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Who wants to be a deadbeat?
Frogwatch wrote:
Answer: Probably nobody. However, due to either poor planning or circumstances beyond their control, it happens. It is in everybodies best interest that we foster a morality that expects people to pay their debts even though it is a hardship and even though we may lose money on them. Is it unusual for people to default on a debt where the collateral is worth less than the loan? Answer, NO. Consider how many people default on car loans where the car is immediately worth less than the loan as soon as it is driven off the lot but the repo man coming after a persons car is very common. OK, but that is a not much money, what about bigger loans? Boats are an example. For some reason, people have no qualms about defaulting on boat loans and we all know how much boats depreciate and repoing boats is a normal business in Florida. For some reason, we all think very hard about considering defaulting on a home loan even when the home is underwater. In general, this is good. However, does it make sense individually when many people have no problems defaulting on other loans? We seem to have one morality that applies to cars and boats and another that applies to homes. In the past, this was never a problem because homes always appreciated (in general). Now that the fundamentals of the economy have changed, is it unreasonable for our attitudes toward default on home loans to change? If people begin to default in larger numbers, lenders will no longer do the absurd zero down loans and will demand at least 5% or 10% down like they used to. We should not favor defaulting but when the lender who has been given federal money at very low interest will not even refi at a lower rate, what do they expect? They do not lose money by refinancing on the principal and in cases of being severely underwater they could even reset the loan at the rate they get from the feds until the principal was down to the actual value and then raise it back. Home owners have taken a huge hit economically whereas the large lenders have done well because the feds gave them billions which the lenders are not lending. Why should the poor economy fall only on the homeowners? If the banks are taking taxpayer money at low rates and then will not lend it. do they expect individuals to operate on a higher moral plane? I would never consider an adjustable rate mortgage but apparently it is the norm in most of the world. Most of the world has economies far less stable than ours so lenders demand to be able to adjust mortgages. Looks like you're thinking about the "walk-aways" among other things. I don't disagree with most of what you've said. Couple quibbles. There are plenty of born deadbeats. And I've met my share. Prisons are full of them, and many others belong in prison, but are smart enough to stay within the law. Some aren't bad folks aside from being deadbeats, and I'd guess that most of us has some in the family. Most of those boat and car repos are the result of deadbeats. They could pay the notes but choose to spend their money elsewhere. Anybody spending the money on restaurants, vacations, clothing, toys, etc., instead of paying their notes is a deadbeat. Anybody who doesn't downsize their home or apartment when it could allow them to pay their notes is a deadbeat. If it's beyond your control to pay your note because your world turned upside down through no fault of your own, and it hurts you inside to default on your note, you're not a deadbeat to me. But to the lender you're still a deadbeat. Personally I never considered putting my soul in hock for a car or boat, but I can see where that's a valid course for some who have run the numbers and find that financing is beneficial to the bottom line. Just never been the case for me. A home is different. Or was at least until prices became inflated and subject to value erosion. We all saw that happen and some fully expected the crash. The saddest part of that is a lot of young folks just starting off got screwed in chasing "The American Dream." Didn't even have time to do a few refis to buy toys like some of the older fools did. Cars and boats have always declined in value as soon as they are purchased. Variable rate mortgages are not inherently bad if used as a calculated tool. Eight years ago you could refi with a 2 1/2% 3 year ARM or a 6% 30-year fixed. Most of those ARMs have yet to hit 6% after adjusting. A brother of mine did that and his ARM's high was 5.75% for one year and is currently 4%. I don't know if you could even get a fixed rate 30-year for that now. Paid my house off 6 years ago so I'm not up on that. He paid most of the mortgage down before it even adjusted and saved a bundle on interest. But he had a backup plan if rates went against him: Cash. Jim - Tightwad Number 1. |
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