HMW that sounds like what everyone did in Korea! But I guess when everyone does it, it is “okay”. The social pressure only holds as long as it holds.
higgmond Wrote: ------------------------------------------------------- > 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. Okay, good arguement. Add in fear factor, some of which may be real. Say it is *currently* not in people’s best financial interest to walk, so they don’t walk. But how long do they hold out before behavior changes. Example. This guy above makes 3K a month payments including his condo dues and covered parking. His CFA is worth crap these days, he could make the payment but he could also ‘slump it’ and rent for 1K during these hard times. His opportunity cost here is $2k per month. He is losing 24K per year, the market sucks for 10yrs and he loses 240K. Now what looks better to him, take the 100K hit and start over, or lose 240K over 10 yrs and still be nowhere. The view of the future could change behavior suddenly.
purealpha Wrote: ------------------------------------------------------- > Now what looks better to him, take the 100K hit > and start over, or lose 240K over 10 yrs and still > be nowhere. The view of the future could change > behavior suddenly. If he can honestly capture all the costs of walking away and determines that he would be better off doing so, he should walk. When you really look at all the costs though, it takes a pretty rare combination of facts and circumstances for walking away to really be the better financial option. In your example, part of the $24K he’s “losing” every year is paying down principal (probably won’t be upside down in 10 years), the interest is tax deductible, and property taxes are tax deductible. If he walks, 100% of his rent is lost forever. If all those things, and a dozen more that I’ll never even think of, are considered and he’s better off walking, then walk.
purealpha Wrote: ------------------------------------------------------- > HMW that sounds like what everyone did in Korea! > But I guess when everyone does it, it is “okay”. > The social pressure only holds as long as it > holds. Personally, I think the social pressure should remain. Interest rates, down payment, and loan size depend on risk based metrics, which are quantified in scores, income levels, or past performance. Remove borrower level risk quantification and you increase systemic risk. This means that ALL borrowers suffer because SOME borrowers can’t adhere to contract terms merely because their gamble didn’t pay off. The comparison to businesses is silly. A bank/company has bond/share holders to answer to. Sole proprietorships and personal loans only affect a single person.
Well, the first of the 4 Cs of Credit is “character”, which refers to one’s financial history as a financial citizen (biztaxlaw.about.com). I would say that, by and large, persons with better credit probably do have better character. For example, my friend has tens of thousands of dollars in credit card debt (and has had it for several years now–mostly spent on clothes, alcohol, car stuff, etc.) but he has never missed a payment and has no issues getting credit. I asked why he’s never walked away from it–he says it’s his responsibility to pay off his debts. His credit score reflects his payment history–his credit score reflects his character as a financial citizen. A counter example: my friend’s dad is a failed business owner, has repugnant credit, has nothing in savings. He’s a good guy, but definitely an alcoholic and totally irresponsible with his money. I gave him a $3,600 loan to keep him above water during tough times as he struggles with a serious illness. He immediately defaulted on it and was happy that I forgave the loan. And that was that. His financial character is reflected in his credit score. So I’d say that, by and large, paying your debts reflects one’s character and is a moral/ethical issue.
kkent Wrote: ------------------------------------------------------- > Well, the first of the 4 Cs of Credit is > “character”, which refers to one’s financial > history as a financial citizen > (biztaxlaw.about.com). I would say that, by and > large, persons with better credit probably do have > better character. For example, my friend has tens > of thousands of dollars in credit card debt (and > has had it for several years now–mostly spent on > clothes, alcohol, car stuff, etc.) but he has > never missed a payment and has no issues getting > credit. I asked why he’s never walked away from > it–he says it’s his responsibility to pay off his > debts. His credit score reflects his payment > history–his credit score reflects his character > as a financial citizen. > > A counter example: my friend’s dad is a failed > business owner, has repugnant credit, has nothing > in savings. He’s a good guy, but definitely an > alcoholic and totally irresponsible with his > money. I gave him a $3,600 loan to keep him above > water during tough times as he struggles with a > serious illness. He immediately defaulted on it > and was happy that I forgave the loan. And that > was that. His financial character is reflected in > his credit score. > > So I’d say that, by and large, paying your debts > reflects one’s character and is a moral/ethical > issue. Certainly this is the case. The biggest problem I see with treating default/foreclosure on mortgages as a simple economic decision is that you’re fvcking with the whole system and affecting everybody, not because you can’t pay, but because you don’t want to. Sure, everybody should learn a lesson from this situation and I certainly think the banks have with the mortgages defaulting of those who *can’t* pay. However, the people who can pay, but won’t, get a free lunch off of the whole thing by just walking away from their own bad decision. Since the foreclosure won’t follow them the rest of their lives (which it should), they get away pretty clean. However, the damage is already done. Since this risk metric, character, disappears, it cannot be included in a risk-based pricing score. Thus, since you can’t quantify the risk, you must assume ALL loans are at risk for a foreclosure due to a walk-away, or you must amend the loan docs to counter this risk. However, even with changing the docs, people are still getting away from recourse loans, another free lunch. Thus, in the end, you still feed into systemic risk, affecting all borrowers. This is absolutely a social and moral issue, as you are distributing the cost of your poor decisions among ALL borrowers and, in fact, all of society. In this situation, any “strategic defaulters” should have this follow them the remainder of their lives. That will clear up the situation pretty f’ing quickly.
Interesting, you guys take a very corporation-sided stance even though you are individuals not a corporation. The social pressure is obviously strong, but my guess is it breaks down slowly as ‘doing the right thing’ becomes harder and harder for the people. When push comes to shove people go into survival mode. In my area defaults and short sales were on the rise in H2 of '09 and expected to keep ramping up in '10. Interesting one to watch…
Call the amber lamps !
Wow, spierce stalks kkent even more than I do. I would note that generally, if any part of a recourse loan is forgiven (as often happens in a short sale) you generally have to pay income tax on the forgiven portion, so it’s not a free lunch. Serious question: If a bank makes a loan, and both parties (lender are borrower) aren’t really sure the borrower can pay it back, but they both hope the borrower can, and the loan goes bad, whose fault is it?
Our profession isn’t concerned with fault, we just need to know where to invest the get returns off the outcome of the stupidity.
NakedPuts Wrote: ------------------------------------------------------- > Wow, spierce stalks kkent even more than I do. I > would note that generally, if any part of a > recourse loan is forgiven (as often happens in a > short sale) you generally have to pay income tax > on the forgiven portion, so it’s not a free lunch. > > > Serious question: If a bank makes a loan, and > both parties (lender are borrower) aren’t really > sure the borrower can pay it back, but they both > hope the borrower can, and the loan goes bad, > whose fault is it? not positive but don’t we have legislation in place waiving the tax on forgiven debt? That only gives one more incentive to do it now since they won’t have to pay up…
NakedPuts Wrote: ------------------------------------------------------- > Serious question: If a bank makes a loan, and > both parties (lender are borrower) aren’t really > sure the borrower can pay it back, but they both > hope the borrower can, and the loan goes bad, > whose fault is it? Assuming there was no deception on the part of the lender, the vast majority of the blame falls on the borrower. Banks don’t force people to borrow money. It’s the individual’s responsibility to know what they can afford.
higgmond Wrote: ------------------------------------------------------- > It’s the individual’s responsibility to > know what they can afford. Disagree. There is a huge case study and it is called reality. People ate the junk food cause it was there. People shot the gun at the dood cause the gun was there. People took the loan cause it was there. The American agruement is always ‘individual responsibility’ steadfastly ignoring that the herd always does what is easily available in the environment. If there is rat poison on every corner with a sign that says “FOOD HERE” people will eat it. They naturally assume if the food wasn’t good or the loan wasn’t good it wouldn’t be there. We can continue to agrue that reality shouln’t be the reality, but 100 times out of 100 people will do what they did. The banks knows that.
purealpha Wrote: ------------------------------------------------------- > higgmond Wrote: > -------------------------------------------------- > ----- > > It’s the individual’s responsibility to > > know what they can afford. > > Disagree. > > There is a huge case study and it is called > reality. People ate the junk food cause it was > there. People shot the gun at the dood cause the > gun was there. People took the loan cause it was > there. The American agruement is always > ‘individual responsibility’ steadfastly ignoring > that the herd always does what is easily available > in the environment. If there is rat poison on > every corner with a sign that says “FOOD HERE” > people will eat it. They naturally assume if the > food wasn’t good or the loan wasn’t good it > wouldn’t be there. > > We can continue to agrue that reality shouln’t be > the reality, but 100 times out of 100 people will > do what they did. The banks knows that. I guess we should have a totalitarian state then to protect people from their own stupidity, ignorance, greed, and laziness. Or, we can realize that we created the “reality” you mention and decide to change it. The bank knows some people won’t be able to pay the loan, but they also know the majority of their other borrowers who were in the same situation will end up making their payments and the bank will net a profit because of the slightly higher interest rate charged to all. The borrowers don’t really care though, because they don’t perceive any real consequences for them when the loan goes bad. Tell those 100 people that the bank will break their kid’s legs if they don’t pay and let’s see how many still want the loan.
^ Exactly right. The penalty for defaulting is simply not steep enough, or at least perceived as steep enough by the common citizen (read: someone not reading this board). If the perceived loss is immaterial, why not walk away??
Yes if you write ‘eat this product and you will die’ or ‘take the money and we will come after you’ people *maybe* won’t take it. But that defeats the purpose since the corporation isn’t trying to not exploit the herd.
higgmond Wrote: ------------------------------------------------------- > NakedPuts Wrote: > -------------------------------------------------- > ----- > > Serious question: If a bank makes a loan, and > > both parties (lender are borrower) aren’t > really > > sure the borrower can pay it back, but they > both > > hope the borrower can, and the loan goes bad, > > whose fault is it? > > > Assuming there was no deception on the part of the > lender, the vast majority of the blame falls on > the borrower. Banks don’t force people to borrow > money. It’s the individual’s responsibility to > know what they can afford. Now let’s put it another way - assume I’m a private equity firm looking for debt for a transaction. If someone is offering an equity bridge and PIK debt with 8 EBITDA turns at L + 50, why shouldn’t I take it? I think the company can pay it back. Even if the company can’t, my equity in the deal is so small that I’m not too concerned about handing over the keys. Even if things only go well for a year, I can a dividend recap in a year and my equity is out. Whose fault is it when this loan goes bad?
Hello Mister Walrus Wrote: ------------------------------------------------------- > 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. +1.
No one?
An MBA is trained to walk away… the CFA has a ethical responsiblity not too.