Democrat walking away from her house...

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Democrat walking away from her house...

Postby Lathander » Wed May 21, 2008 10:52 pm

Congresswoman Walks Away
Capital Weekly is telling the story of Congresswoman Laura Richardson's decision to Walk Away.


The story of the foreclosure of Long Beach Democrat Laura Richardson's Sacramento home is a tale of a real estate market gone sour. It is also an illustration of how far many candidates will go to seek elected office, even if it means quite literally mortgaging their own financial future.

While being elevated to Congress in a 2007 special election, Richardson apparently stopped making payments on her new Sacramento home, and eventually walked away from it, leaving nearly $600,000 in unpaid loans and fees.

Tax records at the Sacramento County assessor's office show that in January 2007, Richardson took out a mortgage for the entire sale price of the house -- $535,000. The mortgage amount was equal to the sale price of the home, meaning she was able to buy the house without a down payment, even though the housing market was beginning to turn.

A March 19, 2008 notice of trustee's sale indicates that the unpaid balance of Richardson's loan, which is held by Washington Mutual, is more than $578,000 –$40,000 more than the original mortgage.

The Curtis Park house is not Richardson's primary residence. She also owns a four-bedroom house in Long Beach, in her Congressional district. Real estate records show she purchased that house in 1999 for $135,000. An estimate from Zillow.com puts the current value of that house at $474,000

Like many homes that have gone through foreclosure, Richardson's new residence quickly became an eyesore. With Richardson gone, upkeep on the home lapsed, and neighbors began to get angry.

"The neighbors are extremely unhappy with her," said Sharon Helmar, who sold the home to Richardson. "She didn't mow the lawn or take out the garbage while she was there. We lived there for a long time, 30 years, and we had to hide our heads whenever we came back to the neighborhood."

While Richardson walked away from her loan, she bested Oropeza in a June special election, and moved on to Congress. As a member of Congress, Richardson has been asked to vote on legislation pertaining to the spike in foreclosures around the country.

On the biggest pieces of legislation having to do with government bailouts for people whose homes have entered foreclosure, Richardson has recused herself. She did not vote on legislation by Rep. Barney Frank, D-Mass, which would direct $2.7 billion in government funds to help an estimated 500,000 homeowners who are at risk of foreclosure.

Richardson also did not vote on a measure by Rep. Maxine Waters, D-Los Angeles, that would give local governments $15 billion to purchase, rehab and resell foreclosed properties.

While Richardson walked away from her bank loan, she has begun to pay herself back for the money she personally invested in her initial race. Records show that Richardson spent $587,000 out of her Congressional campaign committee since declaring her Congressional candidacy through March of this year. Of those expenditures, Richardson has spent $18,000 of that money to begin repaying herself for the money Richardson loaned to her campaign.

According to documents at the Sacramento County Clerk's office , Richardson first received a default notice in late 2007. By December 2007, less than a year after Richardson purchased the house, she was behind in her payments by more than $18,000.

Three months later, on March 19, a notice was filed with the county that Richardson's property would be sold at auction. According to the documents, the unpaid balance and other charges Richardson owed the bank was $587,384.
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Source:
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Re: Democrat walking away from her house...

Postby Ragorn » Wed May 21, 2008 11:10 pm

Now that's dedication to the campaign. I admire her.
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Re: Democrat walking away from her house...

Postby Corth » Thu May 22, 2008 12:31 am

In California, pursuant to some consumer protection law or another, the mortgages are non-recourse. If you walk away, the lender cannot obtain a deficiency judgment against you for the difference in the amount owed and the amount received at the foreclosure sale. For me, its a no brainer. If you live in California and your house is worth significantly less than the mortgage, the smartest thing to do is walk away. Its a simple business decision.

Even in states where the lender can get a deficiency judgment, it probably makes sense in most of these cases to walk away. Lenders might be allowed to get deficiency judgments, but choose not for their own business reasons. Additionally, you will no longer get hit with a tax bill for the deficiency.

The foreclosure assistance programs being promulgated by the federal government will generally fail. Those schemes are designed under the assumption that people would continue to pay their mortgage if they were able to afford to make payments. However, ability to pay is irrelevent here. People won't pay, and shouldn't pay, not necessarily because they can't afford it, but because its a bad idea to do so from a financial perspective.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth

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Re: Democrat walking away from her house...

Postby Gormal » Thu May 22, 2008 12:46 am

This is happening all over San Diego with how bad the real estate market is down here now. Especially with military personnel who are reassigned around the world, they are starting to just walk away like this because they can't possibly sell their homes.
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Re: Democrat walking away from her house...

Postby Yasden » Thu May 22, 2008 2:01 am

I just bought a brand new house for $303,850. 1778 square foot rambler, 3 bedroom 2 bath, bonus room which can be used as a 4th bedroom. The house was lowered $30k from $329,950 in February to $299,950 and I managed to work a deal to get them to pay not only my closing costs, but also the 3% required by FHA (the increased amount on the mortgage compensated for the closing costs).

I was slightly over my debt-to-income ratio due to the almost $80k in student loans I have on me. FHA was at 50%, and I was at something stupid like 50.43, so I had to be manually approved.

The real estate market is starting to pick up, but house values won't start the upward climb again until houses begin to start selling like they were before. The FHA exceptions are going away at the end of this year, so if you're really looking to get into a house, now's definitely the time.

Here in the Puget Sound area of Washington, house values continue to go up annually on average (7% a year on average), although some areas saw a decline simply because people in the area were forced to sell their houses at a loss. My previous house (the one I was renting but closing fell through 2x) had this issue, and the wner had gone behind my back 6 months ago and refinanced it at a $10k higher amount. The house's value fell below that, he was making interest-only payments, and I told him to go to hell for violating our purchase-and-sale agreement.

My wife has to go back to work just so we can make the mortgage payments. I could afford them on my salary but with the rising cost of gas (I'm putting about 28,000 miles on my car annually just from commuting from school to work), I'm eating away roughly 10% of my wages each month. That, and the rising costs of energy to power a home (especially natural gas) have forced me to take as many measures as I can to conserve energy. I've replaced literally every single bulb in my house, and next week the plumber will be here to install the tankless hot water heater I bought from Home Depot (original plumber has to install it so I don't void the warranty on the pipes in the house). I have brand new EnergyStar appliances throughout, as well.

So needless to say, I'm one of the many who have been forced to completely change my lifestyle simply because of the cost of gas. I can't carpool or use the bus because I start my work day at 3-4 AM. That, combined with the increased costs of food, especially with the baby, have eaten away far more of my wages than I care to admit. I completely understand why a lot of people are going into foreclosure, even though they make enough to pay their mortgage according to how the lenders calculate your pre-approval amount. A lot of people saved themselves from certain doom by refinancing into a fixed mortgage off of their nice cushy 4-5% ARMs, but now they're facing that same doom again simply because of the energy and wheat crisis.
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Re: Democrat walking away from her house...

Postby Corth » Thu May 22, 2008 2:09 am

Seems to me like you got in over your head a bit buying that house.

By the way, if prices go up 7% a year they will double in price every 10 years or so. So your 300k house will be 600k in 2018. 1.2 mil in 2028. 2.4 mil in 2038. 4.8 mil in 2048. 9.6 mil in 2058. 19.2 mil in 2058. If your children hang onto it for a while they might see it worth almost half a billion dollars! There better be a whole lot of inflation between now and then. Otherwise who is going to be able to afford your modest house?

Not going to happen. Real estate historically tracks inflation. Simple as that. 7% a year is a complete fantasy. 3% a year is a lot more realistic.

IMHO, nominal home prices will drop nationally about 30% by the time this is done, with some places being a lot more and some a lot less. If you take into account inflation, real declines will be a lot more significant. I don't think you'll see any significant turnaround for another 4 or 5 years at the earliest. If your buying a home right now you are definitely trying to catch a falling knife.

But opinions are like assholes... :)
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Yasden » Thu May 22, 2008 2:16 am

I'm just stating what I've seen in this area. Over the past 6 months, especially the last 2, people are getting out more and more each weekend and looking at open houses. While that might not be the trend everywhere, it is looking that way here. I was the first homeowner in this development (17 plots, 4 houses built so far), but my next door neighbor just got his keys this afternoon, and is moving in this weekend. The other 2 houses are larger 2-story models, but in the 3 weeks I've lived here, I've seen easily 50 people driving through or doing walk-throughs with the realtor (corner house is the demo model).

I didn't get in over my head per se, as I will have absolutely no problems paying my mortgage in 6 months when my car is paid off. I told my wife that if she wants a fence put up and if she wants to get a new car when mine's paid for, she needs to get back to work. My budget is tight, but I haven't been late on a payment in 7 years. I'm of the mindset that I will do whatever it takes to make sure I have shelter, food, and clothing for my family long before I have anything for myself. Of course, I did use a little emotional blackmail by threatening to drop out of school (9 months left) to get a 2nd job in the evenings. I probably will anyway when I'm done just to have the extra money to either put into savings or apply toward something else (like my $6000 Home Depot debt that I plan on using my 2008 tax return towards).
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Re: Democrat walking away from her house...

Postby avak » Thu May 22, 2008 3:38 pm

Corth wrote:If you live in California and your house is worth significantly less than the mortgage, the smartest thing to do is walk away. Its a simple business decision.


This concisely sums up what is wrong with our American version of capitalism. Not saying you're wrong, just sayin'.

Ah, you know the cliched story, my grandfather used to make land deals based on a handshake and verbal agreement. Just not like that now....for better or worse.
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Re: Democrat walking away from her house...

Postby Corth » Thu May 22, 2008 8:18 pm

Its exactly whats great about American capitalism, imho. People are free to make decisions in their own best interest. I can't say enough in favor of freedom.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Kifle » Thu May 22, 2008 9:39 pm

Corth wrote:Its exactly whats great about American capitalism, imho. People are free to make decisions in their own best interest. I can't say enough in favor of freedom.


Corth, unless certain freedoms are checked, things run amuck. The free market and poorly distributed wealth are one of those freedoms. The bottom line is that the free market that big business and "capitalists" push for is, as your catch-phrase so adequately puts, an affront to human dignity.
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Re: Democrat walking away from her house...

Postby Corth » Thu May 22, 2008 10:24 pm

Your mother is an affront to human dignity!

I don't see what the problem is here. Its the little guy getting over on the banks! Isn't that kind of life affirming in a bleeding heart sort of way? :)
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Kifle » Thu May 22, 2008 11:45 pm

Your mom's an affront to sex holes.

I just think it's funny how you are a capitalist that agrees with behavior that degrades the backbone of the US economy.
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Re: Democrat walking away from her house...

Postby Corth » Thu May 22, 2008 11:56 pm

Walking away from a non-recourse mortgage that your underwater on isn't good behavior or bad behavior. Nor is it criminal behavior. There is no moral element to it. Its smart behavior.

Its only central planning socialist types who think that the economy can be managed. In reality, the economy is simply a reflection of millions of individuals acting in their own best interest.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby shalath » Fri May 23, 2008 12:10 am

Corth wrote:Walking away from a non-recourse mortgage that your underwater on isn't good behavior or bad behavior. Nor is it criminal behavior. There is no moral element to it. Its smart behavior.

Its only central planning socialist types who think that the economy can be managed. In reality, the economy is simply a reflection of millions of individuals acting in their own best interest.

Just to back this up - surely the banks take into account the risk of this happening when they set the cost of borrowing the money in the first place? If an individual is legally entitled to just hand over the keys and leave, it becomes the bank's problem, which they budgeted for, and on average they will make money.

Here in the UK it wouldn't be legal to just give up and leave - people sometimes are forced to rush sell properties at a loss and still owe banks tens of thousands of pounds, leading them to have to declare bankruptcy. Your system sounds better for the individual...
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Re: Democrat walking away from her house...

Postby Corth » Fri May 23, 2008 12:25 am

Shalath,

You have it exactly right.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Sarvis » Fri May 23, 2008 12:36 am

shalath wrote:
Corth wrote:Walking away from a non-recourse mortgage that your underwater on isn't good behavior or bad behavior. Nor is it criminal behavior. There is no moral element to it. Its smart behavior.

Its only central planning socialist types who think that the economy can be managed. In reality, the economy is simply a reflection of millions of individuals acting in their own best interest.

Just to back this up - surely the banks take into account the risk of this happening when they set the cost of borrowing the money in the first place? If an individual is legally entitled to just hand over the keys and leave, it becomes the bank's problem, which they budgeted for, and on average they will make money.

Here in the UK it wouldn't be legal to just give up and leave - people sometimes are forced to rush sell properties at a loss and still owe banks tens of thousands of pounds, leading them to have to declare bankruptcy. Your system sounds better for the individual...



I don't know that banks plan very well for this... I mean, aren't we having a huge crisis right now because they didn't?
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Re: Democrat walking away from her house...

Postby avak » Fri May 23, 2008 12:37 am

Corth wrote:Walking away from a non-recourse mortgage that your underwater on isn't good behavior or bad behavior. Nor is it criminal behavior. There is no moral element to it. Its smart behavior.

Its only central planning socialist types who think that the economy can be managed. In reality, the economy is simply a reflection of millions of individuals acting in their own best interest.


To say that there is no moral element to that scenario is, uh, interesting. There may be no -law- against the behavior, but there are numerous moral elements to the situation. It's smart because you can save a whole bunch of money? And that's just it? You save money so it is the 'right' thing to do?

As for an unmanageable economy...not that it is relevant to the topic, but it's government's job to adjust the equation so that desired behaviors (for the greater society) are in an individual's best interest. Of course that makes the economy manageable.

I realize you may be taking this opportunity to look at some distilled arguments, but quite frankly, it actually comes across as somewhat naive.
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Re: Democrat walking away from her house...

Postby Corth » Fri May 23, 2008 12:42 am

OK so tell me what exactly is immoral about breaching a contract or defaulting upon a secured loan.

Yes, it is absolutely smart to walk away from a non-recourse mortgage that you are significantly underwater on. Now tell me why its wrong to do it.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby teflor the ranger » Fri May 23, 2008 12:46 am

Corth wrote:OK so tell me what exactly is immoral about breaching a contract or defaulting upon a secured loan.

Yes, it is absolutely smart to walk away from a non-recourse mortgage that you are significantly underwater on. Now tell me why its wrong to do it.


There is not very much there. Secured mortgages are simply that. Secured by the transfer of property.

Banks that make bad loans, get bad payments. It's not exactly a surprise.
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Re: Democrat walking away from her house...

Postby Corth » Fri May 23, 2008 2:00 am

Exactly Teflor.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Kifle » Fri May 23, 2008 4:09 am

shalath wrote:
Corth wrote:Walking away from a non-recourse mortgage that your underwater on isn't good behavior or bad behavior. Nor is it criminal behavior. There is no moral element to it. Its smart behavior.

Its only central planning socialist types who think that the economy can be managed. In reality, the economy is simply a reflection of millions of individuals acting in their own best interest.

Just to back this up - surely the banks take into account the risk of this happening when they set the cost of borrowing the money in the first place? If an individual is legally entitled to just hand over the keys and leave, it becomes the bank's problem, which they budgeted for, and on average they will make money.

Here in the UK it wouldn't be legal to just give up and leave - people sometimes are forced to rush sell properties at a loss and still owe banks tens of thousands of pounds, leading them to have to declare bankruptcy. Your system sounds better for the individual...


That is proven by the way banks have been folding in the US and one of the largest lenders had to be bought out? Yeah, this rampant forclosure mindset doesn't hurt banks -- they all have enough investments to cover their losses. Give me a fucking break.
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Re: Democrat walking away from her house...

Postby Kifle » Fri May 23, 2008 4:11 am

Corth wrote:OK so tell me what exactly is immoral about breaching a contract or defaulting upon a secured loan.

Yes, it is absolutely smart to walk away from a non-recourse mortgage that you are significantly underwater on. Now tell me why its wrong to do it.


I don't even have to write anything... but I will. In this instance, the secure loan was given based on the value of the collateral -- which has greatly dropped. Therefore, you must treat this credit as unsecure. So, just like in an unsecure line of credit or loan, the banks do not get a return on their investment when there is a breach of contract. In fact, the opposite happens. So, in all actuality, these recent defaultings must be equated to a breach of contract on unsecure loans rather than the "ethical" breach of a secure loan.
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Re: Democrat walking away from her house...

Postby Corth » Fri May 23, 2008 5:23 am

Oh please, the banks weren't capable of anticipating reduction in value of the collateral? Oh those poor unsophisticated banks. They really got taken advantage of by the little guy.

Moreover, even if it wasn't secured, its perfectly ethical to default as a business decision. Credit card companies, for instance, make unsecured loans all the time. Is it immoral to default on it? Of course not. From their perspective its a cost of doing business. They expect a certain amount of loans to default, and they charge a suitable risk premium so that it continues to be a very profitable business.

I find it interesting that some of the people who often argue that corporations take advantage of consumers are now saying that its somehow wrong for ordinary people to legally do whats in their best interest. Banks and corporations hire the most expensive attorneys, acountants, analysts, and so on, to take into account every possible option and contingency. Yet ordinary joe shmo shouldn't protect his own ass when dealing with them.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Demuladon » Fri May 23, 2008 5:34 am

The lender should have insisted on Morgagee Insurance to protect themselves against the loss.
(Edit:Corth beat me to it...)
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Re: Democrat walking away from her house...

Postby Ragorn » Fri May 23, 2008 2:33 pm

It's immoral to breach a contract.

Thankfully, there's no room for morality in business, nor should there be.
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Re: Democrat walking away from her house...

Postby Corth » Fri May 23, 2008 3:03 pm

Well I think we can all agree that its perfectly legal to breach a contract... nobody is trying to say otherwise. The issue is whether or not its moral. I really would like to see someone explain why breaching a contract is immoral other than just a conclusory statement that it is.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Gormal » Fri May 23, 2008 3:18 pm

Every time I visit my bank, I look the teller straight in the eye and tell him "This transaction is our bond. Now and forever." Then we usually embrace or spoon a little before I leave. Financial decisions are from the heart man.
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Re: Democrat walking away from her house...

Postby Kifle » Fri May 23, 2008 3:50 pm

Corth wrote:Well I think we can all agree that its perfectly legal to breach a contract... nobody is trying to say otherwise. The issue is whether or not its moral. I really would like to see someone explain why breaching a contract is immoral other than just a conclusory statement that it is.


I didn't say it was immoral, just unethical. Morality and ethics are different. In the case of the secure loan, I think I explained pretty well how it was unethical in this situation. I'm not sure what else you're wanting, unless you want a long-winded philosophical debate on the subject of ethics and business.
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Re: Democrat walking away from her house...

Postby Corth » Fri May 23, 2008 4:06 pm

Kifle,

Your message assumes that it is ethical to default on a secured loan but not on an unsecured loan. You essentially say that we should consider some of these mortgages as unsecured, and thus it is unethical to default on them. As best I can tell, you stated in a conclusory manner that it is unethical because the lender does not get a return on investment. I see where your going with this, but I think you need to articulate it some more so I can understand your position. Why does the lender's return or lack thereof on the investment make a difference into whether or not the consumer's action was ethical?
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby avak » Fri May 23, 2008 4:46 pm

I think you need to take a step back and look at intent. Yes, the lenders may (are) anticipating losses. Yes, the borrowers know that they have entered in to a unique contractual relationship, unlike in most other states and situations, where the consumer can legally do what has been talked about.

But do you think the two parties sat around the desk cajoling back and forth about the speculative housing market? The -intent- is that the lender is offering a service, for which the borrower pays fees and interest. Do these contracts actually state that the borrower has the option to 'walk away' based on a strategic financial analysis? Or is it the case that the CA law, including the insane anti-business law that created non-recourse loans, provide a loophole for such behavior?

Wouldn't it be funny if the banks could decide to confiscate the house because the market would allow them to sell it at a price that would exceed the roi for the loan? Would that be unethical or immoral?

Anyway, I was at the grocery store today and I bought a handful of apples. I set them up in the top of the cart where you put a big fat baby. The apples fell through the hole where I guess fat baby legs go. The produce guy was standing right there as two of my apples bounced on the floor. We looked at each other. He said, 'don't worry about it, just grab some new ones and I'll toss those.' I picked them up and bought them.

Why should the price of your apple include the costs of my mistakes?
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Re: Democrat walking away from her house...

Postby Sarvis » Fri May 23, 2008 5:16 pm

Corth wrote:Well I think we can all agree that its perfectly legal to breach a contract... nobody is trying to say otherwise. The issue is whether or not its moral. I really would like to see someone explain why breaching a contract is immoral other than just a conclusory statement that it is.



So wait, it's both moral and legal to breach contracts? What the fuck is the point of a contract, then?
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Re: Democrat walking away from her house...

Postby Gormal » Fri May 23, 2008 5:50 pm

Well part of the contract does stipulate what happens if you breach the contract. If its in there and you want to abide by it... where's the fire?
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Re: Democrat walking away from her house...

Postby avak » Fri May 23, 2008 6:03 pm

Also, don't completely overlook the original post. "Democrat walking away from her house..."

What connotation does that invoke?

And inside the article, "The neighbors are extremely unhappy with her," said Sharon Helmar, who sold the home to Richardson. "She didn't mow the lawn or take out the garbage while she was there. We lived there for a long time, 30 years, and we had to hide our heads whenever we came back to the neighborhood."

Apparently someone holds her accountable.
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Re: Democrat walking away from her house...

Postby Gormal » Fri May 23, 2008 6:09 pm

Responsible, not accountable.
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Re: Democrat walking away from her house...

Postby Corth » Fri May 23, 2008 6:53 pm

Right, Gormal. There are consequences that can occur if you breach a contract. You can be sued for any one of a number of different remedies.

Avak, I agree that the title of this thread is unfortunate. Its an interesting topic, but there are plenty of both republicans and democrats walking away from their homes, and I think that both sides are doing the smart and ethical/moral thing.

As to intent.. well the loan documents clearly spell out what happens in case of a default. In addition to foreclosure, the banks, in most states, can sue for their net losses. California is a liberal state and takes extra efforts to protect consumers, so the mortgages there are not recourse. The intent is to borrow money per the terms articulated in the loan documents. The bank is very aware of what can happen if property values go down, and the borrower is not only well within their rights, but acting in a rational and ethical/moral manner when he/she uses the provisions within the agreement for their own benefit. In this case, walking away and allowing the bank to seize the collateral.

I have no sympathy for the banks. They made a business decision to loan money to people they knew would never be able to pay them back. The entire house of cards rested on the belief that real estate values could continue appreciating at 7-15% indefinitely. Of course they can't. When values are going up there are very few foreclosures because you can always just simply sell for a profit if the payment becomes onerous. When values go down, then people are locked into that mortgage and foreclosures go through the roof. This was bound to happen, and myself and many others were predicting for years it would. I cannot possibly begrudge anyone who chose to just walk away and face the consequences. Its the option given to them by the banks themselves.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby Kifle » Fri May 23, 2008 7:41 pm

Corth wrote:Kifle,

Your message assumes that it is ethical to default on a secured loan but not on an unsecured loan. You essentially say that we should consider some of these mortgages as unsecured, and thus it is unethical to default on them. As best I can tell, you stated in a conclusory manner that it is unethical because the lender does not get a return on investment. I see where your going with this, but I think you need to articulate it some more so I can understand your position. Why does the lender's return or lack thereof on the investment make a difference into whether or not the consumer's action was ethical?


Personally, I don't think breaching any contract is ethical; however, I do understand how one would see how breaching on a secured loan contract is fine. I just hold myself to a more strict set of personal ethics is all. In my mind, there are very few reasons to breach a contract and being able to afford your mortgage and still defaulting is not one of them.

To answer your last question(s), it would be less of a problem because the bank would not lose out (and would still gain) through forclosure because they would recieve what they gave through collection of collateral. They still make what little they did while the owner was paying on intrest as well as the principle balance; therefore, they never lose any money, yet they still gain a bit by doing business. This may or may not cover the cost of labour to process the entire process of lending (paper work, in-house lawyer fees, etc.). So, while it can be considered ethical by the standards of recouping loss to where there is minimal or negligable loss within a breaching of a secured loan contract under optimal conditions, there is still the grey area of whether or not breaching is inherently unethical in business practices.

Insofar as secured loan contracts go under sub-optimal conditions (such as the housing market now and loans for new cars), a breach would cause the lender to lose money. If we look at this scenerio in a smaller context you could easily see how me lending my friend 20 dollars while he gives me 20 dollars worth of food as collateral would be a huge loss in the end if he chooses to breach. If I need that 20 dollars next week, and he doesn't pay it back, I have the food, but most is spoiled now and the net gain I would recoup from resale would end up being far less than what I had in the first place. The borrower screws the lender out of something that was never the borrowers in the beginning. In this case, the lender is screwed since he can't pay his bills now (lets assume). Now, without this money, the borrower would be screwed (lets say he owed a loanshark or something). So the borrower has repositioned his bad situation onto the lender who was doing a favor. The lender in this situation is double fucked.

You can equate the above situation (or the housing market) to a man on a sinking ship with other people. He takes the last lifeboat for himself. If we compare it to the secured loan and why people think it's ethical, we could say the man thinks to himself, "I think there was another lifeboat (secured loan)... They should be ok with floating debris at the very least (secured loan treated as an unsecured due to depreciated asset as collateral). I didn't do anything wrong." To compare it to an unsecured loan default the man would say, "Sucks to be them. At least I'm safe." In both situations, however, nothing has changed. The people he left behind are still fucked regardless.

Now, do I think defaulting on a secured loan (where depreciation is rampant) is great business. Shit yes, and I have done it and will continue to do it. Does this mean I think it's ethical? Not in the least. It is definately more ethical than defaulting on an unsecure loan, but going back on one's word is dishonest. So, yeah, it's great business, bad ethics. But, ethics and business are a messed up combination, so...
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Re: Democrat walking away from her house...

Postby Ashiwi » Sat May 24, 2008 12:21 am

Because we would never want to encourage anything like honesty or integrity in people; what would be the business sense in that?

Truth in justice? Pffft, if we wanted that, we wouldn't have attorneys in the first place.
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Re: Democrat walking away from her house...

Postby Corth » Sat May 24, 2008 12:35 am

Yawn Ashiwi. You are growing duller over time.

Kifle, you make some good points, I'll address them within the next couple of days when I have a chance to look at it closer.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby shalath » Sat May 24, 2008 8:35 am

Bear in mind that, when a bank loans money on a house, they value that house. They make a decision, saying "This house is worth X to us as a bank. If the guy can't pay, we'll have got the house for X".

When property prices go down, the bank might lose out. They are taking the same risk as the rest of us when investing in the property market.

If they had done their due dilligence, they will have only lent a percentage of the perceived value, to minimise their risk. Also they will have checked carefully to make sure that the person they are lending the money to can afford to pay - even if costs go up and prices go down.

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Re: Democrat walking away from her house...

Postby Gormal » Sat May 24, 2008 9:41 am

When you take out a loan you accept a certain amount of risk based on the market, banks take the same risk. If you walk away, you risk destroying your credit rating but you save thousands of dollars in the short/semi long term. It makes perfect financial sense to walk away from a losing prospect, and expecting people to continue paying because "its the right thing to do" is ludicrous. Banks will adjust their loan criteria and interest rates to compensate, and people will and should do what is best for them. No one's going to lose their job over someone saving tens of thousands of dollars so why are you guys pulling the ethics card? How many of you can afford 6 month's salary because its the ethical thing to do?
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Re: Democrat walking away from her house...

Postby avak » Sat May 24, 2008 4:24 pm

I would just go back to the example of the opposite scenario. The bank decides to reclaim the property based on the increased value and sell it on the open market. If that were contractually legal, would it be ethical? Of course not.

There are many examples of strategies that are perfectly legal contractually, but completely unethical. Look at the credit card industry as a prime example.
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Re: Democrat walking away from her house...

Postby Corth » Sat May 24, 2008 8:33 pm

Avak,

Actually, there ARE new loan products which allow the bank to share in any potential appreciation on the house. There isn't any particular reason why it shouldn't be done that way.

People are free to structure their financial dealings in just about any way they want, so long as no laws are broken. The banks were fully aware of what would happen if property values decreased. They lost the bet. Cie la vie.
Having said all that, the situation has been handled, so this thread is pretty much at an end. -Kossuth



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Re: Democrat walking away from her house...

Postby kiryan » Thu Jun 05, 2008 10:13 pm

First off I totally agree with Corth on his analysis of Targsk's situation. Targsk you sound like someone who bought in and is trying to sell yourself and the rest of us on your decision. You're counting on the economy to maintain and the sky high foreclosure rate will not affect you significantly. Good luck with that, maybe you read your local market well, maybe not.

On morality of "breaking" a contract. Obviously the main foundation of the contract is that you are going to pay everything off, however, part of the contract is also what the parties are going to do collectively if you can't / don't make your payments. Because interest is what compensates the lender for risk and the default terms are clearly laid out, I don't think its immoral or unethical at all to walk away from such a contract as everyone involved was informed and made a decision based on risk.

Now if you borrow $100 bucks from your buddy and promise to pay him back with no if ands or hedges about it, thats different. That would be a moral obligation because your buddy was not compensated for his risk nor did the two of you discuss default scenarios. Its really not a business decision, thats a mans word. Your typical contract is a business decision not a bond between to men.

I had an argument with one of the associate pastors at church who basically held the position that you pay off unsecured debt before secured debt because it was the morale thing to do. I disagreed strongly and he fell back on "thats what other experts say". There is a concept of hssed (sp) which stipulates that both parties work together to try and get the most favorable outcome, but while an individual is often willing to work with the lender, the lender is often more interested in following the letter of the contract. That is what is happening today. Some people are willing to stay in their homes that they owe more than its worth on, but are still being foreclosed on because of the terms of the contract. I don't blame anyone from straight walking away from these kinds of loans.

Its a prudent business decision as Corth stated earlier.

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