patrick.net

Austinhousingbubble says

If there’s even a shadow of a doubt in your mind that you might ‘walk away’ you should be horse-whipped for even thinking of buying. It’s like getting married to a woman who you might not be totally in love with, with divorce somewhere in the back of your mind on your big day.

This is complete and utter BS. And it's thinking like this that is creating legions of debt slaves. Buying a house is a BUSINESS transaction. You do NOT have a moral obligation to pay your mortgage. It says right there in the contract (that was signed by both you and the bank) that you agree to pay the bank the money back OR they get to keep the house. It's a cut and dry BUSINESS decision. You and the bank are entering into a contract w/ both eyes open and both agree to its terms. And if you stop paying and give back the house you are not in fact breaking the contract - you are simply exercising the alternative payment option.

On the marriage front I have two things to say. First, the "contract" you enter into (your vows) typically say you'll stay with that person forever no matter what until you die. So if you do break up you're in effect breaking the contract (unlike the above). Second, for most people, marriage is in fact a moral obligation and so breaking it has moral consequences.

Disclaimer: I am neither pro nor con divorce and pass no judgements on anyone for their personal decisions.

You do NOT have a moral obligation to pay your mortgage. It says right there in the contract (that was signed by both you and the bank) that you agree to pay the bank the money back OR they get to keep the house.

In a non-recourse mortgage loan, this may be true, but recourse loans are worded in order to circumvent the very evasion that you promote as sound business logic.

It’s a cut and dry BUSINESS ...

Kinda like what a hitman says to his mark before he lets him have it. You draw a much thinner dividing-line between personal morality and business ethics than I do, and while it probably looks sensible on paper, the two are not oranges and apples. Your attitude has ramifications that go beyond self interests and financial acuity. We're not talking about late fees at the video store, or letting the repo man have your car.

I realize I am wasting my breath and that your mind is made up to disagree, but let's at least be clear about what we disagree on. There are, of course, unique and extreme instances where defaulting on a loan is the only realistic option. I am not being dogmatic and suggesting you drive your car off a bridge because you made some bad decisions in life that led to excessive debt and/or inability to honor said debt.

That said, these are not the instances to which I refer. According to your purview, it's not only acceptable to make bad financial decisions and go knowingly into a major purchase like a house with machinations of fucking-off if you decide at some point that your obligations are no longer in your best interest - even if you can still afford them as easily as you could when you first assumed them - it's just cut and dry business. That business model sucks in its own way, but ESPECIALLY with tax-payers (your neighbor) on the hook in the case of FHA guaranteed loans. That's what burns, and I put it to you that this will lead to both blight within our communities as well as within the human spirit - whatever's left of it. I doubt you're being completely sincere when you say this is utter bullshit. It simply is not. What is, however, is the relativist attitude that's emerging from the ashes of our stagnant economy.

Meanwhile, marriage IS a contract, and what is more, it is NOT necessary to validate one's vows to another person with a state license/contract. My best friend has been with the same woman for nearly 16 years, with no marriage plans. I guess you could call them responsible RENTERS. At least two other people I know are on marriage #2 before the age of 30, with an eye out for #3 and probably #4 after that. How is this so vastly unique from the mindset mentioned above?

http://barefootmailmen.blogspot.com/2009/07/fha-mortgages-next-bubble.html

I guess I was hoping that the nation might have emerged from this latest speculative mania with a sense of clarity and humility. Maybe even a renewed grasp of certain fundamentals when it comes to things like personal values and basic econ. Instead, I am sensing a vast sigh of relief that there is still someone there to feed you some cards under the table, after all - in this case, Uncle Sam.

...by the way, I contend what creates legions of debt slaves is the smash 'n' grab-gotta-have-it-now-on-the-installment-plan-consumerist attitude. That is to say, the problem is irresponsible debt - not honoring one's debt.

Austinhousingbubble,

Excellent posts.

Austinhousingbubble says

Kinda like what a hitman says to his mark before he lets him have it. You draw a much thinner dividing-line between personal morality and business ethics than I do, and while it probably looks sensible on paper, the two are not oranges and apples. Your attitude has ramifications that go beyond self interests and financial acuity. We’re not talking about late fees at the video store, or letting the repo man have your car.

Uh, dude you're off your rocker. Killing someone is ILLEGAL. Defaulting on a mortgage is not.

What possible ramifications does my thinking have? If the bank had 2 brain cells to rub together they should not have made an $800,000 loan on a 1,000 sq ft house. But they agreed to the terms of the loan so if one party decides to stop paying and give up the house (per the terms of the contract) the bank simply takes it back. It is the BANK'S fault that the house isn't worth $800,000 any more. They should have to eat that loss (not the taxpayers). If they can't eat the loss then they should go out of business to give room for other banks who were not so reckless.

Do you know that companies break contracts all the time? If they decide that the penalties incurred by breaking the contract are better than continuing with the contract that's what they do. It's up to the counter-party to write the contract such that if one side breaks the contract they'll still be ok. This stuff happens literally EVERY DAY and the world hasn't come to an end. So take your faux morality some place else.

Austinhousingbubble says

…by the way, I contend what creates legions of debt slaves is the smash ‘n’ grab-gotta-have-it-now-on-the-installment-plan-consumerist attitude. That is to say, the problem is irresponsible debt - not honoring one’s debt.

Oh believe me, I don't feel sorry for these people who got in over their heads. If they can't pay their mortgage they should be out on the street. But you can't fault someone for realizing their mistake and taking corrective action which could mean defaulting even when they still have the ability to pay. Why should someone keep paying on a $600k mortgage when the house next door is selling for $300k? They take their lumps (bad credit for a few years) and the bank takes theirs (the house).

grywlfbg:

You have touched on an important point - and that is, what if lenders will not extend a home loan to those who have been recently (2005--->) foreclosed on or walked away?

There's a lot of borrowers who are assuming that everything will be OK in 7 or so years and that they will simply reapply for a loan to buy a house that is presently sold for 600k only to buy it (or something similar) for 300k or less.

WHAT IF lenders won't lend to these people. Maybe they will now or in the immediate past, but if the economy is in for a long, slow descent, who's to say that money will be available to borrowers with these sorts of backgrounds: walk-aways, foreclosed, jingle-mail types, etc.

Just a thought. Not sure that making assumptions based upon past policies will work in the future.

Misstrial says

You have touched on an important point - and that is, what if lenders will not extend a home loan to those who have been recently (2005—>) foreclosed on or walked away?

Well, that's certainly an option. If it comes to pass those people will simply be renters until such time that a bank will lend to them. But I'm quite sure that I would rather be a renter for life than have to pay off a $600k mortgage for a house that's only worth $300k. That's because I would likely be paying half or less of my mortgage in rent which means I'd have a dramatically higher quality of life than if I'd stayed in the mortgage.

But yeah, people need to weigh all possible consequences (I never said defaulting was a free lunch - just that it should be considered in a strictly financial context, not with faux morality heaped on.). However at this point it looks as if people's credit is recovering in 3-5 years after default.

So like what is the downside of putting 3.5% on a $400,000 house?

You lose fourteen grand and your credit is wrecked plus whatever other closing costs. IS that it?

OK, like what would be typical closing costs?

I am starting to think I am a sucker for not buying an "option" on a house. I would get to live in a nice house and if the market goes south, I just walk. Who knows if the government keeps printing money like they are doing the price might actually go up.

Obviously this is really a stupid deal for the government but why not take advantage?

Uh, dude you’re off your rocker. Killing someone is ILLEGAL. Defaulting on a mortgage is not.

Right. It was meant to be tongue in cheek, in opposition to the chip on your shoulder.

What possible ramifications does my thinking have?

I'll go ahead and assume this a genuine question and do my best to illuminate the obvious, although I think I already did that in my previous post.

As long as it remains etched into the popular mindset that entering into a deal with the clause somewhere in your mind that you will just walk away from your financial commitments, then we can all look forward to a future where "aw, fuck it" becomes the order of the day. If you really genuinely see nothing wrong with that portent, then something tells me you might be the ebay seller from the early days who took my money order but never sent the goods based on some subjective purview and the lack of a binding handwritten contract, or the waiter who treats customers like shit on the last day of your employment someplace because you are not required by law to treat them any other way, and because you have nothing to lose. Personally, I never want to conduct business with some one with that attitude. Just because you can, doesn't mean you should. Now repeat that twenty times. I think that home loans SHOULD contain some recourse, at least or especially in the case of FHA loans. Maybe they wouldn't be such a trivial matter then.

I hear people bellyaching all the time about having too many renters in Shrangri la. Seems to me that people who have no qualms about walking away from their place are just as much a detriment to communal solidarity as a renter with no real liability to the area - the difference being that, when a renter splits, you aren't on the hook for the balance of their lease, as you will be with FHA loan defaults. If that's cool with you, then you're right - no ramifications.

If the bank had 2 brain cells to rub together they should not have made an $800,000 loan on a 1,000 sq ft house. But they agreed to the terms of the loan so if one party decides to stop paying and give up the house (per the terms of the contract) the bank simply takes it back.

It is never that simple, as recent history has shown. It ends up hurting everybody BUT the banks, including the communities with a bunch of empty houses sitting around. As for the the banks, they're still making a fortune on derivatives, so you can't criticize their smarts too much. Lack of ethics, yes. As for the scenario where the bank simply takes it back - you're out of touch. That was yesterday's scenario. I'm referring to the FHA scenario, where defaults are projected to be just as high as the subprime loans from the heyday. Do a little research.

It is the BANK’S fault that the house isn’t worth $800,000 any more. They should have to eat that loss (not the taxpayers). If they can’t eat the loss then they should go out of business to give room for other banks who were not so reckless.

Well, yeah. But they won't. The public will. That's the whole point, I think. And no bank eats their losses, by the way. Einstein said nothing ever really goes away. This is esp. true of debt. Guess where it ends up?. MortgageNewsUSA just had a headline stating: Foreclosures are Often in Lender's Best Interest.

Do you know that companies break contracts all the time? If they decide that the penalties incurred by breaking the contract are better than continuing with the contract that’s what they do. It’s up to the counter-party to write the contract such that if one side breaks the contract they’ll still be ok. This stuff happens literally EVERY DAY and the world hasn’t come to an end.

This isn't a sane comparison. We aren't referring to companies, we are talking about individual transactions and taxpayers. Since when is the taxpayer on the hook when the local Tire Kingdom folds?

So take your faux morality some place else.

You really don't have to get shitty - we'll just agree to disagree on this one.

Obviously this is really a stupid deal for the government but why not take advantage?

This sounds like "if you can't beat 'em, join 'em." In hindsight it sounds something like "Everyone was doing it."

This illustrates the very mindset to which I referred.

Austinhousingbubble says

Obviously this is really a stupid deal for the government but why not take advantage?
This sounds like “if you can’t beat ‘em, join ‘em.” In hindsight it sounds something like “Everyone was doing it.”
This is the very mindset I referred to.

So if the government decides tomorrow to send everyone a million dollar check you won't cash yours due to some moral mindset?

I live in the Chicagoland area and asking prices for housing around here is outrageous compared to other cities, but perhaps the government is creating conditions where I would be a chump not to buy. Buying an option on a house for 3.5% seems pretty cheap to me.

Of course the government is acting very stupidly but I am started to worry that I am being played a fool not to take advantage.

What are the implications of purchasing an option on a house for 3.5%? Is it really that easy?

So if the government decides tomorrow to send everyone a million dollar check you won’t cash yours due to some moral mindset?

People always use this straw man argument or some variation on it. This is quite a different scenario from the one in discussion, but to answer your question, it depends on how Faustian the small print was, the strings attached, and how much would be coming out of Peter's pocket to pay Paul. If Peter is my father, brother, son, neighbor, friend, customer - then yes, there's a moral conflict. Besides all of this, it would mean that a millions dollars isn't worth a million dollars anymore, and so the premium of such a windfall would be all but totally undermined by the inflation that would then occur. Kinda like why house prices will stay artificially high, as long as there's cheap money available.

I live in the Chicagoland area and asking prices for housing around here is outrageous compared to other cities, but perhaps the government is creating conditions where I would be a chump not to buy. Buying an option on a house for 3.5% seems pretty cheap to me.

If you truly believe this, buy several.

Of course the government is acting very stupidly but I am started to worry that I am being played a fool not to take advantage.

I don't think it's at all abnormal to feel that kind of anxiety - it may even be part of the propaganda machine - but keep in mind, the government is...us!

What are the implications of purchasing an option on a house for 3.5%? Is it really that easy?

Depends. I can't speak to your personal situation, but it will keep prices artificially high in many areas, because the government is over incentivizing the purchase of a house with tax payer dollars. This in turn helps keep property taxes artificially high as well. It also means more taxes down the road as more of these loans default in the coming years.

Austinhousingbubble says

I live in the Chicagoland area and asking prices for housing around here is outrageous compared to other cities, but perhaps the government is creating conditions where I would be a chump not to buy. Buying an option on a house for 3.5% seems pretty cheap to me.
If you truly believe this, buy several.

Let's look at some hard numbers. Let us say for example that I had the 20% downpayment and the wherewithall to comfortably afford a $250,000 house. But the problem is that I would rather have the $400,000 house.

If I take the 3.5% route, I could put 14 grand on the house plus whatever other closing costs there were. I am not sure what that dollar amount should be. This would leave me thirty some grand or so to pay mortgage/rent on my house for a few years. And if I took the government's 8 grand. I could get the 400 grand house for 6 grand. and have 40 some grand to pay mortgage/rent on the house.

My question is whether the government is giving me a compelling financial argument to overpay on a house since I can always walk away if the market goes south? In fact I think it highly likely that housing prices will drop even with the government pumping all this money into the housing market.

If there is any hope of appreciation in the next several years, it seems like there is a strong case to buy too much house.

In fact is the government giving me a compelling financial case to buy a house at all--even the $250,000 house. Of course, this is assuming that without all the government giveaways both these houses are way overpriced? My question is whether it makes sense to buy a house that costs too much with all the government giveaways? Do I at least have the math right?

And I do not really care about your moral arguments. When it comes to money if it is legal it is moral.

Everyone if forgetting that when you take FHA loan out they stick you with an upfront fee (that they tack onto your loan amount) which can be quite hefty AND they require PMI payments ontop. So they probably allow people to get into the homes they want, but do not necessarily make a really good deal - what is everyone's take on the additional fees?

AHB,
How is a contract between two companies different than a contract between an individual and a company? I can't follow the mental gymnastics you are doing here.

Target just announced they will break a contract with a developer to build some new stores because the math changed to the point that the penalties incurred by breaking the contract were less than the losses had they gone ahead with the project. Should Target's mgmt be horse-whipped? On the contrary, they are protecting their investors.

Same thing goes for a family. You think it would be better for a family to continue making crippling mortgage payments when that money could be used to fund other things? What if with two incomes they could comfortably make their payment and fund savings, kid's education, etc. and then one person loses their job? They can still pay their mortgage on one salary but other things get pinched (savings, kid's education, etc.). If they could rent for a lot less than their mortgage, those people should be horse-whipped for NOT walking away and sacrificing their savings and kid's education.

If you loan money to a friend, you do have an ethical/moral obligation to pay them back. But in a contract between strangers (the bank and/or govt is NOT your friend) you should protect yourself in case the other side breaks the contract. You won't be in business long if you don't.

The bottom line is that the contract says pay x dollars or give back the house. End of discussion. Neither Option A or B is better or worse than the other.

Also, the fact that taxpayers are bailing out the banks has NOTHING to do with my argument. I think any bank should be allowed to fail if they make too many bad loans.

As for FHA, I don't believe the govt should be in the mortgage business but since they are, they should require PMI if the down payment is small which will protect them in case the person defaults.

How is a contract between two companies different than a contract between an individual and a company? I can’t follow the mental gymnastics you are doing here.

Limber up! When a company goes afoul, it doesn't mean future tax liabilities to the public. Even if there was a swell of local/corporate businesses that tanked over the next year, (and there already is) it has no adverse effect on the taxpayer, other than local unemployment numbers.

Should Target’s mgmt be horse-whipped? On the contrary, they are protecting their investors.

Target probably should be horsewhipped. But the point is, they are not protecting their investors at the expense of the taxpayer.

Same thing goes for a family. You think it would be better for a family to continue making crippling mortgage payments when that money could be used to fund other things?

You keep changing the context of your argument. I'm not referring to financial cripples. I used the example of a fat cat who can just as easily afford his mortgage payment as he could at the outset, but has now decided to walk away because the market has tanked and it doesn't suit him to have overpaid. It's a logistical maneuver, sure, and I can appreciate it on paper, but he's still a POS. He shouldn't have bought in the first place, but thanks to the propaganda that shirking one's debts doesn't make you a deadbeat, he's all but vindicated. The real shits, though, are these shameless buyers taking out FHA mortgages with the idea of "I can always just walk away." I think this slimy self-interested lack of shame will have a ruinous effect on an already battered landscape. I don't want to plunk good money down to live in a neighborhood full of fly-by-night types who have one foot out the door if things get shaky.

If you loan money to a friend, you do have an ethical/moral obligation to pay them back. But in a contract between strangers (the bank and/or govt is NOT your friend) you should protect yourself in case the other side breaks the contract. You won’t be in business long if you don’t.

This is the conundrum, because strictly speaking, you and your friends ARE the government. This land is your land, this land is my land...you know the jig.

>Also, the fact that taxpayers are bailing out the banks has NOTHING to do with my argument. I think any bank should be allowed to fail if they make too many bad loans.

Bullshit. You may prefer if it didn't but there's no decoupling the tremendous future burden to taxpayers from home-buyers who knowingly bite off more than they can chew only to jump ship when the clouds roll in. If this burden doesn't come in the form of FHA loan defaults insured by taxpayer dollars, it comes from bank bailouts for conventional loan defaults. It all comes back to you and me. If you want something to be pissed off about, maybe try this on for size.

As for FHA, I don’t believe the govt should be in the mortgage business

We agree on one thing. Almost. I don't mind them being in the mortgage business, but not to the degree that they are; where the guy who can maybe afford a 250K house in Ohio now thinks overextending himself to afford a 400K house would be better. He can always walk away...no shame.

ut since they are, they should require PMI if the down payment is small which will protect them in case the person defaults

They do require PMI, but it's hardly a safeguard from defaults. Look around. What's needed are recourse loans, like they have on government refinanced loans.

And I do not really care about your moral arguments. When it comes to money if it is legal it is moral.

They aren't my moral arguments. Principle is not subjective from individual to individual. Kinda like Magnetic North. If money and contractual legalese hold sway over your own personal judgment, that's your lot. Good luck.

Austinhousingbubble says

And I do not really care about your moral arguments. When it comes to money if it is legal it is moral.
They aren’t my moral arguments. Principle is not subjective from individual to individual. Kinda like Magnetic North. If money and contractual legalese hold sway over your own personal judgment, that’s your lot. Good luck.

Whose moral arguments are they?

Whose moral arguments are they?

I don't have a proprietary ideal of morality that I'm trying to argue. You don't need to be a full-on absolutist to realize that on some level there are absolutes when it comes to right & wrong, regardless of context, statutes, loopholes, popular opinion, etc.

AHB,

I think you're getting your panties in a wad over what amounts to a very small number of people in the long run. I don't have any data but my contention is that the vast majority of folks who are walking away have little choice. They are financially unable to stay in their house without potentially damaging sacrifices and they have the emotional fortitude to walk away before the Sheriff kicks them out. Most people I've read about have some ridiculous emotional attachment to "their" house and they don't want to lose "their" house so will burn through their savings and rack up tons of credit card debt trying to make a mortgage payment they can't afford. They should have walked away before that point because now instead of just a foreclosure they're looking at a full-on bankruptcy.

I just don't think there are tons of these so-called "fat cats" of which you speak that are simply screwing the bank/govt. If so I'd love to see some actual data.

My panties are fine - I just find it disconcerting that you and people like you are feeding into this much maligned propaganda that it's cool to go out and get in over your head and then walk away, because, hey, it's the bank's lot, and fuck the banks. If this were the case, I would agree; I would buy twenty houses just to stick it to the banks. But, for the last time, it DOES NOT hurt the banks - they pass those debts onto you and me and the next generation, who will likely and rightfully revile this one for it's addiction to both consumer debt and government largess.

As for Fat Cats - there have been quite a few articles recently reporting on preemptive prime mortgage defaults out of self-interest rather than necessity - the fat cats I referred to. Do a Google search. I think Patrick.net even showcased an article or two in the recent past. It's not some phantom menace, and it will result in future tax burdens. On top of that, there are also plenty of people I know of personally who are stretching themselves thin to take advantage of FHA and other tax funded incentives for buying above their station who are one or two hiccups away from default in the coming years.

Here's some interesting news from the AP...

http://www.google.com/hostednews/ap/article/ALeqM5jYs8k4cz398yrVYLt3QxLvIURD9wD99OF1M02

"...the FHA became the main source of home loans to borrowers with poor credit and low down payments after the collapse of the subprime lending market."

"The FHA currently backs a 1/3 of new home loans, up from about 3% in 2006"

"Cutting out 25% of available mortgages would be a disaster, decimating the market and hurting millions of prospective homeowners."