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Old 12-10-2009, 05:18 PM   #21
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Hmmm...

Help me out here: when a company finds that it has a lot more debt than assets, it declares bankruptcy and (at the very least) takes a piece out of the lenders' interest to make up the difference. We all understand this and don't find anything especially immoral about it. Yet when an individual does the same with an upside down house he has committed some major sin in some people's eyes. Does this assymetry of stands bother anyone else?
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Old 12-10-2009, 05:27 PM   #22
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Hmmm...

Help me out here: when a company finds that it has a lot more debt than assets, it declares bankruptcy and (at the very least) takes a piece out of the lenders' interest to make up the difference. We all understand this and don't find anything especially immoral about it. Yet when an individual does the same with an upside down house he has committed some major sin in some people's eyes. Does this assymetry of stands bother anyone else?
I see a big difference. When you are bankrupt, you cannot repay your debt. You either ask the judge to restructure the debt or discharge it. You really have to be deep in the hole to come out debt free. Here people have the money to repay the debt, they just can't be bothered. They made a bad investment, the investment lost value and they don't want to be the ones holding the bag.
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Old 12-10-2009, 05:35 PM   #23
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Dreamer, your problem is with people who made an investment that had a lot of leverage and walked away when it did not work out. Do you only buy the stocks of companies that are debt free? Planning on chipping in your share of the company's debt when a levered investment you make goes bad? Its no different.
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Old 12-10-2009, 05:46 PM   #24
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Brewer makes a very good point. It is a simple business decision. When you give a mortgage to a lender, in part you are paying for the option to simply give them the house instead of the rest of the payments. That is what the banks bargained for and that is what they are getting. In an ideal world, mortgage loans in non-recourse states should bear higher interest rates due to this enhanced ability to walk away.
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Old 12-10-2009, 05:52 PM   #25
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Dreamer, your problem is with people who made an investment that had a lot of leverage and walked away when it did not work out. Do you only buy the stocks of companies that are debt free? Planning on chipping in your share of the company's debt when a levered investment you make goes bad? Its no different.
I invest in REITs that are very much leveraged. When I lose money I take the loss. I don't expect anyone else to hold the bag for my bad decision.
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Old 12-10-2009, 05:54 PM   #26
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I invest in REITs that are very much leveraged. When I lose money I take the loss. I don't expect anyone else to hold the bag for my bad decision.
You are making an equity investment and accept both the risks and rewards of that choice. Secured lenders are entitled to either repayment of the loan or possession of the collateral. That's it.
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Old 12-10-2009, 05:57 PM   #27
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I invest in REITs that are very much leveraged. When I lose money I take the loss. I don't expect anyone else to hold the bag for my bad decision.
Au contraire, you leave the lenders holding the bank when the REIT blows up, same as the defaulting homeowners sticks it to the holder of the mortgage.
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Old 12-10-2009, 06:34 PM   #28
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Although we, as a society, expect our citizens to repay their debts and generally feel they have some kind of moral responsibility to do so, at the end of the day that debt is governed by a legal contract. That contract spells out the rights and the remedies available to each party. I assume everyone here accepts that the bank would exercise its rights and remedies to its greatest advantage and profit. But why not the borrower?
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Old 12-10-2009, 06:35 PM   #29
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I am kind of in both camps.... not looking kindly at people who walk away from their debts... but also in the camp that this is a business decision... and the law allows this to happen...

If you were running a business and you had an asset that was not 'productive' for the costs.... and you could get a similar asset for a lot less... and your debt was non-recourse.... you would be a fool not to get the cheaper asset...


I also think that the banks should stop lending in the states that do not allow recourse... or the banks should require a larger down payment... or get the law changed... I bet if there was no one that would lend you money to buy a house, you would be complaining to the gvmt about it...
Better to laugh than to cry.

I remember 1970 having left Seattle for Denver - the Sunday paper ads(paid by the US govt) - come retire in Seattle - they had thousands of houses where people walked out some leaving the keys in the door. In those days they were actually unemployed and most left town looking for work.

Also a certain 24 yr young lady made dozens of millionaires(herself included) in the subsequent decade by forming a partnership and buying and renting a lot of the empty houses at attractive terms.

Sister city Kobe, Japan was sending America thousands of care packages for Seattle soup kitchens until the govt got a little embarressed and provided some relief. The number 79,000 people a week comes to mind(memory?).

heh heh heh - ? So do I laugh or cry? . . .
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Old 12-10-2009, 06:39 PM   #30
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Here people have the money to repay the debt, they just can't be bothered.
Sounds like the big, sophisticated, bank signed a really dumb loan agreement. Apparently all they cared about was the ability to foreclose on the property in the event of default. And that's all they got. Why are they entitled to more?
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Old 12-10-2009, 07:38 PM   #31
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Here's a very recent study on mortgage default rates, and the differing modes of default, between recourse states and non-recourse states.

It's a .pdf file, and I'm not smart enough to know how to cut/paste from it. Major conclusions:
1) (No surprise): Default is less likely in recourse states. "At the mean value of the default option at the time of default, the probability of default is 20% higher in states with no recourse as compared to states that allow recourse." Also, the number of deficiency judgments probably understates the importance of recourse laws because the threat of a deficiency judgment probably deters many people from skipping out when they are underwater. (the term "strategic default" is used in the paper).
2) In recourse states, when defaults do occur they happen in ways that result in reduced losses to the lenders (again, no surprise).
3) In recourse states, wealthier people are less likely to strategically default than those with less wealth.

Of interest: "The no-recourse moertgage is virtually unique to the United States. That's why falling house prices in Europe do not trigger defaults"

I was hoping to find a study comparing loan costs in recourse vs. non-recourse states. If this info is in the study linked above, I didn't see it. Whatever the difference in rates/terms were before the "bubble", I'll bet going forward there is more of a difference.

IMO, both options (recourse loans and non-recourse loans) should be available on the market to borrowers, if sellers want to offer them. Then the actual cost of the "jingle-mail" option will be explicit to everyone. And, there'll be less stigma from walking away from a mortgage. Some will see that as a bad thing, but I'd rather that the entire bargain be explicit so that people with an (overly?) developed conscience aren't paying a bill that they don't need to, and so those with less scruples aren't getting an advantage.
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Old 12-10-2009, 08:20 PM   #32
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In some ways I'm very glad the banks are feeling the consequences of several years of extremely reckless lending. This is what happens. We can hope this lesson maybe sticks for a while.

If the banks could take your first born for a mortgage - the lending would have been even more reckless IMO!

Not that I would ever walk from a mortgage - not my style.

I guess I don't see how this is hurting me personally. I hold no debt and need no new mortgage. House prices went way up before they came back down.

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Old 12-10-2009, 08:49 PM   #33
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Unless banks learn the lesson that in non-recourse states they must build in a cost for assuming the risk of home price deflation (either due to the market for homes falling or due to careless home upkeep by the occupant), they'll continue to be at risk. At a minimum, I'd like to see the mortgage market develop so that the true cost of loans in non-recourse states truly reflects the added risk the lender assumes and the true cost of loans in recourse states reflects the lower level of risk to the lender.
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Old 12-10-2009, 08:53 PM   #34
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At a minimum, I'd like to see the mortgage market develop so that the true cost of loans in non-recourse states truly reflects the added risk the lender assumes and the true cost of loans in recourse states reflects the lower level of risk to the lender.
In a free market, that is exactly what should happen. If loans aren't priced that way, it is because banks are dumb. See post # 30.
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Old 12-10-2009, 08:54 PM   #35
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I guess I don't see how this is hurting me personally. I hold no debt and need no new mortgage. House prices went way up before they came back down.
Probably isn't to any great degree...... When banks fail it costs the gov't money and you might be contributing to that. It's only another drop of water in an ocean of debt we'll either monetize or raise taxes to pay or some combination.
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Old 12-10-2009, 09:02 PM   #36
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In a free market, that is exactly what should happen. If loans aren't priced that way, it is because banks are dumb. See post # 30.
I'm not sure. It's been 40 yrs since I took "Money and Banking." And I'm not sure I understood it then.

But, yep, if there aren't gov't regs making it difficult for them to price different costs into their rates from state to state, then they were indeed dumb to not do so.

This discussion makes the govt's request for lenders to step in and offer better deals to borrowers to get houses moving again seem more interesting than when I first heard it! Should banks only make loans where they are willing to place big bets that housing will not deflate further and then only to top notch credit risks? Or should they "help American families" by assuming more risk and bringing more borrowers into the fold?

I dunno....... Like Audrey, I don't really have a dog in the fight other than my taxes and the general state of the economy.
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Old 12-10-2009, 09:57 PM   #37
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The mortgage company should be entitled to any money in non-retirement accounts and capable of takinig cars and other similar assets in my opinion. It is simply wrong to walk away if you can afford it.

I am kind of in this situation right now. I bought my townhome 3 years ago (new construction). The unit next to me is identical to mine and on the market for $30K less than we paid for them new. Even at that price, no offers or interest in it. I did put 20% down though with a 15 year fixed loan so I am about even. Still stinks though. I rented my whole life up till that point and wish I would have never "given in". I listened to all the people who clamed renting was wasting money.
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Old 12-10-2009, 11:03 PM   #38
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Great, now our infamous "keep or pay off the mortgage?" debate can have a third point of view: "keep or pay off or walk away from the mortgage?"

Actually, I made this point several months ago. Part of the decision to pay off the mortgage should be how much equity you have in your house. If you have little or no equity in the house than the implied put (i.e. ability to mail the lender the keys and say cya sucker) associated with a mortgage is quite valuable and probably more important than most other factors.

This is especially true for FIRE people who have little need for credit. Imagine you retired 5 years ago moved to a sunny place highlighted in the WSJ article, like California. You bought house for $500K put 20% down and got a $400K 30 year loan @6%. You recently recieved a big chunk of money and are looking at what do with it. Normally, it would be a no brainer to pay off a 6% loan especially considering current CD rates, the stock market etc. However, the walk away option is really worth considering. If the value of the house has dropped to 325-330K (pretty typical in many parts of CA). After expensee, Realtor fees etc you maybe lucky to clear $300K but you owe $400K. Is a good credit score and feeling like you did the moral thing worth a $100K? You don't even need to rent since you could presumably pay cash for the new house. You are retired so you don't care about employers checking your credit scores. About the only thing that will be impacted by the default/foreclosure is paying a bit more for auto insurance, and you'll get less credit card offers...

Does the moral equation change if your mother, daughter, brother, best friend lost their job, had a major medical problem, or needs a nursing home. Is your obligation to pay back the bank higher or lower than to help friend/relative?

Now mind you as direct shareholder in a number of banks, and indirect shareholder via mutual funds in most banks, and of course as Taxpayer I am bond holder and preferred stock holder in other banks, I am very unhappy about strategic defaults. I would like to string up the bank lending officers, government regulators, as well as the folks defaulting....
However, I think it is increasingly less and less a right and wrong issue and more a business one.
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Old 12-10-2009, 11:11 PM   #39
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Probably isn't to any great degree...... When banks fail it costs the gov't money and you might be contributing to that. It's only another drop of water in an ocean of debt we'll either monetize or raise taxes to pay or some combination.
It's not clear to me that us taxpayers are really going to be on the hook for bank failures after all. OK - maybe FDIC or other costs get passed along to the customer, but that just part of the cost of doing the banking business so of course customers pay for federally guaranteed banks. That doesn't sound off.

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Old 12-10-2009, 11:30 PM   #40
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I am kind of in both camps.... not looking kindly at people who walk away from their debts... but also in the camp that this is a business decision... and the law allows this to happen...

If you were running a business and you had an asset that was not 'productive' for the costs.... and you could get a similar asset for a lot less... and your debt was non-recourse.... you would be a fool not to get the cheaper asset...
I actually have to agree with you. I am surprised to say this, but there is no place for ethics/morals in the kind of capitalism we have created. That we have all witnessed in the last couple of years with what the banks, mortgage companies, etc have done in the past decade to advance their profit, and the government let them in the name of capitalism.

All these things that have been unfolding makes me think of the book "Animal Farm" by George Orwell (high school gov't class). I'm sure many people here have read the book too - the book about utopia (derived from communism ideology) turning to greed and corruption. I don't remember the details of the book, but I have a feeling the book wasn't really about communism, but more about human nature, because what's written in the book seems to be happening to us now, in a grand way.

Capitalism doesn't work all that well without some socialistic (moralistic, ethical, or whatever you call it) regulations/controls, is my conclusion.
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