Who's at fault here... The bank or the individual?

[handicapme]

At Delmonico's kitchen (meh... btw) for restaurant week last night after work with a group of friends. We're hanging out at the bar waiting to be seated and this hypothetical came up... you can easily google stories like this and will find 100000000s

Person X makes 90k a yr, has a stable job but salary growth will be flattish year on year (let's say they're a teacher or cop... this becomes relevant at the end). X wants to buy a house (assume he has the down payment for 20% regardless of the price). X can afford a 350k house and live comfortable, however he sees a 500k house that he really likes but unless he makes drastic life style changes can't reasonably afford this at all.

Person X goes to (insert your local bank) and applies for a mortgage on that 500k house and when the bank runs X's credit and such everything comes back good to go. According to their metrics he can afford the house. X decides to buy the house and closes on it. He doesn't switch up his life style and starts to get behind on the mortgage payments and finally after 2 yrs the property is being foreclosed on. Who is at fault?

Is it person X knowing that he would never be able to afford his life style as well as this house, but still going with it because the bank said yes?

Or

Is it the banks fault for knowing that this would be the peak amount he could ever afford at that salary, but allowing it anyways because he could technically afford it.

Does person X have a right to call the bank a scumbag or horrible because they're foreclosing?

The majority of my very close friends are teachers/cops/family business people(aka lucky sperm club), 1 other finance guy. The vast majority of them who were out last night said it was the banks fault, I completely disagreed and said it was X being a fucking dumbass and shouldn't have ever purchased a property to begin with since he wasn't intelligent enough to realize this would be the outcome if he didn't make changes.

My reasoning:

The bank makes a business decision based on facts. They see this guy can afford the property, they don't care if the guy lives beyond his means. They aren't allowed to discriminate against anyone, so all they ever see are the fucking numbers and honestly people... that's all that matters. He's putting 20% down making it an 80%LTV loan on someone who has the ability to pay that loan based on what he brings in. person X on the other hand knows for a fact he's not willing to change his life style to afford this house, but still wants it so doesn't think of the consequences of his purchase. Person X deserves everything that's coming his way, because he also had 1 final out prior to getting underwater and that would have been to sell the house and giving up a portion of your 20% down to save yourself.

What are your thoughts?

BTW will bump my house/condo thread I made a few months ago soon... the trip report will be amazing (or atleast I hope so). FYI to everyone, unless the broker or agent is a family member/friend that you are using, all of them are scumbags and will try and fuck you over. Do NOT trust any of them unless you know them. Legit what happened was both hurtful but the revenge was sweet at the end and honestly worked out in my favor.

[NaturalBornHustler]

I think that if your buyer could come up with 100k liquid cash to buy this property his chances of defaulting and losing said 100k are slim and fucking none.

This scenario is not plausible for any number of reasons that I don't feel like going into.

[handicapme]

I think that if your buyer could come up with 100k liquid cash to buy this property his chances of defaulting and losing said 100k are slim and fucking none.

This scenario is not plausible for any number of reasons that I don't feel like going into.

Not knocking you, but you are 100% wrong. This happened to my friend's cousin neighbor and I was actually looking at buying the house in foreclosure. You can google TONS of stories like this from the 07 and on era. Also note, that once you get behind, say 3 payments, your penalty + increased principle will expand exponentially and you can EASILY eat that 100k when they foreclose and sell your property at under what you paid and you get 0.

It kinda goes back to what I said in your "large sum of money thread" and the advice I shared...you really don't know what you're talking about when it comes to finance it seems like and should get your father to speak to someone who does. Quick little example below on how a mortgage would work in this scenario:

400k mortgage, 4%APR, mortgage payment is say $1900:

month 1:
Principle- 400k
pay- $1900
IR- $1333
Principle payment- $567

month 2:
Principle- $399,433
pay- $0
IR-$1331
Principle payment-$0
Penalty (5% on payment)- $95

month 3:
Principle- $399,433 + $1331 + $95= $400,859
pay- $0
IR- $1336
Principle payment- $0
Penalty- $95

Principle on month 4: $400,859 + $1336 + $95= $402290

You can run the rest in excel and see how long it takes.

[handicapme]

For those curious about how fast not paying your mortgage would eat into you:

http://www.ultimatecalculators.com/m...alculator.html

use 5% and make sure to adjust your "unique payment" on the mortgage table to be -5% of your monthly payment x 12 (penalty). Also note that will the calculator is able to compound the interest correctly, it can not compound the penalty, which causes your number to be slightly less deflated.

This is why most banks will start foreclosure proceedings in the 9-12 month range...

[gimmick]

No idea how it could ever be banks fault. In what world does the individual have so little responsibility about his own finances that he would be allowed to freeroll on shit like this? Like why is this even a question?

[Daly]

It's so 2008 in here.

[Hockey Guy]

I think NBH's point is that if he can come up with 100K down how could you possibly default in 2 years?

I mean he "saved" 100K for the down payment, I'm assuming it wasn't over 120 years, so how was he living beyond his means all of a sudden? I understand your scenario but it's really not plausible tbh. Also, what's the difference in payments on a 400K mortgage & 280K which is what the scenario is all about?

[handicapme]

I think NBH's point is that if he can come up with 100K down how could you possibly default in 2 years?

I mean he "saved" 100K for the down payment, I'm assuming it wasn't over 120 years, so how was he living beyond his means all of a sudden? I understand your scenario but it's really not plausible tbh. Also, what's the difference in payments on a 400K mortgage & 280K which is what the scenario is all about?

This happened hundreds of times during the crisis and still happens today.

Depends on the IR for the mortgage... could be $600 could be more.

[simpdog]

Down payment.

Divorce. Woman takes more than half.

Default

[NaturalBornHustler]

I think NBH's point is that if he can come up with 100K down how could you possibly default in 2 years?

I mean he "saved" 100K for the down payment, I'm assuming it wasn't over 120 years, so how was he living beyond his means all of a sudden? I understand your scenario but it's really not plausible tbh. Also, what's the difference in payments on a 400K mortgage & 280K which is what the scenario is all about?

The difference is about $500.

[Corrigan]

I think NBH's point is that if he can come up with 100K down how could you possibly default in 2 years?

I mean he "saved" 100K for the down payment, I'm assuming it wasn't over 120 years, so how was he living beyond his means all of a sudden? I understand your scenario but it's really not plausible tbh. Also, what's the difference in payments on a 400K mortgage & 280K which is what the scenario is all about?

This happened hundreds of times during the crisis and still happens today.
.

During the crisis you didn't need 20% down, aka the $100k in question. Now you do.

[LarryLaffer]

Seems a bit predatory to me.

here's why i think so:

The bank is giving this guy a loan, when they know the chance of default is high (if he could afford the 350k comfortably, but not the 500k).

they did this shit ALL the time pre-2008 when they were giving mortgage loans to just about anyone with a pulse, and then turned around and sold that mortgage to god knows how many other people.

butttttttttttttttt

it's also on the guy to not live above his means. But the bank enabled him to do so by giving said "predatory" loan.

this is the kinda shit that made 2008 happen.

and since there wasn't an option to lay the blame equally (even though it isn't) on both parties, I went with DelMonicos kitchen. because it is MEH. we have one downtown. it's gross.

[LarryLaffer]

No idea how it could ever be banks fault. In what world does the individual have so little responsibility about his own finances that he would be allowed to freeroll on shit like this? Like why is this even a question?

You mean the banks are free-rolling by handing out loans that people can't repay, solely because they have a good credit score. Shit, i could be broke as a joke, but as long as I make my payments on time to my CC, i'd still have a good credit score. No?

[handicapme]

This happened hundreds of times during the crisis and still happens today.
.

During the crisis you didn't need 20% down, aka the $100k in question. Now you do.

false, I can easily get a mortgage for 5% down... although PMI would be ridiculous. 5% is the lowest most banks will do now a days, back then you could do 0 down interest only type shit.

[handicapme]

No idea how it could ever be banks fault. In what world does the individual have so little responsibility about his own finances that he would be allowed to freeroll on shit like this? Like why is this even a question?

You mean the banks are free-rolling by handing out loans that people can't repay, solely because they have a good credit score. Shit, i could be broke as a joke, but as long as I make my payments on time to my CC, i'd still have a good credit score. No?

You do realize that more often then not the holders of those loans will take impairment... You can afford to pay for the loan, you just choose not to. It's that simple.

[LarryLaffer]

You mean the banks are free-rolling by handing out loans that people can't repay, solely because they have a good credit score. Shit, i could be broke as a joke, but as long as I make my payments on time to my CC, i'd still have a good credit score. No?

You do realize that more often then not the holders of those loans will take impairment... You can afford to pay for the loan, you just choose not to. It's that simple.

more often than not means that sometimes, the banks are at fault. that's why I said it went both ways.

also, I get that you're in finance, and that no answer I give will suffice because I really don't know much about it. But you asked a question, and I tried to answer it the best i could, with the knowledge i have.

i tried. and i think i only half failed there.

[Belly Buster]

You have to take responsibility for your own actions. Society is in a mess because everyone wants to look to someone else to blame for their mistakes. If you can't afford a house don't buy it. Buy a cheaper one.

Banks are pretty scummy but if you don't make your mortgage repayments then they have no choice but to foreclose. They would much prefer not to though.

[OSA]

The same scenario has to do with cars as well.

If you don't give loans to borderline people(many are minorities) you are racist and not allowing them to pursue American Dream of home ownership.

If you do give loans and they default its the Banks whom offered predatory lending practices and took advantage.

Lose/Lose situation it seems like it.

[Dan Druff]

Not the bank's fault at all.

However, the bank should not be bailed out when they make too many bad loans, property values fall, and they lose money.

And yeah, it's 2008 in here all over again, as Daly said.

When you make an investment or a financial agreement, you should be bound to the terms of it, regardless of whether it succeeds or fails. The only exception is when scamming/bad faith is involved.

[sonatine]

Wells Fargo has a 3.5% down mortgage but yeah PMI etc.