Viral Nature of Walking Away

[davelj]

[quote=UCGal]

The 3-C’s you’ve mentioned are usually referred to as CREDIT, Capacity, and Collateral. The big change in the 00’s was that someone with good credit did not have to prove the Capacity to qualify for an Alt-A.

Are you equating good credit scores with “character”?
[/quote]

Ummm… the 3 C’s of “credit” do not include “credit.” That would be just a bit redundant. The 3 C’s of credit, as I stated previously, are in fact: Character, Capacity and Collateral. When you find a lenders training manual that includes “credit” as one of the 3 C’s of credit, I’ll be eager to see it.

I think that credit scores are certainly a component of character (that is, they are correlated, albeit far from perfectly). And I think that many lenders (obviously) relied way too heavily on credit scores as a substitute for character. In largely faceless transactions (like mortgage underwriting is today), lenders *should* require large downpayments, high DSC ratios, etc. in order to offset the inability to dig deeper into the borrower’s ability and willingness to pay (there’s rarely a personal relationship as in the case of commercial credits).

I agree with you that a major underwriting flaw was the lack of documentation required to prove Capacity. The ability to package up and sell mortgages to folks who didn’t understand them has not served us well.

[UCGal]

[quote=davelj]

Ummm… the 3 C’s of “credit” do not include “credit.” That would be just a bit redundant. The 3 C’s of credit, as I stated previously, are in fact: Character, Capacity and Collateral. When you find a lenders training manual that includes “credit” as one of the 3 C’s of credit, I’ll be eager to see it.[/quote]

I admit I was wrong. (How often does that happen on piggington. LOL) The google doesn’t lie. Most of the links referred to Character.

If I google under “3 C’s of credit” it definitely skews to “character”. However, if I google under “3 C’s of underwriting” or “3 C’s of lending” it tends to refer more to credit or credit reputation rather than character for the “c”.

Here’s a link to Freddiemac – no mention of character.

http://www.freddiemac.com/corporate/au-works/factors.html

But I concede – most articles referred to ‘character’

There were others – but I concede- character is used a LOT.

[UCGal]

[quote=davelj]

Ummm… the 3 C’s of “credit” do not include “credit.” That would be just a bit redundant. The 3 C’s of credit, as I stated previously, are in fact: Character, Capacity and Collateral. When you find a lenders training manual that includes “credit” as one of the 3 C’s of credit, I’ll be eager to see it.[/quote]

I admit I was wrong. (How often does that happen on piggington. LOL) The google doesn’t lie. Most of the links referred to Character.

If I google under “3 C’s of credit” it definitely skews to “character”. However, if I google under “3 C’s of underwriting” or “3 C’s of lending” it tends to refer more to credit or credit reputation rather than character for the “c”.

Here’s a link to Freddiemac – no mention of character.

http://www.freddiemac.com/corporate/au-works/factors.html

But I concede – most articles referred to ‘character’

There were others – but I concede- character is used a LOT.

[UCGal]

[quote=davelj]

Ummm… the 3 C’s of “credit” do not include “credit.” That would be just a bit redundant. The 3 C’s of credit, as I stated previously, are in fact: Character, Capacity and Collateral. When you find a lenders training manual that includes “credit” as one of the 3 C’s of credit, I’ll be eager to see it.[/quote]

I admit I was wrong. (How often does that happen on piggington. LOL) The google doesn’t lie. Most of the links referred to Character.

If I google under “3 C’s of credit” it definitely skews to “character”. However, if I google under “3 C’s of underwriting” or “3 C’s of lending” it tends to refer more to credit or credit reputation rather than character for the “c”.

Here’s a link to Freddiemac – no mention of character.

http://www.freddiemac.com/corporate/au-works/factors.html

But I concede – most articles referred to ‘character’

There were others – but I concede- character is used a LOT.

[UCGal]

[quote=davelj]

Ummm… the 3 C’s of “credit” do not include “credit.” That would be just a bit redundant. The 3 C’s of credit, as I stated previously, are in fact: Character, Capacity and Collateral. When you find a lenders training manual that includes “credit” as one of the 3 C’s of credit, I’ll be eager to see it.[/quote]

I admit I was wrong. (How often does that happen on piggington. LOL) The google doesn’t lie. Most of the links referred to Character.

If I google under “3 C’s of credit” it definitely skews to “character”. However, if I google under “3 C’s of underwriting” or “3 C’s of lending” it tends to refer more to credit or credit reputation rather than character for the “c”.

Here’s a link to Freddiemac – no mention of character.

http://www.freddiemac.com/corporate/au-works/factors.html

But I concede – most articles referred to ‘character’

There were others – but I concede- character is used a LOT.

[UCGal]

[quote=davelj]

Ummm… the 3 C’s of “credit” do not include “credit.” That would be just a bit redundant. The 3 C’s of credit, as I stated previously, are in fact: Character, Capacity and Collateral. When you find a lenders training manual that includes “credit” as one of the 3 C’s of credit, I’ll be eager to see it.[/quote]

I admit I was wrong. (How often does that happen on piggington. LOL) The google doesn’t lie. Most of the links referred to Character.

If I google under “3 C’s of credit” it definitely skews to “character”. However, if I google under “3 C’s of underwriting” or “3 C’s of lending” it tends to refer more to credit or credit reputation rather than character for the “c”.

Here’s a link to Freddiemac – no mention of character.

http://www.freddiemac.com/corporate/au-works/factors.html

But I concede – most articles referred to ‘character’

There were others – but I concede- character is used a LOT.

[sdduuuude]

Interesting discussion about walking away here. I have to say, I’m pretty far on the side of “walking away is OK anytime” and I don’t blame anyone who does. I believe this simply because terms of default are spelled out in the contract. While the notes do say “I promise to pay,” I don’t believe it states that not paying is a breach of contract. Default is dealt with as a potential condition that could happen. So, really, if you take the contract as a whole, the contract says “I promise to either pay, or to do x, y and z if I don’t.” That puts the choice in the hands of the borower and, to me, makes it ethically OK to default for any reason. It’s a personal decision, however.

Also, it is important to understand that the interest rate is likely higher for non-recourse loans. So, the borrowers are actually paying for the right to walk away. Personally, I’d like to see borrowers have a choice between recourse and non-recourse loans, with a difference in rate to entice you to go recourse, or even to go with a really low rate and sign a promissary note that does make it a crime to not pay. But we don’t have that. We have non-recourse loans and the banks know this going in.

With that said, if both the bank and borrower know it is a non-recourse loan going in, I see no reason why strategic defaults surprise anyone or make anyone cry “foul.” Even if it is a recourse loan, if the borrower is better off walking away, then they just are and they should.

The fact of the matter, is, however, that neither the banks nor the borrowers really gave much thought to what would happen if they went upside-down and I think they kind of deserve each other. I can’t imagine for a second that the banks, from a business perspective, really believe people will continue to pay this mortgage on an upside-down-and-depreciating asset.

It it is wise for the banks to evaluate people based on their ethical make-up, (or “character” as davelj says) in addition to their financial means. But, they failed in this regard. At least they failed to realize that people with strong character may actually choose to default on an loan for an upside-down-and-depreciating asset.

In giving loans to people with poor capital, capability and character, the banks have done nothing ethically wrong. They have done something stupid. And now, they turn to pressuring the borrowers into “ethical” behavior as a way out. Banks are now trying to make up for their own ineptitude by making this an ethics issue. This is wise on the part of the banks, but I think anyone is a fool to buy into it.

My biggest problem with davelj’s perspective is that he gives the “ethical OK” if you can’t pay the mortgage and walk away, but does not give the “ethical OK” if you can pay the mortgage but choose not to. I don’t see that as an important distinction because many people who “can’t pay the mortgage” have chosen not to by making stupid financial decisions in the past that underly their current ability to pay. Either that, or they simply made a promise they couldn’t keep, which is no different from breaking a promise you knew you could keep. (Ignorance doesn’t get you off the hook either.) Also, if you can afford to pay the mortgage, you can easily put yourself in a position to not pay the mortgage by choosig to spend your remaining cash on a bunch of other stuff. So, from my perspective, “can’t” and “won’t” are the same, except in extremem cases of “bad luck”. I say either give them all the “ethical OK” to walk or none of them.

This all reminds me of the TV Show “Survivor” where some people play nice and others lie and deceive. Sometimes the nice ones get steamrolled because they assume the others are playing nice, when they are in fact complete liars. Sometimes someone who has been very nasty plays the “why don’t you play nice” card, and it works! Sometimes the nice ones know they are dealing with a liar, but in desparation ask the nasty ones “why don’t you play nice” and it usually fails miserably. This latter case is the situation the banks find themselves in as the nice ones. They know they are pushing on a rope in convincing these people to hold on to their “ethics” at great financial cost, but it is their only hope.

What is really unethical is using taxpayer money to bail out the banks who made stupid decisions. Walking away pales in comparison to this.

[sdduuuude]

Interesting discussion about walking away here. I have to say, I’m pretty far on the side of “walking away is OK anytime” and I don’t blame anyone who does. I believe this simply because terms of default are spelled out in the contract. While the notes do say “I promise to pay,” I don’t believe it states that not paying is a breach of contract. Default is dealt with as a potential condition that could happen. So, really, if you take the contract as a whole, the contract says “I promise to either pay, or to do x, y and z if I don’t.” That puts the choice in the hands of the borower and, to me, makes it ethically OK to default for any reason. It’s a personal decision, however.

Also, it is important to understand that the interest rate is likely higher for non-recourse loans. So, the borrowers are actually paying for the right to walk away. Personally, I’d like to see borrowers have a choice between recourse and non-recourse loans, with a difference in rate to entice you to go recourse, or even to go with a really low rate and sign a promissary note that does make it a crime to not pay. But we don’t have that. We have non-recourse loans and the banks know this going in.

With that said, if both the bank and borrower know it is a non-recourse loan going in, I see no reason why strategic defaults surprise anyone or make anyone cry “foul.” Even if it is a recourse loan, if the borrower is better off walking away, then they just are and they should.

The fact of the matter, is, however, that neither the banks nor the borrowers really gave much thought to what would happen if they went upside-down and I think they kind of deserve each other. I can’t imagine for a second that the banks, from a business perspective, really believe people will continue to pay this mortgage on an upside-down-and-depreciating asset.

It it is wise for the banks to evaluate people based on their ethical make-up, (or “character” as davelj says) in addition to their financial means. But, they failed in this regard. At least they failed to realize that people with strong character may actually choose to default on an loan for an upside-down-and-depreciating asset.

In giving loans to people with poor capital, capability and character, the banks have done nothing ethically wrong. They have done something stupid. And now, they turn to pressuring the borrowers into “ethical” behavior as a way out. Banks are now trying to make up for their own ineptitude by making this an ethics issue. This is wise on the part of the banks, but I think anyone is a fool to buy into it.

My biggest problem with davelj’s perspective is that he gives the “ethical OK” if you can’t pay the mortgage and walk away, but does not give the “ethical OK” if you can pay the mortgage but choose not to. I don’t see that as an important distinction because many people who “can’t pay the mortgage” have chosen not to by making stupid financial decisions in the past that underly their current ability to pay. Either that, or they simply made a promise they couldn’t keep, which is no different from breaking a promise you knew you could keep. (Ignorance doesn’t get you off the hook either.) Also, if you can afford to pay the mortgage, you can easily put yourself in a position to not pay the mortgage by choosig to spend your remaining cash on a bunch of other stuff. So, from my perspective, “can’t” and “won’t” are the same, except in extremem cases of “bad luck”. I say either give them all the “ethical OK” to walk or none of them.

This all reminds me of the TV Show “Survivor” where some people play nice and others lie and deceive. Sometimes the nice ones get steamrolled because they assume the others are playing nice, when they are in fact complete liars. Sometimes someone who has been very nasty plays the “why don’t you play nice” card, and it works! Sometimes the nice ones know they are dealing with a liar, but in desparation ask the nasty ones “why don’t you play nice” and it usually fails miserably. This latter case is the situation the banks find themselves in as the nice ones. They know they are pushing on a rope in convincing these people to hold on to their “ethics” at great financial cost, but it is their only hope.

What is really unethical is using taxpayer money to bail out the banks who made stupid decisions. Walking away pales in comparison to this.

[sdduuuude]

Interesting discussion about walking away here. I have to say, I’m pretty far on the side of “walking away is OK anytime” and I don’t blame anyone who does. I believe this simply because terms of default are spelled out in the contract. While the notes do say “I promise to pay,” I don’t believe it states that not paying is a breach of contract. Default is dealt with as a potential condition that could happen. So, really, if you take the contract as a whole, the contract says “I promise to either pay, or to do x, y and z if I don’t.” That puts the choice in the hands of the borower and, to me, makes it ethically OK to default for any reason. It’s a personal decision, however.

Also, it is important to understand that the interest rate is likely higher for non-recourse loans. So, the borrowers are actually paying for the right to walk away. Personally, I’d like to see borrowers have a choice between recourse and non-recourse loans, with a difference in rate to entice you to go recourse, or even to go with a really low rate and sign a promissary note that does make it a crime to not pay. But we don’t have that. We have non-recourse loans and the banks know this going in.

With that said, if both the bank and borrower know it is a non-recourse loan going in, I see no reason why strategic defaults surprise anyone or make anyone cry “foul.” Even if it is a recourse loan, if the borrower is better off walking away, then they just are and they should.

The fact of the matter, is, however, that neither the banks nor the borrowers really gave much thought to what would happen if they went upside-down and I think they kind of deserve each other. I can’t imagine for a second that the banks, from a business perspective, really believe people will continue to pay this mortgage on an upside-down-and-depreciating asset.

It it is wise for the banks to evaluate people based on their ethical make-up, (or “character” as davelj says) in addition to their financial means. But, they failed in this regard. At least they failed to realize that people with strong character may actually choose to default on an loan for an upside-down-and-depreciating asset.

In giving loans to people with poor capital, capability and character, the banks have done nothing ethically wrong. They have done something stupid. And now, they turn to pressuring the borrowers into “ethical” behavior as a way out. Banks are now trying to make up for their own ineptitude by making this an ethics issue. This is wise on the part of the banks, but I think anyone is a fool to buy into it.

My biggest problem with davelj’s perspective is that he gives the “ethical OK” if you can’t pay the mortgage and walk away, but does not give the “ethical OK” if you can pay the mortgage but choose not to. I don’t see that as an important distinction because many people who “can’t pay the mortgage” have chosen not to by making stupid financial decisions in the past that underly their current ability to pay. Either that, or they simply made a promise they couldn’t keep, which is no different from breaking a promise you knew you could keep. (Ignorance doesn’t get you off the hook either.) Also, if you can afford to pay the mortgage, you can easily put yourself in a position to not pay the mortgage by choosig to spend your remaining cash on a bunch of other stuff. So, from my perspective, “can’t” and “won’t” are the same, except in extremem cases of “bad luck”. I say either give them all the “ethical OK” to walk or none of them.

This all reminds me of the TV Show “Survivor” where some people play nice and others lie and deceive. Sometimes the nice ones get steamrolled because they assume the others are playing nice, when they are in fact complete liars. Sometimes someone who has been very nasty plays the “why don’t you play nice” card, and it works! Sometimes the nice ones know they are dealing with a liar, but in desparation ask the nasty ones “why don’t you play nice” and it usually fails miserably. This latter case is the situation the banks find themselves in as the nice ones. They know they are pushing on a rope in convincing these people to hold on to their “ethics” at great financial cost, but it is their only hope.

What is really unethical is using taxpayer money to bail out the banks who made stupid decisions. Walking away pales in comparison to this.

[sdduuuude]

Interesting discussion about walking away here. I have to say, I’m pretty far on the side of “walking away is OK anytime” and I don’t blame anyone who does. I believe this simply because terms of default are spelled out in the contract. While the notes do say “I promise to pay,” I don’t believe it states that not paying is a breach of contract. Default is dealt with as a potential condition that could happen. So, really, if you take the contract as a whole, the contract says “I promise to either pay, or to do x, y and z if I don’t.” That puts the choice in the hands of the borower and, to me, makes it ethically OK to default for any reason. It’s a personal decision, however.

Also, it is important to understand that the interest rate is likely higher for non-recourse loans. So, the borrowers are actually paying for the right to walk away. Personally, I’d like to see borrowers have a choice between recourse and non-recourse loans, with a difference in rate to entice you to go recourse, or even to go with a really low rate and sign a promissary note that does make it a crime to not pay. But we don’t have that. We have non-recourse loans and the banks know this going in.

With that said, if both the bank and borrower know it is a non-recourse loan going in, I see no reason why strategic defaults surprise anyone or make anyone cry “foul.” Even if it is a recourse loan, if the borrower is better off walking away, then they just are and they should.

The fact of the matter, is, however, that neither the banks nor the borrowers really gave much thought to what would happen if they went upside-down and I think they kind of deserve each other. I can’t imagine for a second that the banks, from a business perspective, really believe people will continue to pay this mortgage on an upside-down-and-depreciating asset.

It it is wise for the banks to evaluate people based on their ethical make-up, (or “character” as davelj says) in addition to their financial means. But, they failed in this regard. At least they failed to realize that people with strong character may actually choose to default on an loan for an upside-down-and-depreciating asset.

In giving loans to people with poor capital, capability and character, the banks have done nothing ethically wrong. They have done something stupid. And now, they turn to pressuring the borrowers into “ethical” behavior as a way out. Banks are now trying to make up for their own ineptitude by making this an ethics issue. This is wise on the part of the banks, but I think anyone is a fool to buy into it.

My biggest problem with davelj’s perspective is that he gives the “ethical OK” if you can’t pay the mortgage and walk away, but does not give the “ethical OK” if you can pay the mortgage but choose not to. I don’t see that as an important distinction because many people who “can’t pay the mortgage” have chosen not to by making stupid financial decisions in the past that underly their current ability to pay. Either that, or they simply made a promise they couldn’t keep, which is no different from breaking a promise you knew you could keep. (Ignorance doesn’t get you off the hook either.) Also, if you can afford to pay the mortgage, you can easily put yourself in a position to not pay the mortgage by choosig to spend your remaining cash on a bunch of other stuff. So, from my perspective, “can’t” and “won’t” are the same, except in extremem cases of “bad luck”. I say either give them all the “ethical OK” to walk or none of them.

This all reminds me of the TV Show “Survivor” where some people play nice and others lie and deceive. Sometimes the nice ones get steamrolled because they assume the others are playing nice, when they are in fact complete liars. Sometimes someone who has been very nasty plays the “why don’t you play nice” card, and it works! Sometimes the nice ones know they are dealing with a liar, but in desparation ask the nasty ones “why don’t you play nice” and it usually fails miserably. This latter case is the situation the banks find themselves in as the nice ones. They know they are pushing on a rope in convincing these people to hold on to their “ethics” at great financial cost, but it is their only hope.

What is really unethical is using taxpayer money to bail out the banks who made stupid decisions. Walking away pales in comparison to this.

[sdduuuude]

Interesting discussion about walking away here. I have to say, I’m pretty far on the side of “walking away is OK anytime” and I don’t blame anyone who does. I believe this simply because terms of default are spelled out in the contract. While the notes do say “I promise to pay,” I don’t believe it states that not paying is a breach of contract. Default is dealt with as a potential condition that could happen. So, really, if you take the contract as a whole, the contract says “I promise to either pay, or to do x, y and z if I don’t.” That puts the choice in the hands of the borower and, to me, makes it ethically OK to default for any reason. It’s a personal decision, however.

Also, it is important to understand that the interest rate is likely higher for non-recourse loans. So, the borrowers are actually paying for the right to walk away. Personally, I’d like to see borrowers have a choice between recourse and non-recourse loans, with a difference in rate to entice you to go recourse, or even to go with a really low rate and sign a promissary note that does make it a crime to not pay. But we don’t have that. We have non-recourse loans and the banks know this going in.

With that said, if both the bank and borrower know it is a non-recourse loan going in, I see no reason why strategic defaults surprise anyone or make anyone cry “foul.” Even if it is a recourse loan, if the borrower is better off walking away, then they just are and they should.

The fact of the matter, is, however, that neither the banks nor the borrowers really gave much thought to what would happen if they went upside-down and I think they kind of deserve each other. I can’t imagine for a second that the banks, from a business perspective, really believe people will continue to pay this mortgage on an upside-down-and-depreciating asset.

It it is wise for the banks to evaluate people based on their ethical make-up, (or “character” as davelj says) in addition to their financial means. But, they failed in this regard. At least they failed to realize that people with strong character may actually choose to default on an loan for an upside-down-and-depreciating asset.

In giving loans to people with poor capital, capability and character, the banks have done nothing ethically wrong. They have done something stupid. And now, they turn to pressuring the borrowers into “ethical” behavior as a way out. Banks are now trying to make up for their own ineptitude by making this an ethics issue. This is wise on the part of the banks, but I think anyone is a fool to buy into it.

My biggest problem with davelj’s perspective is that he gives the “ethical OK” if you can’t pay the mortgage and walk away, but does not give the “ethical OK” if you can pay the mortgage but choose not to. I don’t see that as an important distinction because many people who “can’t pay the mortgage” have chosen not to by making stupid financial decisions in the past that underly their current ability to pay. Either that, or they simply made a promise they couldn’t keep, which is no different from breaking a promise you knew you could keep. (Ignorance doesn’t get you off the hook either.) Also, if you can afford to pay the mortgage, you can easily put yourself in a position to not pay the mortgage by choosig to spend your remaining cash on a bunch of other stuff. So, from my perspective, “can’t” and “won’t” are the same, except in extremem cases of “bad luck”. I say either give them all the “ethical OK” to walk or none of them.

This all reminds me of the TV Show “Survivor” where some people play nice and others lie and deceive. Sometimes the nice ones get steamrolled because they assume the others are playing nice, when they are in fact complete liars. Sometimes someone who has been very nasty plays the “why don’t you play nice” card, and it works! Sometimes the nice ones know they are dealing with a liar, but in desparation ask the nasty ones “why don’t you play nice” and it usually fails miserably. This latter case is the situation the banks find themselves in as the nice ones. They know they are pushing on a rope in convincing these people to hold on to their “ethics” at great financial cost, but it is their only hope.

What is really unethical is using taxpayer money to bail out the banks who made stupid decisions. Walking away pales in comparison to this.

[sdduuuude]

[quote=davelj]But it’s pretty clear to me that moral standards have changed too.[/quote]

Did they ? Or did the situation change? i.e. are borrowers more up-side-down than ever before and the “morality” of paying off the loan in underwater conditions has not been tested to this extent before.

Or, perhaps the availability of ez credit drew in more people of a lower moral standard than ever before.

[sdduuuude]

[quote=davelj]But it’s pretty clear to me that moral standards have changed too.[/quote]

Did they ? Or did the situation change? i.e. are borrowers more up-side-down than ever before and the “morality” of paying off the loan in underwater conditions has not been tested to this extent before.

Or, perhaps the availability of ez credit drew in more people of a lower moral standard than ever before.

[sdduuuude]

[quote=davelj]But it’s pretty clear to me that moral standards have changed too.[/quote]

Did they ? Or did the situation change? i.e. are borrowers more up-side-down than ever before and the “morality” of paying off the loan in underwater conditions has not been tested to this extent before.

Or, perhaps the availability of ez credit drew in more people of a lower moral standard than ever before.

[sdduuuude]

[quote=davelj]But it’s pretty clear to me that moral standards have changed too.[/quote]

Did they ? Or did the situation change? i.e. are borrowers more up-side-down than ever before and the “morality” of paying off the loan in underwater conditions has not been tested to this extent before.

Or, perhaps the availability of ez credit drew in more people of a lower moral standard than ever before.

[Author]

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