yourmortgage, you should bail so you could stick it to the bank. That's
Are you kidding? The NYT seems to think they are just misunderstood minorities.
-- Anyone wanting to run for any political office in the US should have to have a DD214, and a honorable discharge.
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I think you meant "secured loan." Sure, it's that, and if the bank miscalculated on its collateral then you have them at a disadvantage-- they tried to help you, they went out on a limb for you, and they shouldn't have--they screwed up.
Cheating on your wife is legal too, but it's still wrong.
Again the lending-to-the-wrong-people problem is moral hazard--Freddie and Fannie created perverse incentives, and the market responded. It's corrupting, if not outright corruption.
Now the moral taint, the corrupting influence, is metastasizing as those who play fairly see they're being treated very unfairly--it pays them far better to cheat.
(Oh, BTW, Freddie and Fannie? Not part of the Democrats' "Wall Street" "reform". It's quite appalling.
e.g.
-- Cheers, James Arthur
You're never going to be a good politician if you actually believe that (rather than just paying it lip service), James. :-)
Oh I'd be a terrible politician, a far better statesman, but there's zero chance of me ever getting elected so it's not like it matters.
If you were a lawyer, however, you'd notice I said _his_ wife... :-)
-- Cheers, James Arthur
This doesn't sound like the same Wall Street that screams 'moral hazard' when people want to renegotiate their mortgages.
--
Paul Hovnanian mailto:Paul@Hovnanian.com
------------------------------------------------------------------
Entropy: When your shoelace comes untied, you can't fix it
by walking backwards.
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It seems consistent to me. In valuing companies, they're worth more unburdened. In valuing mortgages and mortgage-backed securities, they're almost worthless if people don't pay as promised. (If everyone defaults on their mortgages we just won't have mortgages any more.)
Both cases seem like rational appraisals, as best as can be. And, if people think they can bail without consequence, that's truly a textbook example of 'moral hazard,' of being insulated from the true cost of your behavior.
But let's be clear about what "renegotiate their mortgage" means. It means the buyer wants the bank to take the loss.
That's wrong. It's unfair. But, banks are willing, because Mr. Obama wants them to, and Freddie and Fannie and FHA--aka the taxpayers, via Barney Frank--make them whole. So, that's yet another example of 'moral hazard.' Or, put more simply, most people are more careful with their own money than with someone else's. Banks too.
-- Cheers, James Arthur
[*] That is, the bank didn't cheat you. If you think you paid too much, who got that money? The seller. Go sue _him_.
James Arthur
Hugely different. In one case, at some point, you no longer pay the capital value, your costs are fixed, and you have modification rights.
It is in any "free" society. Property rights must be protected.
Choice.
All three. It's foolish to live in CA if all you're making is 75K a year. It's foolish to live in CA in any case, but...
I don't agree. A fixed rate is almost always a better deal, long term. There are times where it's reversed, like the early '80s, but that was an anomaly (one that could soon be repeated, given who's in charge). A fixed rate can easily be negotiated downward, if the rates drop significantly. I have a 4.5% fixed mortgage now, so that's not a likely scenario for me. ;-) ...though a variable rate mortgage would be an incredibly stupid move; no up-side and a huge down-side risk.
I'd rather the lender be at the mercy of the market. One reason I don't do mortgage loans.
Paid for by someone else. They're silly enough to pay for it, I'll take it.
The numbers wouldn't, IMO.
[snip]
If you are the creditor of a company, I don't think you want them to unburden themselves of your loan. If you are a shareholder, you don't want them unburdening themselves by declaring bankruptcy
As are corporate loans or stock.
In part, yes. It means the buyer is thinking of mailing back their keys. In a bad real estate market, that means the house will sit on the banks books as an unperforming asset for months. Or years. While the neigborhhood thieves strip it of copper wiring and plumbing. Or the banks and buyer can negotiate a deal which will keep some money coming in.
The next time an airline defaults on a loan, 'fair' would be the creditor seizing its assets and padlocking them.
-- Paul Hovnanian mailto:Paul@Hovnanian.com ------------------------------------------------------------------ RAM disk is *not* an installation procedure.
Blackmail, basically. Pay, or I'll make you lose even more.
And we're back to your original question of creating moral hazard. With any given case it may indeed be cheaper for the lender to pay $150k rather than fight. But overall, if this financial reward, plus society not just removing any stigma and penalty from default, but actively promoting it--like the NY Times--encourages a stampede of defaults, the system collapses.
"When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that justifies it." -Frederic Bastiat
Or it would, except the taxpayer's backstopping all this anyhow.
The whole thing turns into a tragedy of the commons: it's in each citizen's interest to grab what he can from the kitty, but in so doing, the kitty is busted.
"Everyone wants to live at the expense of the state. They forget that the state wants to live at the expense of everyone." - ibid
The difference is we're talking about a quarter of America voluntarily defaulting as a financial strategy, and isolating them as a matter of policy from the customary consequences.
Basically, we're talking about making robbing banks legal, accepted, to the point of telling people they're actually crusaders, heroes somehow righting a wrong.
I'd say let borrowers default, let them bear the usual consequences, and let the lenders go bust too, if they loaned foolishly. The problem is the lenders are insured through the GSEs, Freddie, Fannie, FHA, etc., so the burden's not theirs, it's ours. Again, moral hazard. The government did that. They made the whole mess.
Anyway, it's a mess. I figure Mr. Obama will put it on the MasterCard, and that will damp the economy severely for a long, hard time.
-- Cheers, James Arthur
That's a bit of an exaggeration. Its more like 10% that are behind on payments.
Renegotiating terms is not robbing a bank if its a mutual agreement between the parties.
Actually, there's quite a bit of evidence that investment bankers leaned on the government to keep the flow of collateralizable debt flowing into the system. Once everyone had one house, the industry pushed to build houses for speculation.
And its not the banks that will get screwed by loan renegotiations. Even with your assumption of a 25% default rate, the holders of the top CDO tranches, mainly very wealthy and influential people who set this whole mess up in the first place, will still see full income. Its the owners of the lower tranches that will get screwed. And that isn't the banks either. Most banks sell their mortgage paper off within months of writing the loans.
The people with the low risk tranches will get buggered by a wave of early refinances (which is what these term renegotiations will effectively be). Because they'll get cashed out of really high interest rate paying paper and the market will have a smaller amount of lower interest paying paper available to replace it with.
I weep for the coupon clipping trust fund babies. I really do.
-- Paul Hovnanian mailto:Paul@Hovnanian.com ------------------------------------------------------------------ Error reading FAT record: Try the SKINNY one? (Y/N)
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gI was speaking of people who are merely upside down. Those are the potential "strategic" defaulters.
By RUTH SIMON and JAMES R. HAGERTY "The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery."
Of course that'll be getting worse:
So that's the concern. If you remove all the stigma and penalties of defaulting, half of America could stampede demanding rebates on their mortgages.
And if it's offered, they should, financially speaking. If they don't, they wind up paying for everyone else. If they do, everyone else pays for them.
Of course it's still stealing, just done with approval. It's debasing.
Even when coerced?
Sure, I know all that, it's just easier to say "bank" as a metaphor for the distributed harm you'll do to so many nameless faces.
(In the list of the greedy, let's not forget those who bought something too good to be true, and too complicated to understand. Someone offered me 12-14%, "risk free, backed by mortgages" and my BS- meter instantly pegged.)
Freddie and Fannie backed half the loans in the US, and deliberately made subprime-ish junk half their book, as they were obliged to do under Congressional mandate. So, we the taxpayers are on the hook for at least that much of it.
Freddie and Fannie's need for junk made the market for this stuff. Thanks Barney.
-- Cheers, James Arthur
The issue isn't defaulting. Its renegotiating mortgage terms as a means of preventing high default rates.
When someone defaults, they walk away from 100% of their remaining debt. I don't see any figures on what the anticipated average reduction will be. It certainly is nowhere near 100%.
The mortgage holders still have a choice: renegotiate or take back the keys. And they still negotiate from a position of placing a bad report on the homeowners credit record if they choose the 'walk away' option.
Everyone wins except for the holders of the low risk CDO tranches. They get cashed out of high yield securities. And now the market isn't paying anything like it was when they bought the last ones.
-- Paul Hovnanian paul@hovnanian.com ---------------------------------------------------------------------- Have gnu, will travel.
Right, under threat of default, for a payment of taxpayer money.
Remember, we're also talking about people who are perfectly able to pay, but simply don't want to.
Why not extend that technique those socks you bought last week, before they went on sale? Or your new tires? Or the haircut you just got-- why not renegotiate after the fact? Surely it's cheaper for the haircut guy to settle for, say, half, than to bother suing you to collect the rest?
Shouldn't we all do that? And it's perfectly ethical to "renegotiate," even after he did his part, right? No, of course we shouldn't, and it isn't.
That information's available--something like 1/4 of Americans are more than 20% under water, a smaller group is 50% under, etc.
No! I think you're missing something important--the taxpayer pays for it. Directly. Freddie and Fannie and AIG pay off the losses, the "renegotiated" mortgage amount, then Mr. Obama's Treasury Secretary pays them, with our money.
We take the loss, we wind up monetizing a debt that should've been dissolved in bankruptcy for forced defaults, or which should've been paid by the borrower for unforced defaults.
It's a great evil, it really is.
That creates a system where everyone loses _except_ the defaulters, who steal their gain from the rest of society. It creates a system where only suckers are honest, where it pays to steal (using the government) from your neighbor. That's moral hazard too--it wrecks everyone's honor.
-- Cheers, James Arthur
If there was ever a good time wherein the political winds were that restructuring Freddie, Fannie, AIG, etc. such that they only made loans to people "very highly unlikely" to default, it would be now.
But I'm not crossing my fingers that's going to happen.
Heck, the banks have figured out that there's lots of money to be made from people with truly awful credit -- people who 30+ years ago would have *never* been able to obtain, e.g., an unsecured credit card. But now to them it's just a question of, "can we make money off this person before they default -- which we fully expect they will?" -- no moral judgment whatsoever as to whether or not engaging such a person is a proper thing to do in the first place; the only thing that matters is the money.
That's wrong too. Seems to me they're doing just as much to "wreck everyone's honor" as all those folks defaulting on their mortgages and still squatting in their (former) homes.
Most don't even realize this is happening in most cases, James.
---Joel
Surely you're joking. Look at who is running the show.
Whew! I thought you were going to hold your breath.
I don't think that's true. They can't make money without getting the principal back. Sure, if they can bounce checks en route, that's "great", but they still need the principal back. Even 30% interest is no good on a bankruptcy.
Nonsense. The contract has been agreed upon. The banks are not the ones nullifying the contract.
You're going to have to explain that inside-out one (too much indirection).
If you mean that "being behind on payments" is a proper subset of "snubbing a legal contract", OK...
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