Nice statement I found

[Jon Miller]

By the way, Jon: if you're attempting to make a statement about the morality of saying "so sue me" instead of making good on your obligations based solely on the fact that this risk was priced into the rates being charged, then you are aggregating morality across debtors.

Those who take advantages of weakness in enforcement are effectively taking from others whose credit indicators are similar to theirs and who do not take advantage of this weakness. That's the point; in equilibrium, the burden of default falls not on the creditor, but on debtors as a class.

I guess you could put it that way, I don't agree with the perspective though. It's not taking advantage of weakness, it behaving correctly under the contract. That some people don't make decisions for themselves that appear advantageous means that they have included other aspects into their decision making (like the possibility of future loans/etc) or are just bad decision makers.

The possibility of the debtor not holding his/her end of the contract is included in the contract price. It is just like the possibility of an accident being included in my price of insurance. If I am known to not keep my contract, if I have a history that suggests it, if something about me suggests that I will not be able to, then I will end up paying more for the contract (I will pay a high interest rate/etc).

I think it is the right thing to do to exit your contract if staying in the contract ceases to be advantageous to you. Note that this will obviously effect future contracts/etc.

Take for example the mortgages, since that is what interests people right now. A contract was drawn up. As surety for the contract, the house was provided. Therefore, if the homeowner can no longer keep the contract, then the mortgage holder gets the house and the homeowner exits the contract. If additional surety was desired, then that should have been entered into the contract. The fact that it wasn't, isn't the homeowners fault. The homeowner and the mortgage holder both expected the price of the houses to rise (or at least stay the same). If the housing market was robust you wouldn't have lenders being upset about borrowers exiting the contract in the mortgage industry.

JM

[Jon Miller]

Actually, apparently some of the cost included in home loans is Mortgage Insurance, which is suppose to cover if you no longer make payments on the house and it sells for less than you owed on it.

JM
(For some strange reason this is only required up to 20% equity, and doesn't have to be payed after, this seems to me to be the same as taking advantage of cash for clunkers or any other government regulation that businesses or persons take advantage of. Obviously the 'rest' of the insurance will be included in every loan.)

[KrazyHorse]

I guess you could put it that way, I don't agree with the perspective though. It's not taking advantage of weakness, it behaving correctly under the contract.

No Jon, it's not. As I stated earlier in this thread:

Most of the people who walk away from their mortgages in the US are able to do so simply because it is difficult and costly for the creditor to collect what he is owed above the residual value of the house (the debtor manages to retain assets, instead of being forced to go through bankruptcy).

The majority of home mortgages in the US are not no recourse according to the contract as written; they are often effectively no recourse because of the difficulties in collecting residual value which the mortgage holder is legally owed.

I have no problem with jingle mail when state law or the contract preclude the chase for residual value. I have some problem with it when state law and the contract allow it, but the borrower takes advantage of an inefficient and weak enforcement mechanism. I have a HUGE problem with it when douchebags attempt to squeeze as much free rent as possible out of the property while it's in foreclosure, all the while destroying the property's value and proclaiming that they've been taken advantage of by "predatory lending"...

[Jon Miller]

Would you agree with me that the borrower can choose to default, if it is to his advantage to do so?

The possibility that the borrower defaults should be, and is (in many cases), covered by insurance. Insurance that the loan company can select/etc.

If the loan company did not require 'enough' insurance, due to not properly predicting the economy/housing market, how is that the problem of the borrower?

People or companies that loan money and expect it back should write up the contracts so this happens (as they get to write up the contracts, baring government regulation). That includes insurance for cases when the borrower defaults.

Where I disagreed with you about perspective is that you argue that morality is involved (that this is a fundamentally moral question?). I am not a relativist, what is moral is not a matter of perspective. But what people consider to be moral is.

The response of 'sue me' is included in the market/risks/etc, and from a morality neutral point of view is sometimes the correct response.

JM
(Purely on moral terms, people should follow the contract because they gave their word...)

[KrazyHorse]

Would you agree with me that the borrower can choose to default, if it is to his advantage to do so?

That he can choose to default without fear that the lender will appropriate his other property is possible in two cases:

1) The mortgage itself is explicitly no recourse, or was agreed on in a state in which mortgage loans are legally no recourse
2) The mortgage lender has legal recourse to assets above and beyond the home itself, but is effectively precluded from enforcing its rights because the borrower's assets are worth less than the cost of litigation

I have no problem with the borrower's actions in case (1). I do have a problem with it in case (2).

In case (1), if it is the state legislature which prevents borrowers from signing recourse mortgages then the state legislatures are effectively reducing consumer choice. In case (2), borrowers who choose to take advantage of a weakness in enforcement are victimizing future borrowers.

[KrazyHorse]

The possibility that the borrower defaults should be, and is (in many cases), covered by insurance. Insurance that the loan company can select/etc.

If the loan company did not require 'enough' insurance, due to not properly predicting the economy/housing market, how is that the problem of the borrower?

Jon, what the **** is this supposed to mean? If I choose not to get rental insurance and am burglarized, can the burglar point to my lack of insurance and claim not to have done wrong?

WTF sort of reasoning are you engaging in here? Most owners who strategically default do so SOLELY because enforcement mechanisms to make them pay what they legally owe are weak. They DON'T declare bankruptcy and DON'T lose their other assets to the creditor (which the law as written says the creditor is entitled to).

People or companies that loan money and expect it back should write up the contracts so this happens (as they get to write up the contracts, baring government regulation). That includes insurance for cases when the borrower defaults.

OMFG, the existence of insurance does NOT mean that the borrower's default doesn't harm anybody. What sort of ****ing world do you live in? Whoever the terminal holder of default risk is is the one who is harmed directly (economic incidence is different, as stated earlier).

[Jon Miller]

I didn't maintain that insurance meant that no harm existed.

First, I think we should stay away from ideas of morality. Not because I believe that morality doesn't matter, but rather because I realize that my ideas of morality are not shared by everyone else.

Did you have a problem with people taking advantage of cash for clunkers? Trading in a perfectly good car/etc to get a new car/etc? This is brought about by government regulations/laws/etc.

How is that any different than the governments laws regarding litigation/etc? Why shouldn't people (not from a moral/ethical point of view) not take advantage of these laws of litigation the same way they take advantage of cash for clunkers program?

Overall this government regulation/law just changes the market similarly to the cash for clunkers program or the many laws and regulations that companies or other individuals use to make money (like the rum deal with US Virgin Islands/Puerto Rico).

Actually, from a purely market perspective (not from an ethical/moral perspective), I think the right choice is to leave the contract and take advantage of the laws with regard to legal recourse/etc. And just as obviously, the market existing in such a regulatory environment increases the worth of lawyers/etc, and creates members of the lawyer profession that handle these situations (of the 2nd type). Obviously such a lawyer could write up a contract that would handle the 2nd type of situations and provide recourse to the lenders (for an appropriate fee).

This is really a pretty minor issue compared to all the other ways that the government supports home ownership and creates imbalances in the housing market.

JM

[Kuciwalker]

First, I think we should stay away from ideas of morality. Not because I believe that morality doesn't matter, but rather because I realize that my ideas of morality are not shared by everyone else.

Did you have a problem with people taking advantage of cash for clunkers?

Uh, Jon, that's an inherently normative question.

[Jon Miller]

There are two separate questions, as I see them:

1. How should someone behave now (assuming current rules/laws/practices ( and disregarding differences in morals/ethics, like some people thinking they should keep their word, and others not valuing doing so))?
2. What should be the set of rules/laws/practices in place?

I have been discussing question 1.

JM

[Kuciwalker]

That is a question of morality, Jon.

[KrazyHorse]

Did you have a problem with people taking advantage of cash for clunkers? Trading in a perfectly good car/etc to get a new car/etc? This is brought about by government regulations/laws/etc.

No, I had a problem with the law, not people's reactions to take advantage of the law. Same as I said earlier for case (1).

This is COMPLETELY DIFFERENT from people taking advantage of the weakness of ENFORCEMENT of the law.

Burglars may go years without being caught, but the weakness in enforcement does NOT mean that their actions are any different from a moral perspective than they would be if enforcement was better.

Corporations (and especially larger corporations) usually DON'T GET the option to tell creditors to **** off and die because it's a lot easier to enforce legal claims against them.

An inability to enforce a claim due to an inefficient, slow legal system is completely different than a specific prohibition against enforcement beyond foreclosure.

When the prohibition is due solely to a contract clause then I view the situation as perfectly fine; both lender and borrower were able to agree on whatever contract terms they liked, and decided on this type of contract. When the prohibition is due to state law, then the legislature has eliminated the ability of borrowers and lenders to enter into a whole class of contracts (recourse home mortgages). When the law allows for recourse, but lenders take advantage of the relatively small value of their assets to the cost of litigation, it is THEY who are reducing overall welfare by effectively eliminating the value of the recourse clause.

[KrazyHorse]

Jon, it would be virtually impossible for ANYBODY to do business with individuals if everybody's response was "so sue me".

The fact that people AND corporations mostly live up to the obligations as set out in their contracts without any fuss is the only thing that makes modern economies possible.

When people agree to a limited recourse loan and live up to the terms of that contract, they have not increased transactions costs for anybody else. When people agree to a full recourse loan and fight their obligations then they have.

Simple enough.

[Jon Miller]

Isn't the enforcement a crucial part of the law/rule? And the level of enforcement purposefully set?

People have a desire to have the system work, I am sure that is some of the reason people generally fulfill contracts.

I agree that many laws should be changed, including those dealing with being sued.

But it doesn't change the discussed behavior from being a behavioral option that is possibly via the rules/laws and currently accounted for by the market. I think it is possible that the easiest change to the way things are done currently would be to add a couple clauses to the contract (of course this wouldn't fix the fundamental problem of the regulations dealing with 'so sue me').

JM

[KrazyHorse]

People generally fulfill contracts partly because they feel a moral obligation to fulfill contracts. Corporations also tend to fulfill contracts (and much more fastidiously than the average person). The moral obligation a corporation's agents feel is likely lower than that which they feel in fulfilling their personal contracts, but corporations generally fear reputational damage far more than people fear a hit to their credit score (corporations rely on financing more than people do, and enter into more long-term transactions) and also have their obligations more easily enforced.

The thought that better enforcement could provide the same sort of benefit as "trust", the willingness of parties to fulfill their obligations even without enforcement, is ridiculous. If people weren't morally averse to burglary, then it would be close to impossible for enforcement to reduce burglary to the levels it's at today. I wholly disagree with the idea that because a claim is difficult to economically enforce it is completely moral for somebody to prey on this weakness. I also wholly disagree with the suggestion that a contract with a difficult-to-economically-enforce clause is morally equivalent to a contract without that clause.

A borrower that agrees to a no-recourse loan is in a far different moral situation than a borrower that agrees to a recourse loan and then protects his other assets by forcing the matter to go to litigation.

[Kuciwalker]

There's nothing wrong with what Dexter does because he gets away with it