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Strategies & Market Trends : Value Investing
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To: Jurgis Bekepuris who wrote (39725)10/19/2010 12:42:03 AM
From: Spekulatius  Read Replies (1) of 78753
 
Jurgis, for me defaulting on a loan (be it strategic or not) is not renegading or breaking a contract. As i understand it, defaulting on a secured asset is simply an option that is freely given the borrower by the lender, at the time the loan was granted.
So essentially, the lender has handed out the borrower a put option. Obviously lenders underestimated the probability that the borrower would exercise that option.

This is really no different than the case where your bring your wedding ring to the pawnbroker to get a (secured) loan. The pawnbroker is responsible to make sure he has enough collateral at hand , if not he is going to be out of his money. There is no breach of contract if you can't or don't want to cough up the money to get your wedding ring back (assuming no fraud), because for example the gold price took a dive since the loan was granted. In my point of view, you would have no obligation to make the pawnbroker whole, just as the pawnbroker does not have an obligation to make you whole if you can't pay off you loan and the pawnbroker were able to sell of you ring for more than the value of the loan plus interest. A foreclosure works just the same way, except that the lenders were exceptionally bad pawnbrokers for the last couple of years.
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