no third solution

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What is Your Obligation to Your Lender?

March 25th, 2008

Initially I was going to include this in the next issue of “Comments on Comments,” but it’s awfully long, and despite having recently posted a handful of thought-provoking posts (at least, IMO) in the last week or so, the comments have been few and far between. I didn’t want to let this wait any longer.

I really must have a pushed one of Logan‘s buttons when (in #10)I said:

It is perfectly within the realm of accepted behavior to forfeit one’s collateral to the lender when one is unwilling or unable to continue servicing the debt as scheduled

He left a lengthy comment, the crux of which is: “No, it’s not acceptable to forfeit the collateral,” and that it’s morally wrong to do so, especially e.g., “to sidestep the lender by buying another property just to avoid being in a negative equity situation in the original property.”

Further, he’s conflating my arguments, and although I appreciate feedback, I think his enthusiasm is misplaced. I never suggested that someone should play musical chairs with his mortgages. What I suggested is that you should get into a new home and default on the old one, if you anticipate being unable to make the payments. Logan explains that you can get positive equity by paying down your mortgage, but I think my position has gone over his head: if you can’t afford your mortgage payment, you certainly can’t afford to pay it down!

The bank is going to end up with the property anyways, so you might as well get out and in to something you can afford, if you can afford it. To be sure, there are very few circumstances under which this would even be possible given the current market conditions.

Let me make one thing abundantly clear: I’m not talking about people who are trying to dump a property that they can easily afford, just because they’re upside-down. That would be financial suicide, and Logan should know better than that. If you can afford to make your payments, you should just weather the storm. If you have the financial wherewithal to pay down your mortgage, that’s probably the single smartest thing you can do: it’s a guaranteed return on your investment of 6 or 7%.

He proceeds with a fictional diatribe as spoken by the defaultor to the lender:

I’m going to stick you with a piece of property that I know you never wanted, that I know you hoped to never have to ever deal with, and that I know you only wrote in the note as collateral for contingency purposes should I default on the terms of our mutual agreement…

I hope you now realize, Mr. Lender, that my word is no good, my signature is meaningless, I’m acting in bad faith, and even though you fulfilled your obligation to me by lending me the money to buy the property I now say unto you: SCREW YOU!

It’s important to note that none of the banks really had to raise the capital! On top of loaning out other people’s money, the rest of it, they conjured it out of thin fucking air, with the help of their friends at the Federal Reserve.

Logan is acting like a bank-apologist, which is ultimately a state-apologist. Probably more people should be telling the banks where to go. It’s not like the banks did nothing wrong during the last half-decade! Lots of people who don’t know better were sold sketchy loans by people who do (or ought to) know better. And lots of otherwise good people took on shady loans from otherwise good brokers and lenders because they all thought the housing boom would last forever.

Perhaps the borrower is saying something like,

I’m giving you this property that I know you never wanted, because you’re sticking me with an interest rate and payment schedule that you know I never wanted, and that furthermore, you should have known I could not afford. I only accepted the terms of your contract of adhesion because I thought I’d never have to deal with those contingencies, just like you thought you’d never have to deal with my default. The only reason I bought the house is because you, dear lender, approved me for the loan. You told me I could afford it. (And if you hadn’t, someone else would have). We both erred. Now it’s your turn to deal with this property, and my turn to deal with a severely damaged credit rating.

Of course, it was expressed in the contract that there would be no guarantee of refinancing on favorable terms (or any terms, for that matter) but the implication was certainly that financing was and always would be indefinitely available. Even if the banks did not say so, it had to be so, in-fact, because the house-of-cards upon which fractional reserve banking is built relies on the perpetual augmentation of the monetary base.

He continues,

Such behavior does not follow the Golden Rule, which we all learned from preschool onward as the basic foundation of human decency.

Are the bankers to follow this Rule, too? This is not an unimportant question, what with the foundation of human decency and all!

I mean, “Hey, let’s make riskless profit off the backs of people who don’t know any better! Let’s profit from monetary inflation!”

Logan, I shouldn’t have to tell you: that’s not much of a rallying cry.

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no third solution

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