Irvine Housing Blog

Swiller should come on down to southern NM where I rent 37 miles from the border.

In EP (El Paso) he can view the 5-gallon paint buckets thrown over the Fence where the Mexican cartels have shoved-in the remains of anyone in MX they consider to be against them.

Next would be the arms, legs, and heads thrown over the Fence by the cartels of police officers and Federales.

Interesting how you don’t hear about this stuff in the MSM.

~Misstrial

“It was the murder of that rancher that broke the camel’s back.  You see, Swiller did not know him.”

You knew him, then.

Was he a good man? How are his family holding up? Have you visited to comfort them?

It’s too bad that the rancher story hasn’t been broadcast (yeah, like MSM gives a crap). However, given this information, I fully support AZ cops going after them.

You know the end result when you pull something in front of a cop

That I know…surprisingly through MSM.

After all, sex and gore sells

*Misstrial wonders if her luxury Toyota will develop Sudden Acceleration Syndrome should she view a small group of short men carrying bales crossing I-8 between Gila Bend and the I-10/8 interchange on her way to NM….*

hmmmmm….

You are correct - they can also find an all cash buyerr but that is besides the point: The value of the asset is not defined by what the previous debtor borrowed to pay for it.

Passing on costs is an economic fallacy?  Everywhere? Always?  Come on, IrvineRenter - you know this can not be true.  Have you noticed how banks are clawing in fees hand over fist lately and raising interest rates across the board on people with CC debt?  Why do you think they are doing this?  I say that it is because they are taking steps to make up for their losses by ramping up the fees and APR’s on people - indirectly passing on the costs.

The problem with your car analogy is that it is not an example of a strategic defsult.  So you can’t use it to morally justify a strategic default.  In your analogy, no, the borrower did not act immorally - he also did not strategically default.  Your assumption that the car maintains it’s value above the loan principal makes strategic default impossible and therefore is not a valid comparison to somebody who opts to default on an underwater mortgage even though they can still afford it.

Let’s take your example the other way.  Suppose he crashes the car and the insurance pays him less than the principal owed on the car and he is without gap insurance.  Is he morally obligated to pay the difference to the bank?  Or do you think the bank should just take what the insurance paid out?  I say he owes the difference and if you agree then why is a car loan so much more sacred than a house loan?

why the debate on the correct analogy?  Let’s just look at the mortgage agreement itself.  It is a contract where the borrower pledges his house to the bank in return for the cash to buy it.  If the borrower does not pay and goes into default then the lender takes title to the house.  There is no moral or legal obligation to avoid default.  After all the bank is getting back the collateral.

I know that this has been stated a million times before, but it just seems like the discussion is getting circular today.

Calculated Risk talks about the three c’s of mortgage underwriting:
Credit
Capacity
Collateral
Did lenders know that lots of the appraisals they were getting loans based on were garbage?  Did they actively pursue appraisers who would hit the numbers?

Why we boiled everything down to subprime & FICO scores is a big part of the problem.

There are two ways to use credit cards: pay off the balance each month (or within a few months) to use as a payment smoother, or you carry a large balance and use the card as a catch-all type loan.  The first is OK, the second is bad, but the differences should be acknowledged.

“Have you noticed how banks are clawing in fees hand over fist lately and raising interest rates across the board on people with CC debt?  Why do you think they are doing this?”

They are doing this because they can. Borrowers are willing to take on the debt under these terms. Let’s look at it this way; lenders would charge these fees whether or not any borrowers defaulted. They will charge whatever they feel they can get away with.

If no borrowers defaulted, then competing lenders would move in and charge less, but the only cost-push comes from a desire to maintain margins. As I stated, they may not take the business if the revenue does not exceed the costs, but costs do not determine the revenue.

For the car example, lets take unemployment out of the picture. Let’s say the owner just decided to give the car back because he didn’t like it. Is he immoral then?

In my opinion, if a borrower returns the goods instead of the money, the borrower’s motivation is irrelevant. The lender experiences no loss because the loan terms were rational and did not leave the lender exposed. If the lender was stupid enough to make a loan where the collateral value does not match the loan balance, then they better have a high interest rate to take on that risk. This isn’t about morality, it is about risk assessment.

“Suppose he crashes the car and the insurance pays him less than the principal owed on the car and he is without gap insurance.  Is he morally obligated to pay the difference to the bank?  Or do you think the bank should just take what the insurance paid out?”

Contractually, the borrower would owe the difference, but if he didn’t pay it, he isn’t immoral. The failure to pay will impact his FICO score just as defaulting on any debt would. The lender is foolish to expose themselves in that way, and for that exposure, they generally charge a higher interest rate.

Actually a car is a perfect analogy to houses when the market value is going down.

Both assets are depreciating.

Where current conditions are different is that IR chose to situation where the car owner is not upside down, a rare condition until late into the car loan.

I think the current analogy would be better with the people that were buying large GM SUV four years ago.  They went with no money down and were always upside down.

Many of them… interestingly enough… were also buying houses with subprime loans… Cars and houses with NO MONEY DOWN…

The banks obviously did not know -or likely cared- that the RE prices were inflated and likely to drop.  Just like they didn’t care that the prices of those GM crappolas were inflated too and that GMAC was selling very low wuality loans.

So, the market crashed… people’s cars got repo’d.

So what’s different from homes then?

Interestingly, in our country, people are less likely to default on a car than on a house because you _need_ a car more than a house.

Personally, I see nothing wrong with people defaulting on their loans.

BUT, they should pay their fair share of their TAXES if only to pay for the subsidy that the banksters will get from the Gov to pay for their “loss”.

Whether a business can freely pass extra cost to consumers or not depends on the nature of the product/service. Economists coined terms like price “elasticity” to describe service providers’ relative pricing power and the ability to screw the buyers. Companies can pass cost to consumers if their products/services are essential to everyday life. There are a lot of people now arguing that commercial banks should be tightly regulated like utilities companies since they provide a vital function to our society. If we deem services provided by banks fall under the domain of public goods both their risk appetite and prices need to be controlled.

There is a problem though with your private contracts when you are talking about bank loans which you see the fractional reserve detractors refer to as “consideration” being that the bank is allowed to loan money that it does not actually have which would be considered illegal for any other type of contract and be declared null and void.

The bank loans may be officially between private parties but as we are witnessing - it’s all just kabuki.  The loans directly impact the foundations of our society.  The lenders have a moral obligation to society to not do stupid things with our money ( they failed ) and borrowers have a moral responsibility to honor their pledge since both have consequences for society as a whole if not honored by everyone.

IR has finally won me over here. The guy at the gas station did not enter a contract were getting robbed was a recourse for some other action. It is a different situation.

Plus, at what point does a private contract become a moral obligation? At this point I get what IR is saying. It is a business arrangement. Nothing more, nothing less.

The real immoral ones here are the public servants that were elected to protect the common good, but instead enjoyed the special mortgages they got and looked the other direction.

“The lenders have a moral obligation to society to not do stupid things with our money ( they failed )..”

Ay, there lies the rub.

The banksters played the field.. they made the loans, pocketed the fees and hedged their bets by going short against the long instruments they were selling.

The banksters acted immorally by your measure and now expect the rest of the world to pay for their errors.  They will get it, of course, because they own the frickin’ Gov… indeed, they ARE the Gov.

Hardly moral, huh?

IMHO, banks should be allowed to fail.  People should go to jail for committing fraud, engaging in racketeering and Ponzi schemes and paying (engaging) in bribes/embezzelment.

Homeowners should be allowed to default, but they should pay their taxes.

Just wait ‘till I dump my chateau… gimme six months before I move to Canada…. 

There you have it.  I encourage everyone to immediately charge up their CC’s to the maximum.  Take a bunch of vacations, buy some jewelry, throw some parties.

When you are done, call up the bank and inform them that you will not be sending them any more payments and that they will just have to collect that money from somebody else.

It’s a private contract and FICO is taking care of the morals.  It’s all good.

Canada’s health care makes more sense that Obamalosi’s.

They got cuban cigars in Canada.

What else do you need?

“

There you have it.  I encourage everyone to immediately charge up their CC’s to the maximum.  Take a bunch of vacations, buy some jewelry, throw some parties.

When you are done, call up the bank and inform them that you will not be sending them any more payments and that they will just have to collect that money from somebody else.

It’s a private contract and FICO is taking care of the morals.  It’s all good.”

I know you were being facetious, but I agree with everything you wrote here.

If everyone charged up a bunch of stuff on credit and then walked, we would see the end of consumer credit as we know it. I think that would be great!

The FICO score of everyone who uses consumer credit and defaulted would go down, the lending industry would get much smaller, and consumers would be free of lender interest charges. I have no problem with that at all.

If you haven’t noticed, this already how it works. There is no need to encourage anyone to do it.

The CC issuers charge a rate with the loses built in.

If the lenders make good decisions on who to make loans to, the system works just fine.

I also like Arizona Dave’s argument, but is it merely a call for debtor’s prisons? If breaking a housing loan (or car or cell-phone or credit card) contract would result in jail time, would that be a good solution? Would we be going back in time by 100 years?

“If everyone charged up a bunch of stuff on credit and then walked, we would see the end of consumer credit as we know it. I think that would be great!”

So true.

If you rob a bank for $10K and get caught, you are sent to a federal prison for 5 or maybe 10 years. But if you charge $10K on your cc and decide not to pay for no legitimate reason (lost job, became gravely ill, etc), which has the same effect of robbing the bank (in a more “civil” way), you get dinged on FICO. Punishment does not fit the crime. What we need is debtors’ prison.

Our credit system was built on the shaky foundation of a perceived mutual trust - but without any meaningful enforcement mechanism. And I doubt that mutual trust still exists after so much exposure of the abuse of the system. Once the illusion of the trust is gone, the system may not survive much longer.

We need greater consequences for those that default and those who make poor lending decisions.  Unfortunately, in a consumer/debt driven economy it is politically unpalatable.

We lack tough love and leaders willing to administer it.  This is the bane of forced altruism.  We steal from one to give to another and the result is financial/economic cannibalism.

There are people who have warned about this for 50+ years.  The road to hell is paved with good intentions - we are on that road.

“IMHO, banks should be allowed to fail.  People should go to jail for committing fraud, engaging in racketeering and Ponzi schemes and paying (engaging) in bribes/embezzelment.”

Sell that one to your Republican comrades.  That’s why it’s so funny to me to hear the Tea Partiers scream about socialists, liberals, blah blah, when it’s their very own GOP (and not just the GW Bush spender types) who would NEVER EVER let the banks fail.  Think Phil Gramm gives a crap about putting bankers in jail? Give me a break.

Here’s a litmus test for you: how many of you started crapping in your panties the moment IrvineRenter said the words “nationalize the banks”?  You cry and whine about Obama siding with the banks, but how many Republicans would’ve done anything different?  And how many of YOU would have supported nationalizing the banks?  Very few.

My panties are clean.

This is an APOLITICAL problem.  You can not cast it as an issue with the GOP, Dems, Tea Party, etc…

The fundamental problem is that Very Rich People own the Government.

In essence, banks are already nationalized in a backwards way.  The Banks control the Government, which is why they could not fail.

It’s like Church and State.  They are supposed to be kept separate, and usually they are.

But banks and the Gov have pretty much created their own world and the rest of us are the insurance for their bad mistakes.  Come to think about it, we’re only the source of their money when they don’t make mistakes.

Hmmm… that realization that we’re owned, you see, is what makes me soil my panties…

Both the Dems and the GOP are in the same boat here.  None of them will allow banks to fail because the banks own them.

We don’t need a debtor’s prison. What we need is a lender who doesn’t loan money to anyone who can fog a mirror.

If you rob a bank, the bank has no real choice but to give you the money.  If you charge $10k on your credit card and default, its the banks choice to loan you such high amounts of money.  A) why did the bank give the irresponsible CC-owner such a high credit limit?  B) Why did the bank fail to charge high enough interest to compensate for the risk. (i.e. lousy credit, high interest rates. Excellent FICO, low interest rates) C) Why didn’t the bank make sure you had the financial resources to pay back the CC debt? Our credit system isn’t based on mutual trust, its based on risk assessment. 

If one Credit Card borrower defaults out of a 100, then the bank makes sure they can make profit out of the remaining 99 CC borrowers. Once of the causes of the housing bubble is caused by bank’s failure to properly analyze risk

IrvineRenter -

It sounds to me that you are saying we need Land Barons ( you call them ‘cash flow investors’) to buy up all the properties and rent them out to society in order to get us out of trouble?

I don’t think that is the answer.  I think society would be much better served by less housing debt and much lower rents.

Land Barons will just cause rents to remain artificialy high to provide that unnecessary ‘cash flow’.

“It sounds to me that you are saying we need Land Barons ( you call them ‘cash flow investors’) to buy up all the properties and rent them out to society in order to get us out of trouble?”

Yes, that is exactly what is required. Whether these land barons are hedge funds or private individuals, the money needs to flow into the market to clean up this mess.

Note that I am distinguishing between the dipshit land barons of the bubble who purchased with enormous leverage and negative cashflow from the new breed of land baron that purchases with limited debt for positive cashflow.

Positive cashflow = good.

Negative cashflow = Ponzi Scheme.

You seem to be making a fundamental assumption that rents do not reflect the value of the property.

If the value of the property drops 20%, will the rents stay at the same level, or will they drop?

It’s true that during the bubble rents did not cover costs since people were buying on pure speculation.  But if the value of RE swings back below the historical norm (appreciation based on inflation) won’t then rents drop accordingly?

Rents are typically a function of area incomes. If pepeople have jobs and earn money, rents will rise to the level of incomes in the area. There can be temporary disruptions due to supply constraints, but over time, rents will match the incomes of the area quite closely.

“The problem is that any investors with ‘boatloads of cash’ who employ this strategy have the potential to screw over the little guy like me who wants to buy a house and has enough saved for a tiny down payment, but is afraid to commit to the current ‘monthly out of pocket expenses’ that come with today’s prices.”

Typically, this will not be a problem because the investors with boatloads of cash will not overpay for assets and drive the prices up. An owner-occupant will always be willing to pay more than a professional investor. That doesn’t mean some speculative fund might not try to “corner the market” on housing (Donald Bren did it locally), but cashflow investors are not the ones who inflate prices in real estate.