NakedPuts Wrote: ------------------------------------------------------- > 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? No fault at all. The company seeking the money has to have it to survive and the lender knows that. Start-up businesses that will either crash-and-burn or will be wildly successful are in no way comparable to an individual. Kind of like comparing life in grad school to life in the real world - comparisons don’t apply.
higgmond Wrote: ------------------------------------------------------- > NakedPuts Wrote: > -------------------------------------------------- > ----- > > 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? > > No fault at all. The company seeking the money > has to have it to survive and the lender knows > that. Start-up businesses that will either > crash-and-burn or will be wildly successful are in > no way comparable to an individual. Kind of like > comparing life in grad school to life in the real > world - comparisons don’t apply. What? I’m talking about a PE deal here. The company seeking the debt is really the PE firm, and they don’t need it to survive, they need it to meet their 25% IRR hurdles while still paying 12X EBITDA for a company. The target isn’t a start-up, it could be a multi-billion dollar company. Comparisons absolutely do apply: In both cases, the borrower and lender are coming together under their own free will and doing something they believe (assuming no bad faith) will be mutually beneficial.
NakedPuts Wrote: ------------------------------------------------------- > What? I’m talking about a PE deal here. The > company seeking the debt is really the PE firm, > and they don’t need it to survive, they need it to > meet their 25% IRR hurdles while still paying 12X > EBITDA for a company. The target isn’t a > start-up, it could be a multi-billion dollar > company. > > Comparisons absolutely do apply: In both cases, > the borrower and lender are coming together under > their own free will and doing something they > believe (assuming no bad faith) will be mutually > beneficial. Sorry, it’s late in the day and my brain is basically mush. Bottom line though, if you borrow money to buy something you can’t afford, it’s your fault when you can’t pay. It’s not the lender’s fault, it’s not the government’s fault, it’s not the media’s fault, it’s not the school system’s fault, it’s not your parents’ fault, it’s not your neighbor’s fault, it’s not my fault, it’s your fault. Disagree with me if you’d like and draw whatever comparisons you think make it justifiable to be fiscally irresponsible, but stable, sustainable “economies”, whether they be household, government, or business, are built on participants actually being able to afford what they buy.
spierce Wrote: ------------------------------------------------------- > 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. I disagree. The risk metric here is not character. These people would pay back their loans if their mortgages weren’t +$100k underwater. So it can’t be character. It’s simply an economic decision they are facing. The risk metric here a possibility of economic recession. And as a bank, you can either price this risk in or adjust your lending behavior. Some banks gave no-doc loans in Phoenix, others didn’t. Thus, if you default on your underwater mortgage, you are not harming society. You are simply harming a dumb bank. Rest assured, the smart banks will (smartly) fill the void left by the dumb banks, and society will be fine.
higgmond Wrote: ------------------------------------------------------- > Sorry, it’s late in the day and my brain is > basically mush. Bottom line though, if you borrow > money to buy something you can’t afford, it’s your > fault when you can’t pay. It’s not the lender’s > fault, it’s not the government’s fault, it’s not > the media’s fault, it’s not the school system’s > fault, it’s not your parents’ fault, it’s not your > neighbor’s fault, it’s not my fault, it’s your > fault. Disagree with me if you’d like and draw > whatever comparisons you think make it justifiable > to be fiscally irresponsible, but stable, > sustainable “economies”, whether they be > household, government, or business, are built on > participants actually being able to afford what > they buy. Obviously the borrower bears some degree of fault, but this very popular notion of all these irresponsible borrowers buying something they couldn’t afford means it’s all their fault is absurd. In credit, there’s an inherent conflict of interest between the borrower and lender. The borrower will always try to seek better terms. It’s the lender’s job not to let those terms get out of control. Imagine you’re the SVP at some Big Bank, and 9 of the last 10 loans a certain loan officer made have since gone bad. That LO comes to you and says “Well, it’s the borrowers fault. They borrowed more than they could afford”. As SVP, what’s your response to that?
NakedPuts Wrote: ------------------------------------------------------- > Obviously the borrower bears some degree of fault, > but this very popular notion of all these > irresponsible borrowers buying something they > couldn’t afford means it’s all their fault is > absurd. In credit, there’s an inherent conflict > of interest between the borrower and lender. The > borrower will always try to seek better terms. > It’s the lender’s job not to let those terms get > out of control. > > Imagine you’re the SVP at some Big Bank, and 9 of > the last 10 loans a certain loan officer made have > since gone bad. That LO comes to you and says > “Well, it’s the borrowers fault. They borrowed > more than they could afford”. As SVP, what’s your > response to that? Big Bank clearly has some internal control issues and the LO clearly needs to be fired. A bank’s willingness to lend someone money however, does not absolve that person from the responsibility borrowing only what he can afford. By your logic, it’s Frito Lays’ fault when the morbidly obese guy buys a bag of chips (they encouraged him to buy them with all those funny commercials and by making the chips so tasty), it’s the car company’s fault when you speed (they made a car that could exceed the speed limit), etc. Where does it end?
Absolutely not, and those are terrible analogies. The car speeding is illegal, and the chip issue involves gross misuse in a situation where the manufacturer has no control. Stop making it an absolute case; I’ve already agreed the borrower bears some degree fault, but why must you continue to insist the banks are largely blameless?
NakedPuts Wrote: ------------------------------------------------------- > Absolutely not, and those are terrible analogies. > The car speeding is illegal, and the chip issue > involves gross misuse in a situation where the > manufacturer has no control. > > Stop making it an absolute case; I’ve already > agreed the borrower bears some degree fault, but > why must you continue to insist the banks are > largely blameless? Unless we’re talking about a predatory lending situation, what did the bank do wrong? With rare exceptions, banks do not make loans they expect to go bad. They realize some will go bad and try to diversify that risk, but they don’t want to own a bunch of houses all over the country. They didn’t force the borrower to borrow. I’m sure you get 2 or 3 credit card offers in the mail every week the same as I do. Do you accept them? Do you charge your existing cards to their limits? No, you presumably exhibit some fiscal responsibility. Let’s also remember that banks used to be much tighter with their lending, but they were accused of discrimination and the fair housing act was born. While the act’s intentions are noble, it’s implementation has been misguided at best and it has forced banks to make a lot of loans that they otherwise would not have made.
@higgmond, Back in the old days where securitization was a Bankers friend; many banks made questionable loans knowing they could sell them off to investment firms. But I agree with you that most banks were not in the business of doing this.
Zokeseh Wrote: ------------------------------------------------------- > @higgmond, Back in the old days where > securitization was a Bankers friend; many banks > made questionable loans knowing they could sell > them off to investment firms. But I agree with you > that most banks were not in the business of doing > this. Agreed. I’m certainly not trying to argue that the banking industry be nominated for the Good Guy of the Century award. It’s just upsetting to me how it’s become so acceptable to absolve people of responsibility for their decisions. We have become a society of victims. People who spend beyond their means are victims of an evil banking system. Kids who fail out of school are victims of a crappy educational system (I do agree that the system is crappy though). People who rob you are victims of a socio-economic system that holds them down. Athletes who take PEDs are victims of the system that forces them to take them to be competitive, forgetting that their unions fight any attempt at increased testing. Etc., etc., etc.
Stop making this about something bigger. Your screed about the fair housing act shows this isn’t really about the act of lending to you. What did the bank do wrong? They made a loan which went bad, and more importantly, not just one loan but a whole bunch of loans with all went bad for the same reason. That hypothetical Big Bank above isn’t hypothetical; it’s a Dow component.
NakedPuts Wrote: ------------------------------------------------------- > Stop making this about something bigger. Your > screed about the fair housing act shows this isn’t > really about the act of lending to you. > > What did the bank do wrong? They made a loan > which went bad, and more importantly, not just one > loan but a whole bunch of loans with all went bad > for the same reason. That hypothetical Big Bank > above isn’t hypothetical; it’s a Dow component. We’re just going to have to agree to disagree on this one.
naturallight Wrote: ------------------------------------------------------- > > I disagree. The risk metric here is not character. > These people would pay back their loans if their > mortgages weren’t +$100k underwater. So it can’t > be character. It’s simply an economic decision > they are facing. > > The risk metric here a possibility of economic > recession. And as a bank, you can either price > this risk in or adjust your lending behavior. Some > banks gave no-doc loans in Phoenix, others didn’t. > > > Thus, if you default on your underwater mortgage, > you are not harming society. You are simply > harming a dumb bank. Rest assured, the smart banks > will (smartly) fill the void left by the dumb > banks, and society will be fine. Is it the bank you’re harming, or the securitization bond holder? Is it the bank, or the investor in the bank? Is it the bank, or the depositor? Is it the depositor or the FDIC? Is it the FDIC or the taxpayers? Is it the taxpayers, or the DIF fund funders, who are the banks, who are the investors, who are the 401k/pension/mutual funds, and bailout providers (taxpayers). Are you shooting a bank in the dick, or just society because you made an “investment” decision rather than a rational long-term housing decision? Furthermore, since the lenders can’t predict the behavior of borrowers, then all borrowers are now inherently riskier. So who are you harming? All borrowers, all taxpayers, all investors. All for your *own* personal gain. Sounds pretty selfish eh?
flynnch Wrote: ------------------------------------------------------- > An MBA is trained to walk away… the CFA has a > ethical responsiblity not too. Maybe I missed that one in the ethics section on the I/II, but what LOS are you referring to? I must have my facts wrong, because I could have sworn that the CFA does not disqualify someone on the basis of a bankruptcy. I live in an area that didn’t have as great of a bubble cycle, but if I was more underwater than I quantify the costs of bad credit (higher interest costs if I finance things, lost job opportunities - which would be the biggie for me), I’d do this in a heart beat. It is an economic decision for me - I short stocks (which some could say hurts other market participants) - I make decisions that maximize the economic utility for me and my family and comply with the legal and ethical framework that I operate under - at the end of the day that is the framework from which I make my decisions, and for me - I’d be OK with exercising my put option and accepting the ramifications. Let me ask you this, to the individuals who feel morally compelled to NOT live up to what a contract states, but to live up to what they FEEL the contract encompasses/should encompass (the contract states you can walk away, and what will happen if you do) - what dollar amount would you quantify a foreclosure/bankruptcy/etc… If someone offered you $1 million dollars, would you take that hit? $2 million? $10 million? Don’t try to tie a bunch of other things into the equation - just ask yourself the question. For me, the number just isn’t high enough (and likely won’t ever be - but if someone said they’d throw me $1 million I’d jump in a heartbeat and take the bad credit for ‘x’ years). I don’t judge those who wouldn’t walk away, and I don’t judge those who do - but for those who wouldn’t, ask and answer that question honestly.
Dont want to be the materialistic weasel among the group, but given the large number of homeowners with negative equity on their homes, the fresh memory of the housing price decline and the persistent worry among the general public that this may continue, i imagine there would be significant consumer demand for hedging products perhaps indexed to local real estate prices. like a consumer home protection etf for specific geographic regions.
nil_trebla Wrote: ------------------------------------------------------- > Dont want to be the materialistic weasel among the > group, but given the large number of homeowners > with negative equity on their homes, the fresh > memory of the housing price decline and the > persistent worry among the general public that > this may continue, i imagine there would be > significant consumer demand for hedging products > perhaps indexed to local real estate prices. like > a consumer home protection etf for specific > geographic regions. See UMM (up metro market), DMM (down metro market). They are exchange-traded products indexed to Case-Shiller 10-city index.
i just looked at those. i cannot believe how little interest there is in these product (a market cap of around 10m and daily volume of only 2000 shares). while these number may be representative of a newly issued etf (i doubt it). i think instead of marketing as an exchange traded products, it should rather be like a consumer product offered at the point of sale to new homeowners right at the bank or through real estate lawyers much like a title insurance. i am not sure what type of regulatory hurdles this would have if any. does something like this exist?
nil_trebla Wrote: ------------------------------------------------------- > i just looked at those. i cannot believe how > little interest there is in these product (a > market cap of around 10m and daily volume of only > 2000 shares). while these number may be > representative of a newly issued etf (i doubt it). > i think instead of marketing as an exchange > traded products, it should rather be like a > consumer product offered at the point of sale to > new homeowners right at the bank or through real > estate lawyers much like a title insurance. i am > not sure what type of regulatory hurdles this > would have if any. > > does something like this exist? It’d be a security product, so would require FINRA licensing and disclosures. An actual insurance product might be easier (similar to PMI, but as protection for homeowners against declining home values).
I always thought it would be a good idea to be able to trade future home price appreciation. In other words I buy a house and sell off the potential future price appreciation in exchange for a fixed monthly payment. So I own the home, but someone else owns a claim on all or part of the appreciation. Five years ago this might have been a popular product, as it would have given speculators a way to bet on price appreciation without having to actually buy a home, but who would pay for this type of thing now? This idea occurred to me when I bought my home 4 years ago (!) and had no interest in participating in what I felt was a housing bubble. But I needed a home for my family and wasn’t interested in renting.
the covenants in a personal mortgage are nothing compared to business loans so its comparing apples to oranges. For example, if Ford defaults on one of their 20 billion bond issues they go into technical default on the others… Mr. Smith walls away from his mortgage, and it has no affect on his EXISTING student/ car loan. Yeah, credit card rates wand future loans might go up, but generally, individuals have much less financing to roll forward.