mortgage squatting

So how bad is this problem? Are we talking about a few isolated cases, or is this a systemic rot? Last year I reported that 362,000 American delinquent mortgage squatters refuse loan modifications. These are the most hardcore. Black Knight reports that 2,836,000 borrowers are 30 days or more behind on their mortgages.

When Edward DeMarco ran the GSEs for the FHFA, he foreclosed on delinquent borrowers, so very few delinquent squatters’ loans pollute the residential mortgage-backed securities of agency loans. The private-label RMBSs are a different story. These loans reside on the books of investors and major banks, and this is where mortgage squatters find safe haven because the values of their properties haven’t risen enough for lenders to foreclose and recover their capital.

Keith Jurow provided me the chart below showing this is not an isolated problem.

Borrowers in Hawaii who refuse to pay their mortgages enjoy a free Hawaiian vacation. A shocking 76% of delinquent mortgage squatters enjoyed a free house for more than three years, 61% enjoyed a free house for more than five years. Wouldn’t you appreciate a free Hawaiian house in perpetuity? I would. In fact, I would list the property on AirBnB and travel the world while someone else pays to rent my free house.

Sticking it to the man

It’s difficult to feel very sorry for the banks considering they created the conditions that put millions of borrowers into homes they couldn’t afford and inflated a housing bubble in the process. Many people angrily decry the banks’ bad behavior, but that fails to justify millions of squatters living indefinitely in houses they refuse to pay for.

I once wrote about a man who delivered his demolished house to repossessing bank. In that post, I recounted my belief that lenders are more culpable than borrowers in the housing debacle; however, that doesn’t absolve borrowers of all responsibility for their actions. Barry Ritholtz in Bailout Nation listed those he blames for the housing bubble, and lenders are higher up the list than borrowers; however, Mr. Ritholtz goes on,

“Regardless of how low rates got, the fact remains that many borrowers took out mortgages regardless of their own ability to repay the monthly principal and interest. This was simply reckless behavior, and should be recognized as such.

Irresponsible borrowers behave like children, if lenders offer them something they want, no matter the terms, borrowers will take it. Does ignorance of the consequences remove responsibility from the borrower? No, innumeracy is no excuse. If lenders offer free money to the irresponsible, rational people would expect the borrowers to spend it irresponsibly and not worry about paying it back. Is it logical to expect anything different? In my opinion, it shouldn’t require a clairvoyant to foresee that abandoning lending standards would end badly. However, Wall Street geniuses expected something different.

That being said, when will people hold themselves responsible for their actions? Is our entire culture based on achieving victim status and dodging responsibility? Bailing out these borrowers with a government program merely creates more dependence, as most government programs do. Despite this fact, every few months, the government unveiled a new bailout program designed ostensibly to benefit borrowers while really bailing out the banks. These programs maximized moral hazard by encouraging both irresponsible borrowing and irresponsible lending — a lose-lose for the US taxpayer who will foot the bill now that we insure 80% or more of the mortgage loans originated. It still makes me angry.

Perhaps I wouldn’t care if I “owned” a free house in Hawaii.

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