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Monday, February 4, 2008

Mortgage Crisis vs Integrity

There was a great story about the Mortgage Crisis on 60 Minutes. While we have all heard the various issues explained about how much inventory is out there, how many people have been pushed out of their homes due to the ARMs resetting. But something struck me hard while watching the videos.

I have always felt bad for the people who lose their home. We nearly went through it as a kid and it was a horrible experience. There was real shame in being in a nice middle-class neighborhood and really not being able to afford it anymore. However, in the videos a couple were basically saying..."Whatever!"

In the "walking away" video, the couple admits that: they overpaid, they got a ARM knowing it would reset, and that they can pay the new payment after the increase...but they are going to let the house go and be repossessed. When asked by Steve Kroft, "Why?" They basically say that they aren't going to pay that kind of payment for that kind of house. Basically if the investment was working they would continue to pay, but now that is not...Oh well! They will go rent for a few years, get their FICO back up and give 'er a try again!

Maybe we are weird, or it is just the way we believe that you should act, but we would just never do that. If we lost, or gave up our house it would only be after every measure was taken. When we were going through trying to pay all of our medical bills and old debts, a bunch of people (including one of the ladies at the hospital) suggested to really consider bankruptcy, but we believed that we weren't disputing any of the charges, so we had the obligation to repay them.

Maybe some feel it is OK to some because 50% of this (or more) falls on the backs of the lenders giving loans to those with very little hope of paying them back. But for us integrity is blind. I am not saying that if you decide you must go bankrupt you are doing wrong, just that it should be a last, ditch effort. For us it is worth the effort and harm to our budget to try and pay our debts. No matter to whom.

So how about it? Are we just Luddites, and hopelessly out of step with the way the world works?


traineeinvestor said...

The word dishonest describes these people perfectly.

Even if it were just the lenders who end up wearing the loss, it would still be moraly unacceptable. Although I know nothing about the American legal system, I would hope that (like most places) walking away and losing the house still leaves the borrowers liable for the shortfall when the house is sold.

And of course, it is not the lender who wears the loss. It's the lender's shareholders (pension funds, mutual fund investors and small investors like you and me), its the tax payers (like you and me) and the employees who get made redundant or have their bonus cut as a result of the borrowers dishonesty (although I have little sympathy with the latter).

The other group who loses are the responsible borrowers who use debt prudently and who honour their commitments. The price we pay for borrowing money reflects the expected default rate on all borrowers (to some degree). When people default like this they push up the cost of my mortgage payments as well.

Bring back debtors prison.

End of rant.

CatherineL said...

Hi Racer - bankruptcy has now become less stigmatised - even in the UK which is a good thing as it gives people the chance to begin again.

But we have had TV programmes here showing how easy it is to run up heaps of debt through extravagent spending then start all over again. Some people do it several times and this has encouraged those who are dishonest.

RacerX said...

@trainee - Welcome!

They are liable, but they are declaring backruptcy on the amount. It really was a Ponzi Con in many ways, were the next guy pay the debt plus interest to the next, until you run out of suckers...then it crashes. Therest of us will pay for the mess either through higher taxes or rates!

@CathL - If it is needed I really do understand filing. Especially how the uninsured can rack up huge medical bills and have no choice, but it is the people that do it on purpose that bug me. The laws were put into place to help those that really needed it, now the law will get tighter and hurt those later that might need it.

Thank you both for visiting and commenting!

Mrs. Micah said...

That is definitely not honest. It's not even like the banks were dumb to give these people their mortgage---because apparently they can afford it. They just don't want to pay.

Ethically, I think it's fine to buy a house, take the ARM, and sell the house once the rate adjusts because you don't want to pay that much for the house. It's like any other reason you might move---you were able to find a better deal elsewhere on renting or buying. Eat the difference if you have to.

But declaring bankruptcy to get out of that is a dumb financial move and extremely dishonest/slimey. Ugh.

RacerX said...

Could not say it better!

Your word should be worth something, regardless of the honesty of the other party.

Tom said...

Don't kill me for this, but I'm going to argue the opposite opinion.

These people agreed to a contract with a lender. The contract stipulated the performance of both parties and both parties agreed to the contract. The contract also stipulated what could/would happen if one party or the other _didn't_ perform.

Who's fault is it that the penalty for NOT performing (for the homeowner) is a better situation than continuing to perform? I would argue that it is NOT the homeowners problem, but the banks problem (and maybe a bigger issue) based on the language in the mortgage document itself.

I do take issue, however, with calling these folks "dishonest". If you choose not to hold up your end of a contract and are willing to suffer the penalties prescribed within the contract, how is that in the least bit dishonest?

RacerX said...

Tom - First Welcome! And don't worry I don't allow bloodletting on Mondays :)

Were I believe it dives into dishonesty (for both sides) were the people that inflated their income as the economist pointed out.

Now the banks and lenders accepted this wink and nod, but it doesn't make it right.

My personal code I guess!

Thanks for commenting!...Look no blood!

Barbara said...

Hello Racerx,

I keep seeing your comments on Catherine's and Ian's blogs, so decided to check out your blog. This post tweaked my interest.

I don't agree with the "whatever" attitude of the homeowners, however, I also don't agree with realtors, appraisers, and mortgage brokers who grease each other's palm to get an unsuspecting home owner into a house they can't afford. I sold real estate in the late 80's when lending was a lot tighter. I wouldn't even show a home to a potential buyer until they were prequalified. Then I would "hold their hand" all the way until closing. If at any point they got uncomfortable about making such a huge purchase, I would tell them they could back out (risking their earnest money), but I wanted them to know nothing was carved in stone. A lot of home buyers don't have a clue about what they are getting into, and they end up as prey for those who want to make a quick buck. For those home owners who know what they are doing and use the system, they "have it coming".

Thanks for letting me have my say.

RacerX said...

First off...Welcome! Hope you enjoy the blog!

I totally agree with you that there is culpability o' plenty to go around.

I was lucky with our Agent, brutally honest all the way through, didn't push us up at all. That why we recomend him to everyone we know.

But...two wrongs don't make a right!

Thanks for visiting and commenting...hope you come back!

Anonymous said...

I think anyone who can afford to make their mortgage payments and doesn't but allows the bank to forclose should be forced to pay cash for everything. They can not be trusted with credit.

RacerX said...

I can understand that feeling. It is the reason every other responcible person has seen there house value fall, or at least not climb as fast as it should!

Thanks for visiting!

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