patrick.net

The penalty for strategic defaulters is coming back in 2012. Right now there's a get out of jail free card for the amount of your forgiven debt which ends in 2012.

Mr.Fantastic says

A short sale is just a less smellier walk-away.
Hand backs/foreclosures are even worse because two (sometimes three) banks get robbed.

Still on the robbery analogy, huh? For someone who calls others uneducated, you certainly have a poor grasp on contract law.

Mr.Fantastic says

Don’t worry Tatupu, your heloc is non-recourse for the time being. You need not feel ashamed for your financial failure. Your wife still loves you, even though she might not like living in the desert much.

Again with the insults. When all else fails, I guess.

toothfairy says

The penalty for strategic defaulters is coming back in 2012. Right now there’s a get out of jail free card for the amount of your forgiven debt which ends in 2012.

That's with regards to short sales.

Walking away from non-recourse loans is still penalty free sans the credit rating.

It's two different things.

Mr.Fantastic says

Some of them are being ridiculed in local papers, but I agree, the punishment for “strategic defaulting” should include much more severe penalties.
If I go to a bank and rob $350,000, I’m going to prison for 10-15 years if I get caught.
If I buy a house and steal $350,000 of “equity”, I can throw back the keys to the owners, keep the BMW M5, and rebuild my credit within a few years.
Something doesn’t make sense here.

Equity is fake, it isn't real. It is a virtual imaginary item that only persists if you think it does. You can't touch it, smell it, smoke it, eat it. Banks suckered a lot of people into thinking there is this "magical" concept of home equity. When in reality it's just a hollow bubble.

If you believe in Equity, try other religions instead, there are plenty with better benefits. We have Christianity, Judaism, Islam, etc... (much cheaper and a lot more convenient)

Isn't it really that the banks write the contract in their favor under most circumstances? When a contract says, "the consumer doesn't pay, the bank gets the house" that's normally a threat...to the consumer. This time it just happens to be turned around.

I've often heard people say, "Nice house", and the homeowner says, "I don't own it, the bank does".

It's never been truer!

IF ENOUGH PEOPLE DO IT CASUALLY IT IS NO LONGER STIGMATIZED!

The whole thread seems silly to me.

I mean really, alcohol was once illegal. People drank it anyway, nobody really gave a crap how "immoral" it was to be a lawbreaker.

We have the example right from the top that whatever you want to do, all will be forgiven.

Historically speaking, this is a country of fresh starts.

You can go bankrupt, and have credit card companies falling all over themselves to give you a new card. I know 3 people personally that fell behind and were obviously never going to dig out, and they said screw it and walked. I expect 5 years or so from now they'll be just fine and not walking around with their heads hung low whenever they see "respectable people".

One of my ancestors had a little "problem" regarding the alleged theft of a horse, that involved a sudden relocation. His life turned out OK after a reboot.

If everyone in the USA with a spot of trouble in their credit history was scarred for life, we really NEVER WOULD come out of the Great Recession.

klarek says

Mr.Fantastic says

You can justify your HELOC induced “strategic default” all you want, but you’re no better than the gambling banker.

I don’t know why those folks aren’t being made into national examples and put through financial suffering that everybody else would want to avoid. They’re worse than the bankers.

"Stiffing" a mortgage lender is no more immoral than stiffing a pawnbroker by not going back for the item you pawned.

There is nothing immoral about defaulting. You just face the consequences AS DEFINED UP FRONT. And there is certainly nothing illegal about it.

Mr.Fantastic says

A short sale is just a less smellier walk-away. If someone signs a contract to pay $350,000 for something, and then changes their mind and say they’ll only pay $275,000 or just walk away, someone gets screwed out of $75k.

Nonsense. When a lender makes a loan, they know full well that they are taking a risk that the borrower will not repay it if it makes no financial sense to them.

Banks make business loans all the time, especially commercial real estate loans, hoping for an effortless profit from the business owners efforts.

If a business is not profitable to the owner, they default on their lenders, and lenders lose money. They weren't "screwed". They took a risk, and lost. It's no different with home loan.

@Vicente

Good points...I just wonder about the non-recourse loans.

Mr.Fantastic says

This thread kind of reveals who abused HELOCs and who didn’t.

Really? Please do tell. Who abused HELOCs and who didn't?

MarkInSF says

“Stiffing” a mortgage lender is no more immoral than stiffing a pawnbroker by not going back for the item you pawned.

There is nothing immoral about defaulting. You just face the consequences AS DEFINED UP FRONT. And there is certainly nothing illegal about it.

It depends on whether your parents taught you to pay back money that is loaned to you.

klarek says

It depends on whether your parents taught you to pay back money that is loaned to you.

I don't know of any parent that would object to not repaying a pawnshop lender. A pawnshop lender is not some benevolent entity to which you have a moral obligation. They are trying to make an effortless profit off your labor, and get to keep your collateral if you don't make the payment terms.

A mortgage lender is exactly like a pawnshop lender.

And what about a business loan? Businesses fail all the time, and banks don't get all their money back. And guess what? In many cases the only thing securing the loan is the assets of the business. The owners of the business might be billionaires, but they're not going going to pay back their lenders a single penny more than they have to.

Or the business owner might be you. Do you own any stock? If the company that you own goes bankrupt are you going to reach into your pocket to make bondholders whole?

I'm curious Mark - so when do you owe a moral obligation to pay back money you borrowed from someone and when don't you? If they were trying to make a profit on the loan? So, e.g., refusing to pay for your car and taking off with it would be morally ok?

If your brother or your neighbor loaned you some money to start a business in exchange for interest and/or a stake in the business and with no intent to help you run it, they would be "trying to make an effortless profit off your labor," so you presumably have no moral obligation to pay them back either right?

Sounds to me like you are taking the worst of people's behavior (those evil billionaires, of course), and making that the standard of morality, and more importantly failing to distinguish between complying with the terms of a loan in a way that results in it not being paid back (e.g., pawnbrokering), and not complying with the terms.

The difference should be obvious.

Borrowing from friends or family obviously comes with the moral obligation you have to your friends or family. Of course you have to pay them back, no matter what. Heck I wish some of my friends and family felt the same way =/

Borrowing from a bank is a business transaction. The consequences of not paying are right in the contract plain as day. Both parties are fully aware (in theory) of the details of that contract.

There's no moral obligation whatsoever. None. There's no question. It's not even debatable.

This is coming from someone who is incredibly honest (much to my detriment) and doesn't owe a dime to anyone.

JimAtLaw says

Sounds to me like you are taking the worst of people’s behavior (those evil billionaires, of course),

Those evil billionaires? I didn't say they were evil, I just said they are acting in their own interest. You completely ignored my example that *YOU* own companies.

When a corporation no longer shows the potential for profit for it's owners, and nobody wants to buy it, it's going to be shut down and the lenders are likely going to loose money. If a company *YOU* own goes bankrupt, are you seriously going to dip into your savings to pay back the companies lenders?

You likely owned GM stock if you own an index fund. Lenders and other stakeholders got "stiffed" in the bankruptcy. Did you step up, open your wallet, and offer to make them whole?

A corporation has no moral obligations to it's lenders. Of course not. Corporations have no moral obligations. Only legal ones.

Yet here people are suggesting that people have a moral obligations to a corporation (a bank).

Do you really not see how one sided this is?

If you're borrowing money from a friend or relative, and their is an understanding that you'll make them whole no matter what, implicit of explicit, then of course you have a moral obligation to them. But you never, ever have moral obligation to a corporation, for the simple reason that a corporation can never have a moral obligation toward you.

JimAtLaw says

and more importantly failing to distinguish between complying with the terms of a loan in a way that results in it not being paid back (e.g., pawnbrokering), and not complying with the terms.

Huh? Pawnbrokers have terms too. You agree to pay $X by Y date, or they get to sell your item to recoup their losses.

michaelsch says

Mr.Fantastic says

Yes, but do you know who else is buying lots of toxic securities? You, me, and many of the posters on this board.

So, why do You buy them?
Why won’t You make sure those who buy them on Your behalf stop doing this?
Those who walk away are best serving our society by waking up You and the like.

You have a good point about communicating with whoever invests on your behalf. Even if it is just a threatening phone call that you will pull out your money. The problem is that these toxic debts were not revealed to anyone. So an investor buying AAA rated bonds did not know they were crap until it was too late.

Yes, exactly-MarkInSF says

JimAtLaw says

Sounds to me like you are taking the worst of people’s behavior (those evil billionaires, of course),

Those evil billionaires? I didn’t say they were evil, I just said they are acting in their own interest. You completely ignored my example that *YOU* own companies.
When a corporation no longer shows the potential for profit for it’s owners, and nobody wants to buy it, it’s going to be shut down and the lenders are likely going to loose money. If a company *YOU* own goes bankrupt, are you seriously going to dip into your savings to pay back the companies lenders?
You likely owned GM stock if you own an index fund. Lenders and other stakeholders got “stiffed” in the bankruptcy. Did you step up, open your wallet, and offer to make them whole?
A corporation has no moral obligations to it’s lenders. Of course not. Corporations have no moral obligations. Only legal ones.
Yet here people are suggesting that people have a moral obligations to a corporation (a bank).
Do you really not see how one sided this is?
If you’re borrowing money from a friend or relative, and their is an understanding that you’ll make them whole no matter what, implicit of explicit, then of course you have a moral obligation to them. But you never, ever have moral obligation to a corporation, for the simple reason that a corporation can never have a moral obligation toward you.

Ah, so it's not “trying to make an effortless profit off your labor,” as you were saying before, that triggers the absence of morality, it's a corporation. That's not a crazy position. It does have some interesting holes though.

So, for example, if a neighborhood charity, which is also a corporation, loans you money, interest free, to make it until the next month, there is no moral obligation to pay back the charity - it's a corporation! Or your employer's family business, which is incorporated - no obligation to pay them back on a pay advance either right? Careful now, because if you say it's different because they're corporations whose shares are owned by friends, or by people whose purposes you believe in (charity, rather than profit), now you're saying you're not morally obligated because of who the shareholders are - strangers, ok not to pay back, friends, not ok - or whether you think their purpose meets some arbitrary criteria to except them from the usual "corporation means no obligation" rule.

Another interesting thought - if you can't have a moral obligation to a corporation, then not only is it ok not to pay back a loan to a corporation, it's ok to steal from one directly! After all, it's only a corporation! If you can't get caught, or the risk/penalty of getting caught is minimal vis-a-vis the reward, you're absolutely in the right to loot away!

Of course, this completely ignores that the corporation has shareholders from whom you're actually looting that value, but since they've insulated themselves from legal liability using a corporate form, they're not included in the moral calculus.

And another thought on the same line - can the owners of a corporation then use it to perform acts that would be immoral if performed personally/directly? After all, if third parties owe no duty at all of morality to the corporation and it owes them none, and the shareholders can therefore freely and morally have the value of the corporation looted out from under them, aren't they similarly absolved of anything the corporation does?

Food for thought.

Not really, those are silly examples. You're comparing stealing to obligating a portion of a contract. They aren't even remotely the same thing.

Regardless, this discussion is dumb.

JimAtLaw says

So, for example, if a neighborhood charity, which is also a corporation, loans you money, interest free, to make it until the next month, there is no moral obligation to pay back the charity - it’s a corporation! Or your employer’s family business, which is incorporated - no obligation to pay them back on a pay advance either right? Careful now, because if you say it’s different because they’re corporations whose shares are owned by friends, or by people whose purposes you believe in (charity, rather than profit), now you’re saying you’re not morally obligated because of who the shareholders are - strangers, ok not to pay back, friends, not ok - or whether you think their purpose meets some arbitrary criteria to except them from the usual “corporation means no obligation” rule.

Those are some interesting cases. A charity is presumably acting out of a sense of moral obligation toward the community, so that is an exception where a corporation can have moral obligations. I still say one has no moral obligations to a corporation that has no moral obligations to them, even if their brother owns it. Any moral obligation is to the brother, who's corporation acted on his behalf, not to the corporation.

CrazyMan, first of all, stealing was not the only example, but secondly, your dismissal is without substance, how are they not the same thing in context? If there are no moral obligations to a corporation, there are no moral obligations! Read what Mark wrote: "A corporation has no moral obligations to it’s lenders. Of course not. Corporations have no moral obligations. Only legal ones. Yet here people are suggesting that people have a moral obligations to a corporation (a bank)."

What we are talking about is whether you have a moral obligation, irrespective of what you can get away with under the law (which we all know has little to do with morality and not much more to do with justice) to pay back borrowed money, and if not, why not exactly.

Theft is not the same thing, as somebody voluntarily giving you something and you failing to give it back.

This may be a bit esoteric, but a very key part of the is problem lies with the nature of modern money. It's all debt. Even the dollar bills in your wallet are just a liability of the fed, backed by a liability of the federal government.

Consider this: If I buy a home seller financed, $20K down and a note for $80K to be paid over 10 years, has the seller "lent me money"? Have I "stolen" any thing from him if I fail to pay him? He gets the house back after all.

Bank financing is really no different. They just stand between me and the seller. The bank gets my $82K note (bank fees), and the seller gets $80K of newly created bank money. The bank "money" is just as much an IOU as the IOU I would have given him if it was seller financed, just more liquid The whole notion of something actually having been "lent" is just an illusion, and it's in fact just some numbers being changed showing who owes who and how much, just like in the case of me writing a note to the seller myself. Of course it's not quite this simple, and lots goes on behind the scenes, but the net effect is exactly the same.

So, just like in the case of the seller financed home, has the bank "lent me money"? Have I "stolen" anything from the bank if I fail to pay it? It gets the house after all.

JimAtLaw says

And another thought on the same line - can the owners of a corporation then use it to perform acts that would be immoral if performed personally/directly?

Of course they can. And they do every second of every day. That is why having laws that reflect our moral values, and restrain corporate behavior is so important.

After all, if third parties owe no duty at all of morality to the corporation and it owes them none, and the shareholders can therefore freely and morally have the value of the corporation looted out from under them,

A corporation can't be looted by a third party in legal transactions. It has do make voluntary choices that lead to it loosing, like making bad loans or insufficiently collateralized loans.

The biggest frustrating part of the last three years, was personally knowing about three people that started out 07 in a house, they were upside down on and were in arrears. They were in a new house by last year.

MarkInSF says

JimAtLaw says

And another thought on the same line - can the owners of a corporation then use it to perform acts that would be immoral if performed personally/directly?

Of course they can. And they do every second of every day. That is why having laws that reflect our moral values, and restrain corporate behavior is so important.

After all, if third parties owe no duty at all of morality to the corporation and it owes them none, and the shareholders can therefore freely and morally have the value of the corporation looted out from under them,

A corporation can’t be looted by a third party in legal transactions. It has do make voluntary choices that lead to it loosing, like making bad loans or insufficiently collateralized loans.

But we're not talking about whether the owners can *get away* with doing so, but whether it's *MORAL* for them to do it - whether they are relieved not just of legal liability, but moral culpability for actions technically taken by the corporation. I think many people would say no, just as I think many people would say that when you steal from a corporation, you are really stealing from the shareholders and this is no better than stealing from another person directly, and just as many would say that by the same token, failing to pay back a corporation (and by extension, the shareholders) is morally no better than failing to pay back a single human being, whether it be your mother or a stranger. Many corporations, and people, behave terribly, and the laws have been written and enforced so as to allow them to do so. The question, IMHO, is whether we want to emulate them.

Excellent logic again, Captain. I'm against the death penalty. Therefore, I must have committed a capital crime at some point in my past, right?

@pawn shop example: Maybe not a good example, but ..... The pawn shop keeps your item until you either buy it back or the time is up, they do not sell it until they own it. OTOH, The loan brokers sold house debt without getting the house back, and without the terms of the loan being broken.

also, Franklin and Barney are not telling pawn shops to give money to people that do not have correct colateral. They did exactly that to loan brokers.

also, you can not hand over your pawn, and then rent it to another, collecting the money while the pawn shop holds the item.

Just tossing out some ideas is all

Mark, as always, thanks for trying to keep folks on track. Mr. Fantastic, klarek and others -- we certainly understand your frustration, but try to focus your energy on some of the real evils of the bubble. For instance 'yes, this will be my primary residence' is the little white lie (and fraud, I might add) that nearly destroyed the free world. Thousands of homes were removed from the marketplace by highly leveraged individuals. Complaining about walkaways is like tilting at windmills. The problem is not folks abandoning their homes (and loans) the problem is that many fraudulently obtained mortgages on properties that were purchased and then leveraged again untli the scheme collapsed under its own weight. So many incentives to fib a bit everywhere in the seccuritization food chain -- from the buyer on through to the investment bankers.

Mr.Fantastic says

Mark is just proving he’s a deadbeat, and unfortunately, he probably has deadbeat kids too. This is why the bubble even happened in the first place, deadbeats and their deadbeat values. How disappointing this can still exist in this day and age.

I've never had any debt in my life, more than a credit card balance I've paid off every month. You've really got a lot of nerve making accusations like that.

Bap33 says

The pawn shop keeps your item until you either buy it back or the time is up, they do not sell it until they own it.

Same with a mortgage lender. They are the true owner of the title to your house until you either pay in full or you don't pay in time, and they don't sell until then. There is absolutely no difference except you get to have use of the item pawned. I fail to see how this make the morality of defaulting on a pawn lender different that defaulting on a mortgage lender.

Bap33 says

also, Franklin and Barney are not telling pawn shops to give money to people that do not have correct colateral. They did exactly that to loan brokers.

The vast majority of bad loans were not made to meet any government requirement. They were made because they were profitable to originate and sell on.

JimAtLaw says

But we’re not talking about whether the owners can *get away* with doing so, but whether it’s *MORAL* for them to do it - whether they are relieved not just of legal liability, but moral culpability for actions technically taken by the corporation. I think many people would say no, just as I think many people would say that when you steal from a corporation, you are really stealing from the shareholders and this is no better than stealing from another person directly, and just as many would say that by the same token, failing to pay back a corporation (and by extension, the shareholders) is morally no better than failing to pay back a single human being, whether it be your mother or a stranger. Many corporations, and people, behave terribly, and the laws have been written and enforced so as to allow them to do so. The question, IMHO, is whether we want to emulate them.

The ENTIRE POINT of a corporation is to shield the shareholder from ANY AND ALL obligations beyond their financial investment.

And for the 3rd time, letting a lender have your collateral instead of meeting the terms to claim the collateral, just as was agreed to in writing up front, IS NOT STEALING.

Absolutely wrong Mark. The entire point of a corporation is to shield the shareholder from LEGAL LIABILITY, not from MORAL CULPABILITY, which is not something that can be done by a LEGAL FICTION.

Or do you really think, e.g., that the guys who made the decision to keep selling Pintos they knew would blow up, killing innocent families, truly bear no moral responsibility for the people whose deaths were caused? Of course not - that's an absurd position, the corporation may be the legally liable party by virtue of being the seller of record but these guys all know in their hearts that they bear responsibility for those deaths, and the rest of us know it too. (Of course, in the Ford case, not all shareholders knew, etc., so not all might be morally culpable here (though that's another debate), but you can easily extend the example to similar actions by a smaller business where all of the shareholders are knowing participants.)

And re: stealing, I never said it was the same as failing to comply with loan terms - if you'll recall, I specifically raised stealing as a separate example since if there are no moral obligations to a corporation, stealing should also be perfectly fine if you can get away with it. And the distinction you made re: a charity was specious - they aren't necessarily obligated to do anything, they may be helping because they WANT to, don't invent moral obligations for them for convenience of your argument (and in any event how about a company that donates 50% of its proceeds to charity - the net effect of your stealing is still that the charity is reduced). It's a corporation, so robbing BofA, IBM, Best Buy, your local 7-11, UNICEF or the Red Cross should all be just fine by the "no moral obligations can be incurred from or to a corporation, nor can they pass through to or from shareholders or others" standard.

MarkInSF says

Bap33 says
also, Franklin and Barney are not telling pawn shops to give money to people that do not have correct colateral. They did exactly that to loan brokers.
The vast majority of bad loans were not made to meet any government requirement. They were made because they were profitable to originate and sell on.

We have went around this block a few dozen times. SOMETHING had to change to make/allow those who make loans (BANKS) to make loans to unqualified buyers. That was/is step one in this entire mess. Then came the HELOC and other greed induced actions. But, without any exception, the first step was to make buyers out of non-buyers. I say Barney and Franklin made thus deal over breakfast in bed at Barney's home based tom-cat house, but that's just a guess.

My original post was not intended to reflect on any "moral" issue with walkaways. Allowing folks to walk with zero accountability for the forgiven amount is absurd. That reduces the dollar to ass-wipe. But, in my little mind, the immoral act was handing money to liars/invaders/poor people, to buy something that was over-priced due to their being able to access the free money lever.

Let's not go overboard now - we don't know Mark did any of those things and I wouldn't assume such. This is a theoretical discussion IMHO, and we can all be civilized to each other. That said, the expressed values are, again, IMHO, the impact of moral hazard personified.

We see corporations screwing the ordinary citizen, over and over again, in countless ways, every day of our lives, and our politicians and laws actively supporting them in this.

We see obscenely rich executives getting huge bonuses for destroying shareholder value (see, e.g., Dick Fuld's bonus immediately before the Lehman BK) and/or being rewarded by our politicians with taxpayer money for destroying our economy, for destroying people's savings, for destroying our national wealth, for robbing ordinary citizens, sometimes by straight up fraud and theft.

And it's hard after seeing this every day not to conclude that the system is rigged firmly against both the little guy and the honest person.

And when you see that, over and over again, that regulatory capture in this country is so complete that we are all laid out as ready made victims by the people who are supposed to be representing and protecting us, your own sense of morality starts to give way to a sense of vengeance and entitlement.

If our politicians and business are robbing me and treating me wrongly, why should I treat them better? Why should I comply with anyone else's sense of right and wrong when no one will help me when I've been wronged, and in fact many of them are collaborating to take as much as possible from me every day? Hell, even the police could give a #!@$% less if you've been robbed because they're too busy impounding cars and making DUI arrests due to revenue oriented policing (see, e.g., the story of Bell last week in the L.A. times). I called the police in L.A. because someone tried to break into my house and I couldn't even get them to come take a @#$%ing report! But they're down on the corner with the radar gun, supplied to them for free by an insurance company looking to raise your rates on insurance you're legally required to carry, every morning.

None of this ends well.

Just curious--if I missed your answer, I apologize. But the analogy with GM stockholders is somewhat apt. Is it immoral for shareholders with the ability to pay GM's creditors not to make them whole?

Good question. I think the answer is no, for the same reason it's moral not to pay back the pawnbroker - the creditors who extended credit to GE did so knowing that if GE failed to pay, they would specifically not have access to the assets of the stockholders. This is a legal point rather than a moral one, but it's important from a moral stance as well here because it was *part of the deal*, a deal between GM (the corporation) and the creditor in question - if either party contemplated access to the shareholder assets, the deal would likely have been quite different (and in fact, for small businesses, the owners are often asked to personally guarantee credit arrangements).

I personally would think that if someone is unable to pay a non-recourse loan and the bank takes the house, they have no further moral obligation to pay back any more, provided that they fully complied with the terms of the loan otherwise and didn't obtain it under false pretenses. That was the deal the parties made, and each party fulfilled its end. Of course, for a lot of people, they will find that whatever alternative arrangements they've made (e.g., HELOCs, refinancing, etc.) have rendered their loan a recourse loan, and then, in compliance with the terms they agreed to, they're morally as well as legally obligated to repay the full amount. Honor the deals you make.

The bulk of these analogies are stupid, n'est-ce pas? Since the home loans are collateralized, the banks has its bird in the hand.

Like the pawn broker example, the idea is if you don't get your guitar out of hock within a certain time frame, the broker keeps the guitar. The pawn broker isn't stupid, in fact, he probably gave you less money than the guitar is worth just to cover the chances and make some dough.

Now, the relatives example would be fine, IF....the brother or sister or whomever, agreed that if you don't pay them back they still get xxx. One is a loan, the other is secured, right?

If your family agreed to give you money for a business and that business failed, what would matter would be f they were giving you a personal loan or if they were co-owners or co-investors with you.

If they were investing in your company, even the family should not morally get paid back.

But these are not personal loans, so again, the analogy fails.