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Judge Rules Sprint Early Termination Fees Illegal
Antiglobalism writes to tell us that an Alameda County Judge has ruled against Sprint Nextel in a class-action lawsuit, awarding customers $18.2 million in restitution for early termination fees. "Though the decision could be appealed, it's the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation's fast-growing legions of cell phone users. The judge - who is overseeing several other suits against telecommunications companies that involve similar fees - also told the company to stop trying to collect $54.7 million from other customers who haven't yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee."
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Prorated termination costs seem reasonable, especially given the subsidies on the hardware. I was surprised to see that Sprint is the only company that doesn't prorate. I figured the wireless companies would avoid any change that makes it easier for customers to change providers. When selling a commodity it's essential to avoid the profit-killing, competing-on-price, race to the bottom.
This will be appealed, so I don't see anything changing in the short term. The figures on the $55 million in uncollected fees is impressive. It would be interesting to know how much of that would be profit after subtracting the depreciated cost of subsidized hardware.
The disappearance of the 1-year contract bugs me, but at least it's easier to move up and down in rate plans once you've signed up.
And yes, it would be nice to have the option to buy unlocked phones from any vendor and use them with any provider, but I'd bet that less than a quarter of the customer base would make use of this on a regular basis. TMobile comes closest to supporting this now, but I left them when I got an IPhone and really do miss dealing with them. Their customer service web site is far superior to AT&T's.
If this goes through without appeal, other suits will follow and that will certainly impact plan pricing, since a large number of users don't want to leave their current provider because of those early termination fees.
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The article was light on details.. why did they decide that fees that are clearly stated in a contract before people entered the contract are now illegal?
I hate cell companies as much as anybody, but that's how they subsidise those cheap phone prices.
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This sounds like a good time to get one of those $199 subsidized iPhones and walk away from the contract.
But isn't the whole mortgage crisis based on the same principle? People walking away from their contracts?
No, the mortgage crisis was caused by a combination of irresponsible lending practices by lenders and people attempting to live beyond their means. People walking away from the contracts was an effect, not a cause.
This is great news. I never understood why telcos decided to charge all these fees in the first place. Couldn't they get rid of them and just increase the cost of their plans? Since they claim they need them that seems like the way to do it. Why sneak all your revenue in by shady practices? Too bad they will likely appeal the ruling and nothing will be decided for years will this is tangled up in court.
Surely EULAs are even less enforceable than signed contracts?
I hope that I read that wrong. You can get good deals by entering a long term agreement. I pay about $30 less per month for my collocation because I have a 2-year agreement. Are you saying that I should be able to pull out after a month and not have to pay anything? Even if my setup fee was waived because of the deal? That sounds unfair to the providers and if this continues it will result in higher prices for everyone.
I thought it had to do with irresponsible lending by the banks/borrowing by home buyers. Basically, the bar was lowered considerably by taking on high-risk mortgages as ARMs (Adjustable Rate Mortgages). When they tried to adjust the rate, the risk came back to bite them in the ass and the irresponsible borrower could not afford to pay it.
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Exactly. One classic example I know of:
A couple who made a combined net income of $5000/month were given a loan, by credible, big name lender, where their monthly payment was going to be $3500. This couple also had 2 car payments, credit cards, and all the other usual irresponsible US household money leakages (big flat screen tv, cell phones, expensive digital cable package, etc). Needless to say within 6 months of blowing through their saving is came down to deciding to sell the house or starve to death. They had no money left for monthly essentials, like food.
What exactly are the charges? Did Sprint Nextel not describe the early termination fees in their contracts? Why would an early termination fee be illegal?
While I do agree with you fully there was a bit of deception in some cases.
Lendee: My boss is a dick and I have no proof of employment! Morgtage Broker: We get commissions anyway so we'll get you a "Liar's loan" for the downpayment and the bigger the morgtage the bigger the commish! you just have to pay interest on the loan at market rates. Lendee: Awsome, so the government will subsidize my american dream? Morgtage Broker: Exactly.
To be a little more complete, the easily available credit also increased demand on real estate, thus driving prices upward drastically... and the combination of tightened credit availability and a slower economy has now caused prices to fall, leaving people in a negative equity situation.
Some of the problem is people signing stupid loans (A 5-1 ARM with a ridiculous teaser rate?). Because credit tightened up, in order to sell the home (or refinance) before the fixed period was up (almost everyone's plan), they would need to take a loss... which they couldn't do because they were in a negative equity situation.
I think that more so than people choosing to live beyond their means, it was people paying too much for properties they bought... the necessary market correction in property prices left a lot of people in bad shape. Speculation that property prices would continue rising is as much to blame as bad lending practices and poor budgeting.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
Since Sprint operates in Canada, I wonder whether this can be taken as precedent in Canada as well. I'd be glad if it did.
There are two key points in the article (couldn't the actual opinion) hitting these points:
Interesting; because judges are usually very reluctant to over-ride decisions made by juries. Generally, juries make findings of fact and the Judge makes the finding of law. Here, the Judge said that the Jury clearly erred in finding the contracts valid. Which makes me think that the Jury instructions were extremely poorly written, or that the Judge feels very strongly that the plaintiffs made the legal side of their case so well that "no reasonable jury" would have returned the decision that it did. (Also, I note that the Jury appears to have awarded damages despite finding that the contracts were valid -- this semi-contradictory result may have persuaded the judge to go in the direction she did.)
The second interesting argument:
YES! It is a founding principle of contract law that the non-breaching party's damage recovery is limited to its actual losses and its cost to make up the breaching party's violation of the agreement. Traditionally, a contract that agreed to damages in excess of the non-breaching party's actual exposure (i.e., punative damages) were ruled invalid and "reformed" by the court into something reasonable.
However, the courts over the past few decades have been relunctant to follow this principle -- instead, most consumer contracts today contain a "liquidated damages" clause, where the parties agree ahead of time on an estimate of what the actual damages would be. To me, fundamental principles of contract law dictate that an agreement to excessive liquidated damages clauses (particularly in consumer contracts) should not be upheld. I'm glad to see a court finally moving in that direction.
Incredibly, I'm going to have to pay back my student loans while these "classic" parasites get a free ride.
"They were pure niggers." – Noam Chomsky
I was just wondering if this will cause a ripple effect to the legality of penalties for early exit from any contract, not just a cell phone contract.
Any lawyers out there care to offer an opinion?
The insane jumps in "fair market" valuation and the reasons for them are to blame. Manipulation of markets, flipping the properties, shopping for appraisals and far more nefarious dealings set the bar lower for ethics in yet another field in America. People everywhere were making money off real estate and most of them were idiots. Welcome to America, where as long as a gaggle of lawyers can successfully defend injustice or impeach justice in a court of law that lawyers (senators, judges and supreme court justices) create and abuse no one can touch you. Retroactive immunity should be prohibited under the constitution and approved by the people not by more fucking lawyers because I honestly believe that more heads should be rolling than just Countrywide and the isolated local condo scandal.
Welcome Real Estate Agents your place in hell is reserved between RIAA/MPAA lawyers and the most monstrous bratty children of the oligarchy. Enjoy being raped by the billionaire spawn you helped create you bastards.
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ARM5-1 isn't a stupid loan. Its a low rate for 5 years. The idea is that before the 5 years are up you either sell, or refinance to avoid the higher rate (possibly to another 5-1, possibly not). It's actually a smart idea if you don't plan on living there 30 years. Now if you want a bad loan, look at interest only, 3 month ARMs, and negative amortization loans.
I still have more fans than freaks. WTF is wrong with you people?
Also, operators (particularly resellers like Carphone Warehouse) are willing to "buy out" contracts to encourage people to switch. They eat the termination fee on your behalf. Phone Company X gets its subsidy, Phone Company Y gets its customer, Customer gets his free or cheap phone.
No kidding!!! What do you say at this point?
To be a little more complete, the easily available credit also increased demand on real estate, thus driving prices upward drastically... and the combination of tightened credit availability and a slower economy has now caused prices to fall, leaving people in a negative equity situation.
Better yet, define that as a feedback loop - increased demand for real estate gave people a lot of equity they could use for even *more* easily available credit! Yay!
So you had people taking out loans they couldn't afford, to get money to pay credit card bills, which they rationalized by figuring they could re-fi next year when their house went up 25%.
Fun game of merry-go-round for a lot of stupid people...while it lasted.
An adjustable rate mortgage, in and of out itself is not bad. In fact, before the reforms brought on by Great Depression centralized home lending into one system, the local bank would give you a ballon loan for 5 or 10 years, then refinance it or bounce it, and so on until the house was yours. 30 year mortgages were an effect of the federal banking system and didn't become common until post-WW II.
The high risk mortgage comes in where people were allowed to outright lie about their income and took on mortgage products traditionally used by people who had sterling credit. But the key is the outright lie there...if you're making 20K and then the broker has fluffed and self-reported your income to 50K or 60K, it doesn't matter what kind of loan you have, it's going bad.
On top of that, everybody went "Real Estate always goes UP!!!" which is flat out wrong and then used that to rate a loan that should have been a D into a B or C, thus putting a whole lot less risk on paper and making mortgage backed securities look like treasury bonds when they more like junk bonds.
I don't see where the "free ride" comes in. They lost the home, wiped out their savings, probably increased their debt, and (almost certainly) killed their credit rating. It will be a long time before they can attempt to own a home again, even if we assume they've learned from the experience.
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..from late 2006/early 2007? sprint had, for two months in a row, charged me double on every item on my bill, and even billed me per-kb for data usage while at the same time charging me the unlimited usage fee i had agreed to(the bills were well over $300 for a month of service - you see, i was also being charged per minute even though i had a 1000 minute/mo plan). after two months and many hours on the phone arguing that this was their mistake and i should not have to pay them these outrageous fees, i simply stopped paying the bill. next thing i know, they're after me for the remainder of the 2-year contract (!!!) plus early termination fees. which i promptly ignored. havent heard from the collection agency lately...but i will never give sprint a dime and neither will any of my friends/family.
Nope the mortgage crisis was from idiots buying more house than they could afford and now defaulting on it.
Do not look at laser with remaining good eye.
It's a stupid loan if you do not foresee a collapse in property prices in your area due to near-future restrictions on easy credit. This is what happened to many tens of thousands of people, and why so many people are hammered by a negative equity situation. They cannot sell, because they owe more than the vlaue of their home and do not have cash reserves... and theycannot afford their ballooned payments.
Sure, the lender will (if they are smart) renegotiate with the borrower... but many borrowers find it a better proposition to walk away and declare bankruptcy.
Yes, IO 3 month ARMs are REALLY bad... unless you're just flipping the property. Negative amortisation loans, same deal. Either case, you better know what's going on in the housing market locally before you jump in.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
This is good news for Sarah Conner.
Utilizing the synergization of benchmark e-solutions to pre-workaround action items!
But an even more fun game for those of us who sold in 06 or early 07 and are now looking at buying on the cheap.
A coworker of mine sold his house in April 06 for $825,000. He just bought the same house back, with about 40k in improvements, for $675,000. There were two successive owners in the time he did not own the house. I wish I had his foresight... but I didn't get into the game until 2004, so my profits were much lower.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
Thats not a screw you loan. Getting a 500k house with a 3-1 ARM at Fed Rate *When it was 1.5%* interest only with a Ballon Payment. while your working Part Time Cashier at Wally World... Now thats a loan to loose your house too!
Will this apply to other service providers?
Will I be able to walk away from my Direct TV Contract?
An I/O loan would be great if you were on a variable income - perhaps self-employed or on commission.
That way you can make IO payments in the leaner months and when you get a big check you can pay down your loan.
There's nothing inherently bad about ARMs either and even NegAms have a place.
The real problem here is that people signed things without reading them over and understanding them. What percentage of the general public could even work out a loan payment?
I had a slightly surreal experience buying a car. We negotiated $20k even with a 0% rate for 5 years while I was sitting with the finance guy at the dealership.
Me: "Ok, so that's $333 a month"
He shot me a strange look, and proceeded to punch the numbers into his calculator (including the 0% interest rate) and was surprised to get the same figure as i'd worked out in my head.
If the finance guy are a car dealership is that slow, i dread to imagine where the average person is.
They had six months living in a house they knew they couldn't afford. And if they didn't know, they should have known. Sadly, the lenders knew they were going to get their fix of government bailout crack regardless, and more than likely rubber-stamped the application without thinking twice.
Jesus is coming -- look busy!
Actually, the root cause is that the availability of artificially cheap money (read: credit) by the Federal Reserve misprices risk: this has resulted inâ"at leastâ"the tech bubble in the late 90's and the housing bubble in the 00's.
Since no one in power recognizes or at least wants to admit that the Fed is the cause of these problems, expect a new bubble to appear soon.
[ home ]
there is no guarantee the house will be higher value in later years, especially 5 years away.
It's a bad loan, and a bad investment.
Of course, I am extremely hardline. I wouild make it illegal to have a home loan longer then 10 years, and not allow balloon payments.
Yes, people would still get homes, they would lust need to become more reasonably priced.
The cost of a home compared to income has become stupid. Compare it to 40 years ago.
Yes, I do own a home, my second one in fact.
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Which has always happened. The problem was lenders underrating the risk and puffing up the credit rating, which in turn puffed up the credit rating of their mortgage-backed bonds, which allowed them to sell them better.
upon the advice of my lawyer, i have no sig at this time
In addition to irresponsible lending practices and ill informed/stupid borrowing practices, the value of homes has gone down. For some people, the market value of their home is now less than what they owe on their mortgage, so (at least in the short term) they have no reason to pay their mortgage. In the long run, I suspect that the value will return to their house, but people who think about that are generally not the ones who get themselves into mortgage troubles.
Didn't your mother teach you not to do things you would be ashamed to see on the evening news?
It will be interesting to see how and if this carries over to otehr carriers. For them it sets a dangerous precedent, but it's great for consumers. It's bordering on creation of monopoly, only thing is they all do it to ensure their customer base.
Sprint, very frequently, changed rates for various services under the contract. Contract law in most states allows one party to terminate the agreement without penalty when the other imposes material changes. In this situation, they have been known to lie, which I experienced personally (specifically regarding their text message rate hikes). Glad to see both the market and now the courts punishing them for this ridiculous behavior.
I recently tried to get my girlfriend signed up with Roger's, using an existing phone, sans-contract.
Rogers no longer seems to allow *any* of their (weekend/evening/friends/etc) rate plans other than a by-the-minute plan without a contract. This doesn't work for my girlfriend, as she'll be out of the country for 4-6 months near the end of this year and early next, and doesn't want to be paying for a phone that's unused.
So we had to go with Telus, which tends to have much crappier building penetration (the Telus phone doesn't work indoors near as well as my Rogers phone), but allows you to sign up for any plan sans-contract so long as you already have a phone.
Whether Sabraw's ruling will stand isn't clear. Experts say an appeal is likely, and the Federal Communications Commission is considering imposing a rule - backed by the wireless industry - which might decree that only federal authorities can regulate early termination fees.
Sorry, Charley, Tenth Amendment says no:
The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.
You just can't make jurisdiction up, but they certainly do try. They'll try to call it "interstate commerce", even though that provision was meant to keep the interstate commerce unimpeded, and not to be a source of power grabs.
Slashdot's rate-of-post filter: Preventing you from posting too many great ideas at once.
I wonder if America would just be better off if we moved to a system like in Europe and Asia, where phones cost much more, and the plans are significantly reduced.
I long for the days when this was reality. I remember dropping $200 for a phone and then choosing my service plan and not being tied to a contract. I had the same phone number for almost 10 years. Every few months I would look to see if there was a better plan available from my provider. Never happened the rates I had were consistently lower then newer rates and I would be required to go back on contract. What finally broke me down was needing to switch from TDMA to the newer networks. Two years later and I'm finally off contract again.
I miss the days when few people had cell phones and it wasn't a commodity. I was treated great by my provider (since I was off contract and had been a customer for so long anytime I have an issue with my phone they would typically send me a new one free of charge).
--
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Yes, creating risky or bad debt by giving loans to people who cannot afford them was a key part of the problem.
But the reason the crisis has exacerbated, and badly hurt major financial institutions (CitiBank, IndyMac) is because the process of debt selling allowed bad debt to be masked as good debt. There were insufficient safeguards to make sure that the people (investors, businesses, financial institutions, etc.) that put their money into these debts knew that they were as risky as they truly were.
Consider the Freddie Mac situation. As a quasi-private company, Freddie Mac is directed to make a profit. However, as a quasi-government entity, they have special rights such as the right to use the Federal Reserve as their bank, and the right to guaranteed loans at preset rates. These guarantees made Freddie Mac have an impeccable credit rating, despite the fact that, to continue growing their profit, they kept buying more and more debt that was downright awful.
In other words, Freddie Mac's credit rating didn't reflect the junk nature of their assets. The same is true for CitiBank and IndyMac and other banks that held debt that they may-or-may-not have known was bad, but wasn't being shown as bad on their books.
Things that could have prevented this:
1) Congress has decided that our country is more stable when people own their own residence, so it encourages home ownership. Freddie Mac exists for this reason. I think this conflicts greatly with their charge to earn a profit. Wikipedia says this: "Both Alan Greenspan and Ben Bernanke have spoken publicly in favor of greater regulation of the GSEs, because of the size of their holdings and the widespread perception that they are government backed.", which to me indicates that they agree. This quasi-goverment thing doesn't work. They should have been government owned, or privatized completely.
2) To avoid your home-town bank from getting its fingers (and your money) dirty in less-than-reliable debt, the depression-era Glass-Steagall Act, among other things, prevented banks from offering things like investments and insurance. The late-90s Gramm-Leach-Bliley Act repealed those parts, allowing banks, insurance companies, and investment firms to co-mingle. It's been argued that this relaxation of regulation also contributed to the crisis, as it allowed institutions that need to be stable for financial security (banks) to engage in the riskier activities of investment firms.
It doesn't hurt to be nice.
I've seen a lot of issues with "popular" cellular providers taking a dump in customer service. Previously, Telus was the big dog in town and would regularly screw customers over. In my hometown their grid was becoming overloaded, and I had a period of 4-5 months where calls mysteriously never made it through (straight to voicemail, and not due to my phone because others experienced the same issue).
Now I'm on Rogers - as with many I made the switch - and while my actual phone service is improved I'm starting to see the same disregard for customer service.
A contract is one thing, but if you're stuck in a contract paying for a service that doesn't work as intended.... the contract should be voidable.
I'm unsure as to the specifics of this case, but it seems that most telcos are happy to let customers rot once they're stuck in a contract.
These people weren't given a loan, they applied for it. Now you can say that the lending institution shouldn't have given it to them, but they should have also known that they couldn't afford it. $5,000 net monthly would seem to be around $75,000 anually, $3,500 in monthly mortgage payments would be about a $600,000 mortgage. No rational set of human beings could begin to think that they could afford that. Undoubtedly they thought they could tough it out for a few years, make a huge return and move on. I feel absolutely no pity for them. They were idiotic and got exactly what they deserved. It shouldn't be the place of society to protect people from themselves.
I'm not not licking toads.
It wasn't the Fed who agreed that some form of statistical manipulation could turn a slice of consumer mortgage loans into a debt as secure as the Fed's own. The root cause (i.e. initial thing to be done wrong) was the credit rating agencies assigning higher-than-true credit risk values to the mortgage tranches.
Just because the Fed made money cheaply available doesn't mean I should put a bundle on number 7 at the roulette table. There's a proven-smart investor (Buffet) who's been commenting for awhile now about how much of his investment funds he's unable to invest because the prospective return on investment was less than the risk.
So, does this mean that any contract could potentially be reviewed by a court and parts of it thrown out? After the fact? In some cases, long after the contract was terminated?
This seems a little uncomfortable to me. It sounds like the judge decided the fees weren't valid and that he decided Sprint didn't justify the fees in terms of actual monetary losses. I know lots of fees for non-compliance that aren't based in any way on monetary losses - the fee exists as a penalty.
I suppose I could see a judge ruling that the cell phone carrier service agreement contract was invalid and new customers could not be signed up until it was revised. But changing the terms of a terminated contract sounds a little fishy. And it does not seem like a good idea in terms of contract law in general.
So, are CD penalties to be thrown out next? Aren't they just as unfair? How about traffic tickets? What monetary loss is represented by a $200 speeding ticket? And besides, where was the contract that I signed that made me agree to pay the $200 fine anyway?
I got into a battle with Verizon over termination fees years ago. After getting raped for going over the minutes in my plan, I opened an account with another carrier and moved my number. When Verizon tried to charge me for early termination, I explained that I had moved my number to a new carrier, which the courts had recently ruled was a consumer's right, but I would be happy to continue paying the monthly fee for my Verizon account ( I had a couple months left on my plan), and they could assign me a new number if they wanted to, although I wouldn't be using it.
They said it didn't work that way and I had to pay termination fees. I had three phones, and the termination charge was about $300 per phone. After about 6 months of harassment and threats they finally gave up. I'll never give those losers another dime.
Never let a lack of data get in the way of a good rant.
This ruling is a product of the fact that this has been a feature of contract law in this country since before this was a country, yes. It doesn't "mean" that in the sense that suddenly now that will become the case where it hadn't been before.
Interest only loans aren't any worse (or just as bad) as an Amortized loan when used outside their proper place and when used improperly.
Just like every other financial instrument out there, most of them are good when used the right way, and bad when used the wrong way.
Neg-Amortized Option-ARMs, though, are pretty universally bad for just about 99% of people out there. But even then, there are some cases when they make more sense than any other loan.
You think that's a free ride? Let's go over this again:
1. They have no home. Back to apartments for them.
2. They lost their savings.
3. They probably took on more debt.
4. Their ability to get new credit or make large purchases (e.g. a vehicle) is now stunted.
5. They have no hope of seeing another house for several years into the future.
6. Any long term plans they made are probably shot.
So how exactly is that a free ride? It sounds to me like they'll be paying a hefty price for quite a long time!
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It looks like it's going to be a long time before I can "attempt to own a home" in the first place, so my sympathy there is guarded.
I didn't say that nothing bad has happened to them; just that we seem to heavily subsidize (if not reward) people who take absurd efforts to appear affluently-middle-class, as well as the system of accomplishing this. It's an artificial sustenance of a lifestyle which is increasingly at odds with actual productivity.
"They were pure niggers." – Noam Chomsky
IANAL (but IAA Law Student), but I suspect no, because this is, despite how important it seems (and is, at least for Sprint users) because of the importance of cell phone contracts, in substance a fairly routine application of generally applicable limits on what is acceptable in terms of liquidated damages provisions, which the early terminations fees, in effect, are. So, in terms of legal precedent, I don't think there is anything particularly new here (even assuming it is appealled and upheld on appeal; a trial court decision is of minimal precedential weight to start with,)
This is nice to hear but I'd like to hear more details on the reasoning behind the decision. Why are the fees illegal? Does it apply to all fees? Is there a law in the US that such clauses should only relate to the losses suffered by the company (as is the case in England), or is there another factor involved?
Actually, the entire educational system is an attempt by society to protect people from themselves. Perhaps it would be sufficient to say that the responsibility here is ultimately upon the borrower. I'm all for educating these numbskulls to do the right thing, especially the ones who haven't already made the mistake.
I think it'd be really important to read Judge Sabraw's opinion in this matter. Does anyone have a copy of the opinion, or else at least have the case number, or the courthouse in Alameda County where the case was filed?
Sprint has been saying that the fees are to recoup the losses of subsidized phones if a person exits a contract early, but were unable to show how it worked like that. In reality, it appears the fee was a penalty for changing providers, and as such, in accordance with California fair trade laws, the judge ruled that part of the contract void. CD penalties are not in place to prevent you from giving the money to another bank. I've always seen it more as a "if you withdraw your money too soon, you won't make as much money" (correct me if i'm wrong that early withdrawal will actually cause the CD value to be less that what was paid for). As for speeding tickets, it's not a penalty for contract violation, it's a fine for breaking the law.
The problem is with may things, cell phone especially, is that if you itemize things out so that each "thing" gets it own line item, people's eyes gloss over and they start to drool.
It is too complicated.
Remember, we're slashdots, and generally do better with math, often time being able to calculate faster in our heads than the idiots running the calculator can.
They want "simple" and that is what the companies give them. They want to know what the "price" is (payment) and go strictly by a single number. AND they don't want the number to change, even if it goes down, that's too complicated.
I'm sorry but the court is wrong on this one, the early termination fee is part of the price of the simplified contract that most people WANT.
Just because a few idiots think it is ridiculous shouldn't matter, they should have read the contract before signing up. Don't like early termination fees, get a Boost or Gophone. Doesn't have all the fancy features????
May I offer you Hemlock or Cyanide?
Agent K: A *person* is smart. People are dumb, stupid, panicky animals, and you know it.
$5,000 net monthly would seem to be around $75,000 anually,
Actually, it would be around $94K gross (in a state with income tax), and it would be closer to $500K mortgage, assuming the interest rates were typical for some of the "shaky" loans that were made.
They still definitely overcommitted, but where I live, $500K doesn't buy a whole lot of house. There's no way I could afford to buy the house I live in right now, but I got lucky and bought a while ago at the bottom of the market and was close to the same state they were for a while ($1,200 house payment on about $2,800 net).
They were at 70% and I was only about 43%, but today even with a lot more pay, I'd be over 60% if I wanted to buy my house today (assuming the same percentage down payment as when I really bought it).
You think that's a free ride? Let's go over this again:
1. They have no home. Back to apartments for them.
2. They lost their savings.
3. They probably took on more debt.
4. Their ability to get new credit or make large purchases (e.g. a vehicle) is now stunted.
5. They have no hope of seeing another house for several years into the future.
6. Any long term plans they made are probably shot.
So how exactly is that a free ride? It sounds to me like they'll be paying a hefty price for quite a long time!
OK, I'll play too:
1. They didn't pay for the home so it wasn't theirs.
2. These are normally zero down loans, no savings invested.
3. Took on more debt... Huh? While probably true (if you can't handle credit in one situation, likely enough you can't handle it elsewhere) - it really isn't relevant to the free ride.
4. Bad credit - that's a consequence, but it doesn't benefit the person that loaned them the money, so still not involved in the free ride argument.
5. Yep, goes with 4.
6. Plans built on quicksand... still not relevant to the free ride.
The exact way that it is a free ride is that they agreed to pay X dollars to live in a house, then they didn't pay X dollars and continued living in the house. The entity that made the loan did not get paid what they were promised. They also get no benefit from any of the negative financial consequences that happen to the buyer. That is a free ride.
Now, outside of that transactions they may have had a lot of bad things happen to them financially. That doesn't really enter into the calculation. Maybe it would be simpler if we were not talking about a house. What about a nice silk dress instead? Let's say they promised a dressmaker $50 per month for a year for a nice custom made dress. The dressmaker delivers the dress as promised. The buyer accepts delivery and has a nice time wearing the dress to parties and gets lots of great compliments. The buyer never makes the promised payments. After about 6 months the dressmaker repossesses the dress. Can you see how that would be a free ride? Can you see how it is the dressmaker who is the aggrieved party?
Even if the party-goer has horrible financial luck and wound up in a tough situation and so couldn't afford the 50 bucks, it really doesn't change the calculus. She took advantage of the dressmaker for 6 months, and now the dressmaker is stuck with a dress that cannot be sold for anywhere close to the promised sum.
Speeding is a violation of the law, and not a contract you signed (although I believe in my state you DO sign something to the effect of "I agree to obey all traffic laws" when you get your license initially. Renewing the license would then be considered renewing the contract).
Furthermore, it isn't that the fee itself was the problem, it was that canceling 12 hours before your contract was up hit you with the same fee as canceling one month after you signed it. A prorated ETF would likely have nipped this in the bud, but Sprint was too proud of their easy millions to do what ever other major carrier had already done.
Perhaps it's not the place of society to protect idiots from themselves, but it the place of society-at-large to protect itself from the idiots.
Let's say Couple A and Couple B are both bidding on a house. Both couples make roughly the same amount of money, have roughly the same amount of savings, and so forth. Couple A is sensible, and not willing to spend more than they can afford. Couple B, on the other hand, is more willing to take the risk, and bids up the house to a level they really can't afford. It only takes a couple of iterations of this sort of bidding war to inflate home prices to the point where sensible couple A has to choose: either join the fray and pay a little more than they can afford, or stay out and either rent or buy less house. This pattern escalates higher and higher, and sooner or later, all of this ends up in the kind of collapse we are now seeing, all of which could easily have been prevented had the proper checks been in place.
So I ask, wouldn't it be to the benefit of society (read - all of us who might someday like to buy a home) to ensure that these checks are in place and properly enforced?
A dress? Really?
This is a perfect place for a car analogy and you went with a custom-tailored silk dress? I mean... Driving around for 6 months without making payments and getting the car repossessed ~= A free car rental with the credit penalty being the only downside. It's that easy.
A dress?
He's getting rather old, but he's a good mouse.
I haven't finished paying for my home either. Obviously it's not truly mine. It's the bank's by way of lien until I finish paying it off. However, I do get to live there as long as I continue to make good on my loan. Welcome to mortgage 101.
The original poster explicitly said: "Needless to say within 6 months of blowing through their saving is came down to deciding to sell the house or starve to death."
Whether they got a zero down loan or not, they lost their savings in a futile attempt to be responsible after the fact.
My presumption is based on the fact that they actually made a serious attempt to pay for that home. If they managed to blow through all their savings in an attempt to pay for it, I can practically guarantee they also took on further debt as a direct result. Whether it be from putting groceries and goods on credit cards that didn't get paid off, or from borrowing to pay off bills they couldn't afford, there's a good chance they are now saddled with additional debt.
Well, I'm glad we can agree on something. :-P
Not necessarily. If they had gone through a better decision making process, there's a good chance they could have found a home that met their needs just as well and still be living in it today. i.e. The plan itself isn't always flawed. Sometimes it's just the execution. Which seems like a fairly likely situation if they foolishly obtained a house that had a $3500/mo mortgage on a $5000/mo income. As a home owner in a major city, I can tell you there are more affordable places to live.
I can see that the dressmaker would be a moron. Dresses lose most of their value as soon as they're worn. They don't make very good collateral against a loan. A house, on the other hand, usually gains value rather than losing it. Which means that the bank can repossess the home and resell it for what is left on the loan. The bank ends up getting their money, plus whatever profits they made off the borrowers while they were borrowing. A win-win deal for banks.
The only reason why things have gotten bad is NOT because people are defaulting on their mortgages. The banks hedged their bets and thought they would be fine in any situation. The reason why things have gotten bad was that banks got greedy and lent a massive number of loans they knew were unreasonable. The result was that the market flooded with repossessed property and the banks starting taking a loss.
So I guess your analogy does work. The banks were as foolish as that dress maker! :-P
Javascript + Nintendo DSi = DSiCade
When I was 11/12 back around 1977 or so. We lived in Utah were the only thing on TV was the nightly news. So As a 11 year old. I watched a lot of news.
People who had ARM's back then were losing their homes at the interest rates climbed. At that point I swore I would never take an ARM.
It is a gamblers game. Get an AMR5-1 and either sell the house before 5 years is up or get a new loan.....as long as housing prices don't drop.
I know people have been making a killing in real estate for the last 25 years. Flipping houses and all that. However, that still does not negate the fact that sooner or later housing prices adjust to a sane level. And in the muscial chairs game of bank loans, you don't want to be left holding an ARM once they start pulling chairs.
vi +
And yet we blame the lending institution because this couple was too stupid to do some math?
I stuck out my contract with Sprint because I was bloody well determined NOT to pay their damn termination fee. Pity this decision hadn't happened a year or so sooner.
where was the contract that I signed that made me agree to pay the $200 fine anyway?
Probably buried somewhere in the agreement of obtaining a license to operate a motor vehicle. Certainly not easily found though.
~ I am logged on, therefore I am.
It's subtler than that. I object to the notion that bad debt was being "masked" as good debt. Nobody was hiding the fact that a lot of these mortgage-backed bonds were backed by subprime mortgages. They diversified the regional exposure of their mortgage-backed bonds, structured the bonds into multiple tiers so that a higher tier couldn't default unless all lower ones did, used complex mathematical models and financial to estimate the actual risk of the mortgage pools that backed the bonds, and used the structure of the bonds and the results of the models to convince the rating agencies to give them high ratings.
Of course, we know how well those mathematical risk models worked out: they were way too optimistic, and what's worse, in precisely the way that fit the bond issuers' short term profit. But the ratings agencies ought to have been more skeptical.
Are you adequate?
You think that's a free ride? Let's go over this again:
1. They have no home. Back to apartments for them.
Actually, it's worse than that. To my knowledge, most decent apartment complexes do credit checks on prospective renters. So if you have bad credit (like a recent foreclosure), many apartments will not rent to you. So where are you going to live now? A lot of these people probably ended up either moving in with family, or renting ghetto apartments.
Ah yes, the old "it's the Fed!" canard. It has nothing to do whatsoever with relaxation of regulatory controls on the bankig industry that are not within the scope of the Fed. Right.
Hmm, seems to me that the Fed policy of moderate ((unspoken)~4% cost inflation) and (spoken) low wage inflation will correct the issue, since it will bring the money supply more in line with GDP.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
This was definitely a risky loan and I don't feel sorry for the bank that lost money. Both parties in this situation were idiotic, but the bank lost a lot more money than the stupid couple.
Also, look at the other expenses the original poster mentioned: "big flat screen tv, cell phones, expensive digital cable package, etc."
So the couple made off well relative to the bank, plus lived a fairly luxurious life in the meantime (they certainly weren't sacrificing their entertainment). I think there's good reason to call it a free ride.
I don't see how it can have anything but this kind of effect. Any penalty now could be called into question by a judge.
Dumping a contract that seems to have unfavorable terms - in hindsight - has always had some kind of penalty associated with it. This may have a very strong effect on consulting contracts and other types of term licenses. You know, someone contracts with a consultant for 2 years and decides after 9 months they don't need they anymore. Whatever penalties might have been written into the contract could (in theory) be called into question. Especially if they are not directly tied to monetary losses.
Sounds like a really bad decision to me.
When people walk away from a mortgage, they also walk away from the home. In the case of a phone plan, when you walk away from the contract, you still own the phone, you just lose the service. I could ebay off the phone, but not the house.
There's a Cell company in Canada called Koodo Mobile which advertises the following system:
- You don't have a locked-in contract
- You instead get the cost of the free phone added to your account.
- This amount is lowered as you use your phone and pay your regular phone bills.
I'm not sure if the system 'works' or anything, I'm currently locked in on another provider, but it might be what people are really looking for: AN actual, explicitly subsidized phone, instead of having it 'magically' tied just in to how many months you have left and not have anything to do with the actual cost of the phone or the cost of the plan.
ADVENTURERS! - ANTIHERO FOR HIRE - CARDMASTER CONFLICT
So where are you going to live now?
They will be renting other distressed properties from landlords who didn't fold just yet and save a few of them from foreclosure.
Being a spelling & grammar Nazi is a sign you do not poses the intelligence to contribute to the conversation
If I want a new phone without waiting for my old contract to expire. Does this mean I can terminate my contract and then start up a new contract to get the discounted phone?
Calvin:Do you believe in the devil? Hobbes:I'm not sure man needs the help.
I'll add my spin on this one. I'll even go with your silly dress analogy (how on earth did you come up with this anyway?).
Let's say they promised a dressmaker $100 per month for a year for the dress, and then $1000 per month for the next 5 years afterwards (some more realistic numbers, since custom dresses usually cost many thousands of dollars, judging by what I've heard about bridal gowns). The dressmaker does a credit check, and finds that the buyer makes $15k/year working in fast food. The buyer can afford the $100/month, barely, but no way can she afford the $1000/month. The dressmaker decides to approve this financing for the buyer, knowing there's no way she can afford it after the first year. For the first year, the buyer pays the $100/month. Then, when the payments go up to 1k, she defaults. Dressmaker is outraged!
Who's the aggrieved party here? The one who stupidly made the loan, or the one who took advantage of the stupidity (ruining her credit in the process)? Personally, I think the blame falls on the lender, for making such a stupid decision. There's definitely times when people should be punished for taking advantage of the system, but this isn't one of those times. These lenders were absolutely corrupt and stupid for approving these loans, and they deserve to lose their businesses over them. The bad buyers are already getting punished, in a way; their credit is ruined, and they won't be buying a house again soon. That's punishment enough.
Also remember, the lenders never actually lost anything. The people borrowed money to buy these houses, and they used the houses as collateral. Remember that word? This means that the lenders agreed that these houses were worth what they were lending for them. When the buyers defaulted, the lenders repossessed the houses, and even kept all the mortgage payments already made. If the lenders can't get the same amount for those houses, that's their problem: they should have though about that first, instead of assuming that realty values always rise.
If you're going to lend money to people, it's up to you to make sure they're worthy of lending to. This is especially true for large financial institutions, who can easily afford to do all the necessary credit checks. The whole concept of the ARM is rooted in greed, and the lenders deserve to go out of business for making so many bad loans.
I think this is a good thing. Maybe after awhile cell phone service providers will get the hint. Give good service or loose the customer. Personally, I think cell phone service providers should not be selling cell phones. Instead all cell phone manufacturers should be required to make all cell phones compatible with all providers. That way you go to the manufacturer and buy your phone at their price. Then you can go to any provider with that phone and signup. IF they dont provide you with the service you want or like cancel and go to another one. They should eliminate the 1yr, or 2yr contract and just have it at a month to month thing. That way the customer is free to change to whom they want and the provider is free to change the terms and prices from month to month.
thank you, Brian M. http://www.masonfamilytree.com http://www.thefederation.us http://www.patriciaannmason.com http
Yes, and that's why we shouldn't subsidize the risky loans. There's no way the financial institution would actually offer a loan that they know could not be repaid if the institution had to take the hit when the borrower walked away from the deal.
But instead of taking that hit, the lender lets the government bail them out of their stupid lending decisions so at the end, society is responsible for protecting people from themselves. We're protecting irresponsible lenders. The irresponsible borrowers take a bad credit hit which can have fairly nasty consequences, even to the point of making it difficult to get a job. The lender doesn't have to deal with those kind of consequences.
That bailout needs to go away. When Fannie Mae and Freddie Mac got into trouble, it almost did, but then the government bailed them out, so we're right where we always have been.
Perhaps you don't feel sorry for irresponsible borrowers, but they actually have an effect on the market that hurts everyone. If I want to get a 15 year mortgage at a decent interest rate, I have to remember that I will be placing competing bids with others who probably have 30 year loans, perhaps even interest-only loans with much lower payments. Those people will be easily able to outbid me, driving the price of the homes I am interested in beyond my means. In the end, I may be forced to take a different type of loan so that I don't end up in a dangerous neighborhood. The lenders love this, and will do everything they can to encourage it. The best way to discourage it is to make them pay for their own mistakes!
There's also the bit where the mortgage industry came up with exotic loans which encouraged consumers to gamble on housing prices continuing to rise, in order to maintain inflated housing values when many other markets corrected at the end of the tech bubble. The houses people bought into in many cases SHOULDNT have been beyond their means, if it weren't for the entire mortgage industry scrambling to come up with loans enabling them to purchase homes at prices they wouldnt normally have been able to afford.
This is pure BS. Perhaps some played it as you describe, although it's incredibly stupid of them to have done and their credit is completely fucking shot now.
However, there's plenty of others that are completely devastated now. Like me. I told the loan agent up front what I could afford per month. I was told the home I was looking at would be less per month than I had set as a limit. So I agree, we get to the closing table, and I'm giving a totally different figure that's higher than what I had set as my limit. When I tried to back out, I was blindsided by a host of financial terms and figures that could only be described as pure fucking magic to my eyes, because none of those financial things are simple basic algebra. They shuffle money here and there and I'm told to just not worry about it, I wouldn't have been approved if I couldn't pay it.
Ok, I payed for almost 2 years on the home, struggling the whole way, only to have a major item go out and require replacing. One partial payment incurred a massive backlash of fees and they didn't even count my payment, and the next few payments didn't count either according to them. In the end, I've lost the home, couldn't get anyone to rent to me anymore because of it, my credit is completely shot and my savings is completely gone. Several loans I had to take out to cover major items in the home such as AC and water heater (you cannot live in the Midwest without AC, you die) I'm still on the hook for even though I don't even have the item anymore.
Now tell me, you callous asshole, that the past two years have been a fucking "free ride". I will now have to declare bankruptcy, I have no home, can't get anyone to rent to me so I'm stuck living with relatives, and all of my savings is gone. But that home did me such good, didn't it?
it was people paying too much for properties they bought...
Speculation that property prices would continue rising
Also known as People choosing to try and live beyond their means.
...
So, are CD penalties to be thrown out next? Aren't they just as unfair? How about traffic tickets? What monetary loss is represented by a $200 speeding ticket? And besides, where was the contract that I signed that made me agree to pay the $200 fine anyway?
Well, traffic tickets represent the monetary loss of paying $20-$50 an hour to have some guy stationed on the side of the road in a souped-up, late model, American sedan with thousands of dollars of electronic equipment and the v8 idling to wait for you. The particular contract you signed that makes you responsible for it depends on where you live.
The people need to be paying a hefty price for a long time. They need to learn that if something seems too good to be true, it probably is. I had the option to get into a home and I didn't because I knew that there had to be a catch and there was... the mortgage was going to adjust in a couple of years. I watched home prices inflate over 100% in the neighborhoods near where I lived. I'm only 30 years old but I saw that something was way out of wack and I stayed the fuck away from the whole situation. The thing that pisses me off is that now Congress wants to bail out the banks. Fuck that. I avoided the problem, I shouldn't have to pay increased taxes because other people were stupid.
Which individual right do you believe is being violated by the company when an individual knowingly and willingly signing such a contract? If not a right, then from where does this magical ability to avoid reality come?
The two examples you give, slavery and murder, both involve violating the right to life. Which right is being violated here, for that is the only means of denying the validity of a contract.
These guarantees made Freddie Mac have an impeccable credit rating, despite the fact that, to continue growing their profit, they kept buying more and more debt that was downright awful.In other words, Freddie Mac's credit rating didn't reflect the junk nature of their assets.
Excuse me? The problem isn't that these GSEs were buying bad assets at all. Read this article by the Economist, Fannie Mae and Freddie Mac - End of Illusions. It is a far more credible source than a random post on Slashdot.
"Investors have got quite a bit of protection against a housing bust because of the type of deals that Fannie and Freddie guaranteed. The duo focused on mortgages to borrowers with good credit scores and the wherewithal to put down a deposit. This was not subprime lending.... Although they tended to buy AAA-rated paper, that designation is not as reliable as it used to be, as the credit crunch has shown." - The Economist
They were idiotic and got exactly what they deserved.
Since you're here, you're most likely an intelligent person who would never sign a contract without reading and understanding it. That's not normal. Unfortunately, normal is sign without reading. I'm not saying it's smart or right, just what most people do. Most people have no idea what's in their mortgage contract. Instead, they listen to the (dishonest) sales pitch from their broker and believed them. It's no wonder so many people are surprised when their mortgages reset. These are people who have no idea what amortization is, or how the math behind their loan made a reset inevitable. Most people can't calculate how or weather a bank is making money form their loan.
But you can do all those things. So to you, they're stupid and deserve it. I'll agree with the first part, but not the second. They absolutely should lose their homes. But a significant part of the blame falls with the machine that lured them into a trap because of greed. They didn't have a chance.
Disconnect your television. Do your own research. Draw your own conclusions. They're probably lying. Don't be a sheep.
Closer, but not quite.
The dressmaker agreed to sell the dress for $100/mo for the first year, and then an undetermined amount for the next five years. At this point, any reasonable person would say, "Screw you!" "Oh no!" the dressmaker replies, "The market for dresses is through the roof! In a year, you'll be able to sell this for way more than you paid and upgrade to a new, better dress!"
The government offered carrots and sticks: carrots - government-backed institutions buying the junk debt, sticks - the Community Reinvestment Act, punishing institutions that "discriminate" against people with bad credit.
Mine is Good
I wouldn't blame the lending institution exclusively, but they had the opportunity to do the same math, and also failed to do so.
By claiming the termination "fee" is part of their rates, isn't T-Mobile pretty much asking for the fee to be regulated by the FCC? The proration does sound fare to me, however.
I've abandoned my search for truth; now I'm just looking for some useful delusions.
As I mentioned in another post, the original poster explicitly said: "Needless to say within 6 months of blowing through their saving is came down to deciding to sell the house or starve to death."
Javascript + Nintendo DSi = DSiCade
Now thats a loan to loose your house too!
So I should only consider such a loan if my house is tight?
Not trying to be a callous asshole, but I'm curious. If the bank you were getting the mortgage from didn't get you the numbers in advance, why didn't you ask them for information? I know that for both houses I have purchased, the lender provided me with the exact monthly payment I would have for principle and interest. I knew after speaking to the insurance company what that payment would be, and I could estimate the property taxes if not determining them by simply calling the county assessor. Adding those three numbers together gave me the total payment for the house. If you weren't given satisfactory information to make the deal, perhaps you should have inquired rather than going off the assumption you wouldn't have been approved if you couldn't pay it.
Good, apply this to AT&T and I'll cancel immediately, then sign up again and finally be able to get an iPhone at the subsidized price since they're currently screwing me on upgrade eligibility.
You combined planning and math. How many homebuyers are capable of either? Not many, judging by the current crisis.
Socialism: a lie told by totalitarians and believed by fools.
In some states (such as CA) the first/primary loan is typically a non-recourse loan. This means, the "owner" can literally give the keys back to the bank and the loan is fulfilled. The bank is not allowed to go after any other assets. The "owner" does not have to declare bankruptcy. In this case, it very much is a free-ride.
One thing to note though is that most refinancing loans are recourse loans.
Just an fyi, you could get a 100% loan (really and 80-20 -- a few years ago that would have been 5.4% for the 80 and 6.8% on the 20) and not have an ARM or pay PMI.
In my mind, it has less to do with protecting those of us who want to buy a home. All bubbles eventually burst. You may have to wait around for a while, but eventually, the prices will come back down.
More important, in my opinion, is protecting the economy. Having hundreds of thousands of people in so much debt that they can barely eat is going to put a strain on the economy. In this case, it's entwined with a dwindling dollar and bad investments on the parts of the lenders, making the problem significantly worse. But even the base situation would make for tighter times for all, and all because lending was allowed to spiral out of control.
If people, in general, were sensible, I'd be vehemently opposed to the government stepping in and putting restrictions on lenders. But the sad truth is that they are not sensible. And when mortgage brokers are allowed to negotiate loans which they know will be defaulted, and then turn around and use those loans for triple-A securities, there's a serious problem.
Ok, lets just say that there was some weird verbage in their mortgage contract that was their ultimate downfall, but as I expressed earlier, if you are making $75k a year, you can not afford a $600k mortgage. Using 3x rule-of-thumb stuff here, they should have probably been in the market for $200 - $250k home price range. If you are about to spend a large sum of money, you should shoulder some responsibility and educated yourself about it, don't you think? I mean we are not talking about stretching your budget a little, they bought 2-3X the house they could reasonably expect to afford. Sure the lender probably shouldn't have given them the loan, but ultimately they are adults and made a poor decision.
My real concern is that this latest housing bill basically covers everything, it covers 2nd home mortgages [tax payers should foot the bill for someone's summer cottage?] and mortgages up to $625k.
Personally I think it should be way more limited in scope. Allow a one-time forced free refinance to a 30-year fixed at the default rate. If the house goes into default after that, tough titties. That forces the lenders to take on the risk of their bullshit loans, the "deceived" borrows a chance and should cost the tax payers less money.
I'm not not licking toads.
There's no way the financial institution would actually offer a loan that they know could not be repaid if the institution had to take the hit when the borrower walked away from the deal.
That's called predatory lending. It should be illegal. But the truth is, the company still stands to benefit. They get the house, plus all of the payments thusfar. They can now sell the house to someone else. If that person can't afford it, they default, and the company gets to repeat the process.
The big problem (for the company) comes when they sell off the loan, claiming that it's more secure than it is, and then due to the bubble finally bursting, no one wants to buy the house anymore.
And you're right--we shouldn't bail them out when this happens--except that our economy doesn't really like it when multi-billion dollar companies fail. Printing more money makes it less of a shock, though we end up in the same end position (if not worse.)
It retrospect, it surely did work out badly. The average home buyer probably wasn't well informed enough to see the bust coming, and was no doubt encouraged to see the upside.
The lenders WERE in a position to see the trouble brewing, and either failed to do so or violated ethics by convincing buyers to go into a very risky proposition.
It's a smart idea if you plan on short term ownership AND have reasonable assurance that home values will at least not fall in the next 5 years.
Of course, the lower initial interest led to another idea which certainly wasn't very smart, taking advantage of the initial rate to tread water hanging on to a just bought house you can't actually afford. That's the one that really did some people in.
I thought the legislative branch was responsible for declaring things illegal? Isn't it simply up to a judge to decide whether the fee is illegal framed within the way a law is written?
So I ask, wouldn't it be to the benefit of society (read - all of us who might someday like to buy a home) to ensure that these checks are in place and properly enforced?
I'm not sure it is in society's benefit to enforce common sense. The housing collapse will be very, very good to some people. I expect that there will be lots of good, cheap houses on the market over the next several years. I've wanted to buy a house for a while, but was turned off by what I felt were crazy prices. It turns out that I was right. Those prices were indeed crazy. Now I have a lot of money saved up and a huge buyer's market. Personally, I'm very happy that lots of people are so bad at math that they cannot figure out whether they can afford a mortgage. For me, there has been no downside. The innocent people that are hurt in this are those who bought a house they could afford and are now in a position that they must sell now. I feel a bit of sympathy for them, but that risk is a known part of buying real estate. It is a very illiquid investment; you have to be prepared for that going in.
The lenders writing these loans were creating mortgage pools with say 70% Class A loans, 20% Class B, and 10% Class C. Being in the lending business, they then made all these mortgages available to mortgage brokers, who sold them as retail products. Brokers don't get paid unless the loan closes and with the assumption of appreciation and the ability to do self-reported income, they misrepresented what kind of credit risk buyers were to sell loans. Suffice to say, the problem is there was a third party who carefully made it look that buyer really could afford payments over the life of the loan.
Collateral merely means the lien holder must be paid first in any sale after the origination of the loan. Lenders don't care about equity, that's not what they're generating income from. They're looking at the income stream from the loan and the collateral deal is secondary, it's to make sure if the loan goes bad, they get paid first. Lenders are not in the business of buying & selling real estate for profit, they in the business of selling money.
Exactly. I've heard people defend contract lock-in on the basis of subsidized phones; the best way to counter that is with transparency. Itemize the "phone loan" on the bill, and give lower rates to those who bring their own or have paid the phone off. It's the only fair way.
You should keep an eye on the three credit reporting agencies. Verizon may also sell your debt to third parties who might continue to come after you.
This is only for cases where SPRINT cancelled the contract and still charged the cancellation fee.
If you call to cancel your sprint line(s) right now, they are not honoring this at all and you are still subject to an approx. 200$ early termination for each line.
In my experience, that usually means that the prospective tenants with poor credit will be required to leave a hefty deposit; quite likely first month, last month, and a security deposit equal to at least half a month's rent.
I agree with most of what you said except:
Actually, the entity that made the loan most certainly did get the full payment from the brokerage firm they sold the mortgage to. The housing bubble burst is an accumulation of factors including ridiculous ARMs, mortgage trading, banking/brokerage fee fraud and out and out fraud on the part of the agents representations to the potential homeowner.
This is a sig. This is only a sig. Had this been an actual sig you would have been informed where to tune for more sigs.
In the long run, I suspect that the value will return to their house, but people who think about that are generally not the ones who get themselves into mortgage troubles.
Yes, but mostly due to inflation.
And hey, here's a wacky notion--the reason to pay the mortgage is because you fucking agreed to do so. This is one of the many reasons that you shouldn't be allowed to gamble with credit. When you lose, you really don't want to pay off the debt.
There's no way the financial institution would actually offer a loan that they know could not be repaid if the institution had to take the hit when the borrower walked away from the deal.
But instead of taking that hit, the lender lets the government bail them out of their stupid lending decisions so at the end, society is responsible for protecting people from themselves.
The problem wasn't so much that the government was bailing out the institutions for making bad loans. Fannie Mae and Freddie Mac are publicly traded institutions (where it is assumed the government will not let them fail) and they irresponsibly bought lots of stupid loans. This is putting them in jeopardy and causing their shareholders to (deservedly) lose a lot of money. The real problem was that lenders were knowingly making bad loans because they knew they could sell that loan to someone else. And that someone else knew they could resell that to some other sucker. It was a giant game of hot potato. There was no incentive in the system to turn down loans and that is the big problem that needs to be fixed.
I think the government should back Fannie Mae and Freddie Mac, but that backing should come at a heavy cost. They types of loans they buy should be limited to "safe" loans. This would reduce the market for the high risk, high return subprime loans. This will reduce the amount of home buyers out there, but it should keep the market stable.
I do hate seeing the term bailout used a lot, though. Look at the financial numbers coming out of the banks. They are all hurting big time. Many of them are giving up huge amounts of equity to outside investors to stay solvent, some are getting bought at a steep discount and some are going under. The banks are actually suffering. If you were a financial services company that was responsible and stayed out of this mess, you are in great shape and likely looking to buy a piece of these banks at a steep discount. And I like to see that; smart players in the system should be able to profit from the stupidity of others.
Generally speaking, contracts have to be somewhat fair. Canceling a month before my two year contract is up and getting hit with the same $200 cancellation fee as if I'd canceled 32 days in is absurd. The point of the cancellation fee is because the phones are subsidized. If they've been getting payments for me all along, they've been recovering the subsidy over time.
The biggest problem, to me, is that if my phone breaks (and they're all pretty much cheap, crappy pieces of crap) I'm stuck in my contract /and/ I have to pay $150 for a new phone. Or I can extend the contract and pay the subsidized amount, if I'm "lucky."
And don't even get me started on the rest of the practices in the industry. Hidden "recovery" fees, charges for incoming SMS and calls (yeah, in the US, we pay even if we didn't want to be called)... it's all a bunch of crap. Sometimes I wish I wasn't required to have a cell phone for my job.
So let the company have the phone back, less any charges for wear (they can't sell it new again.) That's a better solution, anyway, in my opinion.
You just saved me ten minutes of my life pointing out the obvious to yet another corporate apologist. (And I'm not the OP). --And where do they get those guys, anyway? At what point does a person start despising humanity so much that they figure the populace deserves punishment simply for existing?
-FL
Seems a mod does not understand what the "Troll" mod is for. Hint: It's not because you disagree with someone.
Further hint: It will hurt in meta-mod. Next time use overrated if you just can't restrain yourself. Better yet, try following the intended use of moderation sometime. i.e. Focus on modding up rather than down.
Javascript + Nintendo DSi = DSiCade
Go out of business? No, they deserve to be in jail for packaging these loans up in "securities" to write them off the books and create more loans they knew people would default on. They were loaning more money than they were allowed to by law by exploiting a loophole, and now we the people are bailing them out.
The people dumb enough to take the loans should be broke and homeless, and that's happening. The assholes that came up with the Ponzi scheme should be in jail getting gang raped, but instead they're all skipping away with the profits invested in foreign bond markets that AREN'T tanking. It's even more lopsided than you think when you consider HOW they made SO MANY of those bad loans.
You're gambling that real estate prices don't go down whenever you buy a home. If you think they will, the correct thing to do is rent, not buy. Like every other investment there's risk involved. And if you don't think you can make a modest return in 5 years on an investment that's likely to be a large percentage of your savings (in fact, likely to be well over your savings) then you shouldn't make that investment.
I still have more fans than freaks. WTF is wrong with you people?
That is a perfect illustration. Well said. (golf clap)
If the market remained flat at the peak and went neither up or down where would be??
It's also worthwhile to point out that if banks are guaranteed to be bought/supported by the gov't if they get too many defaults from bad loans, why would they even care? For example, I make cars. The gov't tells me that since I am very central to this economy, if I go bankrupt they will buy/support my company. What's to prevent me from making extraordinarily risky (risky is not necessarily stupid, but it's like obsessive gambling, no matter how good you do, if you play long enough, you going to lose big) business decisions. Nothing, it would be like my gambling example, if someone told me that no matter how much I lost in the casino they would pick up the deficit, but I could keep the profits if I get any. Who wouldn't go batshit crazy and tip the strippers with Benjamins? At any rate, the easy credit is too blame also, which is the Federal Reserves fault, although they were admittedly under great pressure from the administration to do what they did. Not to mention, IMO, Bernanke doesn't have half the brains or balls that Greenspan did. On the other hand, this isn't to say that buyers didn't make really stupid decisions, they did, but as a society we shouldn't be trying to facilitate that.
Failure formatting five FAQs of financial facts.
the people who have been hit are the ones who took ARMs and interest-only mortgages. So when interest rates started rising, they're payments went up. Sounds like you have a fixed-rate mortgage, so you're not affected by daily interest rate fluctuations.
Wow, I don't think you understand the responsibilities of mortgages and other sources of credit.
1 2 & 3: They made mortgage payments for 6 months, in addition to their car payments, credit card payments, etc. People that do things like this also tend to eat out a lot, which gets expensive. There's more money going out than there is coming in, so that's where their savings goes until they have no savings left, at which point, they start missing bills or paying them with credit cards, thus creating more debt, and eventually creditors come after them.
4 5 & 6: If they declare bankruptcy, which they will probably have to do after taking on so much debt, that pretty much stops them from getting a home (or any other type of loan) for the next 7 years. Even after the 7 years, the fact that they declared bankruptcy will still come up, they will never really be free from it.
Not to mention the fact that money problems put a huge strain on a marriage. Money problems this bad will very likely lead to a divorce unless the husband and wife make an extraordinary effort to grow up really fast, and make major sacrifices. Normally people get into this kind of debt because they're not grown up and they don't know how to make sacrifices. That's an incredibly hard change to make.
In your silk dress analogy, you act as if there wouldn't be any repercussions from not paying for the dress. The dressmaker would not take the dress back, it's already been worn and used for 6 months. The dress maker wants money, so the buyer gets turned over to collections, where agents call and harass the buyer and the buyer's spouse, and they're not nice about it. Collections agents will use insults, question the strength of the marriage and try to pit the buyer and the buyer's spouse against each other. Also, the buyer's credit suffers, so the buyer has a harder time getting loans, and the loans the buyer gets come at a higher interest rate. This is all assuming the buyer doesn't just report the buyer to the police for theft, which is more likely.
To say that they got a free ride is far from the truth. They will suffer quite a bit, even if they did "get to" skip very few months of paying any of their bills before it caught up with them.
I'm married and have children. I make a respectable amount of money and own a decent home. I also have more debt than I'd like, but I've never ever missed a payment on anything. Even so, the debt is a very real burden that I'd rather be free of. If I stopped making payments the burden would turn into a crushing weight, not a free ride.
Come back to the discussion after you've taken on some responsibility.
They did; and a large number of them are getting just what they deserve - bailouts notwithstanding. There are very few of those compared to the number of small institutions in trouble.
It's not a free ride when you're paying all of your money to try to maintain it and still not keeping up. And when you lose the house, it's not over. You have a lot of financial pain to go through for years.
Putting 20% down has more to do with whether or not you have to pay PMI (private mortgage insurance) than whether or not you get an ARM. You get an ARM so that you can have a lower interest rate (for now), so your payments will be lower (for now), so you can get more house for a lower payment (for now).
This can happen if you put 0%, 20%, or 50% down. People trying to get more home than they can afford with a fixed rate mortgage get ARMs, not necessarily just people who don't have 20% to put down.
The reason why ARMs became a problem is because they got to the point where the interest rates started going up so suddenly they have a higher payment which they can't afford.
I didn't just ignore them, I argued with them and got them to drop the charge on my account...three or four times. Each time they'd agree to clear my account, then I 'd get a bill and around we'd go. Finally did get it cleared and that was that. I've since bought a car with nothing down so I think my credit's OK.
But you're right, if I'd just ignored the bill I'm sure they'd have stung me.
Never let a lack of data get in the way of a good rant.
That's a good point. There's never much disincentive to big companies to mismanage themselves and take bad risks. It happened to Chrysler, and now it's happening to lenders.
If Sprint goes "tits up" I'll have to get another provider and I might as well bite the frickin' bullet and buy a couple of iPhones (for the wife and me.)
Sprint is not the stablest and/or the most financially secure of companies and this could tip them into a death spiral.
MSBPodcast.com The opinions expressed here are my own. If you don't like 'em... Think up your own stuff.
And yet we blame the lending institution because this couple was too stupid to do some math?
Yes. The lending institution is a professional organization that does thousands of these a month. The buyers are uninformed in comparison, doing maybe one every few years. The lending institution had all the information they needed to make an informed decision. With the greater knowledge and experience of the lending institution and the fact they were paid in order to assess the risk and have training and procedures for assessing the risk, they should be able to gauge the risk better than those asking for the loan.
Learn to love Alaska
You may think people are being callous ass holes, but frankly, your own carelessness got you into the situation.
Rule #1 of Contracts:
NEVER sign a contract without having your own lawyer review it for legal or financial pitfalls.
Rule #2 of Contracts:
Never commit to terms or financial obligations before the final signing of a contract.
Rule #3 of Contracts:
NEVER sign a contract that is ammended from previously agreed terms without having your own lawyer review.
Rule #4 of Contracts:
NEVER sign a contract that you are unsure/uneasy about for what ever reason! It is easier to not enter a bad contract than it is to exit one.
While may think others are callous, you were foolish and failed to do your own due dilligence. The bank may have been greedy/preditory/whatever but YOU ultimately signed a bad contract without complete understanding of it. That fault is YOURS not the banks.
You're looking in the wrong place. The "free ride" is for all the mortgage companies and brokers getting bailed out that were profiting of high risk loans. You probably cannot see the sucker either look at the tax payer who is going to have his/her rates raised.
Respect the Constitution
Should've backed out when you had the chance. You didn't, let someone else do the thinking for you, and paid for it through the nose.
Jesus is coming -- look busy!
An ARM was stupid if you took it when 15 and 30 year loans were at historical lows and you expected to refinance for a lower rate in the future. When rates are at 6%, you get a 5% ARM, hoping you can get a lower rate in the next 5 years, yeh your an idiot.
Respect the Constitution
It's not up to lenders to fake reality for their lendees. Then again, it's not up to Fannie Mae and Freddie Mac to fake reality for the lenders, it's not up to the Federal Reserve to fake reality for Fannie Mae and Freddie Mac, and it's not up to the American people to fake reality for the Federal Reserve. The only acceptable solution would have been to pull the whole government shebang out of the housing business. What would be left after the inevitable collapse might not be pretty, but it would be *honest*.
Jesus is coming -- look busy!
You should keep an eye on the three credit reporting agencies. Verizon may also sell your debt to third parties who might continue to come after you.
When it comes to unfair debt collection, the collection agency is in dodgy water. It seems to me that collection agents are going to be rather afraid on some level of a big possible whammy. --That is, they are just a thin legal line away from being an extortion racket. --A company falsely decides that you owe money, sends it into the collection system, and then professional collectors are allowed to harass you until you pony up. On some level, these guys know the accusations which can be leveled at them, and while they may never have heard them, they probably spend a portion of their time having one-sided arguments in the car or shower with invisible accusers. Gotta love those self-imposed fears; they always take on the meanest possible face when in the imagination. So that stuff is always gnawing on at least some employees at the collection office.
It's like dealing with government employees during a tax audit, (been there). I noticed in the couple of civil servants I dealt with during the process that they were clearly harboring a gnawing guilt, that they were permanently stressed over the fact that at any moment the subject might leap up and scold them for being over-paid system leaches. I suspect they spend a good deal of internal energy dealing with this guilt or trying to shore up rational defenses against the idea. I remember the agents I was dealing with offering up excuses and defenses for things I'd never said or even implied, and one lady who reacted very strongly when she was questioning my write-off of a bicycle, (which she at first Ah-Hahed! as though it were evidence of my trying to get away with something). When I explained that I didn't drive a car and that a bicycle was my primary means of transport partly because that's all I could afford, she physically recoiled and started blustering apologies and rationalizations not just for her assumption, but for her own use of a car. It was as though I had laid out a big speech about how she was using tax-payer dollars on a selfish means of transport when she could easily take the bus to work, a job where she shook down people who worked harder than her at more worthwhile tasks and why was she being such a coward in life rather than go out there into the world and get a real job like everybody else? --All of that unspoken accusation was suddenly on the table, and it had all come from her! Her baggage. Cool. --Without even trying or ever really pushing the advantage, I discovered all kinds of buttons you could press in these people to torment them if I had chosen to do so. And that was just during a routine audit.
So unless you're dealing with a sociopath, then the same general rules will apply to collection agents; a low level fear that what they are doing is questionable or that it might in fact be illegal if the paperwork isn't clean; those fears are automatically going to reside in their minds, or at least their bosses' minds. Just bringing a little pressure to bear, not even directly, but simply through asking questions which are normal enough on the surface, but which will cause the secondary cascade of unspoken thoughts to lead to thoughts tied to fear buttons, (like that thing with the bicycle), will make their day that much more difficult and your case that much less appealing. And unlike with government employees, these guys aren't guaranteed to have a job the next month if they don't bring home lots of bacon for the company, so anything which makes your case file seem like one to shuffle to the bottom of the heap is good.
But mainly the big thing is the amount they hope to collect from you. It has to be at least equal the cost of employing the agent during the time required to process your case. The longer you drag it out, the less and less you are worth. If you kick up a fuss and insist that the company which sold them your 'debt' was n
So the banks lost more money. The bank can still get by. The stupid couple? They're in a much worse situation.
Cynical Idealist
While we are talking about economy, can anyone please direct me to an online version of the MONIAC? It would really help me to understand basic economics if I could play around with the variables and have immediate visibility of the effects. Thanks!
I like my coffee the way I like my women - roasted and ground up into little tiny pieces.
on a FRM that gamble is against a paper loss, you mortgage payment is $1200/month regardless of what the market value of your home is, so nothing the market can do will affect your home. a 5-1 binds your wallet to the potential paper loss in 5 years
Snowden and Manning are heroes.
$3500/month mortgage isn't outrageous for someone making $5000/month. 2 car payments if they were nice cars could be as much as $750/month totaling $4250, throw in 1200 every 6 months for car insurance (assuming both are high risk drivers) brings fixed costs up to 4450/month and $550 for groceries and bullshit every month. $550 is plenty of groceries and bullshit.
they didn't wipe out their savings because they got screwed by their mortgage, they wiped out their savings because they were "house poor" and too fucking stupid to cut their spending to reflect that.
granted the fixed costs were rather high compared to what would be a good level for growing savings for an emergency fund, but it was by no means unsustainable on it's own.
Snowden and Manning are heroes.
I'm trying to figure out how one might say "location, location, location" when talking about a dress...
The CB App. What's your 20?
A lot of the people who are in trouble got five year fixed mortgages with low- or no down payment. After five years, the interest rate becomes adjustable, based on prevailing rates.
So five years ago, the people selling the loans were saying two things:
So what happened is that someone was paying off interest only--say $2000 per month--and if their rate remained the same, interest plus capital would have been, say, $2500 (I'm sure that's not accurate, but for instance...). Instead, the interest shoots up three points, which means, on a $400,000 loan, an additional $1200 per month, for a total of $3700 instead of $2500.
Additionally, their home value maybe went down instead of up, so no mortgage company will refinance them with a fixed rate, so they don't know they're going to be stuck for another increase in six months.
And the rest, they say, is history.
The CB App. What's your 20?
"A couple who made a combined net income of $5000/month were given a loan, by credible, big name lender, where their monthly payment was going to be $3500."
That's because what they put on their 1033 loan app wasn't $5,000/mo because you can't exceed a 50% DTI... well sometimes 60% but that's very rare. They probably went stated income, claimed they were making 10+ grand a month and got the house.
The LO probably coached them on this, so the LO is just as guilty if not more so for not walking away from the deal. LO could have gotten bank statements and paycheck stubs if requested. The LO knew about the car payments and credit cards because of course it showed up on their credit report.
Put the LO in jail
my karma will be here long after I'm gone
The exact way that it is a free ride is that they agreed to pay X dollars to live in a house, then they didn't pay X dollars and continued living in the house.
Which is exactly WRONG.
First, they didn't "continue living". After payments stop, eviction soon follows. The only times this doesn't happen is when the bank sold a worthless home to begin with (i.e. FRAUD).
What happened to the US markets is that evil greedy banks thought they could make a ton of money by screwing poor people with deceptive loan practices. They would create zero-down loans (one attractive feature) with lots of hidden fees and hidden variable interest rates that they would skyrocket after a few months. They would often outright lie to buyers (saying it was fixed when it wasn't) because the sales agents knew that they could lie all they wanted and get away with it becasue all that "counts" is the text in the byzantine paperwork. And they knew their poor clients couldn't afford lawyers to go over the dense legalese in the contracts.
Shockingly, under these conditions many people defaulted. They defaulted because the banks sold them the house under FRAUDULENT terms.
The whole theory that you should charge poor people higher rates (the people least able to handle higher rates) because they represent a greater risk to the lender is bullshit. Microloan and other loan companies have proven beyond a shadow of a doubt that poor people are NOT a serious credit risk and are MUCH MORE LIKELY to pay back loans than large corporations with AAA credit ratings as long as the terms of the loan are favorable to poor people (low interest, variable payments, etc).
As far as I'm concerned the banks should GIVE the houses to the people they defrauded and the government should nationalize the banks without compensating leinholders or shareholders that KNOWINGLY (unlike the poor homeowners) bought into this ponzi scheme.
The exact way that it is a free ride is that they agreed to pay X dollars to live in a house, then they didn't pay X dollars and continued living in the house.
Which is exactly WRONG.
First, they didn't "continue living". After payments stop, eviction soon follows. The only times this doesn't happen is when the bank sold a worthless home to begin with (i.e. FRAUD).
What happened to the US markets is that evil greedy banks thought they could make a ton of money by screwing poor people with deceptive loan practices. They would create zero-down loans (one attractive feature) with lots of hidden fees and hidden variable interest rates that they would skyrocket after a few months. They would often outright lie to buyers (saying it was fixed when it wasn't) because the sales agents knew that they could lie all they wanted and get away with it becasue all that "counts" is the text in the byzantine paperwork. And they knew their poor clients couldn't afford lawyers to go over the dense legalese in the contracts.
Shockingly, under these conditions many people defaulted. They defaulted because the banks sold them the house under FRAUDULENT terms.
The whole theory that you should charge poor people higher rates (the people least able to handle higher rates) because they represent a greater risk to the lender is bullshit. Microloan and other loan companies have proven beyond a shadow of a doubt that poor people are NOT a serious credit risk and are MUCH MORE LIKELY to pay back loans than large corporations with AAA credit ratings as long as the terms of the loan are favorable to poor people (low interest, variable payments, etc).
As far as I'm concerned the banks should GIVE the houses to the people they defrauded and the government should nationalize the banks without compensating leinholders or shareholders that KNOWINGLY (unlike the poor homeowners) bought into this ponzi scheme.
Or a refinance. Which is the easier way to go. Just don't max out your capital buying the house, so you have room if rates went up for the refinance. Quite truthfully, a 5-1 is far less risky than the stock market, which is real gambling. At least you end up with an actual piece of property with real estate. If you can't take even this mild a risk, I suggest hiding your money in your matress. Its about the only lower risk option out there.
I still have more fans than freaks. WTF is wrong with you people?
Unless you plan to sell in under 5 years, in which case 56. Or plan to take out another ARM loan in 5 years, in which case you're only gambling that the rate growth is under 1%.
The problem isn't ARM loans- its ARM loans with very short periods (1 year or less) and people who were tricked into/didn't understand what they were getting.
I still have more fans than freaks. WTF is wrong with you people?
You're right. The free ride started when they *stopped* trying to maintain it, but kept living there.
Yes there were consequences, but that's an indirect cost. It's like... if I get $100k for FREE for college, then I spend 10 years dicking around and end up not graduating... I definitely got a free ride, but at the same time I wasted 10 years not building a career, not building credit, employers will wonder what the hell I did, etc. Consequences don't invalidate the $100k I got for free.
Free ride? Imagine if you were part of one of the companies; you probably got laid off, lost all your stock options (but they're worthless anyways), and now have no one in your industry highering. Sure other banks bought these mortgage companies, but they're floundering too like Bank of America, Fannie May, or Freddie Mac. Remember the government which is bailing them out also encouraged them to take on riskier loans, which birthed this problem we are in, and the loose government regulations on home loans at the time. There is nothing free here, just different levels of damage.
I agree. I'm not suggesting the couple should be publicly lashed or go to jail or anything. It's not a major sin to get a free ride, so what's so awful about saying it?
If I tricked a credit card company into loaning me $400,000, then I went around the world a few times, bought presents for everyone I know, and generally wasted it in one year, then declare bankruptcy, what would you say? It's exactly the same -- I face all these "consequences" like bad credit. In the meantime I had a good time. Did I get a free ride or not? The only difference is I didn't blow it all on a house.
When I was 11/12 back around 1977 or so. We lived in Utah were the only thing on TV was the nightly news. So As a 11 year old. I watched a lot of news.
Why is your first paragraph so strangely written, while the rest of your post is normal?
Turn it on its head.
The people didn't borrow the money, the bank invested in them. The investment turned bad, tough luck.
The same as if I bought shares in a company and it tanked.
(for the purpose of this analogy divedends = loan repayments)
as stated, many of these people wanted to live on more money than they earned. the lenders totally encouraged that, i know, we refied twice during that time period. we didn't get beat up, but it wasn't for lack of trying. refi people are salesmen, plain and simple.
You may think people are being callous ass holes, but frankly, your own carelessness got you into the situation.
Rule #1 of Contracts: NEVER sign a contract without having your own lawyer review it for legal or financial pitfalls.
Ok, great, so everyone who signs a mortgage is supposed to be able to afford their own personal lawyer to check over it? Please... That would only be practical if lawyers were much cheaper. I bet 99% of people don't get a lawyer involved when they sign a mortgage.
Plus, did you know there are actually 2 contracts generally involved in buying a house? You make one contract (with the seller) just to become the sole person with the option of buying the house for a certain period of time, then you make another contract (with the mortgage lender) to get your loan so you can pay the seller. You want to have a lawyer look over every offer you make on every house? That's what it would take to do what you say.
Rule #2 of Contracts: Never commit to terms or financial obligations before the final signing of a contract.
Um, not gonna work either... As I said, there are 2 contracts involved. To make the first, you have to put money into escrow. If you later back out before closing the deal on the house, the seller gets to keep that escrowed money except for very specific situations outlined in the first contract. So, you already have to make a certain commitment before you ever get to the point where you're ready to actually get your mortgage and buy the house.
Rule #3 of Contracts: NEVER sign a contract that is ammended from previously agreed terms without having your own lawyer review.
So if you make an offer on a house, and they make a counter-offer, now you've got to get your lawyer to look at it again? Have you ever purchased a house? You can easily go back and forth negotiating several times before settling on something -- or deciding it won't work and moving on to the next house, where the process begins again. Do you have any idea how many hours you're going to have to pay that lawyer for?
Rule #4 of Contracts: NEVER sign a contract that you are unsure/uneasy about for what ever reason! It is easier to not enter a bad contract than it is to exit one.
While I agree with you here, it is still true that backing out at that point will cause you to lose that escrowed money, so it is not quite as easy as you make it sound.
While may think others are callous, you were foolish and failed to do your own due dilligence. The bank may have been greedy/preditory/whatever but YOU ultimately signed a bad contract without complete understanding of it. That fault is YOURS not the banks.
I agree with your conclusion, but your rules are crap when it comes to the process of buying a house.
See what you did? This was about cellphone contracts and early termination fees. Instead, you have people talking about dresses and mortgages.
We do have to bail them out, but the terms of that bailout should be as economically realistic as possible. That is, make it a loan at higher than prime interest with a full audit as a condition of the loan. Criminal prosecutions for any fraud discovered by the audit, etc.
As the loans are paid back, take the money back out of circulation.
The crisis was also caused in part by banks calling good loans because the equity in the homes dropped - so people who were living within their means and keeping up with repayments ended up in the same position as those who weren't (i.e. sans house, in debt), and therefore out of the housing market. Thus housing demand is reduced, therefore lowering house value more, so more loans get called, and so on. Just like when margin calls on shares snowball when they flood the market and prices drop quickly. I find it infuriating that banks are even allowed to call loans when the repayments are being made, but apparently it's necessary.
It's not a bug, it's a lepidopter!
But an even more fun game for those of us who sold in 06 or early 07 and are now looking at buying on the cheap.
Ugh. A lot less fun for those of us who had, say, a pregnant wife in early '06 and dire need of a bigger place. Still kills me, I saw the bubble coming a mile away and couldn't wait it out. Bah.
Society benefits more by having bad lenders fail then rewarding bad lenders with government bailouts. So while you think you are saving some people from loosing their jobs with a government bailout, you are costing more job loss down the road and enslaving the middle class to cover the bill. The best solution is smaller government and letting the banks fail. Now yes it will suck in the short term and it will be painful, but it will benefit the country and people the most in the long term. I am disgusted at our government, it is the reason we are failing now, it is the reason we don't have enough oil production at home, it's promise to bail our banks that caused banks to get reckless that is requiring many of them be bailed out, our government is allowing illegal aliens to run over the border and then collect government benefits and even sue citizens in civil court (WTF?), it is government that created stupid programs to lend capital and give away limited education spots to people because of their color or minority status, when what government should have done is said "Lend to the best people, accept the best people, don't discriminate on our behalf" then we would be much better off. Government is expensive and it hurts more then it helps. Our government is not providing a common defense on our borders, hell we put a few rent-a-cops instead of troops there. Government is not providing a more perfect union, and we do not have liberty and to prove it see if a cop lets you drive without your seatbelt. So what is government's solution to the problems it created? Well it would like to nationalize healthcare (which is Unconstitutional without amendment) and it wants to regulate commodities (a sure fire way to push markets and traders to London). Government is evil and liberals worship it. It just blows me away the retarded nature of the common person. We may be created equal, but we do not end up that way, people need to wake up. Liberals get angry when their hard working neighbor makes more money or gets a raise, they want to cut the rich down. I feel good when people get a raise or more money, I think cool that is a system I can understand, work hard, get more stuff. But the government taxing my income makes me think about two other things 1). Socialist are selfish thieves and 2). I should just stop working, because I would rather be poor then work and have a government take my income.
Respect the Constitution
That is a terrible gamble, you are so close the bottom (rates are only better is between 6%-0%), but worse 6.1%+, so that is a stupid risk accepting ARM, you have to gamble you will be able to flip or sell in few years, which is not only a gamble the market will not go up, but that the market will go up enough to cover mortgage payments you put into house, but also realtor costs etc., so you have to sell for significant more to break even and you are gambling that mortgage and credit lending terms will not tighten because if that happens you or a perspective buyer could be unable to refinance the home away from the ARM. You are just making so many terrible choices with a ARM it is like deciding not to hit on a 12. Even if the dealer busts, you are an idiot. ARMs were stupid then and are even more so now, back at the time most ARMs we given out, you could get fixed interest only loans with good credit and payment history and that would have been better idea then ARM if you want to keep monthly costs down until you sell/refi. Also let me say if you are just able to make ARM payment, but unable to make it with rate increase or if you cannot refinance should lenders marginally raise lending standards, then you deserve to get your pocket/credit hit.
Respect the Constitution
I thought traffic tickets helped the council earn money by legalising something that should be illegal in first place.
Plus it helps the nerds earn money during the time they would have otherwise spent watching X-files or Xena.
"Doing what i can, with what i have." ~ Burt Gummer
Since this whole topic is a consecutive weak analogy followed by another I'm going to tack on my own! :D
Let's pretend you've been sued by the RIAA. Now you're an intelligent fellow. Well regarded by your peers. You didn't actually do it mind you... but as we know once you've been charged you're effectively guilty. What do you do?
Being an intelligent fellow probably the FIRST thing you will do is hire a top notch copyright attorney. You explain to your attorney that you're innocent and that you have this huge trust fund that your great grandfather--inventor of the catalytic convertor-- left you that you are willing to dump into your defense to set a precedent. This attorney has won hundreds of copyright cases in the past. Everyone you've talked to says he is top notch.
He decides he's going to base the defense on a little known but solid precedent case involving a case between a hog farm and the local citizens in a small town in lousiana which as he explained it to you is strangely enough really the same sort over reaching prosecutorial misconduct which you yourself are facing. You read the wikipedia page and sure enough it is about prosecutorial misconduct.
The attorney asks you to approve of the plan and you do so. After all, you hired him on the recomendation of all your friends.
Turns out his whole case was as rickety as a toothpick chickencoop. You're out a million dollars and you're being fined $500,000. And it's your own dumb fault for not understanding the fine details of the lawsuit such that you could forsee that it didn't stand a chance?
The moral of my flimsy and useless analagotory story is that it's hard to fault people for being stupid when the they're given expert advice they're unable to validify for themselves.
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A better and shorter analogy would be you take your car to the mechanic. You're completely clueless as to the workings of the engine. You understand thermodynamics and compression and the basic ideas behind how the thing works but only the most general of what each part does. The car is sputtering. The mechanic takes one look and says "oohhhhh ... this " (he yanks out a piece " is supposed to be silver... you need to replace it and everything will be fine."
Now it's a scam of course but how do you know? You asked for expert advice... you received some. At some point you will get into a point in your life where you simply have to sign the line without understanding every ramification.
I don't understand the inner workings of my 401k. Reading the 25 page fine details aren't going to help me either. Asking my financial advisor what my options are, telling him what I want to do and asking what he thinks the most appropriate course of action is the best I can hope to attain. And who knows maybe all of my money will end up in an account in Portugal.
Actually, the entity that made the loan most certainly did get the full payment from the brokerage firm they sold the mortgage to.
To me, this is where the real fraud happened. The entity originating the loan could not have cared less whether the loan could have been paid back or not - they only cared whether the first few months were going to be paid because they were only on the hook for the loan until they sold it to the broker, at which point it totally ceased to be their problem. It was pretty much impossible for them to lose money on the deal, so it was imperative simply to get the loans in place regardless of the long-term ability to pay. The brokers and other people up the food chain bought into the myth that says "property values never decrease", and are paying for that unreasonable belief now.
Please stand clear of the doors, por favor mantenganse alejado de las puertas
I find it infuriating that banks are even allowed to call loans when the repayments are being made, but apparently it's necessary.
I don't get it myself - if you have a debtor that is consistently making payments with no indication that he's going to default, why blow up the only chance you'll get to recover all the money owed on the property? Foreclosure is an option at any time, so the bank always has the ability to take possession and resell the property if the debtor bails, so why the hell would you want to grab the property and try to sell it when the prices are *still* going down? Yeah, you might get $250K for a house that will bottom out at $210K, but wouldn't it still be better to get the $400K that was owed on it? Even if the property gets refinanced, it seems that the bank would be money ahead if they just let sleeping dogs lie.
Please stand clear of the doors, por favor mantenganse alejado de las puertas
Now you can say that the lending institution shouldn't have given it to them, but they should have also known that they couldn't afford it.
Why should they care whether the buyer could afford it or not? They knew that loan was going to get bundled and sold to a brokerage or other entity well before the monthly payments were due to change, and the original lender would be paid in full when those loans changed hands. There was practically no risk at all to the loan issuer.
Please stand clear of the doors, por favor mantenganse alejado de las puertas
And when mortgage brokers are allowed to negotiate loans which they know will be defaulted, and then turn around and use those loans for triple-A securities, there's a serious problem.
And this is where the prisons need to be doing a booming business. It's fraud, plain and simple.
Please stand clear of the doors, por favor mantenganse alejado de las puertas
and $550 for groceries and bullshit every month.
Unless you want to do stuff like put gas in your two cars along with occasional maintenance, use some electricity now and then, have a telephone or Internet connection, occasionally flush a toilet or take a shower, go out to dinner/movie every now and again, do some unexpected home repairs, etc.
IMO, a $3500 mortgage on a $5000 income is ridiculously irresponsible.
Please stand clear of the doors, por favor mantenganse alejado de las puertas
Who's the aggrieved party here? The one who stupidly made the loan, or the one who took advantage of the stupidity (ruining her credit in the process)? Personally, I think the blame falls on the lender, for making such a stupid decision.
Well, I have seen plenty of people behaving like sheep when it comes to credit.
"Well, I can't grasp all this but if they want to lend me the money I guess it is probably OK."
This might be true if you only ever undertake one major mortgage or the like, but when people habitually borrow money because they are allowed I cannot consider them in the least blameless.
Now where did I put that credit card? Daddy needs a new pair of shoes...
Maybe if it was a very small dress...
Hey guys -- Where does all the money go we pay for PMI? Isn't the purpose of that to pick up the mortgage for those who default? And the so-called bail-out money....who gets that? The banks or the people who defaulted on their loans? If it is the banks, then they got the homes AND the money. If it is the homeowner, then it is an income redistribution, rewarding irresponsible borrowing.
Synchronizing stop lights across the US = one less nuclear power plant
Not quite. Your residence is not an investment, your residence is a place to store you stuff (and yourself). If you plan on living in the same area for 5 years you are probably better off buying than renting, with the caveat that you must buy within your means. If your property value goes down but you aren't trying to sell your house, you don't care. You still get to live in it. It is still just as valuable to you this year as it was last year. -- JimFive
Please stop using the word theory when you mean hypothesis.
Well buying at all is a stupid move if you forsee a collapse in property prices in your area. Rent not own people!
But let's not pretend that we all saw this coming. The drop in housing prices we're seeing now really is unprecedented-at least in recent history.
A) They may have gotten some small number of weeks in the home without paying, but it's not that long, and anticipation of things like that is part of interest rates, PMI, etc. It's built into the loan system because some borrowers are risky.
B) There are direct consequences to not paying your loans, you don't just get to hang out and do your thing.
I realize that to responsible people like you and me, we can feel bitter because everyone pays a little more when some people are irresponsible. Risky mortgages aside, we face the same thing in other areas of life, including education, taxes, crime, etc. But saying that someone gets a free ride will only continue to encourage some people to think the risk is worth it to them because they won't have consequences, which is absolutely false. Please stop saying that it's a free ride. Yes the lenders get screwed to some degree, but under normal circumstances, they make up for it in their other loans, it's all part of balancing the risk. In our current mortgage crisis, the ones balancing the risk apparently didn't do a good job, or didn't look far enough ahead to see what was going on, and now we are all paying for it to some degree. Part of it is the lenders' fault, part of it is the borrowers' fault, but don't think that the borrowers are getting off scott-free, with any less consequence than anyone else. They are the ones who lose their homes, savings, have to give up the luxuries they got used to, most likely lose their marriages and tear up their families, and go back to living in really crappy housing because they won't be able to get another loan for years, and most landlords don't want to rent to them either.
I think it's important that people who would consider mortgages and other loans they can't afford know that they will face very real and very dire consequences for their irresponsibility.
Sprint announced back in November 7th of 2007 that they would be prorating their ETF but have yet to do anything with their fees. Sprint's News Release
This might be true if you only ever undertake one major mortgage or the like, but when people habitually borrow money because they are allowed I cannot consider them in the least blameless.
They're not taking advantage of anyone except themselves (they're eventually going to suffer) and the lenders. It's one thing if some jerk borrows money from a private individual (like a relative) and doesn't pay it back. But it's an entirely different thing if some loser borrows money from a large lending institution, which is supposed to be run by experts, and doesn't pay it back, and worse if it's not just one person, but millions. If these lenders are stupid enough to lend money to people who aren't able to pay it back, that's the lenders' problem, and no one else's. It's not the government's job to keep businesses in business, or to protect them from bad judgment, poor decisions, and mismanagement. If a business is vital to the economy, it should either be strictly regulated (like power companies) or even nationalized, but otherwise, it should be left to sink or swim on its own.
Can I play? ?? The next two responders assume a particular "scenario"...which is the people living in the house...but there are scenarios that make up the *lion's* share of the housing market that don't fit this scenario...
How about they didn't live in the house, but it was one of 10 they bought in a rising market that they
hoped they could turn around and resell...
During much of the recent housing surge, this was one of the bigger inflationary pressures -- real estate speculators... There are tons of 'get rich' courses on the market that talk about profiting in the real estate market without using any of your own money -- or for little or no money down. While some of these are legit, like buying a house as a longer term investment -- and eventually expecting rental income will exceed monthly payments -- a time-tested way to *slowly* build wealth -- many were get-rich quick schemes -- where they talked about buying up distressed, auction or "deal" properties, throw in a clean-up and coat of paint (if even that), and turn around for a quick sale. So...Gee... my "S-Corp" bought 20 houses, turned them for 10% profit, each, but the last few didn't sell before the market went down -- so I walk away." Now who is out? The single-person corp, walks away with their "salary" (paid from the corp), but walks away from the house that's below worth. Their S-corp takes a hit. Their S-corp dissolves and reforms under a new name....no credit downside, and I have the 20 houses I sold for a 500,000 profit each....I walk away with $10 mill.
The media is focusing on the many "little guys" that got caught in the "wake" of the high-fliers -- high fliers who were assisted by policies sent down from top -- (Bush lately, maybe going back to Reagan).
I don't know how many heard about this -- but real estate appraisers were pushed by government and industry to inflate the values of appraisals. There were complaints from a few "ethical" weenies, who didn't want to get with the program and toe the inflation line, and got kicked to the curb, but most cooperated due to their own pockets getting increased $$.
In order to mirror the excess spending of the Federal gov. and their deficit spending -- the gov needed a way to prop up people's "standard of living" -- even though they have been over-extending since Reagan "corrected" inflation problems with deficit spending (going from a debt of millions to TRILLIONS) to stop inflation and create economic happiness (at the expense of future generations). So appraisers were "encouraged" to inflate properties beyond their worth to provide "pseudo-backing" for higher and higher "secured loans" so Americans could continue their luxury lifestyle...
So who walks away with the money? The investors who had beaucoup bucks to begin with. Those left holding the bag -- were the ones holding houses when the real-values of the houses began to "hit". That and those left dealing with the 9+Trillion -- 9+ Tera-$ (T$) debt -- that has to come out of taxes (if we take the money from those who benefited most from the Reagan+Bush, tax-cut to Rich while increasing spending ("Voodoo Economics"), OR by massive deflation of the currency.
The Fed is, of course, owned by the "rich" (the Fed isn't part of the US Government) -- he's appointed by those who own the richest banks. So who does he help? He coughs up 22Billion in "aid" to Bear Stearns, to bail out Bear Stearns investors -- about 40-45% of the debt held by JP Morgan/Chase Manhattan Bank. Most of that wasn't a loan -- it didn't come from the Gov -- it came from the "US-Dollar-Common-STock" -- fo
Nobody was hiding the fact that a lot of these mortgage-backed bonds were backed by subprime mortgages.
But the state attorney general of New York disagrees.
In the letter, the New York Attorney General's office alleged that the nation's largest bank "has repeatedly and persistently committed fraud by material misrepresentations and omissions" in the underwriting, distribution and sale of auction rate securities, touting them as safe, cash-equivalent investments.
http://money.cnn.com/2008/08/01/news/companies/citigroup_cuomo/index.htm?cnn=yes
It doesn't hurt to be nice.
I covered this in my original post. Note that I said that "financial institutions" that put their money into these debts might or might now know that they were as risky as they truly were.
From the article you cite:
Although they tended to buy AAA-rated paper, that designation is not as reliable as it used to be, as the credit crunch has shown.
Maybe Freddie Mac knew the stuff they were buying shouldn't be AAA debt. Probably not. So they kept buying more and more loans because it made them the profit their required to earn, and everything they bought, repackaged, and sold, gained the backing of the government. From your article:
The illusion that investors saw through was the official line that debt issued by Fannie and Freddie was not backed by the government. No one believed this. Investors felt that the government would not let Fannie and Freddie fail; they have just been proved right.
It doesn't hurt to be nice.
Auction rate securities are not the same thing as mortgage-backed securities, or mortgage-backed CDOs in particular. The latter were not in general promoted as cash substitutes.
Are you adequate?