patrick.net

Randy H Says:
All I gotta say is: jeebus, there is a lot of shit flying around all the sudden. It’s starting to smell a lot like the feeders to a slaughter house (if you’ve never visited such an operation, I highly recommend it) around here. The tension is in the air, like ten thousand head of livestock about to be gutted, and the doors have just swung open and the head of the line prodded in…

Specifically what are you referring to? I agree a lot of stuff has hit the fan, and to borrow a phrase from Marshall Prentice, "indicators of distress are moving all over the place". Just curious to see which ones you meant.

Funnily enough, I had a project management teacher in my undergrad studies who used to tell us to evaluate the penalty clauses to see if it was worth honoring a contract. Like anything else in America, the decision to do right or wrong is dictated by the least total cost.

BAIdiot: Don't think for a moment that banks would have felt heartache at taking someone's house if it had equity in it. The reason lending was so reckless was because a bank couldn't lose, the house could always be sold during the boom. They wrote loans with an undisclosed hope of default. That's why I'm not shedding any tears for banks or the investors, nor am I buying the, "We didn't know" argument.

Don't you guys just love how retarded the whole country becomes when people lose money? It is like the Clinton memory, either sharp as whip or dumb as a stump dependng on the situation. Everyone is an expert until they have to write a check to someone or answer a judge, then all of a sudden their mental capacity drops to a 10 year old level and "They didn't know better" and want the bailout. It still astounds me to hear Republicans jumping on board with this bailout crap, I just want to smack them.

@BayAreaIdiot,

If the FB actually *intended* to default in the event the house value dropped before s/he signed the loan papers (Google David Crisp, Casey Serin), then the "ethics" argument does have a point. However, if they are walking away because they find themselves underwater after (belatedly) running the numbers and coming to the (also belated) realization that mailing in the keys and renting represents the lesser of two financial evils, then I don't think it holds water. In that case, the FB is analyzing the situation, and coming to the most rational, self-interested conclusion. The FB is also exercizing his/her *legal* option to forfeit the collateral (house) in lieu of payment.

The bank could have requested a larger down payment (or *any* down payment) to hedge default risk, but did not. The bank could have run a full background check on the borrower's income and assets, but did not. The bank could have charged a higher interest rate to compensate itself for default risk, but did not. The bank could have hired an honest appraiser vs. a "hit-the-number" appraiser, but did not. The bank could have refused to participate in Easy-Al's lending race to the bottom, but did not.

In most instances, the FB was the least guilty actor in the grand scheme of things.

Harm, I like how you worded this...*legal* option to forfeit the collateral (house) in lieu of payment.

This is the premise of why I don't see the traditional first nonrecourse loan forgiveness quite as income. The house is interchangeable with the note. I completely agree with the wording.

On topic.

An interesting investment play is person to person lending, such as http://www.lendingclub.com or http://www.prosper.com. Obviously, consumer is maxed and consumer debt is risky business as we stare into the abyss....however, a savvy investor might pick those individuals in recession proof stable jobs, low debt to income ratios, and loan to a well diversified group of borrowers. All while taking good borrowers away from the man, the evil loansharking credit card cartel. Maybe even a little capraesque help to some folks in need.

Heck, it's as safe a harbor as anywhere else in these uncertain times for some cash looking for a home.

Not investment advice.

HARM says:
In most instances, the FB was the least guilty actor in the grand scheme of things.

you totally had me in full agreement until that sentence. The least guilty actor in the grand scheme of things was me, the lowly renter. However, it is increasingly becoming apparent to me that my most salient characteristic, is being an idiot.

HARM, you're sounding more like an Objectivist every day.

How many might be interested in a Thursday evening Marin Brewing Company bullshit fest? Just throwing it at the wall.

To be clear, I think people who perpetrate loan fraud, "Obtaining a loan with the intent of defaulting for personal gain," should be prosecuted. Certainly if we can deliver a $200,000 judgement against some girl downloading songs, we can certainly prosecute someone who steals from a bank.

@SP

I'm referring to my own general uptake of the various communication channels I cross on a daily basis. Colleagues, friends, family, CNBC, the FT, a handful of blogs. It could be just me, but I sense the weather has changed quite abruptly ... even if many have been watching the storm building off the coast for days.

Randy says
My only point is that contract-law isn’t black & white, nor is it _always_ an issue of ethics or morality.

It’s more often about position of power & negotiation. Our legal system, for right or wrong, has become itself part of the negotiation game.

No doubt. In fact you could probably say that any coincidence between the law _as practiced_ and morality is just that. However, we do base the design of our law on what we consider moral.

Enforcing a particular law/contract as it was written is not necessarily moral. Conditions change, interests change. But that's no excuse for being immoral. Of course that's between you and your conscience, not a judge. As you rightly point out, you don't often, even if you've been "wronged". There's still a cost-benefit calculation you need to make.

@BayAreaIdiot,

:lol: Ok, you got me!

@Randy H,

Count me in (though Friday night would be easier for me, given the distance involved).

you don’t often ---> you don't often sue

I've actually only sued once, and that was thankfully settled early.

I've been sued a number of times, though. None of those ever got beyond motions. And most of those went on so long only because I was a young, inexperienced, business owner, flush with success and naive as to how to act in my business' own best interest. I pursued "the principle" of the thing, and helped a number of lawyers fund their children's college funds.

Pragmatism is very underrated.

A FB who "walks" and intended to in the first place should be liable. But, how does it profit the FB? Their credit takes a hit, and they're paying 3X or 4X what they could rent the same place for. It does not make sense. And traditionally in the US actions were punished not states of mind. Now, presumed states of mind are punishable, but you still have to prove that that state of mind happened. How would a FB come out ahead by having the state of mind before buying that they're going to buy and then walk away after a few years, when obviously they'd have tons of money in the bank and a non-trashed credit rating if they'd just rented an equivalent place? The walking-away scenario is only possible given the FB having the initial state of mind that things will work out.

PS - prosecuting states of mind is sure to complicate our already complicated legal system, it may be best to invest in law firms.

There were loans made where a buyer ended up with a huge amount of cash because of an inflated appraisal. Then the buyer walks from the house which then turns out to be much less than the purchase price. Some of these schemes involved the broker, the appraiser, the seller, and of course the straw buyer. All of these people should be liable when a scheme like this is uncovered. Their mental motives are then left for a jury to decide, and often times someone's actions speak as to their motive. Obviously someone not making a single payment on a house they pulled $50,000 out of and then fled probably didn't intend on paying the money back.

Ex-Sunnyvale, the scenario you describe though is a bank's own negligence to its investors. Non recourse loans are nothing new, and they know the typical borrower mentality. If the house goes up in value, great I've made some money and everyone gets paid, if the house loses value, oh well that is a shame for the bank.

None of that is new, it has always been up to lenders to make their decisions based on good practices. That is what I meant earlier about everyone reverting to 10 year olds when the shit hits the fan. All of a sudden, even people's speech changes, "Duh, I didn't read all that legaleeze"~Hillary Clinton.

I pursued “the principle” of the thing, and helped a number of lawyers fund their children’s college funds.

I thought "the principle" is to maximize one's gain by whatever means necessary.

It is something good to have.

PS - prosecuting states of mind is sure to complicate our already complicated legal system, it may be best to invest in law firms.

Doesn't murder as a crime involve the states of mind?

PeeterPee - I'm not sure it does. I know the act of murder is certainly punished, but I think it has to be shown by an action or series of actions. Stabbing someone with a knife, etc. Putting the poison in their drink, etc. Then there's negligent homicide etc. All provable by actions, not states of mind. I think there has to, in a case of murder, be motive too, the old Cui Bono, or Who Benefits, principle.

As outlined above it's hard to figure out how a FB would decide they'd benefit by walking away. They're better off just renting.

New prosecution involving states of mind are such things at the idea of a Hate Crime, and things like the new Thoughtcrime Bill. You can be punished because a state of mind is assumed (such as a possible bias against race etc.) or because you *might* do something based on what web sites you read. This is new.

Malcolm - you are right, and I haven't touched on the FB buying the house then taking out a huge HELOC.

I really think in most cases it's the case of a certain Mr and Mrs Blow, who honestly thought RE would go up or at least stay up with inflation, and that everything would be OK. Basic optimistic and hardworking folks. And then they're encouraged by the used-car-salesman tactics of the RealtWhores and they're caught.

And, since the mid-70s at least, high tech in terms of computers has been a story of up and up. Guess what the Bay Area's been known for over that time? As for the East Coast, there's been a lot of up in the ups-and-downs of government and finance. So, it seemed foolish NOT to be optimistic.

But you are correct, the banks seem to be "getting all dumb" like they never expected FBs whose worlds are crashing down around their ears to walk away!

Doesn’t murder as a crime involve the states of mind?

Almost all crimes have a state of mind element which needs proving at trial. We lawyers call this the "mens rea" element - a fancy term essentially meaning having a "bad attitude". Very few crimes have no mens rea requirements. We call them "strict liability" offenses and generally they are crimes or offenses with smaller penalties (e.g. driving a polluting car).

What gets dicy is that proving the mens rea element generally involves arguing from the perp's actions. If he was hiding in the bushes with a gun before he shot his ex-girlfriend, that goes to show it was premeditated and intentional.

It may be interesting to see how the MSM, REIC, and other interested parties endeavor to manipulate FB 'should I stay or should I go' sentiment over '08. I'm not sure that a coalition will form and fund soon enough to address the issue, possibly a business opportunity for any PR flacks about. Maybe a national "shame" campaign.

It's absolutely unamerican to screw your lenders!

Nobody cares at all about the tiny minority of Americans who try to save money. As best I can figure, they're the only true victims of the subprime mess but nobody gives a crap about them. (I noticed there's a new www.waronsavings.com blog, so maybe the phase is starting to catch on)

NPR, for example ran a story today about the subprime mess and Wall Street's mixed reaction I tried to set them straight with this response (below). They started with a cutesy intro about the various players "Betty" who wants to buy a house, "Claudio" who wants to sell, and "Derwood" who's upset that the value of his house is diminished. I just sent them this letter to tell them they forgot someone: Reuven:

Dear "All Things Considered:"

There was a serious omission in the Davidson / Siegel story about the market going up and the housing market going down (or returning to normal, as I see it.)

You talked about "Betty", "Derwood", and "Claudio" but you forgot one person: Reuven. Reuven is the only real victim here.

Reuven did what he thought responsible Americans should do: save money. But our government has declared War on Savings.

In order to prop up homeowners who think their houses are ATMs, our lawmakers lower the interest rates and pour money into the economy, an inflationary tactic.

Reuven wasn't pleased with house prices rising faster than wages. He knew it was an unsustainable bubble. It just caused his property taxes to rise making it harder for him to retire. Reuven doesn't care what some phony appraiser says his house is worth.

Reuven's losing money left and right. He can't barely keep ahead with inflation with CDs, and has to worry about banks going bust.

Nancy Pelosi thinks Reuven's too rich to qualify for the stimulus handout, so Reuven will get nothing. It's clear to Reuven that he's directly paying for other people's spending sprees simply because he was responsible and saved money.

While Reuven pays a lot of taxes, he gets no deductions because of AMT. Reuven's mortgage is now paid off, but when he had it he received no mortgage interest deduction because of a phase-out. However Deadbeat Betty who walked away from her mortgage got all sorts of tax breaks and is able to escape the tax on forgiven debt thanks to a law that our President just signed. (Isn't paying yourself with forgiven debt one of the tactics the Enron execs used?)

There's only one bright spot for Reuven! He saves $360 this year by not contributing to National Public Radio. Maybe then they won't forget about Reuven next year.

Sincerely,

Reuven S******
Sunnyvale, CA / Windermere FL

Don't worry Reuven, I'm sure the politicians appreciate your contribution since you give them the chance to look like heroes.

Just noticed an Arco where gas is $2.97 a gallon. Seems like it is coming down.

@danville woman,

Errrm, well, I could buy Australian Treasuries directly from the RBA but I don't know whether that avenue's available for non-nationals.

The links at www.aofm.gov.au will tell you more than you ever wanted to know, but I suggest you will just have to find a US broker with access to the Australian Bond market. I imagine most of the big players would have appropriate facilities.

Ignore my previous comment. I have just reached OO's reply to you and it looks like the direct RBA avenue IS available to non-nationals.

Good luck BAP.

BAP,

I'm very familiar with your area and the insane crap that people did with their homes with the weekly jaunts to the Homeboy Despot. I looked at a place out in the country some years back and that was suppse to have an indoor pool.

Now, GET THIS------

The livingroom floor was chainsawed out, a hole was dug and lined with a blue tarp, then filled with water. The mold and mildew was as you can imagine.

Another place was nothing more than a superfund site once the meth lab got busted. At that point, I decided to look elswhere.

Of course, the propreties that were in really good condition, and there were many, were out of my price range. I would bet my life that your offer is fair.

Good luck, Bro.

OO,

Etrade recently stated in a letter to customers that all paid-in-full securities are "customer-owned", which I interpret to mean that they are held "in trust " for you. Whether this is "safe" or not is anyones guess. Cash apparently is different and riskier, especially if it is held in Etrade Bank (via the sweep option) and is bigger than $100k. This is one data point, perhaps others have more.

Too big to fail? Maybe Vanguard and Fidelity. Vanguard assets are again customer owned. In August, after pondering the same question, I pulled some cash out of banks and invested with Vanguard's money market funds, which pays a decent rate (check symbols VMMXX and VCTXX). Of ocurse, all yields are dropping with the Fed's actions.

Not investment advice, just an illustration of what I did.

I like today's story "Wanted: Your Toys" that Patrick posted in today's news. It's a Craigslist posting - check it out before it disappears.

That could be me posting it - even the part of being the geek math major.

Marin is too far for me, but if some of you also want to meet at the Ferry Building wine bar, that would be fun. It's very BARTable, boatable, and otherwise easy to get to and from without a DUI. And pretty cheap as wine bars go.

Maybe Fri Feb 8th at 5:00pm? It gets very crowded, so good to get there a little early.

Patrick,

I'd be in on that. Marin is a bit far for me as well.

WOW Mish did a post about this new company called You Walk Away(dot com) and he talked to the guy running it.

They give legal advice about the time frames, non recourse, and shoot a 'dont call me' letter to your lender and they tell you how long you have to live rent free for a 1k fee. awsome little bidness model. i hope they get massive press and help crash the market further faster by helping FB's do the walk. Of course anyone smart can spend two hours on google and figure all that our themselves....but if you have no computer skills its a good investment, it probably beats listening to 'the guy at work' for such advice...

http://globaleconomicanalysis.blogspot.com/

Im planning on posting a flyer for this fabulous company everywhere I want to buy one day and also leaving them on H2's, tahoe's etc at the mall.

I hope they get a billboard on the freeway...people with loooong commutes who are upside down must dream of walking away and renting next to work.

Hopefully this is a new trend. Instead of "Refinance Now - House payments go down again" ads for idiots we can have tons of 'Just Givver Back To Da Bank!" banner ads, that I would love to see. Animated people 'walking away' instead of those obnoxious 'dancing mortgage people'.

@Patrick,

I'm in, though 6pm would be better for me, given my work schedule.

"Marin is too far for me"

(The guy goes to AMSTERDAM but Marin is "too far") :)

I know, I know (you didn't have to drive back!

I"m happy to show up - you guys will have to come up a chartered flight to/from Prescott Municipal Airport, plus all other transportation, hotel, and $200/day for my time.

Yeah yeah, essentially you'll have to PAY me to go back to the BA, even to visit.

Hello Kitty,

What a HOOT! No kidding, they're an actual company, AND... conveniently located in Carlsbad, CA! (Must be nice offices?) That's up by San Juan Capistrano, right? Maybe the swallows HAVE returned?

I'll BET YOU MONEY those are subprime guys! I'll just bet you.

But.. but.. how we gonna' make $'s now...?

HEY! I got an idea!

Relative to "I want your toys".....

The high end luxury pre-owned car market has changed remarkably recently. I've not seen anyone comment on it anywhere, but at the auctions all the high end stuff s series mercs and 7 series bmers and the like is being bought up en masse by foreign nationals and many arabs. It's driving the price up for such models here.

What's interesting about it to me is this analysis: you've got overextended consumers spending retail on the things, taking the massive depreciation hit (helocs?), then liquidating assets for pennies on the dollar, then you've got foreign nationals coming in buying those up using strong currencies, and emptying our market of the good stuff. We are then left with streets full of korea and detroit vehicles. Good luck hoping these same folks will come in and buy up McCrapshaks as well, about the same chance as them buying Ford's and shipping them Dubai.