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Wednesday, April 16, 2008

Here’s to the Responsible Ones

My buddy Mark called me a sucker the other day, and I couldn’t help but agree with him. See, girl and I would like to move into a new house, but the sad truth is that our current home would be near impossible to sell without losing money--significant amounts of money. But we aren’t going to abandon our house and we aren’t looking to the government to make our mortgage payments for us. We aren’t whining about not being able to make payments because she bought a place that wasn’t beyond her means, that didn’t have painful terms, and that didn’t require a lender to get playful in qualifying her.

All of which sounds pretty good (specifically, pretty responsible) to me. If the government goes on to bailout the idiots who signed loans for houses that they couldn’t afford and the companies who wrote those loans without much regard to buyers’ abilities to repay the loans, that’s a massive, tax-payer funded gift to the people who weren’t being responsible with their decisions. Which makes me--doing my best to do things the right way, yet potentially paying the way for those who weren’t so scrupulous--a sucker.

The markets don’t always choose right, I know, but tell me this doesn’t warm the cockles of your little capitalist heart.

Shares of Wells Fargo & Co. rallied Wednesday, gaining as first-quarter profit fell a smaller-than-forecast 11% amid signs that the lender employed relatively strict lending standards.

See, Wells Fargo apparently had responsible lending standards that minimized risk in the face of market downturns.

Indeed, Chief Executive John Stumpf said on a Wednesday morning conference call that the first quarter of 2008 “was one of the best we’ve ever had for our mortgage business”—a marked contrast to other banks beating a hasty retreat out of the mortgage market after a year full of billion-dollar write-downs.

Here’s to Wells Fargo for exhibiting fiscal responsibility and reaping the rewards.

Read the story.

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the lender employed relatively strict lending standards.

Hey, Wells Fargo originated our mortgage when we bought Castle McGehee back in 1999. So, you know, “relatively” strict has to be about right.

on Apr 17 2008 @ 04:38 AM

My wife and I have had this conversation at great length but unfortunately I have far more to say than I have time to say it. We agree with you 100%. We intentionally live in a house that is smaller and less expensive than we could afford but we want to make sure that we have enough additional income available to weather any potential storms on the horizon. If Big Brother bails these idiots out then it will reward their irresponsibility and punish us for ours.

This isn’t an issue where some large, greedy corporation too advantage of “the little guy.” This is the result of greedy individuals who want to be given the things that their parents had to work for decades to earn.

on Apr 17 2008 @ 05:19 AM

I’m not a Wells Fargo fan myself.  I don’t know about the loans they originate, but I’ve seen them pick up some pretty crappy loans so I’m not convinced.  I also don’t think much of their competence.

on Apr 17 2008 @ 06:49 AM

I’m with Robin, in that I have no love affair with WF, but.....Dude, I have a Capitalist Heart.  That warmed it.  WHY ARE YOU MAKING ME STOP BEING A LEFTIST MOONBAT?

on Apr 17 2008 @ 07:49 AM

”...our current home would be near impossible to sell without losing money--significant amounts of money.”

Econ 101:  You’ve already lost the money; you just haven’t realized the loss.  The money you spent when you bought the house is a sunk cost and should be irrelevant to your current decisions.  What should be considered is whether you can improve your current situation, not whether you could be in a better situation if you had made a different choice a few years ago.

Now, if you can’t get out of your house with enough money for a down on a better house, you might not be able to improve your situation by moving, but that’s a very different calculation.

(And yes, I pay too much attention to sunk costs too.  There’s a reason they are extensively studied, and it’s not because everybody treats them rationally.  8-)

on Apr 17 2008 @ 08:37 AM

I’ve heard that before but I don’t entirely agree with it. Here’s why:

1- By staying in our current place, we have both shelter and a house payment. It doesn’t cost me any more to stay here.

2- If we sold at a loss--a real loss--we would end up owing money on our previous mortgage while still having to find new shelter and a new payment. It would cost me more to leave than it does to stay--so while it might be fair to say that the money is already gone, not as much has gone as there would be if we actually sold the place.

3- But I’m not sure that it’s safe to say that I’ve already lost the money because of two things: first, the actual value of the house isn’t a constant and what we’ve lost or gained isn’t real until we sell. If the value of the house rises, then we could still end up breaking even or possibly making money. It’s like short selling the stock market over a much longer period of time--our money isn’t fully tied up in the purchase (that is, the entire cost of the purchase isn’t yet sunk into the item) and the deal isn’t really finalized until we’ve either sold or completely paid the thing off.

Our real sunk costs are the down payment and all of the mortgage payments made up until now--the rest won’t be sunk into the item for quite some time (barring a miraculous change in the housing market or in our own financial situation). The truth is that we haven’t lost any money yet, but if we sold at a loss we would lose for real with no hope of closing the gap.

I guess what I’m trying to say is that I don’t consider it a sunk cost until we actually own the place--and for the foreseeable future the bank owes it. We know what we’ve agreed to pay for it, but we haven’t yet done so. What we do know is that getting out of our arrangement to purchase would cost us more in real terms than it does to stay in the arrangement especially when you factor in all the other costs associated with the sale.

I might be missing something--like the real meaning of “sunk” costs--and I’ve been known to behave irrationally over far less than the cost of a home, but that’s the way I see our housing situation right now.

on Apr 17 2008 @ 10:26 AM

If they offer bailouts you should take one.  You’ll never get an opportunity to get your tax dollars back from the government.

on Apr 17 2008 @ 11:29 AM

Oh, also, to refute Doug S, if you stay put, assuming you were smart enough to get a fixed mortgage, the coming wave of inflation will forgive your debt anyways, and raise the price of your house.  So waiting it out makes sense to me.

on Apr 17 2008 @ 11:31 AM

Dave,

Doug is correct that the cost of the house is, technically speaking, a sunk cost. That is only one small part of the equation. His example is like evaluating the US economy entirely on the value of the Dow. The Dow is just an indicator, it’s not the entire picture. Similarly, the sunk cost is only one factor of many. The theory that Doug is espousing is that since the cost of the house has already been paid therefore it is irrelevant to the decision. The problem with Doug’s position is that it is incorrect. You have not paid for the house yet, the bank has. For the bank the cost of your house is a sunk cost. Since the bank is out the money no matter what happens the cost of the house is irrelevant to their decision. This is why the bank would rather renegotiate a new loan than foreclose. The bank can get more money with refinancing than they can by foreclosing so they chose the option that gives them the biggest net gain - the original cost of the house is irrelevant to them. For you the cost of the house is not a sunk cost because you haven’t paid it. Your sunk cost, as you correctly identify, is what you have paid on the home (principle and interest).

-Jerry

on Apr 17 2008 @ 12:14 PM

Your sunk costs are the actual checks you’ve written plus the amount you would owe if you walked away.  (I don’t know whether Colorado has no-recourse mortgages.) In return, you own a house that you will owe payments on for n years and you don’t have any transaction costs to pay, as you would if you were to buy a new house.

Your current position may be worse than if you were not to have bought the house when you did but saved what money you could have and bought in to the market now.  None of that is especially interesting, though, because nothing you do now can change those decisions.  The money you spent on transaction costs, interest, and accrued debt is sunk, and if the total value of the asset remaining is lower than the costs you’ve incurred, you’ve already lost the money even if you don’t cash out (realize the losses).

The right way to look at it is to look at your current situation and decide what, given your current assets and liabilities, your best future course of action should be.  If you could improve your situation by cashing out right now and renting for a few years, that would probably be smart.  I’m not convinced that you could do that, though it largely depends on details that are none of my business.

on Apr 17 2008 @ 12:20 PM

I’ll buy your house, but only on the condition that you and the girl stay on as my resident housekeeper and domestic slaves. I’m a lenient master. There will be few beatings.

on Apr 17 2008 @ 04:39 PM

Since the bank is out the money no matter what happens the cost of the house is irrelevant to their decision. This is why the bank would rather renegotiate a new loan than foreclose. The bank can get more money with refinancing than they can by foreclosing so they chose the option that gives them the biggest net gain - the original cost of the house is irrelevant to them.

Not exactly true.  The mortgage holder’s incentives are complicated by mortgage insurance - the most evil invention on earth.  Because the mortgage holder has forced you to pay for mortgage insurance that benefits them by paying the installments if you default, they are not incentivized to to negotiate as much as you might think.  To renegotiate, you have to default first, hitting your own credit, to the point that the mortgage insurer shows up.

As for the “sunk costs” analysis, it is the correct way to evaluate an investment.  However, a house is both an investment and a place of residence so the analysis is not as pure as Doug outlines.

I don’t know why you would like a different home, but I have to tell you that there is a huge amount of comfort in being in a home that you can afford through tough times.  When we were younger, my wife and I bought a house that we got talked into - too pricey, took too much of our income and left us with little margin.  And sure enough there were times when we felt that squeeze and when we got out of that house, we lost a hefty chunk of change ourselves.  Today, we are in a house that we bought at literally less than half of what we could “afford” ( according to realtors, mortgage brokers and other scum of the planet ...).

We were able to make the mortgage and our expenses on just one salary at times - and it gave us some extraordinary options in recent years.

on Apr 17 2008 @ 06:23 PM

What DougS said.

on Apr 17 2008 @ 06:36 PM

Slightly related:

And not that I usually support overly religious types, but I really enjoy Dave Ramsey’s financial advice show Podcast.  It boggles my mind to hear people who make $40K a year total calling in to say they paid off $20K in debt in a year or so.  That’s focus and dedication.  I can’t say we’re that good, but we’re definitely more focused on getting out of debt (since Jan 1, we’ve paid off the minivan loan and two credit cards… one card, one car loan, and the mortgage to go!).

I also enjoyed the documentary “Maxed Out” in which he makes some appearances.

OK, plug is over.

on Apr 17 2008 @ 06:41 PM

This atheist also strongly endorses Dave Ramsey’s financial radio show.  It is unfortunate that he is not on the air any longer in the Denver area.  I actually pointed a couple of clients to his materials - although it is a rare one that is interested in that kind of personal responsibility, the two that I pointed that direction because they seemed suited for his message have turned their financial lives around.

on Apr 17 2008 @ 07:09 PM
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