Categories:
Cost-benefit Analysis
Economics of Crime
When people have little incentive to behave well, and when nobody is watching, what do people do? The last few years have given us millions of opportunities to answer that question as people living in foreclosed homes decided whether to leave those homes in decent condition or to instead pour concrete down the drain.
The option chosen by about half of those people?
Myra Beams, a realtor in Tamarac, Fla., said half of her foreclosed properties, regardless of the price range, have been vandalized by the former owners. “I think the former owners are angry, and for some reason, they think they’re entitled to destroy properties,” said Beams. “I guess they’re angry at the banks for giving them the mortgage.”
“The pour-concrete-down-the-toilet trick is one that most good [home] inspectors know to look for.”
From Zillow:
…Baseboards, appliances and a brick pathway completely removed.…Cement poured down toilets…..Then, there’s the one about a slew of dead fish left to rot in an attic.
And from the WSJ:
…embittered homeowners have stripped out appliances, punched holes in walls, dumped paint on carpets and, as a parting gift, locked their pets inside to wreak further havoc. Real-estate agents estimate that about half of foreclosed properties to be sold by mortgage companies nationwide have “substantial” damage…
People have strong moral intuitions about revenge, so this behavior isn’t surprising.
Larry Summers famously said that the most important lesson of economics is that no one has ever washed a rental car. An excellent point, but the problem is worse than that: Without an incentive to preserve, many of us will gleefully destroy.
Coda: “Sharpie parties“, presumably kids breaking into foreclosed homes.
READER COMMENTS
Tom Davies
Mar 23 2013 at 7:54am
I suppose one lesson is that the lenders should have given the borrowers *some* incentive to preserve the properties, even if they were far underwater. ‘Should have’ for practical, not moral reasons.
Joe
Mar 23 2013 at 7:54am
“…the most important lesson of economics is that no one has ever washed a rental car”
I had never heard that one, but it doesn’t make any sense to me. I lease a car and I wash it all the time. I rent cars too, and they come pre-washed. If I could rent dirty cars for significantly less, I would do it and drive them through a car wash.
genauer
Mar 23 2013 at 8:44am
The “moral hazard” lessons from
“non-recourse” mortgages.
Hazel Meade
Mar 23 2013 at 9:05am
I’m curious as to why the banks don’t press charges for vandalism.
Silas Barta
Mar 23 2013 at 9:41am
Yikes! That’s a pretty bad way to put it, considering that many people have done something similar to washing a rental car, which is to refuel it. The reason that they don’t require you to wash the car is because it’s cheaper for them to do it and roll it into the rental price, not because they blindly walk into some marketplace of car-dirtyers who have no stake in the car’s value and will treat the car horribly on the basis of their short term possession of it.
@Hazel_Meade:
The coda link mentions them pressing charges against the opportunists who didn’t live in the foreclosed home but will vandalize it for fun, which is made all the easier by them putting pictures of it on facebook. Then again, I have never seen this level of resources deployed against fighting vandalism. And it’s all the stranger that the home foreclosee is even easier to find, yet we don’t hear about charges against them.
Brian
Mar 23 2013 at 10:19am
Silas, you fill the gas tank because the rental company charges you an exorbitant rate per gallon the tank is missing since you drove it off the lot. In other words, it saves money to fill the tank yourself.
Ken B
Mar 23 2013 at 10:41am
@joe
I think the question is, would you pay to wash a short term rental car before you return it. Probably not as you have no incentive to do it. With your hypothetical of renting a dirty car cheaper you have been given an incentive. That’s the subtext here: if we want things done we should care about getting the incentives right.
jc
Mar 23 2013 at 10:41am
Two more words: endowment effect.
When folks feel like you’re taking away something they feel is rightfully theirs (whether this feeling is logical or not)… And a house is a pretty big thing.
And, yeah, great saying by Summers.
MikeP
Mar 23 2013 at 11:43am
Color me skeptical that the number is anywhere near so high, or that the “substantial” damage is intent versus wear.
But this hearkens back to Arnold Kling’s answer to what the government should do about underwater homes: pay the expenses to move the “owners” out.
Dangling hope and HAMP and HARP and cetera and cetera to people who will never in the end benefit from it merely compounds frustrations and costs everyone far more in the long run.
Pave Low John
Mar 23 2013 at 12:02pm
There was beautiful two-story house in my neighborhood (Fort Walton Beach, FL, if you’re curious) that was abandoned by its owners because they lost their business (a fitness center) and moved away. They didn’t sabotage it or damage the property, but it just started falling apart from neglect. The pool was full of leaves and swamp water within a year, squirrels and birds had made their own lodgings in it within 2 years. When I moved last April, it was still abandoned and had been that way since the end of 2008. It will take tens of thousands of dollars to fix that place, all from just being unoccupied.
I always wonder how many other homes just like that one are scattered across the U.S.
chris bolger
Mar 23 2013 at 12:21pm
Maybe the lesson hear is greed. Maybe if the banks saw people who couldn’t afoard their mortgages to begin with, instead of seeing the dollars from the fees, and those taking the mortgages realized they could not afoard them we wouldn’t be here. However, since the banks are supposed to have educated people to determine who an who not to lend to, I think they deserve most of the blame. Destroying your house because it got foreclosed, I can see the revenge and even see some justification for it, but that does not make it right.
Mark
Mar 23 2013 at 1:25pm
A couple of points (and answers to questions):
First, I disagree with your premise. It’s not that people will always behave badly without some direct incentive or if they’re not being watched; we act socially responsible all the time, including under conditions of anonymity. This is an instance where anger and feelings of being swindled take over rational thinking and people behave badly.
Second, this might prove why more states should permit recourse, allowing banks to do more than simply recover the property. In non-recourse states banks are limited to repossessing the home and that’s it. Hold homeowners’ personally liable for the damages to the home committed under their occupancy and you’ll see less of this behavior. However, banks, too, behave badly and I’m not certain I trust how they’ll respond given their actions over the past four decades.
Third, Summers’ point is metaphorical. If the property is not mine, I have little incentive to care for it. It’s why rental properties tend to bring down the value of nearby homes. Some banks have resorted to offering homeowners thousands of dollars to vacate the homes from which they are being evicted by foreclosure as long as they don’t resort to damaging the property. It has so far proven very successful in most cases.
Give people the incentive to internalize the costs and benefits of their actions and even under the most trying of circumstances, they’re likely to respond.
Ken B
Mar 23 2013 at 2:28pm
Detroit has been losing population steadily for years. I assume that many of those who left voted for the incumbents before fleeing.
Steve Sailer
Mar 23 2013 at 2:52pm
How do the folks who got subprime mortgages in 2006 treat property in general? Keep in mind how far down in the bottom of the barrel the mortgage companies were scraping by the end of the Housing Bubble. Would you like to be the landlord of the Subprime Class of 2006?
Hana
Mar 23 2013 at 5:44pm
I don’t buy the crocodile tears of banks or real estate agents with regard to foreclosed homes. Furthermore I don’t believe the condition of a foreclosed home is any indication about an individual’s motivation to behave well when not being observed.
Having, unfortunately, observed hundreds of foreclosed homes in Northern California, once the bank takes possession they rarely maintain and certainly don’t improve the properties. Driving through a neighborhood it is easy to pick out the bank owned houses. The grass is overgrown with weeds and dead. Fences are falling apart and pools are left unattended. The municipalities apparently don’t require the banks to maintain the properties to the same standards as home owners. The banks’ lack of maintenance and upkeep requires thousands of dollars of repairs by subsequent new owners, but undoubtedly all of the blame is assigned to the foreclosed prior owner.
When buying a home using a mortgage, the bank has 100% recourse until the mortgage is fully paid. Don’t make payment number 360 out of 360 and see what happens. The home owner pays for all maintenance, taxes and improvements. Should a foreclosure occur, I can fully understand how the homeowner, who paid for all of the improvements, might believe they are entitled to remove the improvements from the property.
Consider the case of a sale of property. The items to stay with the property are subject to negotiation. While fixtures, cabinetry, appliances, yard and patio improvements are generally included, any number of these items might be excluded during the negotiation. (That bird bath was bought by my grandmother before she passed).
During a foreclosure there is little or no negotiation. While banks and real estate agents might like all upgrades to be included in the abandoned property, the foreclosed home owners perspective might be different. While there are some accepted standards, since no negotiation has taken place, the prior owner’s subjective interpretation of what goes or stays with the house is perfectly appropriate.
I am unconvinced that the treatment of foreclosed property is any indication of how people behave in the absence of observation.
clay
Mar 23 2013 at 7:29pm
@hana, crocodile tears would suggest that the banks are showing sympathy that isn’t genuine. That’s not a relevant expression in this scenario.
This sounds like people have rotten behavior when they lose on something substantial.
clay
Mar 23 2013 at 7:39pm
This is less about anonymity and more about how people react to negative consequences.
This is similar to a student reacting to a bad grade or a driver reacting to a traffic citation. Some people don’t accept blame, feel it is unfair, and get extremely bitter and vengeful.
(similar to what Mark said)
Hopaulius
Mar 23 2013 at 11:48pm
The lenders’ only interest in a mortgaged home is in receiving regular payments. Once purchased, they do not send anyone to inspect the home or give any indication that they care a whit about it. Often the mortgage is sold to some huge, faraway, mortgage-servicing company.
Meanwhile, by every indication save the payment, the homeowners appear to own the home. They have to pay the property tax not on the basis of equity, but on some bureaucrat’s algorithmic estimate of its value. They can enhance it, beautify, it, enlarge it, or destroy it. The lender cares not a whit, indeed, doesn’t even notice until the payments stop coming.
Another thing: if the lender goes bankrupt, it escapes many of its obligations, but the homeowner still has to pay the mortgage. Depositers have their FDIC, but the borrower still has to pay.
So if the owner chooses to pour concrete down the toilet, the lender won’t even know unless the payment stops coming. If someone pays cash for the house with concrete toilet drains, the original lender will never know about it. So no sympathy whatever for the lender. The bad borrower and every lender deserve each other.
James
Mar 24 2013 at 1:40am
How long till someone points out that all of this destruction is potentially stimulative? All the construction and trades workers initially hurt by the housing meltdown will soon find their skills in high demand to repair the very same homes they built in the early 2000s.
Patrick R. Sullivan
Mar 24 2013 at 12:50pm
Pretty much the same thing happened in public housing complexes all over the country back in the 1970s. People given below market rentals vandalized them.
Patrick R. Sullivan
Mar 24 2013 at 12:53pm
Prior to the 1990s lenders carefully screened the people to whom they lent. That got them into trouble with the housing activists for racial discrimination. So, then they started lending money according to the prevailing fashions, and look what happened.
Insight
Mar 24 2013 at 4:19pm
It is simplistic to call this evil.
The opportunists are one thing but the other folks seem to employing something like tit for tat, which has enough value to understand why it is a natural (and often helpful) part of human psyche.
mm
Mar 24 2013 at 5:47pm
the bad borrower & lender wasn’t a problem until the feds started pushing banks to lend to bad borrowers (see CRA, Barney Frank, Freddie/Raines & Johnson & Gorelick). Too bad most of those responsible got rich & we end up footing the bill. It is a sad fact that if you google “mistress of disater” the first name up is Jamie Gorelick.
MikeP
Mar 24 2013 at 6:45pm
…the other folks seem to employing something like tit for tat, which has enough value to understand why it is a natural (and often helpful) part of human psyche.
So is giving someone super-low rent for a number of years and then requiring them to leave when they can no longer afford it tit, while wrecking someone else’s property is tat? Or is it the other way around?
liberty
Mar 25 2013 at 9:46am
“So is giving someone super-low rent for a number of years and then requiring them to leave when they can no longer afford it tit, while wrecking someone else’s property is tat? Or is it the other way around?”
No. I think the “tit” is giving someone super-low mortgage for a number of years under the assumption that they will be able to remain there as long as they wish–so that they make it their long-term home, improve it, etc–and then sell on the loan, make boatloads of money, and others re-package and further sell the loans on, also making boatloads of money, and helping to cause a bubble and ultimately a financial collapse–and then asking taxpayers to foot the bill while simultaneously foreclosing on the people who took out the mortgage, who are also taxpayers…
liberty
Mar 25 2013 at 9:49am
Actually that’s the “tat”.
steep
Mar 25 2013 at 4:51pm
I washed a rental car once last summer.
Am I a black swan? (though it was a white car)
Arrow
Mar 25 2013 at 6:49pm
I care for my rental property, partly because it’s my home, but also because – get this – I just get a good feeling from ‘doing the right thing’.
Call me a sucker if you want. But there is an economics point to all this.
Economists expect all people to act the same way (rationally) in response to incentives.
But not all people do this. In fact, many people (like me in the example above) act ‘irrationaly’ in the eyes of an economist. And woe betide the predictions of any economist who ignores this.
Silas Barta
Mar 25 2013 at 7:39pm
@Brian: Perhaps my point didn’t come across clearly. I’m aware that rental car companies charge you a lot of money for returning a car without a full talk. The problem is to explain why they don’t *likewise* charge you a lot of money for returning an unwashed car.
Whatever your explanation, it will probably not be that “nobody has an incentive to take care of something they’re only renting”, and yet Summers’s quip attempts to explain “people not washing rental cars” under that premise. In fact, he’s wrong: there are a number of mechanisms by which people are given incentive to take care of things they’re only renting.
Thus why I think it’s a horrible example — it would imply that no one has ever refueled a rental car, which is false. In reality, contract mechanisms significantly mitigate the incentive incompatibility between owners and renters. To use “washing rental cars” as an example, one must live in some kind of bubble in which you really can get away with abusing items that you’re renting.
My explanation of the phenomenon (that it’s cheaper for the agency to wash the car, but not to refuel it) makes a lot more sense.
MikeP
Mar 25 2013 at 8:20pm
It is almost certainly cheaper for the rental agency both to wash the car and to refuel the car than it is for the renter to do it.
But people are used to refueling their own cars a lot more often than they wash them, and there are a lot more gas stations than car washes. So the renter is asked to fill up the rental car but not wash it.
There may also be a comparative advantage in their choosing the Coasian side of washing the car and not of filling up the car. Most 2-day rentals probably just need a rinse, but there are no car rinses sitting alongside the road. On the other hand, there’s no way to have a cheaper pump that just pumps a little gas.
Nathan Sumrall
Mar 26 2013 at 10:27am
I don’t think your conclusion about our morality and destructiveness is justified here. You’re making judgments about our general moral tendencies based on how people behave in the aftermath of a very traumatic experience. I think stress/depression from losing their homes likely plays a big role in these poor moral choices, and such a temporary lapse in moral judgment is not necessarily indicative of a general lack of morality.
Mark Bahner
Mar 26 2013 at 1:00pm
Yes, it seems to me a reward of a couple thousand dollars for leaving a house in good shape ought to do it.
That way, even if people have ill-will towards their lending institution, they will have to be giving up a couple thousand dollars (opportunity cost) to commit vandalism.
Mark Bahner
Mar 26 2013 at 1:03pm
Oops. I have a bad habit of commenting before I read all the other comments. 🙂
Silas Barta
Mar 26 2013 at 4:56pm
@MikeP: But people are used to refueling their own cars a lot more often than they wash them, and there are a lot more gas stations than car washes.
Yes, and that would be a *reason* why it’s cheaper for people to do it themselves — less time and psychic discomfort than having to wash a car.
Anyway, the point is, “people not washing rental cars” is a very bad example to illustrate the “renters don’t maximize long-term value of what they’re renting” principle, because the person renting it to them can impose penalties that align their incentives.
On the other hand, there’s no way to have a cheaper pump that just pumps a little gas.
And there, you give another reason for the cost differential.
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