There are many ways to view strategic default. Borrowers use mortgages like option contracts giving them a "put" from a lender. It can also be viewed as an insurance contract against downside price movements. Borrowers are merely collecting on their insurance policy.
Irvine Home Address … 26 MIRADOR #59 Irvine, CA 92612
Resale Home Price …… $750,000
{book1}
Where do we go from here now that all other children are growin' up
And how do we spend our lives if there's no-one to lend us a hand
I don't wanna live here no more, I don't wanna stay
Ain't gonna spend the rest of my life, Quietly fading away
Games people play, You take it or you leave it
Things that they say, Honor Brite
If I promise you the Moon and the Stars, Would you believe it
Games people play in the middle of the night
Alan Parsons Project — Games People Play
Do loan owners really want to spend a decade or more under water? It will be difficult to send their children off to college when they make too much for their kids to get aid, but they haven't saved anything because they are paying on a bloated mortgage. At some point, they may decide they don't want to stay, but then they can't move because they can't sell. They spend the rest of their lives quietly fading away.
Many in California will stay because they believe the next housing bubble is right around the corner. Like gamblers at the craps table who were just wiped out, everyone places their bets and hopes for another long run. At least with HELOCs, you never have to worry about leaving chips on the table.
Buyers have no moral duty to lenders
by Brent T. White Brent T. White – Apr. 25, 2010 12:00 AM
Associate professor of law, UA The Arizona Republic
As a result of the housing collapse, many Arizonans have seen their homes lose half of their value. Many owe several hundred thousand dollars more than their homes are worth and are unlikely to dig out of their negative equity hole for decades.
For these homeowners, the American dream has become a nightmare – and their financial future is dim.
To compound the stress and anxiety, when they've called their lender to work out a solution, they've discovered that their lender won't even talk to them about a loan modification or a short sale as long as they are current on their mortgage.
With no help in sight, some of these underwater homeowners have decided that they would be better off letting go of their homes and have stopped making their mortgage payments. Many have done so with the hope that defaulting will finally bring their lender to the table, but they are also resigned to the fact that they will likely lose their homes.
Wait until Cartel Crusher LLC makes its way to Arizona. They appear to need widespread debt destruction to enable them to get on with their lives. I suspect a broadcast message of hope to home debtors to stay in their homes and eliminate the crushing debt would be well received, at least among the indebted. 
It has been suggested that such homeowners are immoral or, at least, irresponsible. I disagree.
Before explaining why, it is important to emphasize that the decision to strategically default on a mortgage involves many complex, localized and individualized factors. No one should decide to strategically default on their mortgage without sitting down first with a knowledgeable professional.
I wonder if professor White laughed to himself as he wrote that silly disclaimer.
But let's say that you've actually sat down with a professional to do the calculations and have concluded that defaulting on your mortgage is the only way out of your financial nightmare. Would it be immoral or irresponsible for you to do so?
The arguments against homeowners intentionally defaulting on their mortgages generally center on the same three basic points.
First, underwater homeowners "promised" to pay their mortgages when they signed the mortgage contract. Second, foreclosures lead to depreciation of neighborhoods, so underwater homeowners should hang on in order to help preserve their neighbors' property values. And, third, if all underwater homeowners defaulted, the housing market might crash. Homeowners thus have a social obligation to pay their underwater mortgage in order to save the economy.
While all three of these arguments might hold some initial appeal, none holds water.
I had never considered the final two arguments Dr. White presents because they are so silly, but he does go on to address them.
First, a mortgage contract, like all other contracts, is purely a legal document – not a sacred promise.
Think of it this way: when you got your cellphone, you likely signed a contract with your carrier in which you "promised" to pay a set monthly payment for two years. Would it be immoral for you to break your contractual "promise" to pay for two years if you decided that you no longer needed the cellphone and elect instead to pay the early termination fee? Of course not. The option to breach your "promise" to pay is part of the contract.
Though involving more money and something of great sentimental value to most people, a mortgage contract is simply a contract. Like a cellphone contract, a mortgage contract explicitly sets out the consequences of a breach of contract.
A mortgage is like a cellphone contract? Wow, I broke one of those and paid the fee. When you break it down like that, you see how much of the argument about morality and mortgages is pure emotional bullshit. Commercial lenders deal with default all the time because commercial borrowers are completely unemotional about their decisions to pay or default. Since loan owners get emotional about their houses, lenders have learned to play on that emotional bond to create a bogus moral connection.
In other words, the lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. Specifically, the lender included clauses in the contract providing that the lender can foreclose on the property and keep any payments that have been made. By writing this penalty into the contract, the lender has agreed to accept the property and any payments already made in lieu of the remaining payments.
Moreover, lenders charge Arizona borrowers on average an extra $800 per $100,000 borrowed because Arizona is a non-recourse state, meaning the lender cannot come after the borrower for a deficiency judgment on a purchase money loan. In other words, borrowers in Arizona pay for the option to default on a purchase money loan without recourse. The lender can only take the house.
That's the agreement. No one forced the lender to make the loan or sign the contract. Indeed, the lender wrote it. And, to be sure, the lender wouldn't hesitate to exercise his right to take a person's house if it was in his financial interest to do so. Concerns of morality or socially responsibility wouldn't be part of the equation.
In short, as far as the law is concerned, choosing to exercise the default option in a mortgage contract is no more immoral than choosing to cancel a cellphone contract. Indeed, exercising the default option in your mortgage contract is similar to cashing in on an insurance policy. You paid for it – and have you a right to exercise it.
I have demonstrated that borrowers used mortgages as option contracts. It is the same idea. Lenders sold downside risk protection to borrowers. They assumed 100% of the risk of price decline, and now lenders want to appeal to borrowers misguided sense of right and wrong to cajole borrowers into paying for the lender's mistakes.
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But what about the argument that mortgage default hurts neighborhoods and the economy?
Well, first, in a capitalist society, we don't generally expect individuals to make personal economic decisions for the collective good. Aside from this fact, however, it's unfair, in my opinion, to ask underwater homeowners to prop up neighborhood property values, or the housing market, on their backs – especially if means sacrificing their ability to send their children to college or save adequately for their own retirement.
Distressed sellers are under no obligation to endure pain for the fantasies of their neighbors. If the neighborhood values get inflated by a few stupid buyers enabled by reckless lenders, and if the owners in that neighborhood concoct fanciful dreams of wealth, the people become poisoned with entitlement and HELOC spending and other abuses. In my opinion, distressed sellers are doing the neighbors a favor by removing the air from the bubble. As long as the bubble air is present, lenders have room to enable more HELOC borrowing.
Why take homeowners, and not lenders, to task for putting their own financial interest ahead of the common good? Indeed, if lenders were less intransigent and more willing to negotiate, underwater homeowners wouldn't have to walk away from their homes in order to save themselves from financial ruin. And we wouldn't have to worry about the fragile housing market crashing again.
Why it is that we speak of morality and social responsibility only when talking about the little guy, who must take his lumps for the common good, while financial institutions are free to protect their bottom line?
It just can't be the case that it's morally acceptable for banks to look out for their financial best interest, but it's not OK for the average American do to exactly the same thing.
I covered Dr. White when he came on the national scene with his paper on walking way, Should You Walk Away from Home Debt?
Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis
Brent T. White
Abstract
"Contrary to reports that homeowners are increasingly "walking away" from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure's perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse."
From the main text:
"This article suggest that most underwater homeowners don't default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure – consequences that are in actuality much less severe than most homeowners have been led to believe. Moreover, fear, shame, and guilt are not mere "transaction costs" that homeowners calculate according to their own personal tolerance for each. Rather, these emotional constraints are actively cultivated by the government, the financial industry, and other social control agents in order to induce individual homeowners to act in ways that are against their own self interest, but which are – wrongly this article contends – argued to be socially beneficial."
Dr. White gets it.
Games People Play
When I look through the property records I often come across the shady games people play to attempt to dodge responsibilities for their debts. California is a community property state which means marital assets are owned jointly; however, it is common for both husbands and wives to maintain separate lives, particularly if there was an extreme asset imbalance prior to the marriage.
The owners of today's featured property attempted some rather bizarre things to compartmentalize what happens with this property. I can't see how they were successful.
- First, the property was purchased by the husband as his sole and separate property for $428,500 on 2/29/2000. He used a $385,650 first mortgage and a $42,850 down payment.
- On 4/13/2001, he refinnced the first mortgage for $390,000.
- Then on 6/13/2003 the husband sells the property to the wife as her sole and separate property. Perhaps an attorney can comment on how this would work. Seems like commingling to me.
- On 6/2/2004 the wife opens a $100,000 HELOC.
-
On 6/2/2005 she obtains $280,000 HELOC.
- On 11/10/2005 the wife sells the property to a family trust owned by both the husband and wife.
- Then on 2/14/2006, the trust sells the property back to the wife as her sole and separate property. I can't see how that is valid, but they tried.
- On the same day, the wife borrowers $800,000 in a first mortgage, and takes out a $150,000 stand-alone second.
- Then on 2/15/2005 — the next day — the wife sells the property back to the trust with the husband. Do they really think they can compartmentalize the debt like that?
- Total property debt is $950,000.
- Total mortgage equity withdrawal is 564,350.
- Total squatting time is at least one year.
Foreclosure Record
Recording Date: 02/11/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 08/12/2009
Document Type: Notice of Default
Irvine Home Address … 26 MIRADOR #59 Irvine, CA 92612 
Resale Home Price … $750,000
Home Purchase Price … $428,500
Home Purchase Date …. 2/29/2000
Net Gain (Loss) ………. $276,500
Percent Change ………. 75.0%
Annual Appreciation … 5.2%
Cost of Ownership
————————————————-
$750,000 ………. Asking Price
$150,000 ………. 20% Down Conventional
5.16% …………… Mortgage Interest Rate
$600,000 ………. 30-Year Mortgage
$158,136 ………. Income Requirement
$3,280 ………. Monthly Mortgage Payment
$650 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$63 ………. Homeowners Insurance
$487 ………. Homeowners Association Fees
============================================ 
$4,479 ………. Monthly Cash Outlays
-$808 ………. Tax Savings (% of Interest and Property Tax)
-$700 ………. Equity Hidden in Payment
$305 ………. Lost Income to Down Payment (net of taxes)
$94 ………. Maintenance and Replacement Reserves
============================================
$3,371 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,500 ………. Furnishing and Move In @1%
$7,500 ………. Closing Costs @1%
$6,000 ………… Interest Points @1% of Loan
$150,000 ………. Down Payment
============================================
$171,000 ………. Total Cash Costs
$51,600 ………… Emergency Cash Reserves
============================================
$222,600 ………. Total Savings Needed
Property Details for 26 MIRADOR #59 Irvine, CA 92612 
——————————————————————————
Beds: 2
Baths: 2 full 1 part baths
Home size: 1,830 sq ft
($410 / sq ft)
Lot Size: n/a
Year Built: 1985
Days on Market: 211
MLS Number: S591359
Property Type: Condominium, Residential 
Community: Turtle Rock
Tract: Po
——————————————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
THIS IS A SHORT SALE!!!!!! Stunning Tuscan Villa with professional chef's kitchen; granite counters; Viking appliances; Enjoy the peaceful serene setting while relaxing in your totally upgraded remodeled home. This is a perfect home in an exclusive gated Turtle Rock neighborhood; This home is gorgeous!!!
No shortage of exclamation points. The realtor must be very excited about this deal. Of course, some ALL CAPS are thrown in for good measure.
There are not many words, but she did manage to use two of my graphics.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,
Irvine Renter
The Cell Phone contract analogy doesn’t hold any water either. When you cancel a cell phone contract, you are discontinuing future service that has not yet been provided. Unlike with a mortgage, the money that you “borrowed” has been 100% consumed and spent into the economy and cheapened everyone elses money.
Comparing a mortgage contract to a cell phone contract is hogwash.
There may be no moral obligation to the lender but there damn well is a moral obligation to society.
This prof down at UA making all this noise is taking an over simplified myopic point of view by only looking at the borrower and lender and ignoring the consequences to the overall money system when people default.
The correct analogy is as I pointed out the other day – buyer purchases a 1$ can of soup with his credit card. He goes home and eats the soup. Next day he sees the same can of soup on sale for .50$ and he decides to not pay his credit card bill as a result.
I would like to see the good professor work with that one.
If the entire industry is governed and regulated by fraud, if the entire MARKET was manipulated ILLEGALLY, then the people who obtained loans are not MORALLY responsible for them. It’s a real scary thing when YOUR morality is legislated against me.
Change the bankster laws, toughen regulation, hold the entire housing industry up to real standards, THEN hold the individual mortgage holders responsible…until that time, you want to punish the small fry, and bury your head in the sand about the 6 largest banksters who now own 60% of the nations GDP, up from 20% during the 90’s.
More “conservative” blind spewing. No wonder AZ has a law that gives unprecedented powers and by-passes our constitutional rights. I hope you get pulled over EVERY DAY and hopefully get busted for having a drink. We ALL know drinking is acceptable by the “morally right” crowd…don’t we 🙂 I’m laughing at AZ right now, not just David.
Bypassing constitutional rights? You are going to have to explain this one, Swiller. This new law that AZ is passing is being perverted in the media and spun to give the impression that police are going to begin systematically pulling over anyone who looks Mexican and demand papers. Makes for good theatre but it’s just a straw dog. I am neutral on it. They are correct that the federal government has failed to do it’s job in enforcing the border. I also understand that the people living south near the border are concerned about their well-being with all of the illegal traffic literally coming through their backyards. Your opinion is that of an armchair general.
Hi Swiller:
Unfortunately for you I rent in two States (CA & southern NM) and I can promise you that illegals in AZ started going back to Sonora MX on their own beginning two years ago.
These illegals worked in the construction industry and were largely employed by caucasian construction company owners who did not want to pay the prevailing wage for workers/artisans.
The illegals who are largely left are the ones who are actively engaged in human smuggling and drug smuggling. They are the “Northern Branch” of the drug cartels who are RIGHT NOW causing CIVIL WAR in Mexico. They throw the body parts of police officers and Federales over the border fence in NM.
In fact, if you are in El Paso you can look over into MX and see the Federales toting machine guns on the overpasses. THESE CARTELS KILL KIDS AND THE MAMACITAS.
Is this what you want here in the U.S. just for the sake of spouting some MSM hysterical hype?
The people of AZ know exactly what they have to do – as a 7th generation Westerner I can tell you that the killing of that rancher in AZ would have been grounds for war in the past. Now the whole mantra is to docile-up the population.
I would rather have the laws enforced in AZ than the place turn feral as in Mexico although with a TWENTY-to-ONE ratio of gun owners to law enforcement in AZ I think AZ won’t turn feral.
~Misstrial
It was the murder of that rancher that broke the camel’s back. You see, Swiller did not know him. Also, Swiller doesn’t reside in the problem area. So it’s easy for Swiler to kick back in the recliner and start engaging in fantasy about AZ police forming mobs and hunting down Mexicans and demanding their freedom papers and infringing upon the constitutional rights. The media reporting has been extremely unfair and biased. It’s more profitable to interview Al Sharpton with his bullhorn screaming bloody murder than waste time interviewing those hillbilly ranchers on the southern border for their opinion.
Swiller should come on down to southern NM where I rent 37 miles from the border.
In EP (El Paso) he can view the 5-gallon paint buckets thrown over the Fence where the Mexican cartels have shoved-in the remains of anyone in MX they consider to be against them.
Next would be the arms, legs, and heads thrown over the Fence by the cartels of police officers and Federales.
Interesting how you don’t hear about this stuff in the MSM.
~Misstrial
“It was the murder of that rancher that broke the camel’s back. You see, Swiller did not know him.”
You knew him, then.
Was he a good man? How are his family holding up? Have you visited to comfort them?
It’s too bad that the rancher story hasn’t been broadcast (yeah, like MSM gives a crap). However, given this information, I fully support AZ cops going after them.
You know the end result when you pull something in front of a cop 🙂
That I know…surprisingly through MSM.
After all, sex and gore sells 🙂
Swiller,
What the hell are you talking about regarding the Az immigration law. Have you even read the law or are you citing the Keith Olberman interpretation. Most of the people chiming in on this have zero clue what is going on in these border towns/border states.
My sister lives in Nogales, Az (border town). She has first hand knowledge of what is going on down there, in a nutshell these places are fucking war zones. The drug cartels are running wild, human trafficking is rampant, torture, murder, mayhem, kidnapping. These organizations make the Sopranos look like the Ward and June Cleaver. The state is hemorrahing money on incarcirating, educating, supporting, deporting, providing free medical care to these illegals. The overall quality of life is in the toilet.
The federal government sits by and does nothing. Arizona had to do something before it was too late (and that point might have already passed). All the race hustlers who are boycotting Arizona have no absolutely no idea what is going on. Face it, this nation has turned into a bunch of pussies who would rather file lawsuits and call up the ACLU rather than make sensible decisions that might offend some people. This country did not get to where it is today having this mentality.
Yep wheresthebeef and its just stunning all the talk about boycotting AZ just on account of them wanting a return to normal living.
As a matter of fact, I spent over $10k in AZ during 2007-2009 to help support the state and as a courteous western gesture from a California native.
(My family came out West 7 generations ago (ND & KS) in covered wagons via the Oregon Trail and have been in California for the last 5 generations.)
Going to spend more this year just to reward AZ for having the common sense to self-protect since the Federal government has abandoned them.
~Misstrial
*Misstrial wonders if her luxury Toyota will develop Sudden Acceleration Syndrome should she view a small group of short men carrying bales crossing I-8 between Gila Bend and the I-10/8 interchange on her way to NM….*
hmmmmm….
What is most ironic about the whole thing is that our former Governor is the current Homeland Security Secretary and is on record as being against AZ’s right to protect citizens while at the same time failing to do anything about the problem from her Federal Government position. To me it would seem very embarrassing as homeland security secretary to be upstaged by the person who replaced you.
How does that make you feel about the government’s ability to protect you? They will make you get naked in an airport to make sure you aren’t smuggling breast milk but by God don’t ask those guys loitering in the Home Depot parking lot if they are here legally.
“Face it, this nation has turned into a bunch of pussies who would rather file lawsuits and call up the ACLU rather than make sensible decisions that might offend some people.”
And hence you need the 2nd to defend yourself against the pussies.
All other amendments are nuthin’ but pussies without the 2nd. Try doing a free speech in front of Big Bro without a Glock.
Yeah, sure Swiller. Just because someone stupidly gives you money when they should have known you wouldn’t pay back, you shouldn’t be responsible for paying it back. I think that is called a “tautology”. AKA a Catch 22. Makes perfect sense.
And, uh, mortage bankers own 60% of the country, huh? You might want to check those statistics there bub. You can’t trust everything you read on the militia-sponsored web sites, you know.
When a borrower takes out a home loan, the money is not 100% consumed because it is collateralized by an asset that is not consumed like air time on a cell phone. When a borrower defaults, they give up the rights to future use just like the cell phone user. The lender takes back the asset. In a non-bubble world, the lender gets all their money back.
“There may be no moral obligation to the lender but there damn well is a moral obligation to society.”
How? Why?
“This prof down at UA making all this noise is taking an over simplified myopic point of view by only looking at the borrower and lender and ignoring the consequences to the overall money system when people default.”
If there had been no housing bubble, there would be no consequences to the money system if people defaulted because lenders would recover the balances of their loans. The money system is only imperiled when lenders loan amounts in excess of the collateral value which creates deflation risk. Our financial system would not be facing these problems if foolish lending never inflated the housing bubble.
To your analogy of the soup can… If a buyer purchases and consumes an item then decides to stop payment on the purchase, creditors would absorb the loss and cut the borrower off from future purchases by lowering his or her FICO score. The borrower would lose the ability to repeat the rip off.
I think you are missing a broader point about lending in general.
There is only one legitimate form of lending: extending loans to purchase collateral assets of tangible value on an amortization schedule shorter than the useful life of the asset.
Lenders, if they only extended loans as I describe above, would never have risk of loss. They are only loaning against something they can take back and sell for more than their loan balance. Any time they extend loans for other purposes, they are taking financial risk — a risk they alone should bear. Once lenders start loaning money on consumer goods, they deserve the losses they incur when people don’t pay the bills. Mass default wouldn’t bring down the financial system, it would cause a bunch of losses, and lenders would stop making those loans. Consumer loans don’t benefit society, and if there were eliminated, that would be a good thing.
Your argument conflates lending on an unsecured basis for consumer goods to sound lending on secured assets. They are different things.
Your banking theory is always good for a laugh, let me break down the reality of banking for the next 3 to 5 years at a minimum:
1. Banks are allowed to claim an asset is worth more than current market value.
2. Banks can claim income on non performing assets.
3. Banks create money out of thin air via 0% interest rates.
Do you get the picture? The rules are set so that banks can’t lose. As long as they can survive they can continue to create money from nothing.
Did you read the thread? We are talking about the morality of not paying your mortgage.
And you conflate the calculus of sound risk assessment with ethics and morality. Yes, lenders probably deserve the losses that come from dumb loans, but that has zero relevance to categorizing the behavior or the borrower as ethical, moral, unethical or immoral. A non-fraudulent dumb loan has the same ethical and moral command on repayment as a good one. And of course you owe it society at large to fulfill your obligations if you can. Societies in which such obligations are routinely ignored evolve in directions of increased exploitation, corruption and violence.
IrvineRenter – the money is consumed when the debtor signs the IOU. The house may be collateral but the value of that collateral is not set in stone (as we are seeing now). The only way to get the money back out of the collateral is to find another debtor to sign a new IOU so new money can be created from nothing.
These banks create loan money out of thin air and each time a new loan is made – the value of everyone elses cash is diminished.
Strategic defaulters are trying to pass the bag onto their neighbors. They say “it’s the bank” but they know that the community will actually be the one holding the bag. It is unfair to society which is why they have a moral obligation.
You are going to respond by blaming government’s bailouts of the financial system. But let’s pretend that the bailouts never happened and that all of these losses were being taken privately by the banks. How do you think the banks would make up for those losses in such a scenario? By passing the costs back to consumers via higher interest rates, fees, etc. Again, the community is left holding the bag.
The cell phone contract is not a valid analogy. The cell phone companies don’t reserve any time for you in advance that is lost. A cell phone contract is just a business decision to give the customer a cheaper monthly rrate in exchange for guaranteed repeat business. If the contract is cancelled then the defaulter pays to compensate for the loss of the repeat business they pledged. There is no underlying collateral.
“The only way to get the money back out of the collateral is to find another debtor to sign a new IOU so new money can be created from nothing.”
No, they could find a cash buyer. Debt is not required to purchase anything. Just ask anyone looking at commercial real estate today. Cash is the only currency available.
“How do you think the banks would make up for those losses in such a scenario? By passing the costs back to consumers via higher interest rates, fees, etc. Again, the community is left holding the bag.”
Passing on costs is an economic fallacy. Lenders can only loan money at interest rates the market will bear. If the lender’s costs are higher, they may not make certain loans, but they have no ability to pass costs on to consumers. Having worked for home builders for a long time, I have heard the cost-push argument many times. Customers don’t pay more for houses because builders have to pay more for lumber.
I have another situation for you to consider: Let’s say a guy buys a car on a 4-year note with 30% down. In such circumstances, the value of the car is never less than the outstanding loan balance. Two years into the agreement, he is laid off and can’t afford the payment. In response, he drives back to the car dealer, returns the car, and tells them he isn’t paying the debt. The car dealer gets back their collateral, and the borrower quits paying the loan. The dealer can resell the asset and recover their loan balance. Is the borrower who does this immoral? Is returning the goods rather than returning the money wrong?
You are correct – they can also find an all cash buyerr but that is besides the point: The value of the asset is not defined by what the previous debtor borrowed to pay for it.
Passing on costs is an economic fallacy? Everywhere? Always? Come on, IrvineRenter – you know this can not be true. Have you noticed how banks are clawing in fees hand over fist lately and raising interest rates across the board on people with CC debt? Why do you think they are doing this? I say that it is because they are taking steps to make up for their losses by ramping up the fees and APR’s on people – indirectly passing on the costs.
The problem with your car analogy is that it is not an example of a strategic defsult. So you can’t use it to morally justify a strategic default. In your analogy, no, the borrower did not act immorally – he also did not strategically default. Your assumption that the car maintains it’s value above the loan principal makes strategic default impossible and therefore is not a valid comparison to somebody who opts to default on an underwater mortgage even though they can still afford it.
Let’s take your example the other way. Suppose he crashes the car and the insurance pays him less than the principal owed on the car and he is without gap insurance. Is he morally obligated to pay the difference to the bank? Or do you think the bank should just take what the insurance paid out? I say he owes the difference and if you agree then why is a car loan so much more sacred than a house loan?
why the debate on the correct analogy? Let’s just look at the mortgage agreement itself. It is a contract where the borrower pledges his house to the bank in return for the cash to buy it. If the borrower does not pay and goes into default then the lender takes title to the house. There is no moral or legal obligation to avoid default. After all the bank is getting back the collateral.
I know that this has been stated a million times before, but it just seems like the discussion is getting circular today.
Calculated Risk talks about the three c’s of mortgage underwriting:
Credit
Capacity
Collateral
Did lenders know that lots of the appraisals they were getting loans based on were garbage? Did they actively pursue appraisers who would hit the numbers?
Why we boiled everything down to subprime & FICO scores is a big part of the problem.
There are two ways to use credit cards: pay off the balance each month (or within a few months) to use as a payment smoother, or you carry a large balance and use the card as a catch-all type loan. The first is OK, the second is bad, but the differences should be acknowledged.
“Have you noticed how banks are clawing in fees hand over fist lately and raising interest rates across the board on people with CC debt? Why do you think they are doing this?”
They are doing this because they can. Borrowers are willing to take on the debt under these terms. Let’s look at it this way; lenders would charge these fees whether or not any borrowers defaulted. They will charge whatever they feel they can get away with.
If no borrowers defaulted, then competing lenders would move in and charge less, but the only cost-push comes from a desire to maintain margins. As I stated, they may not take the business if the revenue does not exceed the costs, but costs do not determine the revenue.
For the car example, lets take unemployment out of the picture. Let’s say the owner just decided to give the car back because he didn’t like it. Is he immoral then?
In my opinion, if a borrower returns the goods instead of the money, the borrower’s motivation is irrelevant. The lender experiences no loss because the loan terms were rational and did not leave the lender exposed. If the lender was stupid enough to make a loan where the collateral value does not match the loan balance, then they better have a high interest rate to take on that risk. This isn’t about morality, it is about risk assessment.
“Suppose he crashes the car and the insurance pays him less than the principal owed on the car and he is without gap insurance. Is he morally obligated to pay the difference to the bank? Or do you think the bank should just take what the insurance paid out?”
Contractually, the borrower would owe the difference, but if he didn’t pay it, he isn’t immoral. The failure to pay will impact his FICO score just as defaulting on any debt would. The lender is foolish to expose themselves in that way, and for that exposure, they generally charge a higher interest rate.
Actually a car is a perfect analogy to houses when the market value is going down.
Both assets are depreciating.
Where current conditions are different is that IR chose to situation where the car owner is not upside down, a rare condition until late into the car loan.
I think the current analogy would be better with the people that were buying large GM SUV four years ago. They went with no money down and were always upside down.
Many of them… interestingly enough… were also buying houses with subprime loans… Cars and houses with NO MONEY DOWN…
The banks obviously did not know -or likely cared- that the RE prices were inflated and likely to drop. Just like they didn’t care that the prices of those GM crappolas were inflated too and that GMAC was selling very low wuality loans.
So, the market crashed… people’s cars got repo’d.
So what’s different from homes then?
Interestingly, in our country, people are less likely to default on a car than on a house because you _need_ a car more than a house.
Personally, I see nothing wrong with people defaulting on their loans.
BUT, they should pay their fair share of their TAXES if only to pay for the subsidy that the banksters will get from the Gov to pay for their “loss”.
Whether a business can freely pass extra cost to consumers or not depends on the nature of the product/service. Economists coined terms like price “elasticity” to describe service providers’ relative pricing power and the ability to screw the buyers. Companies can pass cost to consumers if their products/services are essential to everyday life. There are a lot of people now arguing that commercial banks should be tightly regulated like utilities companies since they provide a vital function to our society. If we deem services provided by banks fall under the domain of public goods both their risk appetite and prices need to be controlled.
In the bubble world, when a borrower would default the lender would get MORE than originally owed. Either they’d foreclose and sell the home for >20% more than original purchase price or have the tenant refinance paying prepayment fees, late fees & other charges, plus another origination fee. This refi could be with original mortgage company or another, it doesn’t matter to the original loan. This is one of the key reasons why banks didn’t care if people defaulted. There was an easy resolution for default. It was the bubble prices deflating that stopped the music. IR is correct in saying that without the bubble, defaults would look and feel a lot different.
Many consumer loans function in the way you describe: cars, TV’s, fridges, have fairly long useful lifetimes, and usually longer than the loan terms. Using credit cards as revolving debt and more like loans than payment facilitators is a bad thing that I’ve read about elsewhere.
“There is only one legitimate form of lending: extending loans to purchase collateral assets of tangible value on an amortization schedule shorter than the useful life of the asset.”
Well said IR. This is exactly what lending should be. It drives me mad just how far off our reality has strayed from the sanity – “Lending out money as loosely and as much as you can to inflate the underlying collaterals which leads to more lending” has been the standard practice.
Perfectly correct. I would also point out that the Professor points at an issue which is not even part of the ethical equation (barring some quite specific circumstances which very few people have) as the justification for breaking the mortgage contract….the current theoretical value of the collateral. The mortgage contract concerns a loan and the repayment of it and one party delivered on its obligation at the closing and the only open question is if the other party is going to follow through on its obligations. Since the second party would have absolutely no ethical obligation to repay more money if the collateral rocketed up in value, on what perverse basis can pay less be justified by the collateral value diminishing? Folks are going to strategically default and pointing out it is unethical isn’t likely to stop them because for a surprisingly large number of people money is much more important than anything else. But I would point out that this behavior is not so different than, say, non-violent robbery or embezzelments generally, in that you take something that does not belong to you.
What I find particularly irritating is when people start equating contracts with morality. Oh they abided by the contract so it must be perfectly moral! Wrong!
I am an implicit signer of a contract with society that states that I shall not hold up the gas station, steal the cash, threaten the clerk, etc. If I default on that contract then I will just lose a few years of my liberties.
From this point of view, robbing the gas station can be made to be perfectly moral. I simply made a business decision to default on my obligations because the quick cash was worth a few years of my liberties.
This is why you can’t just take the myopic view of the contract. You have to look at who is hurt by your actions to default too. In robbing the gas station, it’s obvious who is hurt. It’s not as obvious in strategic defaulting – requires some thought.
That is the best argument you have offered so far.
The difference is that the social contract you are describing is encapsulated in common law. As a society we pass laws that say what is right and what is wrong. If you violate those laws, society has a range of punishments depending on which law you violate.
Contracts are not common law; they are private agreements between two or more parties. The actions of the parties are governed by law — you can’t commit fraud and the like — but the substance of the agreement can be anything the parties want within the boundaries of law.
The only people who can be harmed by failure to keep the promises of a contract is the other party to the contract. And a failure to perform has consequences that are usually defined in the contract. Morality is not an issue in private agreements negotiated at arm’s length.
The problem with the housing bubble was that lenders made so many really stupid contracts that the result of their stupidity has impacted the entire economy. That is the failure of regulators. If the problem has not been allowed to become so large, lenders might have lost a little money and curbed their foolish lending on their own.
There is a problem though with your private contracts when you are talking about bank loans which you see the fractional reserve detractors refer to as “consideration” being that the bank is allowed to loan money that it does not actually have which would be considered illegal for any other type of contract and be declared null and void.
The bank loans may be officially between private parties but as we are witnessing – it’s all just kabuki. The loans directly impact the foundations of our society. The lenders have a moral obligation to society to not do stupid things with our money ( they failed ) and borrowers have a moral responsibility to honor their pledge since both have consequences for society as a whole if not honored by everyone.
IR has finally won me over here. The guy at the gas station did not enter a contract were getting robbed was a recourse for some other action. It is a different situation.
Plus, at what point does a private contract become a moral obligation? At this point I get what IR is saying. It is a business arrangement. Nothing more, nothing less.
The real immoral ones here are the public servants that were elected to protect the common good, but instead enjoyed the special mortgages they got and looked the other direction.
“The lenders have a moral obligation to society to not do stupid things with our money ( they failed )..”
Ay, there lies the rub.
The banksters played the field.. they made the loans, pocketed the fees and hedged their bets by going short against the long instruments they were selling.
The banksters acted immorally by your measure and now expect the rest of the world to pay for their errors. They will get it, of course, because they own the frickin’ Gov… indeed, they ARE the Gov.
Hardly moral, huh?
IMHO, banks should be allowed to fail. People should go to jail for committing fraud, engaging in racketeering and Ponzi schemes and paying (engaging) in bribes/embezzelment.
Homeowners should be allowed to default, but they should pay their taxes.
Just wait ’till I dump my chateau… gimme six months before I move to Canada…. 😉
There you have it. I encourage everyone to immediately charge up their CC’s to the maximum. Take a bunch of vacations, buy some jewelry, throw some parties.
When you are done, call up the bank and inform them that you will not be sending them any more payments and that they will just have to collect that money from somebody else.
It’s a private contract and FICO is taking care of the morals. It’s all good.
Canada’s health care makes more sense that Obamalosi’s.
They got cuban cigars in Canada.
What else do you need?
”
There you have it. I encourage everyone to immediately charge up their CC’s to the maximum. Take a bunch of vacations, buy some jewelry, throw some parties.
When you are done, call up the bank and inform them that you will not be sending them any more payments and that they will just have to collect that money from somebody else.
It’s a private contract and FICO is taking care of the morals. It’s all good.”
I know you were being facetious, but I agree with everything you wrote here.
If everyone charged up a bunch of stuff on credit and then walked, we would see the end of consumer credit as we know it. I think that would be great!
The FICO score of everyone who uses consumer credit and defaulted would go down, the lending industry would get much smaller, and consumers would be free of lender interest charges. I have no problem with that at all.
If you haven’t noticed, this already how it works. There is no need to encourage anyone to do it.
The CC issuers charge a rate with the loses built in.
If the lenders make good decisions on who to make loans to, the system works just fine.
I also like Arizona Dave’s argument, but is it merely a call for debtor’s prisons? If breaking a housing loan (or car or cell-phone or credit card) contract would result in jail time, would that be a good solution? Would we be going back in time by 100 years?
“If everyone charged up a bunch of stuff on credit and then walked, we would see the end of consumer credit as we know it. I think that would be great!”
So true.
If you rob a bank for $10K and get caught, you are sent to a federal prison for 5 or maybe 10 years. But if you charge $10K on your cc and decide not to pay for no legitimate reason (lost job, became gravely ill, etc), which has the same effect of robbing the bank (in a more “civil” way), you get dinged on FICO. Punishment does not fit the crime. What we need is debtors’ prison.
Our credit system was built on the shaky foundation of a perceived mutual trust – but without any meaningful enforcement mechanism. And I doubt that mutual trust still exists after so much exposure of the abuse of the system. Once the illusion of the trust is gone, the system may not survive much longer.
We need greater consequences for those that default and those who make poor lending decisions. Unfortunately, in a consumer/debt driven economy it is politically unpalatable.
We lack tough love and leaders willing to administer it. This is the bane of forced altruism. We steal from one to give to another and the result is financial/economic cannibalism.
There are people who have warned about this for 50+ years. The road to hell is paved with good intentions – we are on that road.
“IMHO, banks should be allowed to fail. People should go to jail for committing fraud, engaging in racketeering and Ponzi schemes and paying (engaging) in bribes/embezzelment.”
Sell that one to your Republican comrades. That’s why it’s so funny to me to hear the Tea Partiers scream about socialists, liberals, blah blah, when it’s their very own GOP (and not just the GW Bush spender types) who would NEVER EVER let the banks fail. Think Phil Gramm gives a crap about putting bankers in jail? Give me a break.
Here’s a litmus test for you: how many of you started crapping in your panties the moment IrvineRenter said the words “nationalize the banks”? You cry and whine about Obama siding with the banks, but how many Republicans would’ve done anything different? And how many of YOU would have supported nationalizing the banks? Very few.
My panties are clean.
This is an APOLITICAL problem. You can not cast it as an issue with the GOP, Dems, Tea Party, etc…
The fundamental problem is that Very Rich People own the Government.
In essence, banks are already nationalized in a backwards way. The Banks control the Government, which is why they could not fail.
It’s like Church and State. They are supposed to be kept separate, and usually they are.
But banks and the Gov have pretty much created their own world and the rest of us are the insurance for their bad mistakes. Come to think about it, we’re only the source of their money when they don’t make mistakes.
Hmmm… that realization that we’re owned, you see, is what makes me soil my panties…
Both the Dems and the GOP are in the same boat here. None of them will allow banks to fail because the banks own them.
We don’t need a debtor’s prison. What we need is a lender who doesn’t loan money to anyone who can fog a mirror.
If you rob a bank, the bank has no real choice but to give you the money. If you charge $10k on your credit card and default, its the banks choice to loan you such high amounts of money. A) why did the bank give the irresponsible CC-owner such a high credit limit? B) Why did the bank fail to charge high enough interest to compensate for the risk. (i.e. lousy credit, high interest rates. Excellent FICO, low interest rates) C) Why didn’t the bank make sure you had the financial resources to pay back the CC debt? Our credit system isn’t based on mutual trust, its based on risk assessment.
If one Credit Card borrower defaults out of a 100, then the bank makes sure they can make profit out of the remaining 99 CC borrowers. Once of the causes of the housing bubble is caused by bank’s failure to properly analyze risk
Agree.
And if a person cancels his cell-phone contract, he must obtain the other party’s consent to cancel.
Further, the customer has to pay a cancellation fee generally in the range of a one-month fee (about $170) – this happened to my son last month.
He decided to cancel his contract, obtained an Contract Termination Agreement with Verizon, paid the cancellation fee and charges and went to a prepaid cell.
~Misstrial
The $175 ETF acts like the secured collateral in that case. If I go to AT&T and activate a new line and port my # from Verizon, Verizon will trigger the $175 charge, and done.
With the mortgage, if I exercise the legal option to not pay, the bank seizes my house, and that’s it (non-recourse, one action).
Verizon still loses money with the ETF given the cost of these smart phones, especially if you cancel early on. There’s still a cost to society if people cancel their contracts en masse, but no one has a problem with this…so I don’t see why there’s such a BFD with people exercising a paragraph in their loan paperwork (not paying).
Corporations owning hotels and properties default all the time, they do so because it’s in their best interest. I wouldn’t want to be a martyr and pay out of some misplaced morality when really this has nothing to do with that. It’s a business deal, pure and simple.
Your can of soup analogy doesn’t hold water or soup. When you finish your soup, you have an empty tin can with no value. If you default and give your house back to the bank, it will be sold – it still has plenty of value. Not as much as was loaned on it, but value nonetheless that has evaporated.
“… and cheapened everyone elses money.”
Well, if the damn gubbermint hadn’t bailed out these lenders, we wouldn’t have **cheapened** money.
IR posted a link/story yesterday about Residential Real Estate Investment making a comeback, and this got me thinking. If I had a pile of cash invested in various securities, I’d be worried about a big collapse coming within the next few years. I can’t think of any truly safe investments right now, especially stocks. I think I’d much rather invest in real estate, by buying a handful of houses/condos (100% cash) and then renting them out. With these ‘cashflow positive’ profiles that IR is presenting, it would make a lot more sense than taking a big risk on an unknown market. As long as rents don’t drop too far, you’re pretty much guaranteed some monthly income.
Of course maybe my opinion of the markets is too bearish and I’m underestimating the hassles involved with playing landlord.
Your observation about real estate being the safest of available investments is exactly what is required to clean up this mess. After a speculative bust, money needs a reason to move into an asset class. Once the speculative frenzy goes away, cashflow value is the only motivator.
In Riverside County, the return on investment through rents exceeds the returns on competing investments. That condition is prerequisite to forming a bottom because it isn’t until returns are better than enough money moves in to stabilize prices.
All the manipulations of the market are an attempt to sustain prices above the level of market clearing. It won’t work because money needs a real reason to move in in large enough amounts to form a durable bottom. Riverside County is there, but Orange County is not.
So if I am understanding this correctly – we need more housing speculation I mean “investing” to get us out of the mess that was caused by excess speculation.
I disagree – what we need are cash heavy knife catchers and lots of them and that’s who the banks are out fishing for.
I think lowdry makes the fatal mistake when he/she uses the phrase “guaranteed income” regarding a rental.
You buy 10 condos and rent them all out. Your condos then lose 20% of their value. Hey at least you have some “guaranteed income” to work yourself back up to net-zero over the next decade.
You are not understanding me correctly. Buying for cashflow is not speculation. It does not require selling the asset later in order to obtain its investment value. A cashflow investor does not care if the asset goes up or down in value after the purchase, they are buying for the income stream not the resale value.
If you buy 10 condos and rent them all out, and the condos then lose 20% of their value, the rental income stream is still providing the return on the invested capital that prompted the investor to do the deal. The investor is not harmed unless they must sell the asset while values are depressed.
I know that argument sounds familiar because foolish speculators make the same argument; however, there is one key difference; speculators are holding an asset because they are trying to profit on the change in asset value whereas cashflow investors are not. When a speculator says, “I haven’t lost any money because I haven’t sold,” they are engaging in wishful thinking. Their investment plan requires higher prices in order to succeed, often because they are running a negative cashflow. A cashflow investor is indifferent to resale value and does not require higher prices to have a sound investment.
IrvineRenter –
It sounds to me that you are saying we need Land Barons ( you call them ‘cash flow investors’) to buy up all the properties and rent them out to society in order to get us out of trouble?
I don’t think that is the answer. I think society would be much better served by less housing debt and much lower rents.
Land Barons will just cause rents to remain artificialy high to provide that unnecessary ‘cash flow’.
“It sounds to me that you are saying we need Land Barons ( you call them ‘cash flow investors’) to buy up all the properties and rent them out to society in order to get us out of trouble?”
Yes, that is exactly what is required. Whether these land barons are hedge funds or private individuals, the money needs to flow into the market to clean up this mess.
Note that I am distinguishing between the dipshit land barons of the bubble who purchased with enormous leverage and negative cashflow from the new breed of land baron that purchases with limited debt for positive cashflow.
Positive cashflow = good.
Negative cashflow = Ponzi Scheme.
You seem to be making a fundamental assumption that rents do not reflect the value of the property.
If the value of the property drops 20%, will the rents stay at the same level, or will they drop?
It’s true that during the bubble rents did not cover costs since people were buying on pure speculation. But if the value of RE swings back below the historical norm (appreciation based on inflation) won’t then rents drop accordingly?
Rents are typically a function of area incomes. If pepeople have jobs and earn money, rents will rise to the level of incomes in the area. There can be temporary disruptions due to supply constraints, but over time, rents will match the incomes of the area quite closely.
Notice I said “*pretty much* guaranteed some monthly income” as I know there are downsides.
The example I described is a hypothetical situation for someone with a boatload of cash (or maybe some other asset that could be quickly converted to cash). If I had $1M, I’d rather buy up houses and condos, even at overinflated (but relatively-cashflow-positive) Irvine values, and try to rent them out to provide an income stream. In this situation, I wouldn’t be looking to sell those houses/condos ever, so who gives a rat’s rectum if they drop 50% in value.
This seems like a much better scenario than putting that $1M into stocks, and watching those stocks drop 50% in value, and then crossing my fingers that the value rises again so I could cash out and get some money out of the deal. At least with the rental units you have some cash coming in. As far as I know, you don’t buy stocks for cashflow (those that do pay dividends don’t really pay much). Stocks are relatively ‘speculative investments’ that only put money in your pocket when you buy low and sell high.
The problem is that any investors with ‘boatloads of cash’ who employ this strategy have the potential to screw over the little guy like me who wants to buy a house and has enough saved for a tiny down payment, but is afraid to commit to the current ‘monthly out of pocket expenses’ that come with today’s prices.
“The problem is that any investors with ‘boatloads of cash’ who employ this strategy have the potential to screw over the little guy like me who wants to buy a house and has enough saved for a tiny down payment, but is afraid to commit to the current ‘monthly out of pocket expenses’ that come with today’s prices.”
Typically, this will not be a problem because the investors with boatloads of cash will not overpay for assets and drive the prices up. An owner-occupant will always be willing to pay more than a professional investor. That doesn’t mean some speculative fund might not try to “corner the market” on housing (Donald Bren did it locally), but cashflow investors are not the ones who inflate prices in real estate.
IR,
Lenders don’t like to fund a new loan vested (owned by) a trust. They want the individuals on the hook.
It was routine for us to transfer the property back to the individual at closing, then the borrower is free to grant the property back to the trust afterward.
I don’t think the borrowers were trying to hide anything in this case… Just following lender rules.
Also, since many programs were FICO driven (like liar loans), it was also common to do the loan in one name (with the Highest FICO), which might explain the transfers back-and-forth from husband to wife.
All rather silly though… FHA actually gets this one right: Even if only one spouse wants to be one the loan and on title, FHA requires the lender to include the spouses debts in DTI (in community property states).
IrvineRenter
Don’t know if you have been to this site it is pretty interesting.
http://www.wlmlab.com/main.asp
Very interesting site.
Wells Fargo has a 17.39% delinquency rate on its first mortgage. Wow!
I couldn’t believe my own eyes when I see this website from the treasury asking for donation:
Pay.gov
Hasn’t the US govt. steal/rob/rape enough from US taxpayers for wasteful spending and bailout big banks and home sqatters??? and now they have the nerve to ask for donation???
F*CK YOU US govt.!!!
I thought it was a joke ( at first )
Tell us how you really feel John!
This is what we need: people need to get pissed off and scream bloody murder. More and more people are getting FED up. Pun intended.
Back to the house in question. This house in neither Tuscan or Stunning. Those who actually live in Tuscany would likely be appalled at what we have done to desecrate the term “Tuscan” in So Cal. This is an 1800 sq. ft. tract house wedged in between 2 other tract houses – How peaceful and serene….as long as your neighbors are at work (probably long hours to pay for the $1million loan they are sitting on).
Back to morality –
Loans are business agreements between 2 parties, IR was correct that this only now impacts the masses socially because of the mass amount of credit made available to a generally greedy group of humans. Foreclosures have been happening forever and have never impacted society as a whole until now. Banks are greedy, humans are greedy. Both are generally immoral when it benefits them to be so.
This debate about morality vs. legality is interesting. However, I think, most people will do what is legal (not necessarily what is moral as many people may think that morality should not be invoked in mortgage matters in the first place). I think that if there was no government bail-out or interference, we would not be having this debate. Hindsight is 20/20 and all these people chewing up borrowers for screwing the taxpayers are based on hindsight. Borrowers did not intend to screw taxpayers when they took out a risky loan underwritten by investment bankers such as Lehman, Stearns, GS…etc.
What does the word “mortgage” mean?
From: http://dictionary.reference.com/browse/mortgage
Word History: The great jurist Sir Edward Coke, who lived from 1552 to 1634, has explained why the term mortgage comes from the Old French words mort, “dead,” and gage, “pledge.” It seemed to him that it had to do with the doubtfulness of whether or not the mortgagor will pay the debt. If the mortgagor does not, then the land pledged to the mortgagee as security for the debt “is taken from him for ever, and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the [mortgagee].” This etymology, as understood by 17th-century attorneys, of the Old French term morgage, which we adopted, may well be correct. The term has been in English much longer than the 17th century, being first recorded in Middle English with the form morgage and the figurative sense “pledge” in a work written before 1393.
Above is from:
The American Heritage® Dictionary of the English Language, Fourth Edition
Copyright © 2009 by Houghton Mifflin Company.
Published by Houghton Mifflin Company. All rights reserved.
Cite This Source
I’m not too up in arms about strategic defaults, I just want the bank to kick them out immediately so the inventory can get churned.
I don’t mind people who stop paying their mortgage but don’t live in the house rent-free for over a year while I pay mine and the bank’s bailout fund. And their shenanigans keeps the inventory low preventing prices from adjusting to where they should be.
While it may not be immoral to “cancel” your cell phone contract, to still use it and eat up bandwidth that I pay for should be.
The husband in a community property state like CA, can purchase the home with “separate funds” and own the home as separate property. However, homes are trickier than other simple “assets” like say, a $500K painting. Any “community funds” (e.g. either spouse’s salary) used to maintain, improve, or pay the mortgage/taxes creates an interest for the community and clouds the “separate property” nature of the house. You can always opt-out of the community property rules. These difficulties can be overcome with a pre-nup or post-nup.
I wonder what they were trying to achieve?
If I owned a house, can I sell the house to my wife and claim the home buyers tax credit?
Interesting point. You’d hope these strawman deals are clearly excluded from the credit, but who knows? It’s a government program, so a fair assumption is 10%-20% are fraudulent recipients, no?
I found my community property outline, and I used the term “interest” above which isn’t the most accurate description. Here’s an outline excerpt:
D. PROPERTY ACQUIRED WITH COMMUNITY AND SEPARATE FUNDS:
1. Where property is acquired with community and separate funds and no title presumption applies, the community and separate interests are determined by apportioning their respective contributions. E.g.:
a) H expends CP to pay mortgage on SP acquired prior to marriage:
(1) The community estate takes a pro rata portion of the principal debt reduction attributable to the expenditure of CP, and the same pro rata portion of the appreciation in value that was realized during marriage.
2. Where CP is used to improve the SP of a spouse, the CP does not obtain a pro rata ownership interest in the asset but may be entitled to reimbursement. E.g.:
a) H expends CP to benefit the SP of the other spouse:
(1) A gift is presumed.
b) H expends CP to improve his own SP:
(1) The community is entitled to reimbursement for the greater of cost of improvements or enhanced value.
E. ACTIONS BY THE SPOUSE ALTERING THE CHARACTER OF PROPERTY:
1. ANTENUPTIAL AGREEMENTS:
a) Antenuptial agreements are enforceable, but must be in writing to satisfy the Statute of Frauds (signed by both parties).
(1) Performance is a substitute for a writing.
(2) Estoppel based on detrimental reliance is a substitute for a writing.
b) DEFENSE TO ANTENUPTIAL AGREEMENT:
(1) It was not signed voluntarily.
(2) There was no fair disclosure of assets/debts, the right to disclosure was not waived in writing, and the other party had no adequate knowledge of the assets/debts
IrvineRenter is absolutely correct. I have priced mortgages for major mortgage originators. This is how the originators price the inherent credit risk in the mortgages – as a default option.
This is why lower down payment and lower FICO borrowers have to pay higher rates.
Exactly.
I have worked pricing engines for mortgage origination systems. There are formal rules to price in the perceived risk of default.
Strategic Default is the wild card to solve the housing crisis. Every other avenue to bring housing back to market rates has been blocked by the government and crony capitalists. I believe that on the way up it was cocktail talk about getting rich with no risk and on the way down it will be the same whispers that get the free rent meme going. I guess no one at the FED goes to parties or hangs around the water cooler. They could have figured out what was going on in 2004.
As for cell phone, what if you stop paying but continue to use the cell phone and the phone company has only disconnection as a recourse?
Car loans have the repo, auction and balance between loan and auction as recources.
Home squatter have an implied out that the banks are allowing them to stay for free. That is a two way street. Banks allowing them to stay for the pretending and squatter staying for the free rent. The one defrauder are the taxpayers because they are left with the bill. The govt will cover any squating expenses that occur by the major banks. It seems like 3 parties (govt, banksters, lesser extent home squatters) are in cahoots to defraud and indirectly enslave the non-mobile taxpayers. The banksters will just move to another country or change/changed citzenship or seek exemption.
Say 2 years of tax free rent at 5% of price at high or total HEW would be about 15% of the downpayment for a comparable house. If they were really smart and saved the HEW, they would need another loan and could pay cash for the new place, who needs a good FICO score. But most were and are useful tools of the banksters and govt. Remember what Ulyanov, Jughashvili and Rohm did with their usefully tools.
What do people think about a price per square foot of $353 in Turtle Rock (feeding into Bonita Canyon Elementary), for an updated but not ultra-modern house about 2800 square feet?
$353/ft sounds about right (more or less) for today’s market in Turtle Rock. TonyE may have a better input on this though.
Inside or outside TR Drive? A condo/attached or a stand alone in the Terrace?
View? No View?
Its’ all in the details and -not kidding- the location. Some homes in TR Terrace have killer lots. Makes no difference between BC or TR elementaries… There are homes on that hill that have views that are breathtaking.
The clowns that bought in TRidge have no clue that they’re owned by TR, view wise.
Now, my humble chateau once fetched over 450 per square foot. Which I thought was insane because I’m on the wrong side of the loop and my view is of the Hill not Mt. Baldy.
IrvineRenter: “Buying for cashflow is not speculation.”
Investment has 2 differences from speculation:
1. safety of principal (predictable value)
2. satisfactory return on principal (predictable cashflow)
Buying for cashflow only is just yet another speculation.
That cop who supposedly got shot by illegals near Gila bend, AZ, probably shot himself and staged the whole thing, just to incite violence against Mexicans, just like this guy did:
http://www.cnn.com/2010/CRIME/05/11/philadelphia.cop.shot.self/index.html?hpt=T3