Write about something you know about. Not about mortgages.

Stephen in California

Write about something you know about. Not about mortgages.

Stephen in California

Write about something you know about. Not about mortgages.

Stephen in California

I will mention what nobody seems to have brought up in the comments above in response to Sarah’s just as flawed parallel to renting: in most states the security deposit is not the limit to what a landlord can attempt to reclaim if someone skips out on their lease. Any of you who have leases should look at them – you’ll find that the language says your landlord can pursue you for any unpaid remainder.

In many states it’s not too challenging to sue the renter and get a judgment, which, depending on the state, can be renewed periodically and interest charged. It may or may not be worth a landlord’s while to do that, but there are additional recourses. The same sort of fact applies to other unsecured debt such as credit cards.

I came to this article and comment section really hoping someone would make a compelling argument for the other side, but I don’t see it here. I continue to think that it’s unreasonable and actually sub-optimal for there to be this imbalance in moral imperative between citizen borrowers and corporate lenders. It certainly didn’t help to have the proponent for this moral imperative admit that he’s never even looked at a typical mortgage agreement.

There may be some overall benefits to society if people continue to embrace this imbalance (though I think it also prevents other positive effects like better action from lenders) but that’s no reason to hold them to a standard above and beyond the law that their counterparts aren’t held to. When we start discussing the things corporations should do in violation of their interest but for the good of society then perhaps I’ll be willing to revisit the subject.

Why should the banks get more than the benefit of their bargain when you never will? They bargain for a risk premium and security….

…somehow, I’m sure these points just won’t matter. At the end of the day, it is what it is and people can either choose to run their personal finances like business and win, or adhere to someone eles’s code of morality and lose.

- Debts are categorized as either “recourse” or “non-recourse”. Under a “non-recourse” debt, the lender may look no further than the collateral at hand. These are rare in personal loans, but common for businesses. Under “recourse” debt, after seizing and selling the collateral, the lender may still pursue other avenues of collection to make themselves whole. A car loan is typically “recourse” as are your credit cards.

- States fall into 3 categories with regards to statutes governing residential mortgage:
(1) All residential mortgages are non-recourse. That is, when the banks take the house, there is no longer an enforceable legal debt.
(2) Banks may choose either: (a) An expedited and cheaper foreclosure process (usually called non-judicial foreclosure), but in so doing they forgo the enforceability of the balance, or (b) A lengthy and expensive process (called judicial foreclosure) under which they eventually get the house and a judgment for the balance. As a practical matter, the bank almost always picks (a).
(3) States that are silent on the matter, in which case the mortgage contract is generally full recourse – that is, after taking the house they may pursue a judgment for the shortfall and enforce the judgment.

Because of this difference in statute, mortgage rates vary from state to state. One can argue that part of what the Arizona resident (case 2) is buying when their mortgage costs 0.25% more than the New York resident (case 3) is the fact that the borrower’s losses are limited to loss of property in Arizona, but not in New York.

In retrospect, the lenders grossly underpriced this risk premium from state to state, but as much as walking away feels wrong, there is an actual statutory difference (at least in Type 1 and maybe Type 2) states between that and stealing.

- With respect to security deposits. In many states, there are statutory limits on deposits, which I view as a gross interference in the marketplace. Even where they are not present though, as a practical matter, a landlord can rarely charge “enough” of a deposit, because the pool of renters tends to have nothing in the bank. My properties (single family homes) range from $850-1000 per month in rent, and I charge identical deposits. That deposit is a dealbreaker for about 1/2 of the prospects, yet that deposit would only cover (in the event of eviction or skip out) the single month’s unpaid rent and leaves nothing for cleanup, collections, court costs, repair, etc. A typical breached lease is about $4000 of losses – I typically sue for the balance and relentlessly pursue for collection (realizing about half), but I’m the exception.

And again: in the case of a mortgage default, the bank has typically already made some money (interest is paid off before principal), and then owns the property outright. It’s still quite possible for this to be profitable, even in a down market.

I’m not sure whether that’s a bug or a feature: shouldn’t the overall effect of that be to cool the housing market, making mortgages more affordable and preventing housing bubbles in the process.

Also, I think Jed’s point about business and self-interest is well taken. If we’re going to say that the market can’t handle the problem, so individuals have an obligation to stop acting in their best interests (without breaking the law) and look to the collective good, then I can’t see why that argument doesn’t extend to businesses.