Wednesday, March 12, 2008

too funny: home equity loans

let's say someone wants to borrow money from you. would you give them the money if:

1) you have never met them
2) they have been referred to you, but not by someone you trust, but by someone you pay for referrals (pay not by performance of referrals, either. just a flat rate, say $5,000 per referral and they have no responsibility for the quality of the borrower whatsoever)
3) the amount of the loan is based on the value of an asset you've never seen (and nobody you have any reason to trust has ever seen). instead, it's value has been assessed by a person who only gets paid if they value it according to what the person who gave you the referral tells them to.
4) you have no way to force the borrower to pay and you are unlikely to get any money back at all if they decide not to

if you would, please send me your phone number, i have a good friend looking for a loan.

does it not seem like a laughably bad idea to give this sort of loan?

the first three parts describe many of the real estate loans in the last several years. the fourth is specific to second loans (home equity & and down payment loans).

seriously, in cases where the second loan was given by a lender other than the lender who gave the first loan, they have virtually no ability to force borrowers to pay. they have no ability to foreclose, they have no right to the borrower's other assets.

it is a loan against a house with no ability to take the house.

now, take it from the other perspective:

say you're the home "owner" who had $100k of equity two years ago. say you got a home equity line of credit for that $100k and went out and bought a Volkswagen Phaeton and spent the change on a trip to Germany to watch it be built and drive it at 155mph on the autobahn (because you've worked your whole life and you deserve it). since then, the markets have turned and your house is worth $150k less than the loans you have against it.

what would you do?

a) keep paying your mortgage and home equity loan because that is morally the right thing to do, even though doing it will be the opposite of your best interest

b) just pay the mortgage because you don't want to lose your house (because it might go back up in value)

c) stop paying the mortgage and live mortgage-free for a year when they kick you out (or longer, depending on how overwhelmed the courts are and how good your lawyers are), because there are no morals in business, because you think banks are evil and it is ok to not pay back debts to evil institutions, or for any other reason you can come up with to justify a profitable, but immoral action.

in case b) or c), the lender who gave you the home equity loan is hosed.

this is another drop in the credit problem bucket we're seeing the markets work through right now. the next will be commercial real estate (aka condo construction) loans.

in essence, what i'm saying is this: the people who got us into this are complete idiots, were blinded by greed, or understood what they were doing was idiotic and dangerous but figured they'd get out before the going got tough and take a barrel of cash with them.

unfortunately, i have to go with the third option. if i were underwater on a home loan right now and looking for an excuse to justify the fundamentally immoral act of breaking a promise to pay back a debt, this would be it: they lied to me and tried to cheat me, therefore i owe them nothing.

as a person who wasn't in the country to get caught up in things, i'm not involved in any way except that i get to watch things fall apart. for what it is worth, i think a lot of home "buyers" were lied to by people they had no reason to trust.

1 comment:

TheBehst said...

Apparently it is easier to sell your soul than to buy it back.