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

[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.

[Daniel]

[quote=analyst]

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.[/quote]

Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).

I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.

[Daniel]

[quote=analyst]

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.[/quote]

Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).

I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.

[Daniel]

[quote=analyst]

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.[/quote]

Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).

I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.

[Daniel]

[quote=analyst]

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.[/quote]

Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).

I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.

[Daniel]

[quote=analyst]

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.[/quote]

Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).

I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.

[NotCranky]

You are right, Daniel. I think most people know you are. Without knowing all the specifics, economic and legal liabilities could be brought to the borrower, mortgage brokers ect.

[NotCranky]

You are right, Daniel. I think most people know you are. Without knowing all the specifics, economic and legal liabilities could be brought to the borrower, mortgage brokers ect.

[NotCranky]

You are right, Daniel. I think most people know you are. Without knowing all the specifics, economic and legal liabilities could be brought to the borrower, mortgage brokers ect.

[NotCranky]

You are right, Daniel. I think most people know you are. Without knowing all the specifics, economic and legal liabilities could be brought to the borrower, mortgage brokers ect.

[NotCranky]

You are right, Daniel. I think most people know you are. Without knowing all the specifics, economic and legal liabilities could be brought to the borrower, mortgage brokers ect.

[sdduuuude]

I’d add to this and say that if the contract doesn’t specifically say that not paying the loan is breach of contract, then what is the problem ?

I mean if it says something to the effect of “if the borrower cannot pay the loan, then x, y, and z happens” then there are no ethical issues at all because not paying the loan is covered in the contract. If it says the borrower will make good faith efforts to pay, regarless of circumstances, then there may be some ethical issues. That is – the ethics involved vary directly with the contract signed.

Also, keep in mind that, because the bank knows it is a non-recourse loan, the interest rate is likely higher than if it were a recourse loan, so the borrower is really paying for the right to walk away without recourse and should have the right to do so without any ethical encumberances.

Being a fan of choice, I’d like to see buyers have their choice of recourse or non-recourse loans, where the interest rate spread between a recourse and non-recourse loan changes based on the market’s perception of the risks involved.

[sdduuuude]

I’d add to this and say that if the contract doesn’t specifically say that not paying the loan is breach of contract, then what is the problem ?

I mean if it says something to the effect of “if the borrower cannot pay the loan, then x, y, and z happens” then there are no ethical issues at all because not paying the loan is covered in the contract. If it says the borrower will make good faith efforts to pay, regarless of circumstances, then there may be some ethical issues. That is – the ethics involved vary directly with the contract signed.

Also, keep in mind that, because the bank knows it is a non-recourse loan, the interest rate is likely higher than if it were a recourse loan, so the borrower is really paying for the right to walk away without recourse and should have the right to do so without any ethical encumberances.

Being a fan of choice, I’d like to see buyers have their choice of recourse or non-recourse loans, where the interest rate spread between a recourse and non-recourse loan changes based on the market’s perception of the risks involved.

[sdduuuude]

I’d add to this and say that if the contract doesn’t specifically say that not paying the loan is breach of contract, then what is the problem ?

I mean if it says something to the effect of “if the borrower cannot pay the loan, then x, y, and z happens” then there are no ethical issues at all because not paying the loan is covered in the contract. If it says the borrower will make good faith efforts to pay, regarless of circumstances, then there may be some ethical issues. That is – the ethics involved vary directly with the contract signed.

Also, keep in mind that, because the bank knows it is a non-recourse loan, the interest rate is likely higher than if it were a recourse loan, so the borrower is really paying for the right to walk away without recourse and should have the right to do so without any ethical encumberances.

Being a fan of choice, I’d like to see buyers have their choice of recourse or non-recourse loans, where the interest rate spread between a recourse and non-recourse loan changes based on the market’s perception of the risks involved.

[sdduuuude]

I’d add to this and say that if the contract doesn’t specifically say that not paying the loan is breach of contract, then what is the problem ?

I mean if it says something to the effect of “if the borrower cannot pay the loan, then x, y, and z happens” then there are no ethical issues at all because not paying the loan is covered in the contract. If it says the borrower will make good faith efforts to pay, regarless of circumstances, then there may be some ethical issues. That is – the ethics involved vary directly with the contract signed.

Also, keep in mind that, because the bank knows it is a non-recourse loan, the interest rate is likely higher than if it were a recourse loan, so the borrower is really paying for the right to walk away without recourse and should have the right to do so without any ethical encumberances.

Being a fan of choice, I’d like to see buyers have their choice of recourse or non-recourse loans, where the interest rate spread between a recourse and non-recourse loan changes based on the market’s perception of the risks involved.

[Author]

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