I disagree with Rydex and bchadwick who see keeping a promise as an all or nothing integrity issue. Any reasoned decision is a comparison of costs vs benefits. Breaking a promise would be a “cost” to the extent that it hurts your reputation or makes you feel bad. However, stating this “cost” as absolute would make the cost infinite compared to any level of benefit. Taking a simple example, let’s say you promise to babysit some friends’ kids when they go on vacation. Let’s say backing out would force them to cancel their trip. Would you back out at the last minute: 1. If you had a conflicting dentist appointment 2. If you remembered your CFA II exam was that day. 3. If your own child suffered an accident and was in intensive care. Clearly a promise is a relative cost to be evaluated in a decision. Does the benefit of lower payment outweigh the cost of financial penalty + morality cost?
If you borrowed money from a family member or friend to buy a house, and it was no longer “in your favor” to keep paying them, would you be able to look them in the eye and tell them “yes I can pay you, but I choose not to”? This is absolutely an issue of integrity. Obviously, we all want to vilify the banks and act like they deserve it, but when it comes down to it, it’s the same thing. I used to work in residential finance, and when the practice of “walking away” first started, it was completely unexpected. The thought process was always that if people could pay, they would. Now that it’s considered “acceptable” to walk away from your mortgage, as long as it is beneficial to you at the time being, the housing market will keep falling as neighborhoods continue to be decimated by “strategic defaulters” who care only about themselves.
I don’t think I take promise keeping as an all-or nothing integrity issue. The main point is that promises shouldn’t be broken just because it’s convenient or profitable to do so, and that is what separates someone with integrity from someone who doesn’t have any. It’s what makes a promise different than saying “yeah, sure, that’d be nice if you give me some money to buy a place, and I’ll pay you back if I feel like it.” Living in a society where people can’t be trusted to keep promises is difficult, capital does not flow efficiently, and the methods for enforcing compliance can be brutal. Russia is a good case in point. So it’s important to fight the descent into a society where people can’t trust each other and therefore have extremely high capital (and social) costs because of it. If a house is foreclosed on, the general idea is that things got really bad for the mortgagor and so both the mortgagor and the bank are going to have to eat some losses as a result. This is the implicit understanding when most people sign a mortgage. So, strategic default, while not illegal, breaks this implicit understanding and therefore carries a moral weight. Now, plenty of people may decide “the banks screwed us; so we should be able to screw the banks.” That’s a different argument about whether the banks have done something that means our promises no longer carry the same moral weight as before, in the same way that promises extracted under duress have little moral weight and agreements based on deception by one or more parties also carry little weight. I also think that deciding that “feeling bad by breaking a promise” is a cost is just missing the point. Plenty of people have no compunction about breaking promises and don’t feel bad at all. That’s like telling people that if you get caught speeding, you’ll get a $1 fine because you’d really just rather go faster. mo34 has an interesting point though: why is it that it seems (to some of us) less integral to strategically default on a mortgage, but not to switch employers? In both cases, there is a contract, and in both cases, the legal text of the contract allows us to a) walk away from our mortgage, or b) walk away from our job, yet defaulting on the mortgage feels like a more problematic issue. One aspect may just be cultural expectations. We know that people leave jobs for better jobs all the time, and therefore it is a much more reasonable expectation that this might happen and therefore more easily controlled or hedged through monitoring or non-competition agreements, etc. The general expectation with mortgages is that people will not default unless they are in dire financial straits - they won’t generally default just because it might be convenient or profitable. The breaking of this uncontracted expectation is what makes it morally objectionable, even if it is not legally so. The other aspect is that with the mortgage, we got to live in our nice home on the bank’s money. We borrowed a bunch of money and lived in a place that we wouldn’t be able to afford on our own, and now we’re going to leave the bank with a loss after having enjoyed the place. It is to some extent parasitic, which is something those with integrity try to avoid. If the company you work for had given you 30 years salary in advance, and then you leave after six months for another company, and pay back only 26 years of your advance, maybe it would seem like a problem of integrity to change jobs. I’m not 100% sure what the difference is between mo34’s cases, but I’m sure there is one.
The bank does not “give you” anything. That’s the fallacy in your argument. The bank let’s you live in a house THEY own as long as you make the payments ( exactly like renting but the owner is the bank), sure they fool some people into “the home ownership dream BS” by giving them a piece of paper " title to the house" , but what value does it have? Nothing. If you’re late on your payments they’ll kick you out no questions asked ( if it’s in their own benefit to do so off-course, otherwise, they’ll re-finance your 30 years into a 40 years mortgage !).
why is that libruls always think their sh!t don’t stink?
monger187 Wrote: ------------------------------------------------------- > If you borrowed money from a family member or > friend to buy a house, and it was no longer “in > your favor” to keep paying them, would you be able > to look them in the eye and tell them “yes I can > pay you, but I choose not to”? This is absolutely > an issue of integrity. Obviously, we all want to > vilify the banks and act like they deserve it, but > when it comes down to it, it’s the same thing. > > I used to work in residential finance, and when > the practice of “walking away” first started, it > was completely unexpected. The thought process > was always that if people could pay, they would. > Now that it’s considered “acceptable” to walk away > from your mortgage, as long as it is beneficial to > you at the time being, the housing market will > keep falling as neighborhoods continue to be > decimated by “strategic defaulters” who care only > about themselves. Are these the same family members and friends that are jacking up interest rates on credit card balances for no good reason? Because that isnt very friendly. And how do you know it is a bank that holds your mortgage? Would they lend you money if, say, you had a life threatening health issue and need surgery? My family would. @adavydov, how is this a librul issue?
bchadwick Wrote: ------------------------------------------------------- > I don’t think I take promise keeping as an all-or > nothing integrity issue. The main point is that > promises shouldn’t be broken just because it’s > convenient or profitable to do so, and that is > what separates someone with integrity from someone > who doesn’t have any. Response: Thanks for clarifying. What you’re saying is mortgage borrowers should place a high “moral breakage” cost to the financial cost/benefit equation. Also this cost should exceed the purely financial benefit - cost for a non-distressed buyer. Sounds reasonable. > mo34 has an interesting point though: why is it > that it seems (to some of us) less integral to > strategically default on a mortgage, but not to > switch employers? > > In both cases, there is a contract, and in both > cases, the legal text of the contract allows us to > a) walk away from our mortgage, or b) walk away > from our job, yet defaulting on the mortgage feels > like a more problematic issue. > > One aspect may just be cultural expectations. Response: Interesting point > The other aspect is that with the mortgage, we got > to live in our nice home on the bank’s money. We > borrowed a bunch of money and lived in a place > that we wouldn’t be able to afford on our own, and > now we’re going to leave the bank with a loss > after having enjoyed the place. It is to some > extent parasitic, which is something those with > integrity try to avoid. Response: you may be looking at the bank/borrower relationship wrongly. Financially, a house produces capital gains/losses + dividends in the form of being able to live there. On this asset, the bank takes a senior debt position, while the borrower takes the equity position. If a company goes into bankruptcy and defaults, the senior debtholders have the right of repossession. I’ve never heard of stockholders considered parasites in this event.
The stockholders are not parasites, but the management can be. That’s the principal-agent problem. In the home case, the mortgagors are both equity owners and the management, which creates additional moral hazard. If we evolve into a society where strategic default is the norm, mortgage rates will simply adjust upwards to reflect compensation for that risk as the new normal. It will no longer be considered gauche to do this, but similarly it will be much harder to obtain a mortgage, and it will be harder to obtain capital for other things and we will be less productive as a result. We are most likely headed there anyway, but I think it’s reasonable to protest the slide.
bchadwick Wrote: ------------------------------------------------------- > The stockholders are not parasites, but the > management can be. That’s the principal-agent > problem. In the home case, the mortgagors are > both equity owners and the management, which > creates additional moral hazard. > > If we evolve into a society where strategic > default is the norm, mortgage rates will simply > adjust upwards to reflect compensation for that > risk as the new normal. It will no longer be > considered gauche to do this, but similarly it > will be much harder to obtain a mortgage, and it > will be harder to obtain capital for other things > and we will be less productive as a result. We > are most likely headed there anyway, but I think > it’s reasonable to protest the slide. The main argument for capitalism has always been that if everyone acts in their own self-interest, society as a whole will benefit as a result. The argument for strategic defaults appears to be that you should do whatever is in your own self-interest. However, in this case if everyone acts only in their own self-interest, society is negatively affected through depressed asset values, stricter lending standards, higher interest rates, etc. Sort of like when you’re driving and there is a lane closing ahead. The guys who zoom up to the front and cut someone else off end up saving themselves a few minutes, but at the expense of everyone else, who end up having to wait longer because of it.
@bchad: I wasn’t referring to the issue as a liberal one, rather I was referring to liberals (as in persons holding liberal beliefs, such as yourself (based on other posts here)) always a having a hollier-than-though attitude because they drive a Prius, donate $10 to Haiti by texting 90999, and elect an interracial president. Not saying you fit all these stereotypes but you must admit/know that you come off as liberal and then you make statements to the effect that those of us who would strategically default lack integrity despite the fact that our decision is based on nothing more than rational thought is just idiotic. Do you understand why? Its idiotic because we would be making a rational decision, whereas you are arguing for integrity? Where does that even enter into the agreement that both parties have expressly agreed to and paid for? I mean wtf? If they don’t want me to walk away write in harsher penalties or price up the rate, i.e. tilt the economic fundamentals driving the decision. Don’t feed me this fukking bullsh!t about integrity!!!
I have no issue with being liberal, though I do prefer to spell it correctly. Just because markets are a good place to make money does not mean that markets are the best way to organize all aspects of society. And just because government is often inefficient doesn’t mean that the private sector isn’t capable of spectacular waste. There are plenty of conservatives I respect and who act with integrity. I may disagree with them on policies or priorities, but I do not assume that they lack integrity or moral worth. However, there are plenty of people who come in with a Romper Room understanding of the Wealth of Nations and say that this proves that anything I want to do is good for society if I can get away with it legally. These people need to go back and reread the parts of the Wealth of Nations about standards and measures, about price collusion among businessmen, about the inferiority of goods that require trickery or deception (and modern fine print) to complete the sale. Holier than thou? In any argument, the party that asserts that there are limits to acceptable behavior almost always comes across as acting holier than thou. Were I to argue to someone that we should not strangle babies and film it for the internet simply because it might be fun to watch them struggle as they expire, I am sure I would come across as holier than thou to the other side. I still happen to think that killing babies for fun is an immoral act. Conservatives who say that people should live within their means and not assume that house price rises will eternally fund family spending come across as holier than thou in times like these, but I still happen to think that they are right. Acting rationally does not automatically mean acting with integrity, as you appear to assert. Here’s a dictionary definition of integrity: http://dictionary.reference.com/browse/integrity in-teg-ri-ty [in-teg-ri-tee] –noun 1. adherence to moral and ethical principles; soundness of moral character; honesty. 2. the state of being whole, entire, or undiminished: to preserve the integrity of the empire. 3. a sound, unimpaired, or perfect condition: the integrity of a ship’s hull. The test of integrity is that you adhere to the spirit of your agreements (and morality) *even* when it is inconvenient or unprofitable for you. That’s really what it’s about. It is not just about finding a clever way to manipulate the legal language of your contract and stay within it. When you work with a counterparty with integrity, you are comfortable doing business with them because you trust them to act on the shared understandings and not to screw you over just because they discovered a new and legal way to do it. In markets, you can often assume that your counterparties will try to screw you if they can, because these are the rules of the game for traders. However, those are not necessarily the rules that the rest of society play by. So when you take a morality that makes sense in the trading pits and you take it to main street, you’re acting in a different environment. You can say, hey, I work in markets and I will use whatever moral code I d@mn well choose, but don’t be surprised if people don’t think you act with integrity and learn to avoid you. An integral person may not always be able to commit to their agreements, but they feel genuine remorse when they are unable to. So look, there’s a payoff to saying, “screw this, I’m going to get rid of this mortgage by walking away and move into a rental and save a bunch of money, even though I’m perfectly capable of making my payments as the contract states.” It can be quite a lot of money you save, and maybe you can afford to support a few mistresses on the difference. But you sacrifice your integrity by doing it. But for most people, that’s really quite a small sacrifice, and it’s therefore rational to do it.
You obviously didn’t read the dictionary definition of integrity that you provided in whole. I’d suggest re-examining the 2nd one. Paying a an 800K mortgage on a house that costs 300K is not my idea of being “whole” or “undiminished.” Furthermore, if you’d like to argue that “Acting rationally does not automatically mean acting with integrity” I would have to direct to the writings of Aristotle (Nichomachean Ethics). You will find that the earliest philosophers considered rational thought and action above all else one of the highest ethical virtues. It was the rational part of the being that gave him his identity, his moral standing, happiness and integrity. Therefore being rational (or as Aristotle calls it the virtue of prudence) and having integrity (the ethical virtue) are dependent on one another and cannot be found within an individual independently. Rational actions and integrity are then an iff statement. So now here is a definition for you: rational Pronunciation [rash-uh-nl, rash-nl] Show IPA –adjective 1. agreeable to reason; reasonable; sensible: a rational plan for economic development. 2. having or exercising reason, sound judgment, or good sense: a calm and rational negotiator. 3. being in or characterized by full possession of one’s reason; sane; lucid: The patient appeared perfectly rational. 4. endowed with the faculty of reason: rational beings. 5. of, pertaining to, or constituting reasoning powers: the rational faculty. 6. proceeding or derived from reason or based on reasoning: a rational explanation. 7. Mathematics. a. capable of being expressed exactly by a ratio of two integers. b. (of a function) capable of being expressed exactly by a ratio of two polynomials. 8. Classical Prosody. capable of measurement in terms of the metrical unit or mora. I’d focus on 3 in particular, i.e. pick your poison if I lack integrity then you’re insane or incapable of exercising reason, in which case this conversation we are having is utterly hopeless since if I arguing with an irrational person I myself am irrational. So, with that I bid adieu to this thread.
No, it can be rational to act with integrity. However it may not always be economically rational to act with integrity. But this is a concept I think you are not able to absorb. It is less important to me to convince you, since it is clear that - however rational you think yourself to be - you will not change your mind or even accept a difference of premises. Be careful not to confuse having *an* argument with having *the* argument. What is more important to me is to offer the counterargument for other readers who might otherwise think that calling people idiots is a substitute for rational discussion.
Bchadwick - You may have just changed my opinion towards strategic defaults. I’ve previously viewed it as a purely financial transaction; however, I will accede that abiding by the spirit of an agreement would probably be beneficial in the case of strategic defaults. Adavydov7 - your hack job personal attacks are not appreciated.
Alright, since y’all are pissing me off: bchad: rational economic acts are subset of all rational acts therefore they too fall under the purview of having integrity. Like I said please pick up and read Nichomachean Ethics. Of course you’re not going to convince me you haven’t made a rational argument. I don’t consider myself rational in all situations and at all times (clearly violating this rule by replying to your irrational argument) but I do strive to act this way in most things I do. IU: a) no one cares, if you don’t appreciate it don’t read it, if you can’t help yourself get off the internet b) there were no personal attacks simply pointing out that the logical result of not acting rationally is idiotic and/or insane if repeated frequently c) re-read my original post in reply to the OP, clearly when I say PV of costs I don’t mean just financial, these costs obviously include qualitative costs such as loos of face, status, reputation etc!!! This is in fact all bchad is doing in trying to justify his “oh you lack integrity if you walk away” argument when in reality the factors he is using to justify his argument are ones a rational actor would consider in making his decision to walk away, thereby tying rational action with action that is also “integral” (since he uses these rationales to stay in home to justify his “I have integrity” argument). That’s it I am really done this time. You are obviously too dense to see that we are arguing the same thing you are just deciding to separate the costs into purely financial (what you think I am purely arguing for) and qualitative terms (integrity, reputation, etc. and what bchad is arguing for).
adavydov7 Wrote: ------------------------------------------------------- > why is that libruls always think their sh!t don’t > stink? Given that Republicans associate themselves with illiterates like Palin it’s only normal that liberals feel intellectually superior.
monger187 Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > The stockholders are not parasites, but the > > management can be. That’s the principal-agent > > problem. In the home case, the mortgagors are > > both equity owners and the management, which > > creates additional moral hazard. > > > > If we evolve into a society where strategic > > default is the norm, mortgage rates will simply > > adjust upwards to reflect compensation for that > > risk as the new normal. It will no longer be > > considered gauche to do this, but similarly it > > will be much harder to obtain a mortgage, and > it > > will be harder to obtain capital for other > things > > and we will be less productive as a result. We > > are most likely headed there anyway, but I > think > > it’s reasonable to protest the slide. > > > The main argument for capitalism has always been > that if everyone acts in their own self-interest, > society as a whole will benefit as a result. The > argument for strategic defaults appears to be that > you should do whatever is in your own > self-interest. However, in this case if everyone > acts only in their own self-interest, society is > negatively affected through depressed asset > values, stricter lending standards, higher > interest rates, etc. Sort of like when you’re > driving and there is a lane closing ahead. The > guys who zoom up to the front and cut someone else > off end up saving themselves a few minutes, but at > the expense of everyone else, who end up having to > wait longer because of it. This argument is probably my biggest problem with strategic defaulters. Risk premium will go up in consideration that there is no risk metric that can predict when a person will default, since defaulting “for the hell of it” is becoming the norm. If anybody here worked in loan portfolio management, lending, or securitization, they would realize the single biggest way of guaging risk of the underlying portfolio is looking at risk metrics for commonality, adjusting lending based upon shifts in those metrics and/or proactively shutting off if those risk metrics become too risky, and adjusting borrowing AND lending costs to those risk metrics. Removing the connection of risk metrics to actual risk will only add systemic risk into the capital markets, raising capital costs for ALL lending. This will, in turn, reduce a lender’s ability to fund cheaply, as borrowing costs for the liability side of the balance sheet will increase, as will the equity piece increase, since all lenders to the lender will then adjust risk expectations for the raise in systemic risk, handicapping the portfolio and demanding more equity enhancement. This will, ultimately, feed into the borrowing costs for the asset side, punishing *ALL* borrowers, creating significant negative carry, whereby even the innocent are burdened by those who are guilty, merely because you can’t differentiate between the two. This may be seen as healthy, since de-risking in this situation is good, however, it is not healthy for this country’s ability to grow out of the economic problems. This all flows to the problem of people considering housing as an “investment”, rather than a place to live. This is aided by the capital gains tax incentives, which have encouraged people to flip homes rather than live in them. As a final portion to the problem, people aren’t really punishing “the banks”, as much as they are punishing the bondholders of the mortgages and the taxpayers. Again, *Everybody* is bearing the burden of other people’s choices not to pay the mortgages, even though they can. In the case of the bondholders, some of the largest are insurance companies, the insurance premiums will go up. In the case of mutual funds, returns will go down, affecting 401K, pensions…etc, destroying other people’s wealth because you choose not to pay. This will affect capital going into the economy further. Taxpayer costs are a problem, considering that without some support, the economy would tumble anyway, thus, the problem extends out further. All of these *ARE* moral considerations. You are asking society to bear your burden because you are unwilling (not unable) to pay.
Interest rates won’t go up… the downpayment will go up My two cents… A mortgage is just a long term call option on American housing. When you put 20% down its a deep ITM option… the bank has 20% downside protection and unless the house drops more than that people have no incentive to walk away - and they never would because they’d sell the house to pay off the loan and collect whatever equity was left. When a bank allows you to put nothing down… or even worse let a loan negatively amortize with option-ARMs the bank is giving you an OTM option and is by definition making a huge speculative bet that the underlying collateral is good. This is that old “banks thought home prices would rise forever.” Unfortunately prices don’t when you have rising unemployment, contracting credit, negative household formation, aging demographics etc etc. When an option expires out of the money the rational move is to let it expire worthless.
Interest rates will go up. You’ve already seen the cap on interest rates going down for mortgages. The risk spread is a little wider than the norm, in that prime is 3.25% and mortgages ~1.75% over that. Downpayment going up is also a proxy for interest rates, in that it’s equity capital that costs something. As far as the call option, that’s an OK way of looking at it. However, I will strongly disagree that the banks were the only ones who thought housing would go up forever. Furthermore, I will disagree on your thesis of them going down to unemployment. They went down because the Greater Fool Theory (GFT) resulted in nobody being the greater fool. That’s because the sins of the past caught up to the banks (and borrowers), when nobody could afford loans anymore since everybody was already over-leveraged and housing prices kept going up. The credit cycle proves this out. Initially it was prime mortgages refi’ing due to low rates. Then it was subprime mortgages, but largely conforming in nature, that speculated. However, the conforming nature of these mortgages, being full-doc and fixed rate, eventually outstripped the ability of speculators to service the debt. This, in turn, resulted in market innovation (or, actually, evolution), using “affordibility” products for higher LTVs. Those innovations were designed to get around the little problem of payment. Thus, your first wave was 3/1 ->5/1 -> x/1 ARMS. Then, once those were unaffordable, you moved into your OptionArms. No/Low docs were mixed in there as well, as an added “booster”. Of course, these were all blended together across demographics and geographics and weren’t exactly temporal in nature. However, this was the evolution of the credit problem and how the GFT eventually sputtered out. JasonU Wrote: ------------------------------------------------------- > Interest rates won’t go up… the downpayment will > go up > > My two cents… A mortgage is just a long term call > option on American housing. When you put 20% down > its a deep ITM option… the bank has 20% downside > protection and unless the house drops more than > that people have no incentive to walk away - and > they never would because they’d sell the house to > pay off the loan and collect whatever equity was > left. When a bank allows you to put nothing down… > or even worse let a loan negatively amortize with > option-ARMs the bank is giving you an OTM option > and is by definition making a huge speculative bet > that the underlying collateral is good. This is > that old “banks thought home prices would rise > forever.” Unfortunately prices don’t when you have > rising unemployment, contracting credit, negative > household formation, aging demographics etc etc. > When an option expires out of the money the > rational move is to let it expire worthless.
Spierce, great post. I was going to write about how the unwritten expectations that people honor the spirit of their agreements helps keep capital costs low and can therefore make for a productive society, but cut it out because I found myself picking on one particular nationality too much. I’m glad you filled in that point so well.