Monday, April 28, 2008

Do Unto Others....

Let me preface this by saying, Mr. BT and I disagree on this subject.

I have largely stayed away from the “walking away” topic, because it pertains more to sellers than to buyers. Paul’s comment this weekend, about how bank’s are more concerned about their bottom line and their shareholders, than treating customers with respect and dignity, made me reconsider.

With the disappearance of local banks, a mortgage has basically become a pure business transaction (its more less a commodity product that is purchased from a somewhat anonymous seller). If there is a failure to live up to the terms of the contract, there are remedies the bank can pursue (i.e. foreclosure). In theory, the bank should not enter into a contract if the remedy is not sufficient to satisfy the breach of contract.

These national banks do not care about ethical or moral obligations, only legal obligations (to creditors and shareholders). Their dealings with customers are purely a cost benefit decision (with some PR considerations thrown in).

So why are a bank’s customers held to a different standard? How can the bank expect borrowers to pay on their contract, even if it is to the detriment of their shareholders (i.e. their family), if it would not do the same?

Of course I am not talking about loans taken out fraudulently, where the borrower knew at the time they would not perform on the contract. I am talking about families that stretched too far, or didn’t have a big down payment, who are now walking away from their house because it’s makes financial sense.

Those who object to this line of thinking, tend to cite the “a (wo)man is only as good as their word” argument. In some cases I agree. If people were dealing with an actual human that they borrowed money from, and not an institution, I believe there is a higher moral obligation to do everything they could to honor that commitment. As that person would likely extend the same courtesy should the situation be reversed.

For those who “walk,” the right thing to do is to offer the house to the lender in good condition, and without a fuss (don’t make them kick you out). In my mind this is still a form of honoring the contract because you are facilitating the contract remedy process.


G Spot1 said...

Maybe it's because I'm a lawyer, but I have no problem with people walking away. The law rarely gets moralistic about contracts. If someone breaches, he pays damages to the other party. The rules of the game were quite clear to the banks when they entered these agreements - indeed, they wrote them - and they cannot cry foul when borrowers cut their losses and breach the agreement. The banks allowed borrowers to enter these contracts without verifying ability to repay, without proper valuation of the underlying collateral (i.e., inflated appraisals), and without requiring the borrowers to put any skin in the game. They have no one to blame for themselves.

If I were at a big lender, however, I'd put together teams of lawyers to start going after at least some of the people for the losses. Purchase money loans are non-recourse in California, but refinances are not. Generally, banks find it isn't worth the cost to pursue recourse against the borrower because the legal costs are high and generally the borrower has few assets to collect. But perhaps pursuing a few high profile cases will send a message and make a few borrowers think twice about defaulting.

Buying Time said...

I would love to see them go after some of the those who took out a HELOC, or bought another house, right before waking away.

As far as contracts go, the banks hold all the cards, they have the lawyers and staff to write the contracts and do the risk analysis. The only power the borrower has is the threat of walking. I certainly don't blame them if they exercise that right.

Patient Renter said...

Re: Walking away and moral obligations, I agree with what Mish points out, that it's a two way street:

Where was the moral obligation of those willing to lend money to someone who they knew could not possibly afford the house?

Where was the moral obligation of those willing to lend money to someone when the lender did not care how overpriced the home was?

Paul said...

Great hot button topic!

Gspot- I am pretty sure the banks are selling the uncollectable seconds (Helocs, etc.) from refi's to collection agencies for pursuit by the collection agencies. I haven't seen a flood yet, but I can't believe they are just going to write-off rather than sell even for $.10 to the dollar. Of course, a team of lawyers (in-house or outside) makes sense, but does anything the banks have done in recent time, make sense?

Perhaps, just perhaps, if the banks treated the customers (yes, that is what borrowers are, customers), with a little respect and dignity, then maybe more folks would give the banks a little more respect. Some examples of conduct that might help the banks: Provide customers with a telephone number and do not subject the customer to "voicemail hell." Provide trained (not just breathing, and not out-sourced to a foreign country) CSRs, who provide their names so that if repeat calls are necessary to work out a problem, folks can. Allow people to actually speak to the same CSR, twice or even more times if that is what is necessary, rather than a different CSR and different story every time. And for those banks who weren't prepared (or still aren't prepared), they should plan on more writedowns as more folks just walk away from their loans rather than deal with indifferent (or worse) banks.

Jacob said...

The sheeple have been convinced that a house is an investment. So when that investment goes bad, if you have the option to default and give back the asset, with no recourse, then why wouldnt you do that?

Its not like it is anything more than an investment to anyone anymore.

And you have a legal right to stay in the home until evicted right? So use that right to the fullest extent you can and save more $$. Works for me.

Sippn said...

Great points AB. I also believe the impersonal banks have created the "walk-aways"

Was discussing with a client who is a mortgage lender and we believe that foreign money will be the source of funds for mortgage money in the future.

The GSEs who are threatening not to lend to a "walk-away" for 5-7 years ... their threats are somewhat empty as they had only been participating in less than 35% of CA loans (no bullets in their guns).

SO then it comes down to morals or does it?

Say you're a buyer in JTS The Ranch of a $1.3 million large unit, paying a generous 20% down.

Your neighbor puts his on the market for $600K, $130K less than your loan because you added a 10% HELOC at close.

So you buy your neighbors REO or short for $600K, recovering $570K of your soon to be lost money by walking away from the beast.

Who created the moral problem?

The qualified borrower who paid $1.3?

The neighbor who had to bail out of the REO?

or the lender who sold the REO/short for so much less than orginal value.


BTW, I don't know much about the JTS project except the prices and I find the potential for walk aways in a place like this high as they are most of the top ten in FITs.

sacramentia said...

I don't care either is hard to judge without being in the situation. I just don't want the taxpayers to pick up the tab.

The next bubble (alt. energy) is building steam: