I'm a little ambivalent on “local flexibility” and “personal relationships” in business. In addition to the good things to be said for it, they can also form the basis of nepotism, corruption, inefficiency etc.

Well this is something that I think the “faceless corporate conglomerate” has really hurt us on. When companies are primarily local — or at least have a lot of local flexibility — then there is a two way relationship that forms where both parties try to work together for mutual maximum benefit. When the local branch is just a persona-less drone that takes its orders from above, and the corporate level certainly doesn't care about the individual (person or often community), while often selling its exposure entirely, then that emotional connection is broken.

As Yves Smith keeps pointing out, there are small community banks that gave out subprime loans and have made money by meeting with each applicant, developing a repoire, keeping the loans on the books and working out something that had mutual benefit when things went south. She argues that all the regulations in the world won't be able to replace the trust you're talking about.

I personally feel like companies have really led the way into dehumanizing the process, and this is an unintended side effect.

I agree that notionally there is a contract that specifies what happens in the case of defaults (and indeed credit spreads and credit rationing exist precisely because there are defaults). I also agree that a double standard is being applied. If I recall correctly, the idea that people in business (as opposed to individuals) don't have a problem with defaulting was pointed out by Tanta (rest in peace) at CalculatedRisk at least a couple of years ago.

However I think we should be a little leery of being too cavalier about this. It takes time and resources to enforce laws – criminal and civil – that could be invested elsewhere. A society in which people are generally honest, and generally meet their commitments is likely to be much more desirable to live in than otherwise – i.e. there is a positive externality to having an ethical citizenry. Companies and individuals enter in contracts all the time to do productive and value-creating things all the time. What kind of society would it be when your default assumption is that your contract will not be honored?

I think this idea dates to Adam Smith …

This has been a great thread btw.

In one particular instance…a bank had the opportunity to almost break even on a multimillion dollar property, but didn't complete the paperwork on time (they had to sign off on a short sale I believe). The buyer got sick of waiting and pulled out of the deal. The property has been sitting empty for a year and is now in disrepair….basically unsellable. The bank is going to end up eating a couple million on the value of the property that they now own.

Oh wait…I guess the tax payers and home owners in the area of the home are really the ones having to eat the banks loss.

The whole point of the hundreds of pages of paperwork involved in a mortgage or indeed most contracts is to take the transaction out of the useless realm of good-guy/bad-guy fingerpointing and into the more productive realm of defined consequences.

A mortgage is a contract, and the mortgage itself specifies what happens if the borrower can't or won't pay (I don't think the document distinguishes between the two cases). In that case, the bank gets the house and tells everyone else not to lend to this person (ie. the credit score gets dinged). Both the borrower and the lender agree to that. Lenders know that if the borrower doesn't pay, they get the house. That's why they do an appraisal to make sure the house is worth what they are lending. It turns out the appraisers were wrong, but that's not the borrowers' fault. The appraiser works for the bank.

The only ethical question that enters the equation is whether the homeowner has some obligation to the community. That's a personal decision, but I would not expect my neighbor to sacrifice his financial future just to artificially prop up the value of my own home. It's a little like the question of whether we should “buy american”. Someone who does that might receive some praise, but how many of us would say that the person who is just looking for the best deal is unethical for buying a foreign car?

Some of these are the same people who talk on cell phones (even text) while driving, don't pay child support and steal their neighbor's Daily Racing Form.

Meantime the big crooks are In DC. They are going to slowly kill the Reverse Mortgage HECM program which has allowed countless seniors (62+) from defaulting on their mortgages, and incidentally allowed them to remain in their homes as long as possible. . Your thoughts Patrick.

“Right you are,” said the man, “and here they are the very beans themselves,” he went on pulling out of his pocket a number of strange- looking beans. “As you are so sharp,” says he, “I don’t mind doing a swap with you–your cow for these beans.” …… Yes, that is so, and if it doesn’t turn out to be true you can have your cow back.”……… Jack and his mother became very rich, and he married a great princess, and they lived happy ever after” But it weren't right, it was stealing.

So, with respect for those of us who do believe the chips need to fall unfiltered on each the origination boiler rooms, the mortgagor, the mortgagee, the securitizer, the investor, don't fill up the bandwidth here with all this railing against corporate welfare. Dial up Paulson or especially, Geithner. No capitalist here ever advocated “too big to fail” anywhere along the food chain.

I think the answer is simple Patrick. Our entire monetary system is designed to guarantee profits for banks if they are prudent. As Yves Smith at Naked Capitalism says, banks used to understand that they had a social role to fulfill and the guaranteed profit was the reward for that role. She points to the 80s as the decade when they started forgetting about that.

As Jill pointed out above, individuals are forced to speculate in assets just to keep still (since you have to at least meet the rate of inflation) and have no access to a myriad of backstops that the banks do. I think it's pretty insane that we have a nation of speculators, especially since by definition the majority of people won't be able to earn enough to beat inflation, but we have what we have.

As the guardians of our financial system, I have little sympathy for the banks. They have all the cards in their favor to make great sums of money for doing nearly nothing, and that wasn't good enough for them. I don't think that individuals should be bailed out, but losing the time and money they put in is a consequence in and off itself. The banks on the other hand failed completely in due diligence.

No but lack of regulations and oversight sure seems to be.

The original regulations were supposed to be tied to the guarantees made by the FDIC, in other words, less responsibility=less freedom. What the bankers want, and many presidents offered, was more freedom without taking back that responsibility, which has never ended well.

I am of two minds on the topic.

Certainly there were plenty of liar loans and I have an issue with banks benefiting from that. So if there is evidence of a crooked loan then my comments don't apply to those situations.

But I have to question to some degree how ignorant some (I emphasize SOME) buyers were.

By this I mean if you are told you can buy a 500,000 house and pay only $ 1,000 a month for 30 years, it doesn't take a math genius to figure out things were funny (and yes I have had a client or two with loans like this). So even if the loan was crooked, if it was this blatant I'm not sure we can entirely blame the bank.

Also even with legitimate loans many of my clients have admitted they took out loans they knew they could not afford but were counting on the housing value going up and being able to refinance. They aren't proud of this fact but they are honest about it. So for those people there is a certain degree of when you take the risk sometimes you lose (and in many cases they are up front about that)

So I'm not sure in these cases the bank should take all of the hurt.

For example, if the value of the house had gone up they certainly wouldn't expect to share that profit with the bank so why is it that the bank is expected to take the whole loss ?

Again, where there was evidence of pure abuse by the bank that's one thing.

But where the lender was knowingly taking a risk, sometimes you don't win.

He may be utterly intolerant of any opposing views but at least he's honest about it.

I'd rather have someone tell me he hates me and/or my opinions to my face rather than pretend.

What is good for the goose is good for the gander…