It’s not like the average homebuyer saw the problems with the bubble. They were being sold mortgages, and sold on the viability of the real estate market, by banks and real estate agents and financial advisers and government economists.
During the real estate bubble, there were literally about four or five economists who expressed reservations about mortgage bundling and the sub-prime mortgage boom, and their voices were completely drowned out in a tidal wave of cheerleading.
The collapse of the sub-prime mortgage industry and the real estate market has seen more Monday-morning quarterbacks than just about anything else in history. Everyone from finance commentators to internet message board “experts” is saying that homeowners should have seen this all along. Where were all these geniuses during the bubble?
And yet most financial experts are saying, in fact, that this is what banks should have been doing all along. The author of the article i quoted earlier in the thread says that banks should have paid more attention to the issue of positive equity when making loan decisions, which would have resulted in fewer loans being written. And almost everyone agrees that banks were lending money to people who had no business taking out a mortgage, and who were always going to be little more than one missed paycheck from defaulting. you’re whining about the possibility of “fewer loan approvals,” but fewer loan approvals might have helped avert the collapse in the first place.
But you’re not suffering higher interest rates. While banks have started to make it more difficult to get loans, and are requiring larger deposits and more security, interest rates are as low as they’ve been for years. If you can jump through the somewhat tougher hoops and qualify for a mortgage, you’ll get your money far cheaper than you would have a few years ago.
Also, despite your hyperbole, banks can’t just hike interest rates randomly in response to defaults, because interest rates are also subject to a wide variety of external factors, including inflation, unemployment, federal reserve decisions, stock market fluctuations, and competition.
But a homeowner isn’t breaking the contract by defaulting and going in to foreclosure. The entire default/foreclosure process was part of the mortage contract.
I am not talking about what experts say banks should do, or even what the reality behind home buying is.
I am only speculating on why a segment of the population may feel negatively about the people who walk away from a mortgage when the investment no longer looks attractive.
Perception, not facts, drives many peoples opinions.
So, you think to keep paying 3X the going rate to a bank who might have sold you a loan you couldn’t afford than to have enough money to give your kids a good life and perhaps send them to college? Remember, you are almost certainly not dealing with the people who sold you the loan, but someone to whom the loan was sold - possibly many people. Perhaps you are visualizing the banker as Jimmy Stewart, which makes it personal.
As a penalty clause should the borrow default on the mortgage. It’s not an anticipated result when both sides enter into the contract. It’s to give the lender a remedy if the borrower fails to make the payments, as well as to give the borrower an incentive to repay the money.
First of all, I think you’re misunderstanding me. If you can’t afford to pay back the loan, you can’t afford to pay back the loan. But I think that if you borrow money from someone, you should pay them back. even if the thing you buy with the borrowed money decreases in value after you buy it. You still borrowed the money. And that’s true whether you borrow the money from Jimmy Stewart or HyperGlobalMegaCorp. That’s even true if Jimmy Stewart sells the loan to HyperGlobalMegaCorp. You borrowed the money. You had the use of the money. You derived benefit and enjoyment from the money. Now you need to pay back the money.
I haven’t noticed anyone in this discussion mention the current labor market; if someone has, I overlooked it. If a person has a good job and good income one day and has had that good job and good income for a period of time, that person might be able to well afford the payments he has agreed to make. If that same person loses his job and his income, what do you suggest he do? Sell his soul to the devil? Hire out as a hitman? What choice do many people in the current economy have but to cut their losses and live the best way they can.
Like I said, if somebody can’t afford to make the payments, and defaults for that reason, then the person obviously isn’t doing anything wrong, If you can’t make your mortgage payments because you lose your job or lose your income, then I don’t think anyone would feel anything but pity. Likewise, if the bank gives someone a mortgage they obviously can’t afford, or they take advantage of ignorant people, or they hide balloon payments in the mortgage, or do any of the nasty stuff that banks have been doing with the mortgages lately, that’s the banks’ fault.
People with mortgages in situations like that aren’t the people I’m talking about. I’m talking about people like the people behind StuyTown/Cooper, or their individual counterpoints; people who CAN afford to repay the mortgages they took out but choose not to anyway.
So you’re saying if I loan you $100 and we sign an agreement saying you’ll pay it back, you can’t renege. But if we add a penalty clause to try to put teeth into it, that’s tantamount to giving you permission to renege? I strongly disagree. The mortgage agreement says they can take the house back if you default on the loan. Defaulting is breaking the agreement.
You’re still not getting my point. He defaulted on the loan (i.e., broke the agreement). Once he did that, the penalties kicked in and the bank took his house away.
It’s not a fallacy. If I have $500,000, and I spend $300,000 on a house (or a painting, or stock, or a prize bull…), I have $200,000 left. If you want to declare my investment only worth $100,000, that’s fine. I haven’t lost any money until I sell it. It’s only a potential loss. Someone could still walk in tomorrow and offer double (or half) what you said it was worth. If I accept that offer, that’s when I’ve made or lost money (well, after all applicable fees and taxes are paid).
You should look up what “default” means. It means he failed to live up to the terms of the contract. The bank taking the house back is a remedy for someone who doesn’t honor his word.
You say he broke the agreement and the bank took his house away. I say he handed his house over to the bank rather than continue to make the payments.
Whichever one you feel is more a more appropriate description, the fact is that his mortgage contract allows for precisely such an outcome, and as a party to that contract he can choose to take such a route. You’re welcome to persist in your moral outrage; i simply don’t share it. The bank accepted the house as collateral for the loan. If the house ended up being worth less than the loan, that’s tough.
And the irony is that the Mortgage Bankers Association skipped outon the $79 million loan on their Washington, DC headquarters, less than two months after Courson berated homeowners who walked away from their mortgages.
Bankers who default on glass houses shouldn’t throw stones.
Actually, after investigating a bit further, i’m not exactly sure that the MBA did, in fact, abandon its loan. According to this story:
If that is correct, then the MBA is still paying off over $30 million on a building it no longer owns.
Of course, all companies involved have declined to comment, so it’s not clear whether the MBA were able to negotiate their loan agreement or receive some other accommodation as part of this deal.
Unlikely. In my cite, the MBA explained their decision to sell the building at a loss:
Why would they continue to pay on a mortgage they deemed “economically imprudent?” Selling at a loss then paying off the balance gains them nothing, and would be no less “imprudent”, so why would they sacrifice $38 million for no reason?
The only possible reason would be to deal with the minor problem that it is tough to take the moral high ground about walking away from mortgages when you’ve walked away from yours. If this is worth $38 million is doubtful, but maybe they will pay until the story goes away.
You’re probably right, although as Voyager notes, they have some PR incentive to at least appear as if they’re paying off the whole thing until the scrutiny dies down.
[QUOTE=Gary “Wombat” Robson;12771667A person found a house he liked and wanted to live in. He worked out a monthly payment that he could live with. An appraiser gave the house a lower value.
It’s still the same house. It’s still the same payments. It’ll still be paid off at the same time. He hasn’t lost any money. But he chose to default on the loan and accept the penalties.[/QUOTE]
Often it’s not the same payment. Back in those days (just a few years ago) many/most mortgages were a 5 year Fixed with ARM after. Thus, the buyer went in with a reasonable payment. However, when his house went underwater, his rate jumped drastically, thus he couldn’t pay. I had this happen to a friend of mine, his payment more than doubled- and his 5year wasn’t a “teaser” either, it was just about what you can get now. Those types of mortgages were common and often suggested by trusted financial experts. So, it’s not the same payments.
OTOH another friend bought a house in a area called Mountain House which is famous for being underwater. He got a reasonable 30 year fixed. Now, he’s also hwaaaay underwater but he still has the same payments. Of course, he can’t re-fi now, thus he can’t get the new lower rates. So, it’s not ideal, but he can live with it.
Yes, poor credit can make employers pass you over in inital hiring, but it takes hwaaaaay more than a foreclosed mortgage in today’s economy to get fired over it. Even back a couple decades, you would not lose your security clearance over a Bankruptcy, as you had legally settled your debts.