Tag: banks

It’s only when the law isn’t on their side. But there can be no “moral” obligation to a corporation outside of the law, since outside of the law, the corporation doesn’t even exist. It is, by definition, an “artificial” person. Mike Shedlock highlights a little-known aspect of Oregonian law:

Underwater Oregon homeowners find an escape hatch

The strategy works like this: Homeowners must first file Chapter 13 bankruptcy and file a motion asserting their home’s value has diminished to the point that it’s worth less than they owe on the first mortgage. If the motion prevails and the lender doesn’t challenge, the court will then cancel the lien the second-mortgage lender holds on the home. The lender’s secured debt is converted to unsecured debt, which most often is eliminated in full in the bankruptcy process.

It’s not a painless strategy. Filing bankruptcy will significantly damage a consumer’s credit.

And the strategy raises issues of morality, for lack of a better word. Many of these homeowners took out second mortgages to buy ski boats, trendy kitchen upgrades and other luxury purchases. Should they get off without repaying the loans? Oregon has at least six banks on the edge of closure after the mortgage crisis of the past year, and this could add to their risk.

The answer, of course, is yes, they absolutely should. The banks decided to loan homeowners the money in the full knowledge that home prices could go down. Retroactively changing the rules in order to prevent the banks from realizing the consequences of their actions is the only potentially immoral action here. As for “damaging” one’s credit, that’s a laughable concept considering how no amount of bad credit will prevent banks from lending to anyone in during the bubble and no amount of good credit will cause a bank to lend to anyone during the bust.

But remember, it’s immoral, wrong, and VERY bad for a homeowner to execute his contractual right to relinquish property to a lender:

Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

If you’re underwater on your mortgage, strategically defaulting and walking away from your property is not only your legal and contractual right, in many cases it is the financially responsible thing to do.  Worrying about impaired credit hardly makes sense when the banks don’t want to lend to anyone regardless of how good their credit is.  And recent history demonstrates that once the banks decide they want to start lending again, they’ll lend to anyone with a pulse.

Since Dubai has announced it is going to blow off the Dubai World debt, it would seem rather obvious that Abu Dhabi isn’t about to volunteer to pay it either.

Dubai revealed last week that it would seek a standstill on debt repayments for Dubai World, a sprawling company that includes property developers, investment funds and a ports operation. Dubai had previously included Dubai World’s debts within its own total sovereign debt of $80 billion but it has said it has no obligation to the company’s lenders….

Abdulrahman al-Saleh, director-general of Dubai’s Department of Finance, said: “Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the Government, which is not true.”

That has sparked anger among some creditors, who believe that Dubai had given an implicit guarantee that its companies were state-backed.

But… but creditors are never supposed to take responsibility for anything! Don’t those backward sheikhs understand how a modern financial system works? It’s heads the banks win, tails the taxpayers lose! I imagine there are many people facing foreclosure that can recall promises and implicit guarantees they were made by their real estate agents and mortgage bankers too. Isn’t it interesting how banks always insist that it’s only the fine print on the contract that matters, right up until that fine print doesn’t serve their interests anymore. Dubai’s actions are particularly interesting in light of how the Federal Reserve and the U.S. Treasury have repeatedly covered the non-guaranteed debt of Fannie Mae and Freddie Mac at the expense of the U.S. taxpayer.