Arnold Kling  

David Andolfatto Questions the Narrative

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Why Applicants Don't Volunteer... Financial Advisor...

He writes,


This couple bought their Reno home in June 1988 for $127,000. Their home is currently valued at $100,000. They currently have a mortgage worth $168,000. At first blush, this seems strange. Assuming a normal down payment and paying off the mortgage for 14 years, shouldn't the current mortgage be much lower? Indeed, should it not be lower than $100,000 (in which case, they would not be underwater)?

Are the Kellers "responsible" homeowners? I am not sure that anyone is in a position to pass judgement on how they chose to manage their wealth. I am happy to label them "responsible" homeowners. I'm just not sure why society should necessarily be obligated, in this case, to enact a wealth transfer in their direction (away, for example, from yours truly, who foolishly chose to rent a small town home 2000-2009, instead of living the American dream).

Pointer from Mark Thoma. David does not seem to have gotten the memo that says that mortgage borrowers are always victims.


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COMMENTS (6 to date)
Patrick Dwyer writes:

Or the memo that voters are irrational. The homeowners then are signaling to the irrational voters that they are victims. Too bad for the homeowners that the list of victims happens to be long. Is there an optimum victim signaling strategy (e.g. wait until the victims list is shortest to signal that you are a victim)to maximize your payout? Imagine a future in which people petition their victimhood the way they did in a king's court with an agent who takes a cut. Then again, isn't that what trial lawyers do?

Lord writes:

Seems silly to think it would be a wealth transfer in their direction. At most it would be a partial realization of the losses the lender already faces and an attempt to mitigate further ones. Now there was a wealth transfer but that occurred earlier with the lenders eager participation. Good luck ever seeing that again.

JeffM writes:

I'd be more impressed with the quotation if I understood the relevance of 14 years' worth of payments on a house purchased in 1988.

I'd be more impressed with the comment if it made clear that in fact the debtors had received $178,000 in cash (secured by the house) and retained the house itself, which has a current market value of $100,000. They owe $168,000 in return. Let's see 100 + 178 = 278 > 168. And they want you (and me of course) to give them another $68,000 so they will not be "upside down" on their mortgage. That would be just peachy for the owners and whoever holds the mortgage, but I fail to see either the moral or economic rationale for this particular flavor of peach.

Moreover, "correcting the situation" clearly would be a wealth transfer. Someone is going to be out $68,000. The fact that it is unclear how that wealth transfer will be divied up between the homeowner and the creditor does not make it any less a wealth transfer. Nor in fact is it even clear that anyone yet has realized a monetary loss. The implication is that the owners are still getting the housing services plus the benefits of that $178,000 and the creditor is still getting paid (probably at a rate well in excess of current market rates.)

Johnson85 writes:
Seems silly to think it would be a wealth transfer in their direction. At most it would be a partial realization of the losses the lender already faces and an attempt to mitigate further ones. Now there was a wealth transfer but that occurred earlier with the lenders eager participation. Good luck ever seeing that again.

The owner's have an unrealized loss, the lenders could, but don't necessarily. The borrowers have an asset that has lost market value, and the banks have a right to a payment stream from the borrowers that is secured by a house. If the borrowers were in a recourse state (I don't think Nevada is one), the lender's asset could very well be very safe.

If taxpayers are forced to give the bank money to reduce the amount owed by the borrower, in what way would that not be a wealth transfer. It's possible that as a practical matter, it may be equivalent to a wealth transfer to the bank also, as it could prevent a default on a debt that would not otherwise be repaid, but that's speculative. The wealth transfer to the borrowers, much less speculative.

Steve Sailer writes:

I hate the state of Nevada.

Glen Smith writes:

Johnson85,

Mortgage lenders have an unrealized loss opportunity once the outstanding note is greater than the true market value of the asset. Most of the solutions offered (for example, loan revaluations) are about minimizing the loss that the lender should have managed or refused to give the loan at the cost to the consumer. Easiest way to recognize a victim here is when a borrower received a mortgage loan they should not have been able to get.

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