Get out of Debt! Bad advice?

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PlicketyCat's picture
PlicketyCat
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Re: Get out of Debt! Bad advice?

Erik, wouldn't mortgages fall under the umbrella of asset-based loans... at least in theory? You pay a hefty down payment, the house is the collateral asset, and the bank hopes you can't make your payments so that they can take your DP, all the interest you paid, and the house (which then can then resell for more than you owed). Whether it's a plane or a house, the bank would only "lose" in a default of an asset-based loan if the asset just happened to no longer be considered the same value as it was on the date of loan.   Am I adding 2+2 and getting 4, or am I misunderstanding?

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Re: Get out of Debt! Bad advice?

Cat, u missed the part that the bank created the money for the mortgage. Cry So even if you default and house prices are 99% lower then a few years ago they come out positive.Surprised Unless they did something stupid of course like takin ghuge risks, oh yeah, but then they get a bailout.

 

 

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Re: Get out of Debt! Bad advice?

Daniel Amerman talks expertly and at length about this subject:

http://www.gold-eagle.com/research/amermanndx.html?page=2

http://www.mortgagesecretpower.com/

What he points out is essentially this: during times of high inflation, savers and investors (in dollar denominated assets) get punished by the inflation rate, and must achieve returns that are even higher than the inflation rate just to maintain their purchasing power (since any "paper" gains they achieve will then be taxed -- so an even higher return than the inflation rate is necessary to compensate).

 He therefore advocate a new strategy: taking on as much (fixed interest rate) debt as you can reasonably handle during hard times, because the balance you owe on the loan gets eroded each year by the inflation rate (resulting in a real gain transferred to you, assuming you used the loan money to invest in a hard asset that maintains its value). Furthermore, having a tax advantaged loan (i.e. with deductible interest, such as a mortgage) further increases your rate of return.

 Amerman is a mortgage professional who witnessed this phonomenon happen on a massive scale back in the late 70's and early 80's during the Savings and Loan meltdown -- millions of homeowners happened to take out fixed rate mortgages at 5% from the S&Ls prior to the inflation surge, and 10 years later were still making little $50 payments when rates were around 15% and average payments had climbed to the $500 - $1000 range. Essentially, massive wealth was transferred from the S&Ls to the homeowners via inflation, causing nearly all the S&Ls to go bankrupt.

A more succinct way putting this strategy is to go 'long' on hard assets and 'short' on the dollar.

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Re: Get out of Debt! Bad advice?

polumathes wrote:
 He therefore advocate a new strategy: taking on as much (fixed interest rate) debt as you can reasonably handle during hard times, because the balance you owe on the loan gets eroded each year by the inflation rate (resulting in a real gain transferred to you, assuming you used the loan money to invest in a hard asset that maintains its value). Furthermore, having a tax advantaged loan (i.e. with deductible interest, such as a mortgage) further increases your rate of return.

OK, the balance you owe only gets eroded by paying down the principle... inflation devalues your dollar, so even if somehow inflation eroded the loan value, it's a wash at best. I'm sure that probably worked in the past, but there is a basic assumption you stated "assuming you used the loan money to invest in a hard asset that maintains its value". The real estate bubble Chris is talking about directly counters this assumption... you cannot expect that your hard asset (home) will maintain it's value anymore. At least not for a very long time until all the markets, economy and dollar restablize.

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Re: Get out of Debt! Bad advice?

polumathes wrote:
He therefore advocate a new strategy: taking on as much (fixed interest rate) debt as you can reasonably handle during hard times,

I hope nobody takes this advice.  This is a deflationary depression.  Inflation is nowhere on the horizon...yet.

Quote:
A more succinct way putting this strategy is to go 'long' on hard assets and 'short' on the dollar.

Again, precisely the wrong advice.  People who built this portfolio lost massively and will continue to lose until deflation runs its course. 

 

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Re: Get out of Debt! Bad advice?

Timing is everything, even when it comes to ethics.

I can glean from Sam's writings that he is an ethical, honest man who is most surely one of the few left who still considers his word, his bond. Good for him; I admire that quality.

But, I also subscribe to a tenet pounded by Chris throughout his teachings: I don't think the next 20 years are going to be like the last 20 years.

While those ethics have been an admirable trait these past 20 years and long centuries before that, the same ethics may not be applicable to the next 20. The rules and the game plan are about to change and we have to look at this change objectively.

What if that day does come and the jobs are no longer there? Do I just stay old school and let the bank foreclose on my mortgage, repossess the cars, buy a bicycle built for two and move the family under an Oak tree in the woods? After all, I gave my word I would pay for them.

The answer is absolutely no.  And the vehicle to keep that answer an ethical one is to do proper estate and financial planning today, before that crises arrives.

I am an estate planner and financial advisor as well (I see some of the others on here are in this business) and the financial advisor that previously stated: 'open up that line of credit' is right on.

I'll add to that: Also obtain the highest credit card line of credit that you can and any other form of credit available to you that is of the non-secured type.

You want to pay off, or be prepared to pay off,any property that you own equitible title too but not legal title too.

When you finance a car at the bank, who owns the car, you or the bank? You both do, You can't sell the car because the bank owns legal title and the banker can't take his girlfriend out in the new car because you own equitable title (the right to use it)--he does not.

So, any property that in which you only own equitable title needs to be paid off using lines of credit that are  not secured by collateral.

As for me, I will also have all titled personal property and real property buried so deep in irrevocable holding trusts that, unless the government goes nuts, no one will be able to touch it.

If hyperinflation hits, you will be able to pay off that credit line with a few days wages.....:-)

Is that ethical? Yes, I think it is. I have paid my bills and did nothing to cause this mess.

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Re: Get out of Debt! Bad advice?

PlicketyCat wrote:

SamLinder wrote:
The important thing to remember here - and so many people seem to want to ignore this - is that people borrow money because they want something now instead of waiting for it. Since a house is very difficult for most of us to save for ahead of time, we borrow the money.

Well, first thing, why was it so difficult to save to buy the house up front? I was making really good money, so was my husband, we'd both been saving our entire careers, we certainly weren't money-wasters, and we didn't buy a McMansion.

PlicketyCat,
If you were able to save enough to buy a house with cash, you have my admiration. Most of us, including me, aren't so diligent. However, from your comment above, you appear to have borrowed to buy your house - nothing wrong with that, most of us have to do just that.

We also were counseled by more than one financial advisor that the only way to keep the IRS from taking an additional 10% of our income every year was to buy a house so we could deduct the interest.

This is true - again nothing wrong with that.

Could it just possibly be that by artificially inflating the market values of homes banks, corporations and governments could get more of your money from you?  Is market-fixing by a government-sanctioned banking cartel even just a tiny bit possible?

This is not true. The housing market was not inflated intentionally by "a government-sanctioned banking cartel". The reality is that the government wanted to encourage home ownership and persuaded the banks to loosen the purse strings to allow more people to be able to purchase homes. Unfortunately, government didn't keep an eye on the banks - big mistake! The banks went to the other extreme and handed out money to anyone who could fog a mirror. Why? GREED!

What went wrong is a classic inflationary situation. Too many people with too much money chased too few houses. Ergo, the price of the product went up. As you probably remember, people, in some cases, engaged in bidding wars to buy a specific house! So of course the price of housing went up - nothing artificial about it.

SamLinder wrote:
At that point we are responsible for that debt - no matter where the money came from! This is the part that I don't understand why it is so hard to accept. It has nothing to do with being a slave to a bank or anyone else. It's a matter of responsibility - a word and a concept that seems to have fallen out of fashion. If you borrow money - pay it back. It's that simple. If you agreed to pay interest, then pay the interest. It's that simple.

Any other argument is unacceptable in my view.


PlicketyCat wrote:
There's that second part of the loan agreement that everyone seems to forget... you agree to pay back the money with interest that you borrowed as agreed or you agree to forfeit your collateral that the bank agreed to take. The bank/moneylender isn't losing anything here, they're just getting the collateral instead of the cash.


I never denied that. Of course the house is collateral against the loan or you wouldn't have gotten the loan in the first place. The bank/moneylender will lose if the collateral turns out to be less than the value of the loan. Why do you think banks are so hard-nosed in the first place?

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Re: Get out of Debt! Bad advice?

strabes wrote:

Sam wrote:
This is intentional subterfuge. You are entering a contract with no intention of holding up your end of the bargain which is to make payments on the loan regardless of the current market value of the house.

That's not what the contract in whole says Sam.  It says "I'll make these payments OR if I don't, you get the house and my credit is screwed for 7 years."  Why don't you see the OR clause?

Strabes,

I do "see the OR clause". I think all of us in this discussion are fully cognizant of the potential harm to the borrower if they default. In a "normal" situation, that sword hanging over our heads (7-years of bad luck) will serve to make most of us attempt to continue making payments if at all possible.

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Re: Get out of Debt! Bad advice?

PlicketyCat wrote:

OK, the balance you owe only gets eroded by paying down the principle...

 

 While this is true in nominal (paper) dollars, it is not true in terms of the value or purchasing power of the principal.  The remaining principal you owe each year is also reduced in *actual* value by the amount of inflation -- as you state in your very next sentence:

 

PlicketyCat wrote:

 inflation devalues your dollar, so even if somehow inflation eroded the loan value, it's a wash at best. 

 

 This strategy is obviously intended to be employed under the assumption that the inflation rate is going to remain, on average, above the loan interest rate -- in which case it would *not* be a wash.  To get an idea of what actual inflation rates are, check out Shadowstats.com.

 

PlicketyCat wrote:

I'm sure that probably worked in the past, but there is a basic assumption you stated "assuming you used the loan money to invest in a hard asset that maintains its value". The real estate bubble Chris is talking about directly counters this assumption... you cannot expect that your hard asset (home) will maintain it's value anymore. At least not for a very long time until all the markets, economy and dollar restablize.

 

 Yes, that may well be true of real estate as it corrects for a while.  However, other hard assets do exist.  And I did not make this post as a suggestion that we should all be buying houses right now.  It is intended to be considered as a potential tool to be used in an appropriate situation.

If, however, high inflation rates hit, it seems likely, in my opinion, that real estate will retain its actual value (not its bogus bubble value) -- as it did during the late 70's and also in Argentina, for example.

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Re: Get out of Debt! Bad advice?

Morality is the reason we're in the fix we're in right now.

It's unethical to default on your loans, and this even being a topic of discussion is raising "red flags" as to the first of my "forecasts" coming true: that people today lack the integrity we had during the "first" great depression. Granted, this is a very minor issue, but how long will it be before the people with lower capacities for reason are starting to ask these same questions?

How long will it be before they start asking why they're not robbing the shops downtown?
How long before they want what you're growing on your farm?

Apart from being unethical, there may come a time where banks start putting leins on you for unsecured debt.
How long until that situation devolves, and you're tied up in litigation?
Is that how you want to spend the beginning of this collapse?

I am 100% on the same page as those of you who think that the business are totally unethical and are thieving bastards. There is no doubt in my mind. But that doesn't give us, as decent, honest people pass to replay their evils. We have to break this cycle of entitlement that's so rampant in our society.

No one force what debt I have upon me. I made my descisions, and I'll obligate them. That said, I'm not going to put banks ahead of my family. Now, or ever.

Pay your debts back if you can.
You took the money, get out from under it, and have the integrity to say you did it for yourself.

If things crash in the meantime and they default, well... that's different.

Cheers!

Aaron

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Re: Get out of Debt! Bad advice?

strabes wrote:

polumathes wrote:
He therefore advocate a new strategy: taking on as much (fixed interest rate) debt as you can reasonably handle during hard times,

I hope nobody takes this advice.  This is a deflationary depression.  Inflation is nowhere on the horizon...yet.

If your horizon doesn't include the next two decades, this would be true.  Mine, however, does, which includes the total estimated debt obligations of the U.S. government that must *somehow* be paid.

strabes wrote:

Quote:
A more succinct way putting this strategy is to go 'long' on hard assets and 'short' on the dollar.

Again, precisely the wrong advice.  People who built this portfolio lost massively and will continue to lose until deflation runs its course. 

It would be constructive to know what and when you are referencing here.  As I mentioned, people who built this portfolio in the late 70's *won* massively.

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Re: Get out of Debt! Bad advice?

PlicketyCat wrote:
SamLinder wrote:
Hi Strabes, Plickety:

I must admit that I'm somewhat dismayed by this attitude of thinking it is ok to walk away from a debt that you took on voluntarily. Perhaps it's a generational thing (I'm 65) or perhaps it's a sign of the times since our banking system has gone awry.

When you bought your house, it was offered at a specified price (let's assume $300,000 just for this discussion). You decided that it was worth the money, so you borrowed some, or all, of the purchase price and paid the seller $300,000. Now, in order to own the home free and clear, you have created an obligation between you and the bank to repay the $300,000 that they loaned to you. As part of the agreement, you agreed to pay a specified amount of interest each month for the privilege of getting the $300,000 up front so that you could buy the house. So far, so good. This is pretty much standard stuff.

Now if, in 5 years, the market value of the house is $500,000 (and you still owe the bank $250,000) and you decide to sell it - good for you, you've made some money without lifting a finger. Pretty much what the bank has done by collecting interest from you for the last 5 years.

However if, in 5 years, the market value of the house is $200,000 (and you still owe the bank $250,000) and you decide to sell it - bad for you. The market value of housing has always fluctuated - no surprise there. So why are you upset because you decided to sell while your house was "upside-down"?

If five years have passed, since you bought the house, and you still intend to live there for years to come, what difference is it to you what the current market value is of the house? You still have a valid contract with the bank (enforceable in a court-of-law) and there is no reason to break it unless your financial circumstances have deteriorated to the point where you can't make the payments that you agreed to five years ago. In that case, there is the legal remedy called bankruptcy.

Well, see, that's where it gets just a little fuzzy. I did not get the $300k "up front" and neither did the seller. It all happened in the ether. My bank just told their bank that they could clear the original note, and some numbers were adjusted in a ledger. Almost no real money changed hands at all, debt was just transferred from one person to another and a different bank got to collect the interest (real money).

PlicketyCat,

Your comment baffles me. To say that the original $300k is not "real money", but the interest is "(real money)" makes no sense. It's all electronic digits unless the borrower walks into the bank and forks out FRN's for each payment (and even FRN's are just pieces of paper). Whether it's real money or not makes no difference in this discussion. The point is that you borrowed (for the sake of this discussion) $300k to buy your house. That creates an obligation on your part and an expectation of repayment on the bank's part.

If my house had the chance to regain it's original value or I intended to stay here forever, then maybe I'd feel more motivated to stay and pay...

This is the part where my argument holds water. You only want to leave because your property has lost value - otherwise, "maybe I'd feel more motivated to stay and pay...".

... however, based on everything that we know about real estate bubble bursts, my house will NEVER be worth the amount of my loan again. It's not that I'm upset because I've chosen to sell it while it's upside-down, I'm upset because it will be upside-down FOREVER. The market was artificially inflated, it's going to crash and not recover... 

This argument is not valid because you are being short-sighted like most people and haven't looked at historical context regarding housing. In my own lifetime, I have seen housing markets crash hard and people swear up-and-down that they'll never be worth anything again. Not true. They have always come back at some point. Why? Because people always need a place to live. I've also seen mortgage interest rates in the range of 10 to 12%. When that happened, I thought I'd never see single digit rates again in my lifetime. Boy, was I wrong!

... the only thing I did to bring this on myself was to buy a home, like every grood American is supposed to do.

I'm sorry, but you are whining here. Nobody twisted your arm and forced you to buy a home.

Yes, my financial situation has deteriorated since I purchased the home. We technically aren't anywhere close to being able to declare bankruptcy, but if my husband loses his job or gets his salary/hours cut then we'll rapidly approach it. We are not yet in dire straits, but why should we put ourselves in jeopardy of becoming destitute by throwing good money after bad? That isn't what a responsible business would do, so why should a consumer be made to feel that's what they should do?

I said it before in my post #50 and I'll say it again here: "If they default, it is often because they have
lost their job or medical expenses overwhelm them or some other similar
situation. For these people I feel compassion and sadness when they
lose their house to foreclosure.
However, if you are not in dire straits, then you have an obligation to the bank per your original agreement.

It's not like the bank loses everything, they have the collateral, the house, and they can sell it to recoup (some/all) of their losses... it's possible (not probable) that the second lender might even get some scraps. But the second lender accepted the risk of not recouping their investment when they extended credit with the house as collateral when that house already had a first lender... that's their own fault. If the banks weren't greedy, they wouldn't have extended high-risk loans and they wouldn't be in this position. 

This argument is unacceptable in my book. The bank will lose a lot if the collateral no longer has the value it did at the time you took out the loan. And, most likely, the second lender will lose completely. Also, I note that you keep blaming the banks for your situation: "that's their own fault". How about accepting your part in this play?

SamLinder wrote:
Plickety - it appears from your comment above that you are financially able to maintain your agreements with both the first and second lenders. Yet because you've decided to homestead somewhere else, you are willing to "stick it" to both contract holders. To say that it's ok because the bankers are crooks anyway is a specious argument. Turn the tables around - how would you like someone else to financially "stick it" to you and your husband because they've decided that it's ok to do so in today's topsy-turvey financial environment?

The lenders get the house, the agreed upon collateral. I'm not sticking it to them with absolutely no recourse. If I had a note with a private lender, things would be entirely different;

I see - so you're only shafting a corporate entity, not a person. Although, if you had borrowed the money from Strabes or Erik, "things would be entirely different". Interesting.

... but the banks artificially inflated the market prices and are devaluing my savings and investments right and left. My bank just got a fat bailout and then was purchased by another bank that also got a fat bailout... but nothing has changed on my bank statements. They're not losing a darned thing if I mail them my keys and save myself from complete destitution while I still have just enough of my hard-earned money left to do so.

I have already dealt with this above - no further comment.

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.
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Re: Get out of Debt! Bad advice?

After reading this thread, I feel like a sucker. I busted my ass to pay off my mortgage in 12 years. I learned the basics of plumbing, electrical and carpentry as well as how to do finish work. I remodeled the run down 10,000 sq ft commercial building I own, virtually by myself so I wouldn't take on any debt. I pruchased a run down house built in 1900, gutted it and rebuilt it from the inside out. I watched the people around me buy jet skis, quads, Escalades and take luxury cruise vacations, wondering the whole time how they could afford it. I took two 4 day vacations in 17 years. I may be debt free but now my L-4 and L-5 are in constant pain. I worked like a slave to get ahead.
Now I read this thread and realize I should have just gamed the system, borrowed money with no intention of paying it back and defaulted on the "evil" banks. Or I should have bought more house than I could afford and hope the gov would come along and bail my stupid ass out. Watching the system implode and everybody with their hand out, from the banks to the people who took the loans makes me sick. I played by the rules and broke my back to get ahead. Where is my "hand-out"?
No one held a gun to anyones head to force them to buy a house. If you couldn't afford to buy a house, THEN RENT!
I watched CNBC's House of Cards last night. They had three stories of people facing foreclosure. All three had refinanced their house for 1) a new back yard 2) a new kitchen 3) a swimming pool.
What ever happened to saving to buy things?

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Re: Get out of Debt! Bad advice?

Hi Plickety,

Almost right. What you describe "could work in theory", but so far as I know, there are no mortgage lenders using asset-based lending strategies, and I doubt there ever would be because houses are not a good asset class for this lending strategy. Remember that the mechanics of the contract (promissory note secured by mortgage on collateral) are the same for conventional and asset-based lenders. The difference lies in the motivation of the lender.

In asset-based lending, the biggest single factor for the profitability of the lender is the ease with which they can reposess the collateral. A house has a long foreclosure notice period, legal obligations, the possibility of a stay of foreclosure after a bankruptcy filing, risk of malicious damage by a disgruntled homeowner and a whole bunch of other hurdles for the lender to overcome in order to foreclose.

Contrast that with a charter airplane (my earlier example). The things are easy to track - every time it flies the pilots have to give the registration number to the FAA on the flight plan, and there is really no practical place to hide it other than an airport. There are only so many airports. So reposession is as simple as having a qualified pilot and an armed reposession dude greet the arriving aircraft and notify the crew that it has been reposessed and will now be flying away without them.

Asset-based lenders generally deal with commercial interests. Given their aggressive reposession tactics, they don't want to deal with consumers who are good at persuading judges they have a hardship case. "Your honor, it's not FAIR of them to take my LearJet away and it causes me undue hardship not to have it any more" is a lot less likely to get sympathy from the courts than "My family including four young children will literally have to live on the street if you foreclose on us".

All that said, we are already seeing hedge funds starting to buy auto loans on the cheap and "strip-mining" them for high equity situations they can reposess. In a sense, those are asset-based loan purchasers, which are sort of the same thing as asset-based lenders. I expect that trend will continue to the mortgage market.

The really cool idea some hedge funds are now pushing is to buy up mortgage paper at 20 cents on the dollar, reverse the securitization process, then sell the loan back to the borrower for (say) 60 cents on the dollar. Expect that trend to grow as fast as regulators let it. It's a really, really good idea which means it's certain to see immense resistance from the gov't.

Erik

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Re: Get out of Debt! Bad advice?

PlicketyCat wrote:
SamLinder wrote:
If Plickety is able to legally and responsibly free herself and her family from the Matrix, then more power to her. However, this does not mean walking away from an obligation if you have the means to meet it - legal or not! That's where responsibility comes in. Why you insist on thinking it's ok just because the bank is "cold, impersonal" is beyond me.

If Plickety enters bankruptcy due to legitimate financial difficulties, that is her legal prerogative. If she enters bankruptcy having hidden her assets elsewhere - that is wrong. I'm not saying that she did - I'm just using this as an example. If she is able to meet her financial obligation but walks away because she wants to invest her money elsewhere - that is also very wrong. Using a "cold, impersonal" bank as the excuse just blows me away!

I understand that not everyone agrees on everything. But I just need to clarify something... my primary responsibility is to ensure the health, safety and well-being of myself and my family. Everything else is secondary. Maybe some people consider that anarchy, but I call it being responsible and accountable.

PlicketyCat,

No argument here - your "primary responsibility" would be mine also.

PlicketyCat wrote:

Yes, I can legally and responsibly free myself and my family from the Matrix (in this case, my mortgage and HELOC) by voluntarily forfeiting my house, which is the collateral that secures both loans... if one or both banks comes up short on that deal, that was the risk they assumed in the transaction. Yes, our family currently has the means to continue to live in this house and pay those debts. Yes, we have chosen, for our own safety and wellbeing, to relocate and radically simplify, which also means it is highly unlikely that we will have any further income.

I am not proposing walking away from this house simply to go buy another down the street at a lower price due to market dips therbey saving myself a few bucks. I'm not "hiding my assets" just to keep them out of the hands of a lender... I'm making sure that my family has the necessary means to survive long-term when THSTF. I'm not buying big-screen TVs, or porsche's, or priceless works of art. I'm buying a water purification system, hand tools, building materials, and seeds. I'm making sure that my family has sustainable, self-sufficient food, water and shelter in an area where we can be reasonably safe.

The fact that I am also protecting myself from possible legal recourse and collection by a lender is secondary to the primary objective of securing my family. The fact that I am choosing not to put myself in a position of destitution where all our income and savings are slowly leached away by deflating home equity, inflated costs of living and devaluation of currency does not make me irresponsible... it means I'm responsibly and realistically planning for a future that is not going to be as rosey as we'd all like to pretend it will be.

If everybody who has gone under water bails out of their houses using the same argument you just made, what do you think would happen in this country? Keep in mind, there are millions of houses under water at this time.

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SamLinder
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Re: Get out of Debt! Bad advice?

PlicketyCat wrote:
SamLinder wrote:
Erik, this is where we start to part ways. Technically you are correct. However, being technically correct doesn't make it ethical. Look again at what PlicketyCat said in her post #19 (added emphasis is mine):

PlicketyCat wrote:
We are seriously considering (pretty much already decided) walking away from this house... either offering the bank a Short Sale or Deed In Lieu of Foreclosure, or just simply accepting the default foreclosure. The second lender is screwed, they may be able to come after us, but they can't seize our capital assets only our cash/monetary assets... which we won't have because we've cashed them out to purchase useful capital assets.

This is not a person in financial trouble who is exercising her legal rights under the contract. This is a person who has decided to bail on the house because it is "under water". If it wasn't, you can bet she wouldn't be walking away. And then the really disconcerting part, to me, is where she is, by her own admission, willingly shafting the second lender! We have gone beyond standard business practices at this point and have stepped into the realm of highly unethical (or worse) behavior. This is why I used the word RESPONSIBILITY in my earlier posts. Don't you see that it is missing here?

Again, maybe this is the way younger people have been raised. "Since someone else is not playing fair, I won't either!"  Mind you, I bet the second lender isn't too pleased with this outcome. Especially when PlicketyCat admits that she has purposely "sheltered" her "cash/monetary" assets by converting them into "capital assets". I just have to shake my head at this one. It is so, so wrong!

Pardon me for not stating my entire financial situation as a caveat before replying to Erik. We are not destitute yet, but I am not able to work and currently fighting with the government for disability benefits that I paid for out of my hard-earned income for the past 20 years. I've accepted the tax hits and early withdrawal penalties on my 401k and IRA to cover medical bills that insurance wouldn't pay so that my husband's income could go toward our living expenses so we wouldn't go into further debt. I accepted the 2/3 value loss and the tax hit on my grandmother's inheritence when I cashed them out to purchase our remote property because that was why she left me the money in the first place.

I'm not bailing on this house simply because it is underwater. We have been planning to relocate for years, but haven't been able to for health and financial reasons. We would much rather sell the house and satisfy both lenders... unfortunately, because the house is upside-down and the market is dead, the house is NOT SELLING and we would still lose money that we don't have and can't afford to lose. We have to default before we can offer a Short Sale to either lender... we'd much rather be able to go to the lenders and say "So-and-so has offered us X on the house, will you accept it and forgive the remainder of the debt?"  But the banks don't want to negotiate before the fact. I don't want to shaft either bank, but that's the nature of the situation. I didn't enter into a contract with full intention of defaulting, but that is the nature of the situation now. As for "sheltering my assets" see my previous post about what the little extra monthly money and remaining savings is going towards.

Here are a few definitions from my handy dictionary:

  • Ethical: conforming to accepted standards of conduct
  • Moral: founded on the customary principles of right conduct rather than on legalities
  • Responsible: able to choose for oneself between right and wrong
  • Insolvent: having liabilities in excess of reasonable market value of assets held 
  • Judgmental: Inclined to make harsh judgments, especially moral or personal ones

PlicketyCat,

Believe it or not, I am sympathetic to your situation. If you had explained some of this earlier on, my responses would have been different. I can only go by what you post. I'm sorry you are in a tough spot and I hope you are able to resolve it to the benefit of your family.

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nkdroth
Status: Bronze Member (Offline)
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Posts: 37
Re: Get out of Debt! Bad advice?

BRIUN,

I can totally relate..We sold our house last March for 150k less than it was worth.  Still received a hefty amount of cash from the equity.  We paid off all debt and are holding cash and metals etc.  I thought  the house was my retirement home and struggled with selling.

 FWIW it has been the most liberating decision we ever made. As a result we are in a great position.Chris is right it is a wonderful feeling.

 nk:)

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SamLinder
Status: Diamond Member (Offline)
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Posts: 1499
Re: Get out of Debt! Bad advice?

Pat Carney wrote:

Hi Sam!

Thank you for your kind words. The Rowe review was truly a labor of love and I'm glad you and others enjoyed it.

And I'd like to return the compliment. I always enjoy reading your posts. They are well thought out and well written. If you weren't so dang far away I'm sure we'd be buds! Hopefully some day I'll get out to Oregon and look you up -- we could have a few beers, shoot some bull and solve world problems!

Pat,

I would truly enjoy doing that - I'm sure we'd be buds too!  Wink

I agree in principal with your position. I am not stating that someone "up-side down" should default willy-nilly, but rather only after careful consideration. After all, it's not like changing your socks; there will definitely be fall out from such a decision. However, I do see it as a viable option for those who find themselves is desperate straits... of their own making or otherwise.

I agree with your comment.

Again, I believe you to be an honorable man with a high sense of morality and integrity, but please let me ask you about your deficit position back in your Cali days... how far under water were you?

Approximately $30,000 - give or take. Been quite a few years. Paid $200,000 - so underwater about 15%.

My understanding is that there are many pockets and communities in CA, AZ, NV, FLA that have lost more than 50% in value. How does someone realistically stay in a home bought in 2006 for $700,000  when it is now, in 2009, worth only $350,000? Even if they put down 20% they still owe over $550,000. That is a huge hole and I don't think patience is going to solve the problem.

Your numbers are valid. But now we get to the crux of the problem. If I had borrowed $700,000 from you to buy my home, I doubt you would be too thrilled if I came to you one day and said, "Pat, old friend. I've got a problem. I know I still owe you $550,000 but the housing market has gone to hell in a hand-basket. I don't think it will ever recover and I can't see pouring good money after bad so I'm just going to have to give you the house back and move on. Good luck trying to sell it for $350,000. If you do, you'll only be out $200,000! Sorry, Amigo. Ciao!"

I await your answer with interest.

I think if we are honest with ourselves we'll recognize that this Financial Tsunami was not of our making. We the people were just pawns in this production. The guys (banksters) that created this environment should have known better, but instead chose Greed. And your "stupidity" assessment is right on!

SIgh. I know I'm beating a dead horse here but, IT WAS EVERYBODY'S PROBLEM! The banks didn't create the housing bubble - they facilitated it. Irresponsible people took on more debt than they should have and stupidly signed up for all kinds of insane loans that should never have been offered in the first place. I would no more sign up for a variable rate loan or a ninja loan than I would jump out of an airplane (with or without a parachute!).

Now, be honest Sam. If you found yourself $200,000 in the red, through no fault of your own, with almost no prospect of ever recovering, you'd still stay there and pay? To your own family's detriment?

If my family's welfare depended upon my abrogating my mortgage, I would do so. However, I wouldn't simply walk away. I would go through the legal process of discharging my debts through bankruptcy. That's why we have laws. Without laws, we have anarchy (There's that word again. Wink) Conversely, if I was under water to the tune of $200,000 but had the wherewithal to continue making payments I would do so. Remember, I buy a house to live in - not to play with as an investment.

And lets not give these banksters any cover for their greed because they surely haven't earned it. And it appears our gov't isn't going to hold them accountable for their actions... they've picked our pockets and have gotten away with it. Not only that, they are sticking us with the bill! Talk about a moral hazard, this is the epitome example!

Angelo Mozilo (and his brethren) pocketed hundreds of millions of dollars overseeing Countrywide's 95% loss in value, giving out liar loans and sweet-heart deals (to our political elite) and both the banksters and politicians continue to operate with impunity. Our gov't continues to prop-up and reward these failures... our system is serious flawed and needs to crash (and be reset).

That millions of individuals have been caught in this scam gives me all the evidence I need. I give no quarter to the Banking Cartel... they instigated this crisis and they should reap what they sow (just as borrowers who default will also be a reaping -- and quite likely weeping).

I have said all along that I do not countenance what the banking
industry has done and would seriously like to see it destroyed and
rebuilt to be more responsible to the public. Just let's not forget that they didn't do this all by themselves.

Given the choice of protecting my family or honoring a commitment made to a corrupt system, I'll pick my family every time.

No question about it - I'm with you 100%.

One other thing to consider... often, in today's financial world, the commitment you (as an individual) made on a mortgage is to a faceless corporate giant that often changes... multiple times. And very likely, at a discounted price.

As a real estate investor, I have mortgages with many "failed" and insolvent institutions... it reads like a Who's Who among the corporately corrupt. Companies like Indy Mac, Countrywide, Wachovia, Citi and American Home Mortgage. All of them, not some, but ALL OF THEM are either out of business or are being nationalized. The new giants that have taken over the loans have done so at a discounted price... maybe greatly discounted. Now, who is my commitment to? And how much skin do the new loan servicing companies have in the game? All the while, the corporate profits are insured and losses are socialized by the gov't bailout/ give away at "We The People's" expense.

Our system is truly ass-backwards.

If Plickety Cat and several millions of others default as a result of this Ponzi scheme, and it causes the system to crash, then I'm all-in. That's what has to happen; needs to happen. Our system is rotten to the core and I believe it is beyond repair. The unholy alliance between the banksters and politicians will not go willingly; their game must be cancelled.

Consider that last fall the politicians gave away a HUGE amount of money (at the time -- $700 B) to fix this mess against The People's wishes. Two weeks ago, We The People gave another $800 B. Now, not two weeks later we are to endure another $3.5 TRILLION... that's $5 T in less than 5 months! ALL of it is borrowed money. Personally, I resent our Power Elite sticking my kids, and their kids with the bill. When does this madness end?

You know when it ends? When it crashes... and hopefully, when it finally does crash, there are enough level-headed folks like Chris and even you, Sam, who can help guide us in the rebuilding process. My suggestion... follow the Constitution.

Wheew!

Sorry. Just had to vent that off... I feel much better now!

To summarize Sam, if you lent me money, I would feel a moral obligation to repay you because that money came from your hard-earned treasure.

Electronic digits created out of thin air, sold at a discount upon the bankruptcy of a failed, corrupt corporate oligarchy? A moral obligation to the detriment of my family's well being?

Nope.

In other words, if the "moral obligation" was earned, then yes. I agree, you do everything within your power to make good on that obligation. If however, that obligation was created in a "manufactured" bubble, by the inmates themselves, then I am going to error on the side of my family's well being.

We can agree to disagree in this instance. Still friends, right?

Pat, I feel your pain on much of the above. I just don't think it is realistic to lay all the blame on one side of the fence.  Another one of my old sayings, "It takes two to tango."  And, yes - absolutely - still friends! Laughing

SamLinder's picture
SamLinder
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Get out of Debt! Bad advice?

strabes wrote:

Sam be careful with your local relationship with your bank.  It helps them for sure.  Note how it makes you feel obligated to them.  But it wouldn't help you if you got in real trouble because the local bank doesn't own your loans.  Any loan you make with the local guys is immediately sold to larger institutions and then securitized and sold again to investors. Those institutions could care less about you and will treat you as a spreadsheet number regardless of your local relationship.

Strabes,

I appreciate the "heads up" but I'm fully aware of how that works. My current loan was obtained through a mortgage broker who turned around and sold it to Wells Fargo Bank. I don't know if they CDO'd it and it's out there somewhere or if they kept it in house. I do know that they act as my mortgage service since I send my checks to, and get monthly statements from, Wells Fargo Mortgage.

In effect the local bank guys are nothing but sales guys now.  Sales guys are paid to make you feel important.  And we all know how sales guys are used as obstacles once things go wrong with customers...the people behind the scenes refuse to negotiate and they put pressure on the sales guys to get the customers off their backs.  This securitization system which made local banks just sales branches is how this whole bubble was created.   

20 years ago local relationships were key.  Today they can get you in trouble by giving you a false understanding of the way the system is really working.

I don't completely agree with your assessment. While in many cases what you say is true, in others it is not. Throughout my lifetime, I have found that if you treat people like robots, you will get a machine-like response. If you treat people like friends, you'll get a response in kind.

Remember what I said before. Banks are populated by real, living, breathing human beings. They are not faceless entities. Treat people well, and you'll get treated well in return. I'm also savvy enough to know that this doesn't work in all cases and I have written a few nasty letters to corporations in my past. Sometimes that has worked - sometimes not.  Undecided

I long for the day when local relationships will be key again.  That's why I like this website...people who understand the need for community.  Cool 

We are in complete agreement now!

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strabes
Status: Diamond Member (Offline)
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Posts: 1032
Re: Get out of Debt! Bad advice?

polumathes wrote:
 It would be constructive to know what and when you are referencing here.  As I mentioned, people who built this portfolio in the late 70's *won* massively.

I hear ya.  That's what I was going to do as well.  But before putting big money down on the bet, I did exhaustive research between inflationary recession and deflationary depression, i.e. is this the 70's or the 30's?  The voices were so loud on the inflationary side I caught myself getting caught up in the energy and wanted to figure it out for myself before following the advice.  I've reached a point of 100% confidence that the deflationists are right...this is the 30's.  Irving Fisher's description of debt deflation back then is precisely what's happening now.  Steve Keen has a great paper describing it.  Bob Prechter's Conquer the Crash and his Elliott Wave service explains it well.  Bond traders have been playing the deflation game since late 07...while lots and lots of little guys (compared to them) have been buying into the inflationary argument and buying gold, shorting $, these big swinging d**ks from Wall St have been patiently playing the opposite side...riding the bond yield curve out to the long end and making a crapload because they know this is deflation and they knew institutions would eventually pile money into a safest haven "guaranteeing" a long-term cashflow to ensure they maximize their chance of remaining liquid...10 to 30 year Treasuries.  Now Austrians know there's no "guarantee" so in the long-run their view is right...but that's a long way off...deflation will punish portfolios based on inflation expectations right now.  

For those who want to really dig in and understand why the Austrians, Schiff, Rogers, Friedman, and other inflationists are wrong for now I highly recommend this video series.  He's one of those ex-market makers on Wall St who has been riding LT treasuries.  He explains (sometimes in boring, technical, dreary detail) why they have it wrong.  And Keen and Fisher writings explain (again in technical boring detail!) what happens under a debt-based monetary system when credit deflation hits.


http://www.youtube.com/user/Crashof2008?blend=2&ob=0

 

 

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SamLinder
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Posts: 1499
Re: Get out of Debt! Bad advice?

ErikTownsend wrote:
SamLinder wrote:
ErikTownsend wrote:

But frankly, if I had it to do over again I would have taken out a huge
mortgage on my house in Maine in 2006, then defaulted on it about now.
I would default on the payments despite having enough cash in the bank
to pay off the principal in full, and I wouldn't feel the slightest bit
guilty about it. The bank made a bet knowing the rules, and lost.

I can't believe you wrote that! Surprised  Basically what you are saying is that "I'm going to gamble using a house. If I win, I get to keep the profit. If I lose, I force the bank to take the loss." This is intentional subterfuge. You are entering a contract with no intention of holding up your end of the bargain which is to make payments on the loan regardless of the current market value of the house. You also probably promised the bank that it would be your primary residence when, in fact, you secretly knew that you were just using the house as a gambling chip. Very, Very Unethical!

Hang on Sam, now you're both making false accusations and errant assumptions about my actions or intentions, which really isn't called for here.

Making false representations to obtain a contract (such as lying and claiming primary residence status on a second residence) is clearly unethical, and something I would never do. Sam, please reflect on whether you really had cause to assume that behavior on my part. I don't think you had any such cause.

Erik,

I choose my words carefully and base them upon what is posted here in this thread. When I read words like this ...

But frankly, if I had it to do over again I would have taken out a huge
mortgage on my house in Maine in 2006, then defaulted on it about now.
I would default on the payments despite having enough cash in the bank
to pay off the principal in full, and I wouldn't feel the slightest bit
guilty about it.

... what am I supposed to think? This tells me that you would have intentionally misled the bank by taking a huge mortgage with the express intent of defaulting on it "despite having enough cash in the bank
to pay off the principal in full, and I wouldn't feel the slightest bit
guilty about it.
" I don't know how much plainer you could have made it. How else should I have interpreted this?

There's plenty of other unethical behavior I would never engage in. For example, I would never lie to the bank about my financial condition, and I would certainly never damage the property to reduce its value out of spite, as many immature homeowners have been known to do when facing foreclosure.

I'm glad to hear that.

Let's reaxamine your objections:

SamLinder wrote:

I can't believe you wrote that! Surprised 
Basically what you are saying is that "I'm going to gamble using a
house. If I win, I get to keep the profit. If I lose, I force the bank
to take the loss."

Ok, that part is pretty much correct, except that your wording seems to imply wrongdoing on my part. The bank was offering a deal that could work in their favor or in my favor, depending on how things worked out. I should have taken the deal, because it would have worked out in my favor. That's all I said.

I continue to be astonished at your behavior, Erik. Perhaps it is my frame of reference. Where I come from, one buys a home to live in. It used to be a source of pride to have a "mortgage burning party". (http://sittingprettyfinancially.blogspot.com/2006/07/mortgage-burning-pa...)

In
1975, All in the Family had an episode that centered around Archie and
Edith Bunker throwing a mortgage burning party. Has anyone ever been to
one of these? Not lately, reports the LA Times.

Jonathan Peterson
writes, “Christopher Cruise, a former mortgage broker who now trains
people who write home loans, recalled the fading tradition of the
‘mortgage-burning’ party, in which newly debt-free homeowners invited
their friends over and ignited the old mortgage in a joyous blaze of
freedom. Younger loan agents often have never heard of the tradition,
he said.”

“One
hundred percent of the people I teach in their late 20s or 30s have no
idea what a mortgage burning is,” Cruise said. “This whole attitude of
paying off the mortgage and owning the home free and clear is
disappearing from the country.”

You seem to think playing with houses as an investment game is ok. See if you can outsmart that mean old bank. If I win - cool. I'm one up. If I loose - dang! Well, I'll try to recoup on the next house. Why don't you just go play in Las Vegas?

As you can tell, Erik, I'm pretty hot under the collar with this one. All the people who were flipping houses or seeing them as an investment to cash in on one day are partly responsible for this mess we are in. To me this is no different than short sellers in the stock market driving a stock down to make a profit. Never mind whether the company in question is a decent company and there is no reason to put them in financial jeopardy. Let's just play the game and make the big bucks - don't matter who we hurt!

SamLinder wrote:

This is intentional subterfuge. You are entering a contract with no
intention of holding up your end of the bargain which is to make
payments on the loan regardless of the current market value of the
house.

ErikTownsend wrote:

Ok, now we're at the core of the problem. With all due respect, Sam, I don't think you understand mortgage contracts. My end of the bargain was not to make the payments regardless of market conditions, as you say here. Quite to the contrary, my end of the bargain was to discharge my responsibilities under the mortgage and note else accept the remedies set forth in the contract, in this case forfeiture of the collateral.

Your accusation that I would have no intention of holding up my end of the bargain is unfounded and just plain wrong. A correct statement would be that I was entering a contract with the expectation of asserting a termination right that was mine to assert, but which might not benefit the bank. I respectfully contend that there is absolutely nothing unethical or inappropriate in that.

Have you ever bought stock in the stock market and made a profit, Sam? You have? You bastard! You knowingly entered the deal knowing the other party would loose money if you made money, and you went ahead and made money anyway, so that means if the other guy (who was short the stock you were long) can't send his kids to college, it's all your fault, Sam, you unetheical greed-monger, you! (See how silly that sounds?)

As someone else said, your morality is supremely laudable, Sam, but I think it is misplaced here. You can be damned sure the bank will assert any lawful option it has when doing so is to its benefit. For the borrower not to operate on a level playing field (assert whatever legal options are available to you) doesn't make sense.

Applying for a loan on false pretenses would certainly be unethical. But taking a loan out after being completely honest in the application process and doing so in whole or in part because you are willing to pay that interest in order to have the default and walkaway option inherent to the loan contract is perfectly ethical.

SamLinder wrote:

Just because you don't like the way the banks do business doesn't mean
that you have a right to shaft a lender when it suits you.

Agreed 100%! Nobody has or should have the right to default or shaft anybody just because they don't like the other guy or don't like how the other guy does business. I never meant to suggest they did. In this case my right (yes, it really is my right) to "shaft" the bank, as you put it, derives from the fact that that was an agreed element of the original contract.

Best,

Erik

Erik,

I'm not responding to the rest of your post as I see no point. You and I have such dramatically opposing views on this issue that there is no way we would ever come to any form of agreement. I have made my points as plainly as I could in all the other posts that I have responded to. Please read my words and try to understand that your perspective in this game you are playing is a real negative to me.

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TimesAwasting
Status: Silver Member (Offline)
Joined: Oct 13 2008
Posts: 100
Re: Get out of Debt! Bad advice?

Sam,

I can happily say we are pretty much in agreementLaughing!Laughing

Based on your experience from years ago, $30 K underwater is manageable and I would have done the same thing... 15 to 20% underwater wouldn't make me run.

$350 K underwater is another deal altogether!

As to you stiffing me for $200,000... you're right, I wouldn't be a happy camper. Having said that though, I can assure you that I wouldn't be lending you that kind of coin to begin withWink! Not of my money anyway (I love ya brother, but not that muchTongue out). But I'll tell you, if I had already banked the profits that Mozilo skimmed it sure would make swallowing that "200 Large" much more palatable, ja?

I absolutely agree with you on the Tango. Borrowers were as much at fault as lenders and I don't think anyone should be bailed out. Not the banksters and not the homeowners... both should suffer the consequences of their actions. The foreclosed become renters (and lose their down payments, such as they were). Banks go out of business (their remaining assets sold off to the competent) but new banks will rise up in the void.

What aggravates me beyond reason is that our government is not allowing the market to correct itself. They are trying to take risk & failure out of the equation and replacing them with socialization. This is a very bad precedent... I think it leads the anarchy of which you speak.

But given the battle between the lender and the borrower, I put the blame squarely on the Banksters... they knew better, but chose GREED anyway. And now, because of that greed we find ourselves at the edge of the abyss.

What we are taking about here is the banksters willingness to lend for obscene profits while ignoring any semblance of underwriting standards. They created the loan programs first, before willing borrowers showed up. That is where this all began. Call it the original sin. In a court of law, a judge would look at the two parties and ask, "who is the expert here?" Who should have known a problem would result from such abusive lending practices? The answer is obvious.

A borrower who finds themselves upside down (through no fault of their own) and decides to exercise one of their contractual options (that of default) will get no gripe from me. I, like you, probably wouldn't do it. But I understand their thinking.

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strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Get out of Debt! Bad advice?

Sam wrote:
This is not true. The housing market was not inflated intentionally by "a government-sanctioned banking cartel". The reality is that the government wanted to encourage home ownership and persuaded the banks to loosen the purse strings to allow more people to be able to purchase homes. Unfortunately, government didn't keep an eye on the banks - big mistake! The banks went to the other extreme and handed out money to anyone who could fog a mirror. Why? GREED!

Sam, the bubble was absolutely intentional by the bankster cartel...and their willing dupes in government some of whom didn't realize what was going to happen.  We need to be clear about 2 separate groups: 1) the banks we know (the public facing banks and Wall St institutions that work with customers, issue loans, securitize debt, etc) and 2) the "banksters" behind the Federal Reserve banking system (the Fed, BOE, BOJ, ECB, Deutschebank).  These are two very different groups (though the latter controls and owns much of the former...most people in the former have no clue about that).  You're right the "banks" and Wall St were just playing the greedy game.  But the game was established by the "banksters"...the system created by the govt/Fed collusion that makes us all passive passengers in the rollercoaster that is our monetary system.  Efforts like this Martenson website are an attempt to wake up, get off the rollercoaster, and establish our own ride.  

 

Aaron wrote:
It's unethical to default on your loans, and this even being a topic of discussion is raising "red flags" as to the first of my "forecasts" coming true: that people today lack the integrity we had during the "first" great depression. Granted, this is a very minor issue, but how long will it be before the people with lower capacities for reason are starting to ask these same questions

Aaron, I'm all for a return to morality.  That's one of the reasons I hope our current immoral system dies.  It's impossible for us to return to morality as long as we participate in our current corrupt immoral system (anybody who has a dollar bill or a bank account is participating in a fundamentally flawed system...that includes me!).  The constant loss of morality we've all witnessed in our lifetimes, isn't just something that happened accidentally.  It was a symptom of the corrupt debt-based, fractional-reserve, immoral monetary system we adopted long ago.  Once that was in place, we lost ontologically meaningful existence.  We became numbers on Wall St spreadsheets...well, slide-rules back then.  Our purpose became to find productive employment in order to incur debt and payoff the rulers of the world with interest.  Everything we do with kids is to maximize their productivity to serve that system...the key is to train them to get a good SAT score, so they can go to Harvard, so they can work on Wall St, so they can invent new ways to productize debt and invent new revenue streams for the banksters that run the world.  And the people who didn't get to Wall St/London/Tokyo are then subjects of that system...working hard to generate the revenues that Wall St charges a fee on as they transfer it to the banksters.  And Wall St also works hard to globalize the system, i.e. suck even more people into the debt-based system to generate more activity for them to collect their fee on as they pass revenue to the banksters.  This is a sick world...it must end.

But more to your point...equating morality with one particular outcome (pay on time) of a contract we have with a bank that allows for multiple outcomes (pay on time OR get out of the house) is I think going too far.  Default and bankruptcy are essential to the smooth operation of our monetary system.  Without it, people would just be in prison, or actual physical slaves to the creditors as they used to be in medieval days.  So see how the very foundation of our current system has immorality baked into it?  Bankruptcy is good and necessary for our current to operate.  Contracts are by definition non-religious or existentially/philosophically-oriented agreements. They are a product of Enlightenment rationalism.  The Enlightenment is dying...thank God.  We are moving back to local communities where interpersonal relation provides the meaning in our lives.  At least that's my hope.  

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Gungnir
Status: Platinum Member (Offline)
Joined: Mar 2 2009
Posts: 643
Re: Get out of Debt! Bad advice?

Wow, I came across this site and this forum after being directed here by a friend, who pointed me at the whole Crash Course.

Sam... With all due respect you're thinking about the problem like it's
something that you can just sit out and it will blow over.

Maybe I just think differently, but in this instance the thing that
most strikes me is this. We're in a Credit Meltdown, the Fractional
Reserve Banking system is all but bankrupt, and I see someone here
arguing, you should try to pay your mortgage, who will benefit? The
Banks? Nope, they have a femoral bleed, giving them a nick on their
finger is meaningless. The Federal Government? Nope they'll just
increase taxation, which is going to happen anyway.

There used to be a term that was used many years ago, called Penury,

Defn. cramping and oppressive lack of resources (as money)
; especially
: severe poverty

It was a situation brought about where you were effectively a slave,
the money you had was solely to make sure you could survive to earn
more that was taken by some money lender. It used to be illegal. Not so
seemingly in the 21st Century.

I've never owned or worked in a financial institution, but I did run
my business successfully for some years. During that time, we had a
couple of companies default payments. Did we care sure we did, but we
planned for it. We wouldn't have lasted for as long as we did if we
hadn't. 

In this instance the argument is

1) Should the person pay their mortgage? You argue yes it's a
responsibility, I say it depends upon that persons situation, you
cannot judge that situation. You're basing it on a moral imperative
that you seem to have, good for you, but the Contract holder (the
bank/company) probably doesn't have your moral imperative, if they did
then the current financial situation would not have occurred in the
first place. 

2) If they don't then they're bad... Well I say screw that, the
contract they have for their mortgage is plain, pay or the loan company
will reclaim their security (the house) no harm no foul. Oh but wait,
the house is under water, hmm... why is that? Inflated average housing
prices for the past 10 years maybe? Driven by cheap easy credit. Over
the past 150 years adjusted for inflation the average US house price
has been $100,000, from 1997 to 2006 it went from about that to
$200,000. This is not a sit quietly and wait out the storm. If in 10
years the average house price is not under $100,000 I'll eat my
boots.Oh and one more point, why should they care that the house is
under water, and the bank may not be able to realize their investment,
the bank is a business, and SHOULD have planned for this contingency?

Now add into that mix the moderate risk that in the next few years
there will be a period of hyperinflation followed by a period of
deflationary impact on the Dollar then your debt is suddenly in real
terms ballooning, Firstly in Hyperinflation, everything costs more
(except that unservicable debt), so you can't support your normal
outgoings, since your pay will not be adjusted monthly. Which forces
you to use credit, which then when the wheel turns suddenly becomes
more valuable as deflation sets in (Assuming that we don't scrap the
entire financial system).

Using the Logic you're using I'm sorry to say you're screwed.
Morally you have the high ground, good for you. Rationally you're not
seeing the bigger picture. The points I've laid out above assume
nothing happens EXCEPT a continuation of the financial crisis. No
Martial Law, no resource starvation, no real economic collapse (other
than the financial markets) no energy crisis, I can go on and on. Using
your logic you're screwed in a complete Financial meltdown, add in the
rest, and good luck to ya, you're going to need it. 

wmarsden's picture
wmarsden
Status: Bronze Member (Offline)
Joined: Apr 6 2008
Posts: 38
Re: Get out of Debt! Bad advice?

jerrydon10 wrote:

If hyperinflation hits, you will be able to pay off that credit line with a few days wages.....:-)

It makes sense mathematically, but in practice you don't get raises that keep pace with inflation.  Instead, the cost of everything ELSE went up and your income now has to pay for food and fuel at the increased prices, leaving you no disposable cash for debt service.

Assuming the future will have endless amounts of money in it is EXACTLY why we're in this trouble.  I think the future will not only have LESS money, it'll have its OWN expenses.  You just can't count on having money available to pay on old debt , even if the value of the debt is eroded.

People will lose jobs in hyperinflationary times, too, you know.  And we've all discovered that a LOT of them will lose jobs in deflationary times.  Either way, figuring it'll be easier to pay off current consumption in the future (with interest) is a foolish bet.

The only time this makes sense is in the case where you have the cash on hand to pay off the debt at any time, and it's invested in some liquid way that makes a guaranteed rate of return higher than the debt you're waiting to pay off.  I've got that going on right now, in fact: I've got $20K in a bank account paying 5% and owe $20K at 3%.  I am not paying off the 3% loan because I prefer to have the options from the liquidity. 

So: tweak what you're saying to back to the original premise: you don't pay off the debt, instead you save up a kitty that you COULD use to pay off the debt.  It's equivalent to getting out of debt but offers more flexibility.  But there's a whopping distinction between saying you can pay off debt with existing savings and you can pay off debt with hypothetical greater future cash flows.  One of those methods is likely to get you in a lot of trouble! 

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1232
Re: Get out of Debt! Bad advice?

It's very interesting how we all see this so differently.

Many of you seem very strongly of the conviction that defaulting on a mortgage is unethical. I'm curious where you got that information? I'm not being coy - I really mean that. Is this something you were taught by someone? Is it just an opinion you formed on your own? Clearly, the mortgage contract doesn't say that. It doesn't say "In the event of default, borrower shall forfeit collateral and be deemed an unethical person". Rather it just says you have to forefit the collateral. So obviously many of you have the belief that the default option is unethical to use unless you have no choice. I'm sincerely curious to understand what caused you to start believing that and when it happened.

Oddly enough, what really took me aback was the comments by many of you who seem to believe that default would be unethical in normal times, but not in crisis times like we now face. I respect everyone's opinions, but that honestly shocks me and scares me. It makes me wonder what else will become "ok" in crisis.

Sam, I mean no disrespect to you in any way, but I was rather disappointed in you when you changed your tune after understanding PlicketyCat's circumstances. In my opinion, her prerogative to default either is or is not a legitimate right (I say it is). To suggest that is is ok under some circumstances but not others is ludicrous to me. If it was somehow unethical in good times (I don't think so), then it would be equally unethical in bad times. Someone in dire straits could understandably be forced to do something unethical, but in my view whether it's ethical or not has nothing to do with the person's circumstances.

A perhaps similar analogy... In my opinion, those who would feel inclined to excuse theft or other obvious crimes because the perpetrator was needy are nuts. If someone steals something, they are guilty of theft. Period. Ok, I'm willing to concede that their sentencing by a court might reasonably consider circumstances and means, but stealing is stealing. I don't care whether the poor hungry starving orphanage steals from a billionaire or the billionaire steals from the orphanage. It's the exact same crime either way, and claiming that your difficult circumstances somehow make the crime not be a crime any more is silly. Sure, I'll concede that there is a lot more room to be lenient on the orphanage when the court decides how to deal with it, but excusing the crime as a non-crime because the perpetrator was needy is absurd in my view.

This reminds me of a situation that happened in San Francisco in the 90s. The Marnia Safeway (big grocery store) complained to the police chief that he'd lost over 100 of his shopping carts (wholesale cost $120/ea) to homeless people living on the streets who had stolen them to use to cart around their belongings. Obviously nobody wanted to punish the homeless people, so the police went around and rounded up the shopping carts from the homeless people. Nobody arrested for posession of stolen property and nobody so much as cited with a ticket. There was a massive public outcry, with calls for the Mayor's resignation if the carts were not immediately returned to the poor, innocent homeless people who are just trying to get by! The Safeway manager was on the radio saying "Look, I'm all for helping homeless people, so if anyone wants to GIVE them a shopping cart, I'll be happy to SELL you one at cost and you can GIVE it to them. I'll even have the handle engraved with the homeless person's name if you want. But because they are homeless doesn't make it ok for them to come to my place of business and steal expensive property!" Nobody would hear anything of it, and very soon all the homeless were invited to come back and get "their" carts! I'm sorry, but if you think the Safeway manager was wrong, I think you're just not thinking straight.

Erik

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Get out of Debt! Bad advice?

wmarsden, let me know what bank account you have paying 5%!!  Surprised 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Get out of Debt! Bad advice?

Erik, when did you shop at the Marina Safeway!?  I was there 99-2003.

Sandman3369's picture
Sandman3369
Status: Bronze Member (Offline)
Joined: Dec 21 2008
Posts: 71
Re: Get out of Debt! Bad advice?

Wow, lots of comments.  Forgive me, please, if someone already posted what I have to say.

Erik must have struck a nerve.

Do what's good for yourself, be selfish.

  It all depends on how much debt you have...  I didn't have much, and it feels good to have paid it all off.  I don't make a lot, and it took me about five years to get where I am (pay off about 20k).   If your honor can swallow defaulting... do it.  If not, you may not have a choice anyway.

  I find it funny that intelligent, resourceful, thoughtful people like all of you can contemplate these ideas in such times.

  My parents and grandparents, et al, are rolling in their graves, but the times demand compromises.

  Seems the only uncompromising people are the ones that want to spend someone else's money.

  If you're not part of the solution...... 

Gungnir's picture
Gungnir
Status: Platinum Member (Offline)
Joined: Mar 2 2009
Posts: 643
Re: Get out of Debt! Bad advice?

Erik,

I strongly do not believe that defaulting on a mortage is unethical. If the boot was on the other foot the financial institution would not spend more than a nanosecond thinking about foreclosing. It's business, the company assumes the same risk you do, that the property will appreciate in value. We would not be discussing on this board if the value was still appreciating anywhere.

A mortgage is a contract, you pay, or you return the keys. Not paying is not unethical, nor immoral, my belief is to sell your life into slavery because of some confused sense of responsibility that, in itself, is unethical; but my ethics likely differ, choosing to conform to a confused code of honor that is ultimately self deafeating is irrational.

PlicketyCat's post got me thinking about my situation, which is not all that different, I would not in any way have any qualms about dropping my keys off at my Mortgage company and waving a so-long to them. Maybe the only reason people view that as a bad thing, unethical or immoral, is that changing the status quo requires a degree of conviction that perhaps others lack, that's not a slur on anyone here, but an observation of "people" in general. Where one person does something that is considered to be against the normal order, they are reviled for it. 

But then isn't this place somewhere that those of us who have woken up to the problems in the "normal order" are meant to meet and discuss our concerns, plans and ideas, and cross pollinate with others. Bring our skills and help those who need those skills, while learning other skills.

Maybe I'm inaccurate in my assessment Wink but I think that's what Chris had in mind when he created this site.

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