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And if so, are you saying that taking more than you can pay off, then walking away from it, is the right way to earn money?
The argument as I understand it is that you have a sort of "insolvency put". Basically, if you default, you get a windfall in the sense that the bank are left holding the bag.
It's not so much "the right way to make money" as it is a cap on downside risk.
Basically (oversimplifying a bit) if you have a probability of default p, and the bank will bail you out of X amount of debt, then you should treat this option as having value p * X.
Again, see the article I posted a link to which discusses this in the context of corporate finance (basically, banks can book declining credit ratings as profits because the market value of their debt declines. The article discusses this in some depth)
This I walk mentality is so uplifting, every deadbeat should be in jail!!!
Get off your soapbox. There is no shame nor moral dilemma in walking away, and it is legal. When you buy a house and obtain a mortgage, you sign a legally binding contract with the bank with very explicit terms on payment and collateral(the house). Both you and the bank take on certain risk/reward. If the bank failed their due diligence and approved a loan on a bad collateral, they have to take the loss.
The bank will take your house kick you onto the street if you miss certain payments per the term of the contract, and you can decide to stop payment, loss your invested equity, destroy your rating and walk per your term of the contract if you feel the collateral is lower than the debt. That is the risk both sides take, and it is a business contract. There is no shame nor moral ambiguity here.
Quote:
Originally Posted by elflord1973
I take it you would ideally prefer an interest-only zero down loan, if a bank were foolish enough to give that out ?
If you're confident that this is the case, you could always go short bond futures or similar.
If the zero down interest only loan carries the same rate (5.5% as of today), then hell yeah. But we know that's not the case and it's impossible to get nowdays. The key here is
1) the low rate
2) your expectation the value of the house will remain flat to increase over the life of the loan.
If either of those are not true, then this whole discussion is out the window.
re: short treasury, yes you could use the mortgage money to short the treasury as an alternative investment to the indices if confident the rate will go up of course shorting anything carries margin call and much higher risk, anyway that's a whole other discussion.
re risk. Your discussion on risk got a little carried away there are 3 types of risk 1) credit 2) counterparty 3) market
I really dont think you can correctly apply them to this discussion here, but if you must: if the focus is on paying down your mortgage you assume higher credit risk(you) and counterparty risk (the house)
if you focus on paying less mortgage and use the money to invest elsewhere you assume more market risk (the stock market or whatever you invest in).
Get off your soapbox. There is no shame nor moral dilemma in walking away, and it is legal. When you buy a house and obtain a mortgage, you sign a legally binding contract with the bank with very explicit terms on payment and collateral(the house). Both you and the bank take on certain risk/reward. If the bank failed their due diligence and approved a loan on a bad collateral, they have to take the loss.
The bank will take your house kick you onto the street if you miss certain payments per the term of the contract, and you can decide to stop payment, loss your invested equity, destroy your rating and walk per your term of the contract if you feel the collateral is lower than the debt. That is the risk both sides take, and it is a business contract. There is no shame nor moral ambiguity here.
that is fair enough. i dont think a dime of my tax dollars should be spent bailing out either side. any talk of finding a way to let these people keep their houses sickens me.
that is fair enough. i dont think a dime of my tax dollars should be spent bailing out either side. any talk of finding a way to let these people keep their houses sickens me.
yes as a pure capitalist society, economic darwinism should be favored.
However i think the argument to bailout the banks/homeowners are that the systematic risk is so great, that if the bailout doesnt happen, even you CaptainNJ who are financially sound will be destroyed in the process because the milks will cost $100 and the neighborhood you live in will become a ghost town, etc...
Now you ask how does the govt or anyone know at what level is the systematic risk too great, the answer is noone knows. Myself, i still cannot decide if the bailout is good or bad and i never will because noone knows what would happened if the bailouts did not happen and the govt let aig and the financials fail.
that is fair enough. i dont think a dime of my tax dollars should be spent bailing out either side. any talk of finding a way to let these people keep their houses sickens me.
thousands of your tax dollars have already been spent to bail out one party (banks) and you will be sickened if a dime is spent for the other party (people)?
don't worry they only want that you buy houses and cars hahaha
yes as a pure capitalist society, economic darwinism should be favored.
However i think the argument to bailout the banks/homeowners are that the systematic risk is so great, that if the bailout doesnt happen, even you CaptainNJ who are financially sound will be destroyed in the process because the milks will cost $100 and the neighborhood you live in will become a ghost town, etc...
Now you ask how does the govt or anyone know at what level is the systematic risk too great, the answer is noone knows. Myself, i still cannot decide if the bailout is good or bad and i never will because noone knows what would happened if the bailouts did not happen and the govt let aig and the financials fail.
let me understand:
capitalism is the best except when it's not
This may be off topic but - I cannot effin believe that they just passed another $2 billion for this clunker joke. No questions asked. A billion here a billion there. This country is SO ****IN ASS BACKWARDS! I give up - really I just can't deal.
You need to move past this mindset that everyone who disagrees with you is either stupid or lacks the ability to "think outside da box".
I understand the concept quite well (see the article I posted and the comments in that thread), I just don't agree with you.
I don't think you are stupid. You are the one that suggested that.
Let us know how you make out after you manage to actually buy your first house. Sometimes (most times) real world experience speaks volumes over reading about it.
let me understand:
capitalism is the best except when it's not
Yeah you cannot have it both ways it's like socializing the risk while privatizing the reward, it is morally wrong and I hope everybody that walked away (and had any benefits from this crisis) rot in either a jail or the hell these people screwed things for the rest (especially those that are pacient and have self restrain regarding instant gratification) ...
As they say karma is a b... and sooner or later it will catch with you ...
let me understand:
capitalism is the best except when it's not
capitalism is the best until the systematic risk (doomsday) becomes a reality. Many civilizations have failed because of a collapsed economy (war is just a byproduct of it, not the cause).
how resilient is the US of A to such doomsday risk? we will never find out because the govt wont let it. The question is do we really want to?
Again i am not supporting the bailouts, just that i dont know what would happened if the bailout were not issued, without knowing the other side of the consequence, how would anyone make a judgement for or against it....
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of course shorting anything carries margin call and much higher risk, anyway that's a whole other discussion. 
