patrick.net

I've been waiting for this shoe to drop - for some folks, these debts may age sufficiently so as to become uncollectable if they're smart, but see, e.g., http://www.bcsalliance.com/y_debt_sol.html, in particular the note about scavenger debt collectors.

And note that it can take quite a while for the SOL to run, and a lot of folks are probably doing things that will actually extend it, etc. - so it would be unsurprising (to me, at least) to see a tsunami of collections business on these loans starting at some point not far off. In fact, it wouldn't surprise me if a lot of folks who thought they were in the clear after a "short sale" actually end up subsequently pursued by collectors and finding out that the bank never actually agreed to discharge the remaining obligation.

GW Bush before leaving office passed a law allowing taxpayers to walk away tax free for the difference of up to 300,000? I dont remember exact number. Basically if you walk away upside down, you don't have to pay taxes on the difference.

In California plenty of people walk away, it's for most part non recourse. By that I mean most loans have a condition in them that walk away condition means bank takes the house and that is it. So according to the contract they can't come after you for anything else.

Walk away = bank gets the house and eats the loss.

Mr.Fantastic says

Yes. Many of them will be haunted by the morality of the decision they have made, bilking tax payers out of billions of dollars for their fool hardy financial decisions. They will rue the day.

Most of the losses are not to taxpayers fortunately. Most of the losses are to foolish investors who bought the worst of the toxic securities created by Wall Street.

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.

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.

Mr.Fantastic says

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.

It's because you are 100% wrong. They didn't steal anything. The bank made the contract with their eyes open. There was no gun to their head. In fact, most sent out all sorts of propaganda begging you to take a HELOC. They'd send blank checks where all you had to do was deposit them to get the loan. If they didn't understand the risk, then that's 100% their fault.

You're crying that they lost money??

Mr.Fantastic says

Tatupu, you shouldn’t be taking any HELOCs, didn’t you say you only make 100k?
Also, claiming “I didn’t know that I was over leveraged!” is a very lame defense. If someone bets $350,000 on black, do they get a free pass too? No wonder you had to move out of California.

Who said that? All I said was that it's ridiculous to blame people over the banks. The banks loaned money to people who they had no business loaning it to. As part of the contract, it explicitly stated that in case of default the bank gets the house.

How exactly did the people rob the bank as you so eloquently put it?

Mr.Fantastic says

In short sales, secondary liens get wiped out.
You simply aren’t educated on the laws governing housing liens.

I'm sorry, did I miss where we were talking about short sales? The post is about walkaways. When you walk away, you are not short saling. Even someone from Irvine should understand that difference.

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.