patrick.net

Sorry to jump in so late on this but I just got home. Pennsylvania Power & Light(PPL) is officially leaving all options open as to a new reactor being built at their Susquehanna unit(Berwick). Unofficially the surveyors are already on site and the electricians union is offering the old boys in retirement 50$ an hour plus the regular 3.50$ an hour annuity to come out of retirement to show the younger guys how it's done. It should be a 10 to 15 year job. The irony is it's only 100 miles as the crow flies from three mile island although 3 mile island is operated by met ed. Wouldn't it be amusing if the first nuclear reactor to be built in the U.S. in over thirty years is that close to the unit that shut it all down?

Mr. Newsfreak

Look at this this way - get cancer, and see how quick they put you on the street. This is a business, to them, it should be a business to you. You shouldn’t feel any need to harm your family just to make them rich(er).

Exactly. Economics ought to be morally neutral.

Malcolm: Just curious, how are you qualifying for the mortgage on the new house? Isn’t your current house screwing up your debt to income ratios?

Don't know for sure, as I rent, but from the people I know it has been a fairly common practice round here (Fortress) to buy your new home before selling your old one. I guess most people would say that they will be selling their old property and therefore it is not counted on their loan application?

I had dinner with a group this past Saturday night and two separate individuals in our group were talking about their own foreclosures as if they were a badge of honor. No shame, laughing about losing properties (no, not primary residences), and freely and openly discussing details amongst a mixed group of only moderately close friends and acquaintances.

Don'tcha know --foreclosure is the New Black? (credit to txchick57, of TheHousingBubbleBlog)

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...

It never ceases to amaze me how many people rant on about the "sanctity of contract law", evil FBs "taking advantage of those poor banksters/lenders", etc.

Never mind that these crooks --in cahoots with the Fed and Congress-- cooked up this whole Ponzi scheme to begin with and established the rules of the easy-money Speculation Game. Never mind that the purchase-money mortgage contract clearly states that the borrower has the right to forfeit the house (collateral) and mail in the keys. Never mind all that, the FBs are clearly the *biggest crooks* here.

One of the guys over at Calculated Risk put it very succintly:

First to walk were the federal "regulators".
Then the mortgage broker walked (after taking his commission).
Then the lender walked (after selling the loan).
Then the mortgage securitizer walked (after selling to pension/hedge fund).
Then the ratings agencies walked.
Last to walk was the borrower.

Invest in sushi and beer.

Not investment advice

"Never mind that the purchase-money mortgage contract clearly states that the borrower has the right to forfeit the house (collateral) and mail in the keys."

Excellent! Provided they all read their contracts then this should play out pretty quickly now!

on Topic
I have all my downpayment savings in CDs (although I plan to look into Randy's recommendations on tax advantaged MM/Munis). I have all my retirement (ha!) savings in stocks - I trust Mr Market to come back eventually.

To be honest I figure that any losses we have in our 401k plan will be a lot less that the potential gain we will have when we do not have to shell out so much for a house!

@HARM

When I departed the Zillow boards, it was over being burned at the stake for "questioning the sanctity of contract law". Man. You should have heard the self-interested zealots proselytizing about the _morality_ of honoring one's contracts.

In this case it was a very earnest buyer who had signed a purchase agreement on an overpriced, bubble home, he then wanted out of before close. He was just asking if it was possible. Only LIB and I (known here as my former nemesis) offered any advice about how to try to can the deal. Everyone started acting as if once you sign on the line you have a duty before your maker to put your head in the guillotine.

Of course, upon analysis, all those people were pissed off home-sellers invading the home-buyer boards, trying to cajole people into buying their languishing albatrosses.

(Do I win any points for the most obtuse, metaphoric references in one comment?)

@Claire I know it has been a fairly common practice round here (Fortress) to buy your new home before selling your old one. I guess most people would say that they will be selling their old property and therefore it is not counted on their loan application?

I know a distant colleague of mine who did it at the "Fortress". This was last year April, when the market was still "hot". He bought a house for 975K first, and then sold his condo for around 550K later. He took an interest-only loan for the new house, and was planning on refinancing it after a year.

As much as I boast about integrity and honoring contracts, I think I would walk from a house that lost half its value. There comes a point when a situation becomes so hopeless that it is unsalvageable. There is some validity to the argument that the bank should have done a little more to protect their interest. After all they are lending on a nonrecourse loan basically co-buying the house with an FB. An appraisal isn't ordered for the buyer's interest, but it is ordered by the lender as part of their due dilligence. Putting aside for the moment, the FB liar loan frauds and all that stuff, fundamentally a bank should bear some of the blame when it turns out their assets were overvalued.

Guys, banks were pretty liberal when it came to lending on new homes because the trend was 100% that the current one would sell. Many a time I watched in disbelief as 'Buy Me' brought out dumb couple after dumb couple who were trapped in a new mortgage while they couldn't sell their current house. I could not believe that a lender would risk it but times were different. I think it would be pretty hard to pull that off now though, especially now that 60 Minutes is trying to Poo Poo our party.

(Do I win any points for the most obtuse, metaphoric references in one comment?)

Sure --you win the first-ever Patrick.net "Dennis Miller Award". ;-)

Former Apt Broker - Nope I didn't place much store by Y2K, unlike a certain fellow named Kuntsler who's making a small fortune ranting about the death of suburbia or a long emergency or something like that.

I think walking away if you're losing the vast amount of money most homedebtors are these days are, makes sense. You must assume in the US that your yearly pay is going to go DOWN. So if your house isn't keeping pace with inflation, and isn't in line with fundamentals then get the hell out of there while the getting's good.

Harm:

One of the guys over at Calculated Risk put it very succintly:

First to walk were the federal “regulators”.
Then the mortgage broker walked (after taking his commission).
Then the lender walked (after selling the loan).
Then the mortgage securitizer walked (after selling to pension/hedge fund).
Then the ratings agencies walked.
Last to walk was the borrower.

I could not agree more. Just to be clear and understood, I believe some interesting social dynamics and anger is building here on the East Coast among those in the worst shape, though this has not really found an outlet yet. Ulimately, the mass jinglemail revolt may be the result.

Don’tcha know –foreclosure is the New Black? (credit to txchick57, of TheHousingBubbleBlog)

The West Coast is well ahead of Washington DC in most trends, the new black here is a very new and recent phenomeon, at least to my experience.

Well it's undoubtedly wrong to screw someone you've made a deal with. However, you're not really screwing the bank as you are giving them the collateral-house when you walk away from your mortgage. It's a win-win!

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. Major corporate clients of mine regularly "back out of" contracts with me and demand renegotiation. I *could* sue them. I'll let you know when that day comes.

It's about relative power in the arrangement. Sometimes the contract truly protects one party from being exploited. But short of that case, the contract is really just a baseline framework.

(I exempt formulaic, government managed, sorts of contracts from this. But those aren't so much contracts as they are compulsive statutes.)

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.