Ethical considerations (none) for defaulting on non-recourse loan.

[analyst]

[quote=UCGal]

I would argue that to stop paying while continuing to live in the home is unethical. It’s trying to play both sides. Breaking the contract but still reaping the benefits (occupation of the house.)

I believe that there is plenty of blame and pain to share among the parties to the contract – borrower loses downpayment and takes credit hit. Lender takes hit to investment and has costs associated with reselling the property. But if the person doesn’t vacate and chooses to not pay – in some ways, that’s theft. It’s kind of like “dining and dashing”. They are reaping the benefits without the costs.[/quote]

The only reason that the lender cannot quickly and effectively close out the situation with a foreclosure sale is because that lender had previously participated (along with the real estate sales force) in convincing the owner-occupant-borrower to overpay for the home.

When people receive punitive damages in court cases, it is not because they “deserve” them. And the fact that they accept them does not make them unethical.

The purpose of the punitive damages concept is to exact a substantial penalty from the party allowing harm to occur, so that they will try seriously not to let it happen again. That is also the purpose of “non-recourse” laws.

In the short run, certain parties receive benefits they may not truly deserve. In the long run, other parties are (hopefully) convinced to refrain from inappropriate activities, to the benefit of the larger community.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[analyst]

[quote=kev374]walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.[/quote]

Again, with or without the bailouts, it is not between the borrower and the lender, because the lawmakers, decades in the past, intentionally enacted a protection for the owner-occupant-borrower. The lawmakers anticipated the real danger of the borrower being convinced to overpay by the concerted action of lenders and the real estate sales force, and pre-specified that the owner-occupant-borrower could obtain relief from the artificially inflated price. Real problem, appropriate relief.

The owner-occupant-borrower is not responsible for the actions of federal officials, which actions are considered to be helpful by some and damaging by others. As a person who pays much more in federal taxes than should be required to fund an appropriately restrained federal government, I am not happy about the risk to taxpayers flowing from current federal government actions.

However, it should be clear to people who spend more than a few minutes studying the current challenges that federal funds flowing to financial companies is more for the rescue of the ultimate investors on the other side of those financial companies than it is for the rescue of the financial companies themselves. These ultimate investors include:
individuals directly
individual retirement accounts
union retirement funds
corporate retirement funds
insurance companies (investing premium revenue)
state governments
county governments
city governments
school districts
foreign governments

This is not to say that the financial companies do not receive some undeserved benefit. They do. It is unfortunately unavoidable that they receive such undeserved benefit from the act of rescuing the intended beneficiaries.

Some will ask why the federal funds do not flow directly to the ultimate intended beneficiaries, bypassing the intermediary financial companies. It is because the records, resources, and human knowledge necessary to enable the flow of funds to the ultimate intended beneficiaries will not remain in place if the intermediary financial companies are designated for liquidation.

[analyst]

[quote=kev374]walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.[/quote]

Again, with or without the bailouts, it is not between the borrower and the lender, because the lawmakers, decades in the past, intentionally enacted a protection for the owner-occupant-borrower. The lawmakers anticipated the real danger of the borrower being convinced to overpay by the concerted action of lenders and the real estate sales force, and pre-specified that the owner-occupant-borrower could obtain relief from the artificially inflated price. Real problem, appropriate relief.

The owner-occupant-borrower is not responsible for the actions of federal officials, which actions are considered to be helpful by some and damaging by others. As a person who pays much more in federal taxes than should be required to fund an appropriately restrained federal government, I am not happy about the risk to taxpayers flowing from current federal government actions.

However, it should be clear to people who spend more than a few minutes studying the current challenges that federal funds flowing to financial companies is more for the rescue of the ultimate investors on the other side of those financial companies than it is for the rescue of the financial companies themselves. These ultimate investors include:
individuals directly
individual retirement accounts
union retirement funds
corporate retirement funds
insurance companies (investing premium revenue)
state governments
county governments
city governments
school districts
foreign governments

This is not to say that the financial companies do not receive some undeserved benefit. They do. It is unfortunately unavoidable that they receive such undeserved benefit from the act of rescuing the intended beneficiaries.

Some will ask why the federal funds do not flow directly to the ultimate intended beneficiaries, bypassing the intermediary financial companies. It is because the records, resources, and human knowledge necessary to enable the flow of funds to the ultimate intended beneficiaries will not remain in place if the intermediary financial companies are designated for liquidation.

[analyst]

[quote=kev374]walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.[/quote]

Again, with or without the bailouts, it is not between the borrower and the lender, because the lawmakers, decades in the past, intentionally enacted a protection for the owner-occupant-borrower. The lawmakers anticipated the real danger of the borrower being convinced to overpay by the concerted action of lenders and the real estate sales force, and pre-specified that the owner-occupant-borrower could obtain relief from the artificially inflated price. Real problem, appropriate relief.

The owner-occupant-borrower is not responsible for the actions of federal officials, which actions are considered to be helpful by some and damaging by others. As a person who pays much more in federal taxes than should be required to fund an appropriately restrained federal government, I am not happy about the risk to taxpayers flowing from current federal government actions.

However, it should be clear to people who spend more than a few minutes studying the current challenges that federal funds flowing to financial companies is more for the rescue of the ultimate investors on the other side of those financial companies than it is for the rescue of the financial companies themselves. These ultimate investors include:
individuals directly
individual retirement accounts
union retirement funds
corporate retirement funds
insurance companies (investing premium revenue)
state governments
county governments
city governments
school districts
foreign governments

This is not to say that the financial companies do not receive some undeserved benefit. They do. It is unfortunately unavoidable that they receive such undeserved benefit from the act of rescuing the intended beneficiaries.

Some will ask why the federal funds do not flow directly to the ultimate intended beneficiaries, bypassing the intermediary financial companies. It is because the records, resources, and human knowledge necessary to enable the flow of funds to the ultimate intended beneficiaries will not remain in place if the intermediary financial companies are designated for liquidation.

[analyst]

[quote=kev374]walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.[/quote]

Again, with or without the bailouts, it is not between the borrower and the lender, because the lawmakers, decades in the past, intentionally enacted a protection for the owner-occupant-borrower. The lawmakers anticipated the real danger of the borrower being convinced to overpay by the concerted action of lenders and the real estate sales force, and pre-specified that the owner-occupant-borrower could obtain relief from the artificially inflated price. Real problem, appropriate relief.

The owner-occupant-borrower is not responsible for the actions of federal officials, which actions are considered to be helpful by some and damaging by others. As a person who pays much more in federal taxes than should be required to fund an appropriately restrained federal government, I am not happy about the risk to taxpayers flowing from current federal government actions.

However, it should be clear to people who spend more than a few minutes studying the current challenges that federal funds flowing to financial companies is more for the rescue of the ultimate investors on the other side of those financial companies than it is for the rescue of the financial companies themselves. These ultimate investors include:
individuals directly
individual retirement accounts
union retirement funds
corporate retirement funds
insurance companies (investing premium revenue)
state governments
county governments
city governments
school districts
foreign governments

This is not to say that the financial companies do not receive some undeserved benefit. They do. It is unfortunately unavoidable that they receive such undeserved benefit from the act of rescuing the intended beneficiaries.

Some will ask why the federal funds do not flow directly to the ultimate intended beneficiaries, bypassing the intermediary financial companies. It is because the records, resources, and human knowledge necessary to enable the flow of funds to the ultimate intended beneficiaries will not remain in place if the intermediary financial companies are designated for liquidation.

[analyst]

[quote=kev374]walking away from your home when you can afford it is VERY UNETHICAL, but only because the taxpayers are now bailing out the banks because of it.

IF taxpayers were not involved in any way and the system was 100% freemarket, i.e. banks would take losses and shut down then I see absolutely no problem with walking away…it is between the borrower and the bank.

But because of the bailouts this is affecting everyone now so yes it is unethical.[/quote]

Again, with or without the bailouts, it is not between the borrower and the lender, because the lawmakers, decades in the past, intentionally enacted a protection for the owner-occupant-borrower. The lawmakers anticipated the real danger of the borrower being convinced to overpay by the concerted action of lenders and the real estate sales force, and pre-specified that the owner-occupant-borrower could obtain relief from the artificially inflated price. Real problem, appropriate relief.

The owner-occupant-borrower is not responsible for the actions of federal officials, which actions are considered to be helpful by some and damaging by others. As a person who pays much more in federal taxes than should be required to fund an appropriately restrained federal government, I am not happy about the risk to taxpayers flowing from current federal government actions.

However, it should be clear to people who spend more than a few minutes studying the current challenges that federal funds flowing to financial companies is more for the rescue of the ultimate investors on the other side of those financial companies than it is for the rescue of the financial companies themselves. These ultimate investors include:
individuals directly
individual retirement accounts
union retirement funds
corporate retirement funds
insurance companies (investing premium revenue)
state governments
county governments
city governments
school districts
foreign governments

This is not to say that the financial companies do not receive some undeserved benefit. They do. It is unfortunately unavoidable that they receive such undeserved benefit from the act of rescuing the intended beneficiaries.

Some will ask why the federal funds do not flow directly to the ultimate intended beneficiaries, bypassing the intermediary financial companies. It is because the records, resources, and human knowledge necessary to enable the flow of funds to the ultimate intended beneficiaries will not remain in place if the intermediary financial companies are designated for liquidation.

[analyst]

[quote=Daniel]Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar. [/quote]

A lender has two tasks:
1. Evaluate the property.
2. Evaluate the borrower.
Both are easily accomplished by a serious lender living up to lender responsibilities. Even for people with complex income situations, there are procedures for the borrower to have tax records released to the lender directly by the taxing authorities.

If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.

[analyst]

[quote=Daniel]Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar. [/quote]

A lender has two tasks:
1. Evaluate the property.
2. Evaluate the borrower.
Both are easily accomplished by a serious lender living up to lender responsibilities. Even for people with complex income situations, there are procedures for the borrower to have tax records released to the lender directly by the taxing authorities.

If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.

[analyst]

[quote=Daniel]Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar. [/quote]

A lender has two tasks:
1. Evaluate the property.
2. Evaluate the borrower.
Both are easily accomplished by a serious lender living up to lender responsibilities. Even for people with complex income situations, there are procedures for the borrower to have tax records released to the lender directly by the taxing authorities.

If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.

[analyst]

[quote=Daniel]Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar. [/quote]

A lender has two tasks:
1. Evaluate the property.
2. Evaluate the borrower.
Both are easily accomplished by a serious lender living up to lender responsibilities. Even for people with complex income situations, there are procedures for the borrower to have tax records released to the lender directly by the taxing authorities.

If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.

[Author]

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