Banks make decisions based purely on business, when they think they can make money off you they move on it, when the deal goes bad they make the best strategic decision and move on. They do purely what is in their economic interest. Why should the individual behave differently? Why is the average American homeowner brainwashed into thinking they need to uphold some illusionary moral code. Sure, they want to guilt you into “doing the right thing” (continuing to work you butt off to make them profit). Why not just strategically default when in your economic interest to do so. My macro argument is that doing what is in your best interest creates efficient markets. My micro argument is that doing what is in your best interest is in your best interest.
Thank you, captain obvious.
Hello Mister Walrus Wrote: ------------------------------------------------------- > Thank you, captain obvious. +1 Strategic DeFUUUUUUUUUUUUUU lol
“Captain Obvious” sounds really fun. Haha.
Yeah but as obvious as it is people don’t do it. Social pressure > logic.
The main reason that rational people don’t drop their house like they would a losing stock is that it takes a lot of effort to move. There might also be some sort of lifestyle routine changes associated with the move that would not be costless to adapt to. People don’t strategically default because it is inconvenient to do so, not because they adhere to some moral code. Indeed, people don’t give a sh*t about banks. Many even feel happy to see “fat cat” banks lose money.
A lot of people don’t walk away to preserve their credit rating, too.
purealpha Wrote: ------------------------------------------------------- > Banks make decisions based purely on business, > when they think they can make money off you they > move on it, when the deal goes bad they make the > best strategic decision and move on. They do > purely what is in their economic interest. > > Why should the individual behave differently? Why > is the average American homeowner brainwashed into > thinking they need to uphold some illusionary > moral code. Sure, they want to guilt you into > “doing the right thing” (continuing to work you > butt off to make them profit). Why not just > strategically default when in your economic > interest to do so. > > My macro argument is that doing what is in your > best interest creates efficient markets. > My micro argument is that doing what is in your > best interest is in your best interest. I agree with you 100%, my only additional point is that our society/policy/lawmaking body need to reward/punish behavior. Banks will make the best business decision for themselves, not necessarily the customer, however, people will remember that, next time, when people choose banking business, they will avoid “bad” bank, that is punish/reward ceratin behaviors. Same thing for walking away from homes. If it is in your best interest to walk away from your mortgage, do it. However, such behavior need to be on your credit report for a long time, so no bank will give your a mortgage in the future. F*** congress should not interfere such market activities. Congress should not keep telling bank to issue loans to those who walked away from mortgage. Bottom line, do what you want. However, there should be consequence for your action. We should award “bad” behaviors.
Failing to satisfy the terms of one’s contracts reduces the amount of trust in the financial system as a whole. Besides, just because something is in your best interest does not mean it is the right thing to do. It would be in my best interest to shoplift, but that does not make it okay. I would like someone to explain how walking away from your mortgage helps create efficient markets. Seems to me that it destroys value by negatively affecting other homes in the neighborhood. It benefits the one who walks away (in a sense), but at the expense of everyone else. Value is destroyed, not created.
monger187 Wrote: ------------------------------------------------------- > It would be in my > best interest to shoplift, How so?
thommo77 Wrote: ------------------------------------------------------- > monger187 Wrote: > -------------------------------------------------- > ----- > > It would be in my > > best interest to shoplift, > > How so? Easy, I can get a 56" TV for free. When it is not in your best interest to get a 56" for free? However, there are consequences for your action.
You are not failing to satisfy the terms of the contract if you strategically default. The contract says that if you default, the bank takes the house. So, if you default and the bank takes your (worthless) house, you are exactly doing what the contract says. The bank becomes long home prices when they enter these contracts. If the bank loses a shitton of money when home prices decline, it’s because they were retarded and didn’t manage their exposure. Example of a retarded bank: Countrywide. In contrast, Wells Fargo made $12 billion in 2008 because they did not have stupid unmanaged exposure. There is no moral argument for not strategically defaulted since YOUR OPTION TO STRATEGICALLY DEFAULT IS SPELLED OUT CLEARLY IN THE CONTRACT. It’s just like there is no moral argument to exercise an in-the-money call option.
Shoplifting is not analogous to strategically defaulting. Shoplifting is illegal. Strategic default is not illegal.
^ Monger I am referring to basically the thing Adam Smith called invisible hand. By doing what is in their best economic interest and walking away banks naturally learn their lesson and lend differently next time. The current equasion has huge factor called social pressure blocking up Adam Smith. The banks rely on this, assuming historically people will sell their first born before they walk away, you will work your whole life to make them their money, but what if that breaks down and you don’t give a f@#$. I’m suggesting the current market is out of wack with the average chump on the losing end. As an investor I wonder what happens if that corrects in mass, I put a material probability that it could in < 5yrs, and where to invest to profit from the shift.
For consumer credit purposes, most significant events are ignored after 7 years. (During go-go periods, you might find lenders working with you as soon as 2 years after the event.) On the employment side: I’m not sure what policies are. However it’s odd that you’re posting this to a CFA forum – I’d guess there’s little chance of putting the charter to use no matter how old the default gets.
^ I wasn’t going to bring this up, but you think it’s hard to get a good finance job now, try it with a foreclosure on your record. Employers do check, particularly in this business.
^ Okay so social pressure is driving the decision process for many people, that is a known.
The contract is flawed if you can walk away from it with little or no repercussions. As a result if people walk away from the contract it wil demostrate to the banks the faults in their system. This will hopefully cause the system to change for the better by writing different contracts in the future so that it won’t happen next time. If you take a loan out ot buy something but you are not on the hook for the loan if the “thing” is purhased at a stupid price or is incorrectly valued then is it the system that is broken. Last time I checked I can’t walk away from a car loan becasue the car has depreciated. I can’t walk away from a margin account because the stock I purchased has gone down in value etc…etc… People should take more resonsibility for their actions and should know what they are buying but if the system is already broken by some crazy flaw which lets them walk away from a contract then they are within their rights to take advantage of that system. This will force the system to be fixed. The market works and will fix the system by exposing the flaws. And who came up with the idea the interest should be tax deductible talk about a destablizing incentive.
Try getting a good finance job when you have a publicly-searchable blog that details how you applied for 18 credit cards in order to borrow over $100,000 to invest in mutual funds, and ended up losing almost all of it when the market crashed in 2008.
Defaulting on your mortgage does not actually clear you of the debt unless the lender agrees not to seek a deficiency judgment. They do not do this automatically, you must specifically request it and they do not have to grant your request. Example, you owe $450,000 on a house worth $400,000 and decide to walk away. The bank forecloses and the house sells at auction for $350,000. The bank can then seek, and will almost certainly be granted, a deficiency judgement against you for $100,000 PLUS their foreslosure costs. End result, you have no house, you still owe bank more than $100,000, your credit score sucks (your next car will cost more, your car insurance can go up, existing credit card companies will likely drop you or boost your APR, etc.), you won’t be able to borrow for another house for at least 2 years and will still pay a much higher rate, no decent landlord will rent to you, etc., etc. So, very unlikely walking way will really be in your financial best interest.