No we dont. You can let them fail and rebuild.
There will be growing pains, but that’s life.
OT: 2 part question
- Thread starter paindonthurt
- Start date
There will be growing pains, but that’s life.
No one can take advantage of you in a loan if you don’t let them. That’s a fact.
There isn't a problem with laws regarding cramdowns on mortgages. The problem that arose in the financial crisis is that you had so many covenants related to MBS's that people servicing mortgages didn't have the authority to do mortgage workouts that probably would have been economically smart. Not sure if they've changed how those are written since then or not. If you don't have a crisis to the point where there are so many foreclosures that there is not money to buy them up at reasonable prices, then you probably don't need them to be different. But while they claim that underwriting standards have improved enough to prevent another crisis like 2007-2009, usually when people say things like that the reality is they have just fixed things enough for the next crisis to look different.
If you want to "fix" it by allowing cramdowns for future loans, that will certainly provide a huge incentive to require bigger down payments, stricter underwriting, higher interest rates, etc. I think that'd be ok but not sure it'd be good. Not sure how easy it'd be to write the laws where cramdowns kept bankrupt people in houses without hurting them long term and without incentivizing people with most of their wealth in bankruptcy protected retirement accounts from declaring bankruptcy if there is a big market drop.
Let's call it what it is: a big number of Americans believe being poor is a moral failure.
The reason isn't constantly changing, there just isn't going to be one variable in a complex economy that can explain everything. The basic mechanism is more money chasing the same number of goods and services means the goods and services will be nominally more expensive. If the nominal supply of money stays the same and the amount of goods and services drops, things will be more expensive. If the nominal supply of money stays the same and the amount of good and services increases, things will be less expensive. What explanation do you have that would make more sense?
Let me try explaining the reality this way. Say a bank makes a dumb loan. The mortgage holder will never be able to repay it. He's underwater. He defaults. He declares bankruptcy. At this point, either the bank takes a loss (bailing out the mortgage holder), or the bank is made whole (bailing out the bank). There is no non-bailout option. That's reality.
IMO, since the bank as a RISK PREMIUM via the rate, and fees, and especially when the loan is already guaranteed by the govt, and since the mortgage holder has paid towards the loan and will be walking away with nothing....the bank should be eating some profit (and maybe even taking a loss).
They can when they don't follow the terms of the loan or the law, and the law lets them. Real world fact.
There is absolutely a non-bailout option unless you have an incredibly broad definition of bailout. Very simply, the lender and the borrower have an agreement where if the borrower doesn't pay, the lender gets the asset back. Depending on the state and type of loan, the agreement may be that giving the property back satisfies the borrowers obligations (i.e., non-recourse), or they may be responsible for paying back any deficit that still exists after selling the property in foreclosure. If it's non-recourse, then there is no bailout. They just follow the terms of the agreement and the law that they knew while making the agreement.
If it's recourse, the borrower will either pay it back or they will negotiate a settlement (in which case there is no bailout in either case) or they will declare bankruptcy and the debt to the lender will be lumped in with other unsecured debt and they will get some portion paid back pursuant to bankruptcy rules. I wouldn't call that a bailout of the borrower, but even if you do, that is just one of several potential scenarios, and the others don't involve a bailout.
In reality, the original lender will likely sell that debt to either private buyers or the government, and I think the post financial crisis rules (and adjustments by MBS buyers) do ensure that original lenders maintain some skin in the game, so they're not just collecting a fee for creating the mortgage and then selling the mortgage along with all the risk to other people or the government. I don't know how those rules work though; I could have just been suckered by a lot of misinformation and brokers and original lenders do get to collect money for creating ****** loans and pass the risk on to suckers or the government.
Its a shame you stopped there, since that comment wasnt even directed to you. That means you missed the response which was directed to you. In there, I pointed out how 17ing awful it is to just categorize everyone as deadbeats when many of those very people were 'working men' who held blue collar jobs or were small business owners, etc etc. You hold 'working men' in high regard, yet many you despise were exactly that.
As for the student loan forgiveness comment, if you would like to start another thread about that, have at it. Or if you want to PM me about it, go ahead. All I care to say here is that the government covering debt for a group/industry is hardly new. The outrage sure seems selective though. I am not saying student loan forgiveness is right and am not saying its wrong. I only commented on the selective outrage.
There was no realistic scenario where the government doesnt step in to help prop up the banking industry.
As I remember, multiple banks that werent even in trouble had to accept money, as a way to not cast blame on specific institutions(its been 15 years, my memory may be fuzzy on that). And remaining banks were incentivized to absorb some of the failed banks.
If this didnt happen, 17ing chaos at a global scale would have ensued. Pretty sure that was the overwhelming narrative, and not just some lefty spin.
I personally would have loved to see banks that were sketch as 17 be allowed to fail. Good riddance to them- they were irresponsible in their lending and pay the price. But again, the fallout from that would have been way worse. A lot of people unconnected to the banking disaster were negatively impacted due to job loss from the economic correction. Thats awful, but even more would have been hurt without the intervention that took place.
You say there will be growing pains and thats life, but we are talking about the fallout that would have hurt even more unconnected people than were already hurt. That isnt growing pains- its lawmakers and giant banks playing with lives and hurting people.
Oh man, why didnt anyone think of this 15 years ago? The answer was so simple.***
Keep in mind the terms of the scenario: it's a loan the mortgage holder can never pay. He defaults. Either he gets released from the terms of the payback (bailout, loss of profit for the bank, even if allowed by the loan), modified terms (bailout, loss of profit for the bank), or the bank is made whole by an outside party (bailout).
ETA: in context of the thread, the bank taking a loss on many of these loans (even if allowed by the terms of the loan so not a "bailout" individually if you want to define it that way), will lead to massive bank losses and thus a govt bailout, realistically.
I wouldn't consider handling a non-performing loan pursuant to the terms of the loan and the law in existence at the time the loan was made a bailout. By that treatment, you've just made breach of contract into a type of bailout, which makes bailout not very useful as a term.
But certainly politically we are going to bailout banks when things get bad. But they typically have losses under the bailouts. Not enough to prevent significant moral hazard, but they aren't made whole. They are just kept from failing, which is still usually a phenomenal deal for bond holders and sometimes a phenomenal deal for stock holders.
Well statistically speaking you have like a 90% plus chance of not living in poverty if you do 2 things.
1. don’t have a kid outside of marriage
2. Have any full time job
3. Graduate high school
you might not call that a moral failure but it’s certainly a personal decision.
Let me try explaining the reality this way. Don’t take a dumb loan. Ignorance isn’t an excuse.
They don’t follow the law but the law lets them? Makes sense.
I fought the law and the law one.
I refrain from hurting your feelings again.
Certainly. But people who are truly poor don’t have the option to be taken advantage of, because lenders won’t give them the time of day. That was my only point.
Not selective. You just pick and choose.
If you take out a loan, you should repay it.
If the government gives you a grant, you don’t have to repay it.
For the record I was against COVID relief in the way it was passed for businesses and individuals.
There was certainly a realistic way but:
A. Politicians politic
B. No one wanted to sacrifice
C. Winner - we could have prevented it by not meddling in the first place
People who are truly poor shouldn’t be buying houses.
So if you agree with that I’m not sure where we differ in opinion.
Except that we handle breach of contract by a court deciding who takes a loss. Bailout.
It does make sense. They ignore the terms of the contract and the law, and you the individual cannot get relief via the courts. It's happening to me right now for a student loan I cosigned for someone long ago. The lender ignored the contract and the law in running up the principle via forbearances, and unless I want to spend a million fighting it there doesn't appear to be much I can do about it. Turns out the terms of a contract don't actually mean anything in America anymore, not for us anyway.
For this discussion, the banks ignored the contracts and laws about how they may foreclose. The system let them get away with it.
I apologize if reality is too much for you to handle.
Please. A big number of Americans believe being any number of innocent traits is a moral failure. You look down your nose at others who think differently as much as anyone.
How do you think foreclosures (which result from a breach of contract) are handled? There are sometimes remedies under contracts that don't require judicial action to enforce initially, but if there is ever a dispute about how they are enforced, you end up in court and they make a determination. At the end of the day, parties to a contract where the counterparty breaches often aren't made whole. That doesn't mean the breach of contract is a bailout. It's just a reflection of the fact that you can't get blood out of a turnip.
The common formulation of this is I think: graduate high school before getting married and get married before having kids, and you have a very low chance of living in poverty and a lower chance of staying there, particularly if you stay married.
I think that's all more or less correct, but I think that's overstated some because the type of people likely to graduate, then get married, and then have kids are different than the people that are not likely to do those things in that order. Same thing with home ownership (to bring it somewhat back to the original topic). Yes, home ownership is generally a good way to force saving and build wealth. But it looks like a much stronger effect than it is (or at least historically it did) because traits like focusing on the long term and being disciplined enough to save (and having skills to generate enough money to do so) cause home ownership and cause wealth accumulation outside of home ownership. It's not just home ownership that is causing all that wealth, although it helps contribute to it. Just like it's not just doing those three things in order, although it helps contribute to it.
So, govt (court) is deciding who is getting relief and who is taking a loss, and this is different than a bailout where the govt gives someone relief at the expense of someone else?
Are you being serious? Contract enforcement is just a basic part of a functioning society that helps limit the need for anybody to result to violence. I don't think anybody thinks having courts available for contract enforcement is a bailout or that every judgment from court or enforcement of a judgment is a bailout.
That's very different from a situation where the government comes in and gives people something they're not entitled to because of voluntary agreement between parties.
Ok, (corrupt) use of govt power for banks is good, use of other govt power (Congress, Executive?) for citizens is bad. Of course.
But anyway, just because a bailout mechanism has existed for a long time as a codified part of law (bankruptcy), doesn't make it not a bailout. The citizen is literally getting relief from their creditors outside of their contracts. That's a bailout.
You are being incoherent. I'm not arguing that the use of government power for banks is good. I just acknowledged the political reality. I wish we had not done so many bailouts and had not encouraged so much moral hazard. But we did and now it's even harder politically to refrain from the next buyout.
To the extent bankruptcy is a bailout of creditors, that is a statutory remedy duly passed through congress. So to the extent you think that's a bailout (which I disagree with), I am saying following the laws as written by Congress and not vetoed by the executive (or vetoed and overridden although I'm guessing there aren't many bankruptcy laws that passed over veto) is good. Even if the laws are not exactly what I would choose, people have contracted based on an understanding/expectation that those laws would apply, and it's good for an orderly society to generally uphold those expectations.
Except that every bailout is just as constitutionally valid (arguably I guess, but they've all been upheld so ultimately yes) as the bankruptcy ones.
Fair point on existing statutory bailouts vs ones added after the fact.
Just saying, when a lendee defaults, someone is taking a haircut and someone is thus getting a bailout. As you said, there's no squeezing enough blood out of the turnip to make everyone whole. As a society, we have to pick a winner and a loser, to one degree or another. We have laws to do that.
They do it for profit. Same reason the phone company or cable company charges a $20 fee to connect or disconnect service (literally a button press on a computer). It's not offsetting any costs whatsoever.
I'm mixed, just because I like for people to be able to make their own choices. People should be able to choose to sell a bad product, and people should be able to choose if they want to buy it or not. I don't generally like trying to "protect people from themselves". But dadgum there are a lot of stupid people. And, at the end of the day, I usually end up having to pay for their mistakes at some point.
40 year mortgages are kind of beyond just a bad decision though. At least in today's market. On a cheap loan, say $200k, you only save $100/mo on a 40 yr vs. a 30 yr at 6% interest. You don't start paying more principal than interest until year 29. 29! You've payed a measly $35,000 less in monthly installments at that point. Conversely, it's going to cost you $100k more in interest over the life of the loan (which you likely don't live long enough to pay).
On a $500,000 loan, you save $250/mo going 40 years instead of 30. If you are taking out a $500k loan, and $250/mo makes or breaks you, you're doing something wrong. The 40 year option costs you a quarter mil in additional interest. The 28+ years it takes you to get ahead on the interest/principal curve remains the same.
Now, if we're talking interest rates like they were 2 years ago, it's a little different. You borrow $200k at 2.75% for 40 years, you're paying $687/mo vs. $816/mo for 30 years. You'll pay $36k more in interest, so not that horrible.
$500k at 2.75% for 40 years is $1,720/mo vs. $2,041/mo for 30 years. It costs you $90k extra in interest. Again, not horrible. At 2.75%, you start paying more principal than interest in year 15 of a 40 year mortgage. So, you're not losing a whole lot.
To me, the 40 year just isn't worth it. Pay the little bit of extra per month and get done ASAP. Really, the ONLY situation I could see where you may want to do 40 is if you just want that payment as small as possible because you think interest rates will crater soon and you can refi at a lower rate and over a shorter duration. But that's likely a bad gamble anyway.
I guess my answer is - I don't know if they should be allowed, but no one should ever take one.
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There's definitely an extra layer of risk on the 40 but it's too early to determine how "systemic" it is. Before '08, there were 100% financing products that required little down (closing costs only) and they performed fine until the home values plumetted. We were making loans on $400K homes that had sold for say $300K just 5 years earlier. That's where the BS started. As long as home valiues are rising, the risk of foreclosure is minimal as the homeowner can easily sell for profit in lieu of foreclosure if they happen upon bad times. People forget how well and for how long the subprime loans performed until we went bat schit crazy with the housing market exploding before eventually imploding. Had we adjusted to this fast appreciation more prudently, we woulda said "Okay, you wanna pay $400K for this home that sold for $300K 5 years ago? Fine. We'll lend you $340K and you pay the rest as a down payment. But there would have been others decrying discrimination against 1st time homeowners and such had those common sense underwriting guidelines been implemented. Politics and Schit.
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