I quite agree that contracts are not to be considered moral covenants (which, incidentally, is why breach of contract awards do not permit punitive damages except in the most extraordinary cases). If you feel you need to rely on moral suasion to get the benefit of the bargain underlying your contract, then you need to become a better negotiator or draftsman or get better insurance.
But there does seem to be a game theoretic aspect to this. Or perhaps a sociological one. And that is that it might be easier to extend credit in a society where there are cultural norms that prod people to pay the debts they’ve agreed to pay, even if the debtor is better off defaulting. What I have in mind is an analogue to the prisoner’s dilemma.
It is not a perfect analogue, of course, as I don’t see banks falling on their swords either.
Interesting how the bank loaned you money in “good faith” then turned around and sold all interest in your loan to a third party.
Get with it, the banks aren’t loaning jack squat on faith, it’s a business decision. Especially with a rental, they know damn well it’s a business decision on your part to invest in this building, they know if you can’t make it work, they risk becoming the owner of that building. They set their rates assuming that, and require insurance to boot.
On the plus side, they’ve got you paying into their bottom line until you wind up settling for the “cheap” Ramen noodle brand, so you can keep their business decisions profitable.
Thanks. I am giving this considerable thought. But a big consideration for us is the credit issue. We’re in the process of opening a deli, so bad credit could hamper that. If we’re successful, I will then need to decide if I want to continue to let them make me eat this tremendous loss. If the deli fails, we’ll be pretty fucked then anyway.
So we need to wait a few more months.
I don’t think it is prisoner’s dilemma, because there is a clear economic answer here which the banks trust people not to choose for social reasons. That lets the banks maximize their profits by engaging in riskier mortgages with the assurance that the consumer will not act in his own best interests
Not exactly. They have some of the rights of “persons”, but not all. And the SCOTUS is not engaged in the morality business. They are engaged in the legal business.
Not only that, but the banks had models to predict the maximum amount of debt a credit card holder could afford, and they set credit limits based on this, not on prudence. Thus it was natural that in a downturn people could no longer afford their debt. The banks could have mitigated the problem simply enough by pulling back on credit limits (like they did after the crash) but that would have hurt the bottom line. With their models, banks can probably predict how much debt the consumer can handle better than the consumer can.
BTW, it is common to renegotiate loans in times of economic hardship. Banks could easily reduce the balance of a mortgage in return for a share of the upside benefit if and when prices recover. They’d probably put a floor on the market, reduce defaults, and save money on foreclosures. But then they would have to admit the true value of their mortgage portfolios, so it is unlikely. The other problem is that with the chaotic nature of the market, it is impossible to tell who need to approve such deals. Again, their own fault. No one forced them to slice and dice mortgages.
FWIW, I lost a house to foreclosure (attempted short sale, but the bank declined all offers) in 2008. My credit score is currently in the mid 700’s.
Granted, I haven’t tried to apply for a mortgage since then – mortgage lenders may look at the foreclosure on my history much more closely than a car dealer or credit card issuer.
If the bank wants to give me a mortgage secured by more than my home and credit rating, they are entitled to ask for more collateral. In that case, they must offer me a lower interest rate. The ability to walk away like this is priced into the loan contract. Not exercising it when rational to do so is giving the bank the benefit of a restriction they neither negotiated nor paid for.
I missed this before, but what exactly do you think people are buying life insurance for? It is specifically to collect the death benefit. That is the only reason I pay my premiums. Whole life is a terrible investment.
I think he’s just making the same point as many other people in this thread - that banks are by their very nature immoral entities, so that worrying about morals when dealing with them, rather than simply what’s in your own best interest, is ridiculous.
FNMA has been nationalized and the money you owe is now to the government and people of the United States. What about your patriotic duty to the Fatherland? If you don’t pay, one of your compatriots must pay for you, so this seems to be akin to desertion or draft dodging.
Moreover, If a human being lends you money on the condition that if you fail to pay, she gets your house, then if you fail to pay she gets the house and shouldn’t get to come after you for more on top of that. This is why it would be very unwise for me to lend you money to buy a depreciating property, like say a laptop, under similar terms. If that’s my collateral I’m screwed, since there’s pretty much no way it will be worth what you owe if you stop paying. A house is different. The house is still a house even though the market drops.
In a non-recourse state, the bank is taking a risk that the property will lose value just like the borrower. I see no reason why banks should not have to assume this risk, especially as they can set the interest rates to take said risk into account. In a way I’m glad all this is coming to light at this stage in my life, well before I’d want to buy a house. Now I feel pretty strongly that I wouldn’t want to take out a mortgage in a recourse state unless the house was an unbelievable bargain or the one I planned to die in (and knew I could afford the payments on my retirement income). Not that I’d go into the transaction planning to default, but I’ll be damned if I’ll pay the bank for the pleasure of losing my home. Fuck that noise. Of course, I’d like to think that hypothetical future house-buying me would be diligent enough to research these regulations and such before getting a mortgage, but clearly recourse is taking lots of people by surprise and I’m glad I’m able to think about it now and plan ahead.
Also, and more to the point, if not what you’d expect ends up walking away, the government will have the property! And Fannie Mae took on the risk when it bought the loan. Again, why should the lender get the property and more money? Why should one party shoulder all the risk?
What’s good for the goose is good for the gander. If the banking industry as a whole is comfortable with practicing strategic mortgage defaults then they have no business complaining about people strategically defaulting on home mortgages. The Mortgage Bankers Association of America was perfectly willing to default on a building of theirs while at the same time chastising Americans for deciding to walk away from homes that were underwater. I have absolutely zero sympathy for the banks.
I wouldn’t say morality doesn’t enter the picture at all. I just don’t think strategic defaulting is necessarily immoral. Mortgage companies have contributed to the current spate of people strategically defaulting on their loans (in addition to strategically defaulting when it suited them). They’ve made their bed and can lie in it.
But this assumes that an easy willingness to extend credit is, in fact, a good thing. It seems to me, though, that a willingness to extend credit to people who probably shouldn’t have received it is a significant part of the problem.
Another one was that banks, knowing that the mortgage contracts provided for the borrower handing over the house in lieu of repaying the loan, continued to give loans with little or no money down, ensuring that, when the crunch came, borrowers had little or no equity in the house and, therefore, little or no incentive to keep paying the loan.
I know house prices have declined a lot in some places, but someone who borrowed 80% of 600,000 (meaning that they had to come up with $120,000 of their own as a deposit) would think a lot harder about defaulting than someone who borrowed 100%. The lenders have themselves largely to blame for the fact that so many borrowers see no reason to hang on to their houses.
There’s a really interesting article on strategic defaulting available here. (You can sign up for free to download a copy.) It was written by someone from the Law Faculty at the University of Arizona. I gave a summary of the author’s main arguments in this post, in a similar thread at the beginning of last year.