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Old 12-31-2009, 03:47 PM   #61
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Originally Posted by clifp View Post
If you do essentially the same thing with a HELOC, demand $100,000 say you will pay back eventhough you have no intention of doing, generally speaking all that will happen is your credit score goes down 160 points.
This wasn't the case of a friend (or family member) loaning money in exchange for a promise of repayment. It was a strict business decision by the bank, which was trying to make money. Both parties were willing participants, there was no "demanding." The only security the lender had was the value of the house. If/when the house decreased in value, they lost their security. Did the "homeowner" defraud the bank? Maybe, depends on the exact wording of the contract. But the bank never should have put themselves in a position that made them vulnerable. When the HELOC + primary mortgage approaches the value of the home, then there's some real risk and the bank should charge a high interest rate or (better yet) get some additional protection from default from the individual taking out the loan. If this happens due to a declining real estate market, a smart lender will be flexible realizing that he is in a very weak position.

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If we want people to behave morally we need to make it hazardous when they fail to do so.
Agreed. And "people" includes banks and mortgage companies as well as borrowers.
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Old 12-31-2009, 03:52 PM   #62
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I have had the choice more than once. I paid my bills and met the commitments I made.
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Never had to face such a choice in my life - unless you count that I chose not to take a loan for anywhere close to the value of the property - so I never put myself in a position where price declines could put me underwater.
Though I am in the camp of people who think that walking away from a financial obligation that you can afford to pay is wrong, I can also see that it is double standard to view it as a morality issue in lieu of a business one.

I think people who jumped on the real-estate bandwagon as dumb me-too opportunists who had no idea what they got themselves into. But then, seeing that others were able to walk away free, it would be hard for them not to follow suit.

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The real solution is to require borrowers to have meaningful skin in the game.
Will we be accused here of denying the "American Dream" to everybody?


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I watched the History channel on the French Revolution the other night and had warm and pleasant thought's about those fine folks who cut my dividends of some of my Norwegian widow stocks - JPM, C, BAC.

heh heh heh - I'm struggling coming up with sympathy for either party in this situation. The French razor for the boards of directors is possibly too extreme - but I will mellow after they restore my dividend cuts. .
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...As pointed out by Professor White (and by Brewer above), this is an uneven playing field, because the banks will make the correct economic choice in a second to violate a contract-- but everyday people feel constrained not to act in their own best financial interests...
To the mortgagors, I would say "You deserve to pay through the nose for future loans". But it is difficult for me to have sympathy for bankers, or specifically the mortgage industry, who are supposed to be wiser than the dumbasses they loan the money to. For the mortgagees, I say "Let them eat short sales".

Can we all say "Moral Hazard"?

Oh, but, but, but why am I caught in this mess? Is it because some financial entities are "too big to fail"? Is it really for the collective nation skin that we had to bail them out, to grease their palms with billions of dollars so that they could reward themselves with high salaries and bonuses for their "job well done"?


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...I think we should be using financial penalties spelled out by the law rather than moral arguments to get people to do the right thing. In particular, I like to see banks be much more aggressive in going after the assets of people who walk away from mortgages.

...In states like CA, or DC where the loans are non-recourse. I think Uncle Sam should step in and attempt to recover some of the money. I think in hindsight passing the Debt forgiveness act, which eliminated the taxation of forgiven debt was a huge mistake...
And whatever harm this has caused, if some existing laws were broken, why weren't they enforced? For what it is worth, Fife Symington, a former AZ governor in the late 90s, lost his office because of allegations of prior misconducts primarily in making false financial statements for a business loan. Yes, and he was a Republican governor in a red state.

Of course it may be a logistic nightmare to go after the numerous fraudulent mortgage applications, compared to a single politician who served as a lightning rod. It appears that our legal system breaks down when there are millions of people falsifying loan applications, abetted by loan officers no less. Are we no longer a country of law and order? That would be a sad situation, if existing laws get ignored because they cannot be enforced due to the perpetrators outnumbering the law enforcers. Ask yourself if there is any 3rd world country that does not have on its books various laws against corruption, briberies, crimes of various sorts? Are these laws enforced? Of course it is hopeless when the populace does not even bother to obey stop signs or traffic lights. Are we headed that way? This, I found alarming.

Oh Scotty, where can you beam me up?
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Old 12-31-2009, 04:55 PM   #63
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Agreed. And "people" includes banks and mortgage companies as well as borrowers.
I think that is the problem. A corporation is an artificial, perpetual person. It's only goal is to maximize shareholder return, although in practice that often means maximize returns to management. Concepts of morality are about as relevant here as they are to the behavior of snails

Ha
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Old 12-31-2009, 06:51 PM   #64
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I think that is the problem. A corporation is an artificial, perpetual person. It's only goal is to maximize shareholder return, although in practice that often means maximize returns to management. Concepts of morality are about as relevant here as they are to the behavior of snails.
Ha
Umm... I would not liken them (corporates AND some of their management) to snails. They are more like small mammals, actually a bit smarter, more like squirrels.
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Old 12-31-2009, 07:21 PM   #65
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I would like to add that of course I am a partial owner of many of these "squirrels".

I like my squirrels to go out gathering nuts, not to steal from me though.
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Old 12-31-2009, 09:40 PM   #66
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Maybe times are a'changin. In another post I said we had recently bought a different home. In fact we closed yesterday to take advantage of the $8000 tax credit. All along we planned to pay cash for the house but got prequaliafied just in case we decided to go higher on the purchase price. We aren't loaded by any means but we own our previous home free and clear, no debt and with $.5M in the bank we only qualified for a $195K mortgage and would require 20% down regardless of the price of the home. Why only $195K? Because our income consists of two SS checks and a decent pension. The fact that we get $20K off the investments didn't count. What gives? Maybe if mortgage companies were more like this 7-8 years ago the country wouldn't be in the financial fix we are. And so it goes, we bought the house that we could afford with cash and the hell with the mortgage. I'll sleep well at night even though our old house isn't sold yet. May have to just rent it out. Moral of the story-can't believe we only qualified for that amount. Seven-eight years ago we might have qualified for a $500K mortgage.
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Old 01-01-2010, 12:07 AM   #67
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You seem to have missed the point. The bank had a short sale lined up that would have given them back a chunk of their outstanding loan. They screwed up the deal by saying they would pursue fraud charges and instead of getting a pile of cash they got the costs of pursuing foreclosure ($$$), lost interest, and a piece of REO that has been trashed (and lost tons of value) and which has hurt the value of the surrounding property. Net loss for everyone.
No I completely understand the point and in the short run you are right a net loss for everyone in the long right you aren't.

It is quite expensive to prosecute a bank robbery also, not mention even more expensive to put somebody in prison for many years. Although you can be fined $250,000 for robbing a bank, I suspect that big fines seldom get collected and the vast majority of time it cost society a heck of lot more money to prosecute a bank robber than to simply look the other way.
Yet we vigorously prosecute bank robber and we have seen a decrease in armed bank robbers. I contend if we do the same thing with white-collar bank robbers we will see less of them. There are too many to go after all of them and as Sam said we should also go after the equally guilty mortgage brokers and loan officers who aided and abetted the fraud.

As a bank owner I am perfectly happy to see bank incur short-term losses to protect their long-term interests.
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Old 01-04-2010, 11:47 PM   #68
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I bet the difference in risk isn't really reflected in the rates, but sort of averaged out. But, if they did that, we'd be back to the complaints that a bunch of people are being 'discriminated' against because the mean old bank won't loan them money at the same rate as the 'rich' (ant) guy.

-ERD50
I totally agree. Political and legal pressure seems to cause mortgage lenders to have one-size-fits-all rates. I'd like to see folks who are high quality credit risks in recourse states who have large down payments get rates MUCH LOWER than those who don't exhibit those attributes. It boils down to financially conservative "ant" types, such as most of the posters on this board, paying higher interest rates, relative to the broader population, than their credit worthiness implies.
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Old 01-07-2010, 01:50 PM   #69
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I'd like to see folks who are high quality credit risks in recourse states who have large down payments get rates MUCH LOWER than those who don't exhibit those attributes. It boils down to financially conservative "ant" types, such as most of the posters on this board, paying higher interest rates, relative to the broader population, than their credit worthiness implies.
Right. If lenders were free to charge mortgage rates commensurate with the credit worthiness of the borrowers, they'd need to mix in a lot of low-risk loans with the high-risk loans if they want the whole tranche of mortgages to earn a good rating and thereby command a higher price when sold. Low risk borrowers would get very attractive rates. Kinda like the CAFE ratings on cars--Ford would sell 10 Escorts below cost so they'd earn enoug credits to sell 3 Lincoln Town Cars at high markups and make more money.
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