Maybe a strategic default was not a great idea

[samclem]

The lenders left holding worthless mortgage were (and are) primarily pension funds and retirees.

Mortgages they bought after receiving assurances of the gilt-edged nature of these securities. These assurances proved to be wrong/fraudulent. The folks who did that also bear some of the blame.

Be that as it may, the borrower owes the bank exactly what was in the contract, subject to the enforcement measures in force at that locale. IMO that's all they owe--but they do owe it. This wasn't a loan from a family member or a charity, it was a loan from a business that was making a business decision.

 

[MichaelB]

Mortgages they bought after receiving assurances of the gilt-edged nature of these securities. These assurances proved to be wrong/fraudulent. The folks who did that also bear some of the blame.

Be that as it may, the borrower owes the bank exactly what was in the contract, subject to the enforcement measures in force at that locale. IMO that's all they owe--but they do owe it. This wasn't a loan from a family member or a charity, it was a loan from a business that was making a business decision.

I agree, on both points. Banks were / are not always innocent bystanders or sorrowful intermediaries. However, they also are not primary lenders nor mortgage holders. Getting back at them for their bad behaviour elsewhere may sound like a justified enterprise but the reality may be otherwise for mortgage default.

 

[ERD50]

Sure. I am thinking this: people "strategically" default and the bank takes the hit. I am thinking if the property value goes up instead, the seller who thinks strategic defaulting is only fair should also think giving some of the profit from that profitable sale to the bank is also fair. I know it doesn't make sense ...

But that is the contract the bank made with you. Yes, you pay the mortgage and if the house goes up in value, the gain is yours, they have no claim to the home as long as you pay the mortgage.

If you don't pay, the bank can take the home back. Now, consumer protection laws can make that difficult if the 'home owner' makes it so. And the banks know that too. Their interest rates reflect what they expect on average.

There's really nothing 'unethical' about letting the contract play out and stop paying and let them take the house - even if you have the funds to pay that mortgage. If that is 'unethical' then the contract itself was 'unethical', because it allows for that case.

OTOH, I don't think there is a punishment too extreme for the people who wreck the house to sell off the copper plumbing and wiring while in foreclosure. That is illegal, it is stated in the contract that you must maintain the home, and that behavior is unethical.

-ERD50

 

[imoldernu]

But that is the contract the bank made with you. Yes, you pay the mortgage and if the house goes up in value, the gain is yours, they have no claim to the home as long as you pay the mortgage.

If you don't pay, the bank can take the home back. Now, consumer protection laws can make that difficult if the 'home owner' makes it so. And the banks know that too. Their interest rates reflect what they expect on average.

There's really nothing 'unethical' about letting the contract play out and stop paying and let them take the house - even if you have the funds to pay that mortgage. If that is 'unethical' then the contract itself was 'unethical', because it allows for that case.

OTOH, I don't think there is a punishment too extreme for the people who wreck the house to sell off the copper plumbing and wiring while in foreclosure. That is illegal, it is stated in the contract that you must maintain the home, and that behavior is unethical.

-ERD50

Yeah... it really gets interesting when the discussion involves LAW and MORALITY... and never the twin shall meet!

#1. You loan $100,000 to cousin Charlie... He can't pay it back. Who loses?

#2. You loan $100,000 to cousin Charlie... He can't pay it back. You bundle the loan with the bad $100,000 you loaned to uncle Jake... and sell it to Fannie Mae. Who loses?

 

[pb4uski]

And I would never do business with someone who doesn't keep their word. Fool me once, shame on you... fool me twice, shame on me.

So you have no accounts with any of the major banks? Cool!

Funny how you rationalize what you did my blaming the lenders.

I don't blame the lenders, per se, but I'm just saying I'm not going to be the only honest guy at the table. The lenders aren't as pure as the driven snow or boy scouts either, generally speaking, so I'm just saying I wouldn't feel bad for them. At all.

Do you live in a recourse state?

Yup. No issues with deficiency judgments. Don't believe the hype they tell you to keep consumers in line.

My only accounts with major banks are credit cards. They allow me to buy things on credit and I pay the bills when they send them to me, after all... a deal is a deal. I've never had a problem with them and vice versa. They have done what they said they would do and I have too.

Let me ask you this... what bad things did the lender do to you? You decided you wanted to buy the property, asked them to lend you the money to buy the property and they agreed to lend it to you. Right?

The deal with a mortgage is that they agree to lend you the money to buy the property and you agree to pay them back. If you are unable to pay them back then they can take the property and it isn't worthwhile to go after you for any more because you can't draw blood from a stone. However, you were able to pay them back but chose not to so in addition to taking the property they should be able to take any other assets you have to make them whole. Bottom line... you cheated and so far have got away with it.

And by the way, as others have pointed out to you, you didn't cheat the bank. They are just an intermediary who got a fee for writing the mortgage and servicing it. The people who you stiffed are investors like me and others on this forum.

 

[meierlde]

My only accounts with major banks are credit cards. They allow me to buy things on credit and I pay the bills when they send them to me, after all... a deal is a deal. I've never had a problem with them and vice versa. They have done what they said they would do and I have too.

Let me ask you this... what bad things did the lender do to you? You decided you wanted to buy the property, asked them to lend you the money to buy the property and they agreed to lend it to you. Right?

The deal with a mortgage is that they agree to lend you the money to buy the property and you agree to pay them back. If you are unable to pay them back then they can take the property and it isn't worthwhile to go after you for any more because you can't draw blood from a stone. However, you were able to pay them back but chose not to so in addition to taking the property they should be able to take any other assets you have to make them whole. Bottom line... you cheated and so far have got away with it.

And by the way, as others have pointed out to you, you didn't cheat the bank. They are just an intermediary who got a fee for writing the mortgage and servicing it. The people who you stiffed are investors like me and others on this forum.

The strategic defaulter just changes the line to if you choose not to bpay them back, then they can take the property. Of course on the commercial side this happens all the time all be it the entity goes into chapter 11 or 7.
Of course if that became the attitude in general the down payment requirement might go to 40% or more.

 

[dallas27]

It's not the lender's or the lendee's fault. A bad situation was created by repeals of the very laws created in the depression to prevent it. Banks are expected to be as greedy as rhe law allows, as are citizens. We all need the proper regulation, even if we dont understand it, to keep a balance.


Sent from my iPhone using Early Retirement Forum

 

[pb4uski]

The strategic defaulter just changes the line to if you choose not to bpay them back, then they can take the property. Of course on the commercial side this happens all the time all be it the entity goes into chapter 11 or 7.
Of course if that became the attitude in general the down payment requirement might go to 40% or more.

I'm not sure what your first sentence means. Please elaborate.

I don't think anyone has an issue with a residential or commercial borrower who is unable to pay, defaults and gets foreclosed. That is a known risk and reflected in underwriting and the interest rate. What many have issue with is those who are able to make payments but chose not to because the value of the property that they decided to buy has declined dramatically and they want to push the economic consequences of that bad decision onto the lender. Given the borrower a put option is the value of the property declines is not part of the deal so if the lenders go after such borrowers I'm fine with that (which is what the OP referred to).

 

[bad_LNIP]

Of course if that became the attitude in general the down payment requirement might go to 40% or more.

Nah, I doubt that. Mortgage volumes would drop off a cliff and then the banks wouldn't make money, and we know they can't have that.

what bad things did the lender do to you?

Committed perjury and fraud in an effort to steal the property from me. Yeah, it was part of the national mortgage settlement. They refused a cash payment also, which voided that payment under the concept of legal tender. They also weren't very helpful in the modification process either. Their proposal increased the loan payment each month.

you cheated and so far have got away with it.

Between the bank and I, one of us committed perjury and it wasn't me.

The people who you stiffed are investors like me and others on this forum.

Really? what % ownership of the MBS did you have? I'll write you a check for what I owe you. BTW, the original lender didn't lose a dime on the deal...

My only accounts with major banks are credit cards.

Oh so despite your rightious indignation, you do actually do business with unethical crooks. Gotcha. A deal is a deal, but I thought you didn't do business with someone who doesn't keep their word, so do you close your account if they change the T/C on a whim, which they do frequently?

 

[timo2]

semi-rant:There are many comments by many posters in this thread about 'business is business'. No wonder our country is in bad shape. Personal ethics can not be compartmentalized like that. Business is part of life. One can not separate the ethics of how they individually behave in life and behave in business. They are the same thing. If a person makes a deal with the devil or banks are whoever, they are accountable for that. IMHO

 

[heeyy_joe]

Urban Dictionary: Teaching a pig to sing

 

[razztazz]

semi-rant:There are many comments by many posters in this thread about 'business is business'. No wonder our country is in bad shape. Personal ethics can not be compartmentalized like that. Business is part of life. One can not separate the ethics of how they individually behave in life and behave in business. They are the same thing. If a person makes a deal with the devil or banks are whoever, they are accountable for that.

Tell that to "Business". They can compartmentalize anything. During the worst of the crash when they started talking about "jess plain foak" starting to engage in "strategic default" it was mentioned (over and over again, that I recall) that businesses do that all the time as part of their business model and book keeping. They don't all do it all the time but if it suits them it is always a tool at their disposal.

Both, lenders & borrowers, were stupid. But who owns the mucking funny? The BANKS. They have all the expertise. All the accountants. All the statisticians. They said "Yes". In business back when I was studying accounting they called it "Allowance for Bad Debts". Eat it. When businesses do it it's The Free Market". When some schlub who bought too much house that the Bank Experts said was not too much house we all have to be Monks and Saints and pay the man. These same bakers and their pilot fish are the same half-men who go around pimping that only the evil Government is f'ked up.
Bring out the piano wire. As some one said earlier, why should the public be the only honest player at the table?

 

[timo2]

Tell that to "Business". They can compartmentalize anything. During the worst of the crash when they started talking about "jess plain foak" starting to engage in "strategic default" it was mentioned (over and over again, that I recall) that businesses do that all the time as part of their business model and book keeping. They don't all do it all the time but if it suits them it is always a tool at their disposal.

Both, lenders & borrowers, were stupid. But who owns the mucking funny? The BANKS. They have all the expertise. All the accountants. All the statisticians. They said "Yes". In business back when I was studying accounting they called it "Allowance for Bad Debts". Eat it. When businesses do it it's The Free Market". When some schlub who bought too much house that the Bank Experts said was not too much house we all have to be Monks and Saints and pay the man. These same bakers and their pilot fish are the same half-men who go around pimping that only the evil Government is f'ked up.
Bring out the piano wire. As some one said earlier, why should the public be the only honest player at the table?

Yes. Banks will stab you in the back and charge you for cleaning the knife. But knowing that, why would you believe a banker when they say you can loan up to some ridiculous $ amount. Just because a bank will give you a loan for a huge house doesn't mean you have to go for the trap. Some people are naive enough to take the bait, and others figure they will just bail on the deal later. When the banks give you too much for a loan, it's not free money. Everything has a cost. What about not taking the deal and just borrowing the minimum amount possible, even if it means no McMansion for you? To me, that is where the ethical behavior starts, and it may avoid having to do things in self-defense against the banks later, like strategically default.

 

[Maenad]

When businesses do it it's The Free Market". When some schlub who bought too much house that the Bank Experts said was not too much house we all have to be Monks and Saints and pay the man.

I don't think timo2 was saying this in the original semi-rant. "Business" needs to be ethical as well. Those decisions were made by people. People who let their greed overcome their ethics, and they excused it (and continue to excuse it) by saying "Business is business".

You can't force someone else to actually develop a decent sense of ethics, but you can enforce it in yourself, and protect yourself from the bastards.

But ultimately, we need to all hold each other accountable, and that means businesses as well. Make unethical behavior less attractive*, and even if someone is a bastard, they won't bother.

* Please don't ask me how to do this, I'm just philosophizing.

 

[pb4uski]

Tell that to "Business". They can compartmentalize anything. During the worst of the crash when they started talking about "jess plain foak" starting to engage in "strategic default" it was mentioned (over and over again, that I recall) that businesses do that all the time as part of their business model and book keeping. They don't all do it all the time but if it suits them it is always a tool at their disposal.

Both, lenders & borrowers, were stupid. But who owns the mucking funny? The BANKS. They have all the expertise. All the accountants. All the statisticians. They said "Yes". In business back when I was studying accounting they called it "Allowance for Bad Debts". Eat it. When businesses do it it's The Free Market". When some schlub who bought too much house that the Bank Experts said was not too much house we all have to be Monks and Saints and pay the man. These same bakers and their pilot fish are the same half-men who go around pimping that only the evil Government is f'ked up.
Bring out the piano wire. As some one said earlier, why should the public be the only honest player at the table?

Strategic defaults and strategic bankruptcies by business are by far the exception and not the rule. Commercial mortgages are generally non-recourse, so a strategic default is possible... but those mortgages generally require bigger down payments than residential mortgages to mitigate the additional risk of non-recourse debt over recourse debt.

While I concede that some lenders encouraged residential borrowers to buy more house than they could afford since they didn't own the risk of default and were just getting a commission for making the loan, shouldn't the borrowers know what they can afford and what they can't afford? Anyway, those borrowers who bought more house than they could afford are not the strategic defaulters we are being critical of - they defaulted because they had a change in circumstances and could no longer afford their home.

 

[Totoro]

Just my two cents: If it is unreasonable of one party to understand the terms of an agreement, it is good to have protection. That is why consumers and individuals in general have different protections than corporations. It is also why some people have power of attorney over others.

Now, in the context of the whole strategic default thing. If the bank gave you a loan and you didn't have the capacity to understand the terms, by all means default strategically. In fact, the bank should be fined and the person who gave the loan should be jailed. It is abusive.

On the other hand some people knew full well what they were getting into, and played the rules at its full extent just to get an advantage.

That I disapprove of, and not because of ethical reasons. I disapprove because it frequently leads to more rules, destroys trust and hampers trade. Everyone is worse off in the long run.

The hard part is protecting the first group while keeping the second group in check. Intent matters. Which group bad_LNIP belongs to is another question.

 

[pb4uski]

....If the bank gave you a loan and you didn't have the capacity to understand the terms, by all means default strategically. In fact, the bank should be fined and the person who gave the loan should be jailed. It is abusive.

On the other hand some people knew full well what they were getting into, and played the rules at its full extent just to get an advantage.

That I disapprove of, and not because of ethical reasons. I disapprove because it frequently leads to more rules, destroys trust and hampers trade. Everyone is worse off in the long run.

The hard part is protecting the first group while keeping the second group in check. Intent matters. Which group bad_LNIP belongs to is another question.

So in your mind to justify strategic default all you need to do is feign stupidity?

 

[Totoro]

No, in my mind you have to be stupid.

As I said, it is hard to tell those two groups apart.

 

[athena53]

Yes. Banks will stab you in the back and charge you for cleaning the knife. <snip> When the banks give you too much for a loan, it's not free money. Everything has a cost. What about not taking the deal and just borrowing the minimum amount possible, even if it means no McMansion for you? To me, that is where the ethical behavior starts, and it may avoid having to do things in self-defense against the banks later, like strategically default.

I agree- with both your statement on banks and on staying ethical, even when you're dealing with sleaze. My first husband borrowed everything he could. When he started defaulting on his credit cards, he got more unsolicited credit card offers in the mail than I did, and they had higher credit lines.

But debt defaults cost us all. Credit tightens, interest rates (at least on borrowing) go up. and taxpayers absorb a portion of the banks' write-offs.

My BIL, in the 1970s, borrowed about $100K to start a business. It failed and his partner (who had been a co-borrower on the debt) dealt with it by fleeing to London. BIL could have declared BK but chose to pay it off. He subsequently married my SIL (she's the sister of my deadbeat Ex), they started another business and last I heard (mid-1980s) they were worth tens of millions of $$. They own a floor-through in a Prewar building in NYC and a home on a private beach in NJ, currently being rebuilt courtesy of the insurance company.

Sometimes that karma thing really works.

 

[zedd]

"Thirty-eight states, along with the District of Columbia, allow financial institutions recourse to claw back these funds."

Do they mention anywhere the specific states?

 

[MichaelB]

"Thirty-eight states, along with the District of Columbia, allow financial institutions recourse to claw back these funds."

Do they mention anywhere the specific states?

Just do a web search for "non-recourse states" and you'll see lots of links. Here's one Foreclosure Laws: State by State, Recourse or Non-Recourse

 

[youbet]

There's really nothing 'unethical' about letting the contract play out and stop paying and let them take the house - even if you have the funds to pay that mortgage. If that is 'unethical' then the contract itself was 'unethical', because it allows for that case.

Yes. But at the same time, there is nothing "unethical" or "unfair" about lenders sharing information about your behavior and chosing not to loan you money again. Or, perhaps charging you more or putting special provisions in your loan in the future.

I understand why and how folks strategically defaulted and have no "ethical" problem with it. I am, however, left confused when these same folks who reaped the financial benefit whine when their behavior causes them to be rated a less than optimum future borrower. The facts are the facts. If you do "X" then live with the consequences of "X" and stop whining and crying.

 

[youbet]

Just do a web search for "non-recourse states" and you'll see lots of links. Here's one Foreclosure Laws: State by State, Recourse or Non-Recourse

This is a great link. Thanks MichaelB!

What I learned from reading it is that "recourse" is not a black and white thing. It's more complicated than "recourse" or "non-recourse." Some states categorized as "recourse" states make it difficult for the lender to collect from a defaulted borrower while in other "recourse" states the hurdles to go after the borrower are low. Some "non-recourse" states actually allow some recourse but only with substantial hurdles and lengthly time frames.

Apparently you can't just look for a "recourse" or "non-recourse" label for your state. You have to understand the legal rights of the lender and the borrower, the difficultly of exercising those rights in your particular circumstances, the consequences and the probability of ever having to bear the consequences.

 

[ERD50]

Yes. But at the same time, there is nothing "unethical" or "unfair" about lenders sharing information about your behavior and chosing not to loan you money again. Or, perhaps charging you more or putting special provisions in your loan in the future.

I understand why and how folks strategically defaulted and have no "ethical" problem with it. I am, however, left confused when these same folks who reaped the financial benefit whine when their behavior causes them to be rated a less than optimum future borrower. The facts are the facts. If you do "X" then live with the consequences of "X" and stop whining and crying.

Agree completely. If someone decides to take this route, there are consequences. Deal with it!

-ERD50

 

[meierlde]

The strategic defaulter just changes the line to if you choose not to bpay them back, then they can take the property. Of course on the commercial side this happens all the time all be it the entity goes into chapter 11 or 7.
Of course if that became the attitude in general the down payment requirement might go to 40% or more.

Basically I was just editing the line " If you are unable to pay them back then they can take the property and it isn't worthwhile to go after you for any more because you can't draw blood from a stone." to change unable to unwilling or choose not to pay