"you can build significant equity with no risk"
LOL!! BWHAHAHAH! Vosilla you know I love you old friend and you are one of my most favorite SI people of all time, but lets have a serious discussion about this concept of risk free equity in rental property. I agree the life that people have wasted sitting here clicking buttons back and forth to increase their green pieces of paper in an account somewhere is a true waste of the gift of life that god gave to them. Keynes even warned the greatest DEMON of all was the liquidity fetish that now employs some of mankinds brightest minds trying to outcode each other with nanosecond trading algorithms, true foolishness! This is brain power that could be put to cancer research or life extension technologies.
I too wasted many years sitting clicking buttons, it is a big casino, but as russ winter often says with his measely million bucks in treasuries earning maybe 30K a year, that is not enough to buy all the senoritas down in south america he wants to consume, so trading the casino is something he is forced to do.
Now I have to preface that I do have many properties generating rent and the only one that gave me some recent trouble was a GM retiree worried about his pension and the pensions crisis is only in the first innings no? I am scared to death that the US dollar purchasing power is going where it belongs, down the toilet. So all these traders who have amassed a fortune, or real estate investors who have amassed a fortune, well the RISK is thier international purchasing power going to heaven - as dickens said in the original version of the christmas carol - all scrooges fine assets being turned into worthless american securities - LOL! Even if euroland implodes - why fall back on the dollar - they are taking care of business in Asia land and acting like the barbarians they need to be!
Message 26188020
I talked to a couple of bank america managers here on the west coast of florida. First off staff rotation at these banks is going at WARP SPEED scotty, no more long term good ole loan officers that knows his customers beyond thier "number of the beast" FICO score. Bank presidents confiding in me they have THOUSANDS of families living FREE for over a year now in the Tampa Bay Orlando Area because they can't get around to evicting them. Then one bank america manager in Miami telling me the supply of real estate held by south american investors that have been held off the market has him sweating in his sleep when/if it ever finally hits.
I went to Siggraph in new orleans recently and all the hollywood magicians no longer had names like lucas or disney, but taganaki and yomoto. Hollywood movie magic is going to be the domain of asian foreigners very soon if not already, so now even our bread and circuses can't be made at home anymore. Face it Vosilla, brittney murphy, mike jackson, brittney spears, a good proxy for our doped up pill head children who have no ambition, no hope, and no future - like that crackhead whitney houston sang!
For the academic in you Vosilla about the real estate future coming from our military guys - read the comments - especially comment 20 -
http://www.interfluidity.com/v2/384.html
20.JKH writes:
SRW,
Your previous post linked to a post by Felix Salmon, who linked to a paper written by Brent White of the University of Arizona law school. I found that paper to be extraordinarily enlightening. Indy’s comment here fits in that context as well as that of your own post. The paper includes numerous anecdotal references to similar behavioural dilemmas regarding potential negative equity walk away/foreclosure decisions.
The “guilt trip” as described by Salmon is only part of the problem outlined in White’s paper. The most interesting aspect is one that you and Felix didn’t focus on so much, which is the problem of fear, more or less as a subset of additional behavioural and actual economics.
The overarching point in the paper and your post is the idea of behavioural norm asymmetry between borrower and lender. The ultimate result is that mortgagors with negative equity resist exercising in the money options for a great variety of reasons, including guilt and shame, as well as additional economics, including fear, all of which are understandable. There is currently a huge asymmetry between the legal right of option exercise and the full moral, emotional, and economic consequences of doing so.
As a result, the effective economic value of the option is greatly reduced when considering all the other factors from a total utility perspective. These factors erode the utility of the moneyness of the put option that is otherwise implied by legal non-recourse. Thus, the legality (with implied economic advantage) of non-recourse option exercise is an illusion and a sham from a total utility perspective.
Of all the dynamics in play, the most toxic may be a broad institutional sham regarding the current “emotional and economic feasibility” of exercise of the legal right of non recourse. This is behind the existence of legitimately legal, broadly distributed in the money put options, whose exercise is dissuaded by the credit industry itself as writer of those options, due to the asymmetry between that legality of that exercise versus the fear of further economic consequences of exercise. Government and industry have effectively marketed the legality of an economic put option while at the same time invoking the expectation of moral and economic punishment for the exercise of that same put option, offsetting the economic gain that is otherwise available.
In particular, the expectation of negative credit rating consequences is fully aligned with the softer factors of guilt and shame and moral right versus wrong. It is a punishment or expectation of such punishment that reinforces these other factors.
Here are some of the more powerful outtakes from the paper along these lines:
“This power to threaten borrowers means that though mortgage agreements in non-recourse states contain an implied put option, or contractual option to default and transfer ownership of the home to the lender, the law plays a subordinate role in lender-borrower relations. A borrower might in fact walk without legal penalty, but the lender holds the borrower’s human worth as collateral – and will likely trash it in retaliation for the borrower’s exercise of their contractual right to default. The credit reporting system thus subordinates the law to social norms, and makes it impossible for a strategic defaulter to avoid the reputational penalty of default, – even by packing up and moving across the country… The point is that the credit reporting system operates in conjunction with other economic, political and social institutions as means of social control by increasing the emotional cost of default…
…Most lenders will, in other words, take full advantage of the asymmetry of norms between lender and homeowner and will use the threat of damaging the borrower’s credit score to bring the homeowner into compliance. Additionally, many lenders will only bargain when the threat of damaging the homeowner’s credit has lost its force and it becomes clear to the lender that foreclosure is imminent absent some accommodation. On a fundamental level, the asymmetry of moral norms for borrowers and market norms for lenders gives lenders an unfair advantage in negotiations related to the enforcement of contractual rights and obligations, including the borrower’s right to exercise the put option. This imbalance is exaggerated by the credit reporting system, which gives lenders the power to threaten borrowers’ human worth and social status by damaging their credit scores – scores that serve as much as grades for moral character as they do for creditworthiness. The result is a predictable imbalance in which individual homeowners have born a huge and disproportionate burden of the housing collapse…
… In the case of underwater mortgages, however, the portion of the mortgage above the home’s present value essentially becomes unsecured. Lenders compensate for this by holding the borrowers’ credit score, and thus their human worth, as collateral – thereby altering the underlining agreement that the home serves as the sole collateral. As a consequence, lenders are often able to reap the benefit, but escape the costs, of their bargain.”
And here is a very interesting recommendation for consideration:
“Preventing lenders from reporting mortgage defaults to credit rating agencies would, as a practical matter, eliminate lenders’ ability to hold borrowers’ human worth as collateral. Such a change would also serve as an important signal from the government – sending the message that a borrower who exercises a contractual right to default should not be viewed as immoral or irresponsible. It would thus help considerably in levelling the playing field between lenders and borrowers. With the threat of damage to the borrower’s credit score removed, the borrower could more credibly threaten to walk absent a principal reduction.
… Moreover, barring the reporting of mortgage defaults could have positive effects on future lender behaviour. This is because in the case of a home mortgage, the lender has the ability to ensure that the collateral is sufficient to create the proper economic incentives for borrowers not to default. In other words, they need not rely upon credit scores to control their risk, but can instead ensure that the purchase price of the financed home in is line with historically sustainable price-to-rent ratios, demand sufficient down payment and eschew interest-only and negative amortization loans. Lenders would be more inclined to take these sensible precautions if borrowers were empowered to behave according to the same market norms as lenders and breach when it is efficient to do so. This added caution by lenders might in turn help avoid a repeat of the current housing crisis.”
That last part makes an interesting connection between creditors’ existing ability to “neutralize” the value of the put option, and the way in which that has contributed to truly appalling risk management by the financial industry, which I still think in general is at the heart of the entire crisis.
Vosilla basically the whole system is going to implode - I see no future in it - www.moslereconomics.com
here is an old family friend from Palm Beach - Warren Mosler - one of the most successful hedgie guys in history - one of the monetarists top priests - and even he says Bernanke getting rehired is the death knell of our once great nation - that bernanke is a total idiot that doesn't understand basic monetary operations and reserve accounting. You know I get more hookers and blows than any man deserves ;) and I am generally an upbeat and happy guy when I aint picking on the egos here, but I can't go long on a prosperous future for the USA. I have not worked my farm and have a tenant farmer keeping things together personally, but you won't get rich off corn every year. |
