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Wow, those are some terrible incentives. I've never had a loan, so maybe I misunderstand the experience. But I'd hate to owe money to somebody that is hoping I

Wow, those are some terrible incentives. I've never had a loan, so maybe I misunderstand the experience. But I'd hate to owe money to somebody that is hoping I fail badly enough that they take my stuff and while keeping my money.

larrydag 5y ago
It's in the best interest of a bank not to repossess because there are operational expenses and the bank will get more return if the loan goes to completion.
- eof 5y ago
  unless the collateral appreciates past some threshold of expectation
- vkou 5y ago
  Aren't you on the hook for those operational expenses? The bank only loses if you default early in your loan, and the price of the collateral collapses.
  - ls612 5y ago
    The way this is set up if the first happens the second was likely the cause.
nostrademons 5y ago
Usually the bank has no mechanism to alter whether you make payments or not. Keep making payments and they can't repossess the car. It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for. Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble. Once housing prices started going up consistently enough, it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process.
- mdavis6890 5y ago
  "...it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process." Not the way it works, for two main reasons. First, people who owe less than the house is worth are generally not foreclosed on - in the worst case they just sell and keep whatever equity they get away with. Second, legally the bank can't keep any surplus. If they foreclose on your house, they have to sell it at auction and keep only up to the amount you owed. They would have to give you any excess. At least for houses, banks aren't allowed to profit from foreclosures.
  - eru 5y ago
    > At least for houses, banks aren't allowed to profit from foreclosures. I assume the details depend on whatever the fine print on your mortgage says?
  - slt2021 5y ago
    the surplus comes from late payment fees, penalties, foreclosure fees, etc. On paper there is no surplus, in reality all equity is wiped out
- eru 5y ago
  > It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for. Seems a bit roundabout. If they want to bet on appreciating assets, they can just buy those assets directly? > Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble. There was no housing bubble. Only a big housing 'burst'. See eg https://www.idiosyncraticwhisk.com/p/a-slide-deck-on-bubble-and-crisis.html https://www.idiosyncraticwhisk.com/p/a-slide-deck-on-bubble-... (and if you are really interested, I can give you some better material.)
MeinBlutIstBlau 5y ago
They're really only keeping the interest and principle up to that point. Long story short, pay your bill.
azth 5y ago
Just usury at work. Is anyone surprised?

larrydag 5y ago

It's in the best interest of a bank not to repossess because there are operational expenses and the bank will get more return if the loan goes to completion.

eof 5y ago
unless the collateral appreciates past some threshold of expectation
vkou 5y ago
Aren't you on the hook for those operational expenses? The bank only loses if you default early in your loan, and the price of the collateral collapses.
- ls612 5y ago
  The way this is set up if the first happens the second was likely the cause.

nostrademons 5y ago

Usually the bank has no mechanism to alter whether you make payments or not. Keep making payments and they can't repossess the car. It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for. Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble. Once housing prices started going up consistently enough, it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process.

mdavis6890 5y ago
"...it becomes profitable to write loans to borrowers that you know are going to default, because you can take the house and enjoy the asset appreciation while getting a nice stream of cash flows in the process." Not the way it works, for two main reasons. First, people who owe less than the house is worth are generally not foreclosed on - in the worst case they just sell and keep whatever equity they get away with. Second, legally the bank can't keep any surplus. If they foreclose on your house, they have to sell it at auction and keep only up to the amount you owed. They would have to give you any excess. At least for houses, banks aren't allowed to profit from foreclosures.
- eru 5y ago
  > At least for houses, banks aren't allowed to profit from foreclosures. I assume the details depend on whatever the fine print on your mortgage says?
- slt2021 5y ago
  the surplus comes from late payment fees, penalties, foreclosure fees, etc. On paper there is no surplus, in reality all equity is wiped out
eru 5y ago
> It'll be interesting to see what this does to the credit quality of future borrowers, which is the only leverage the bank has. Secured loans on appreciating assets mean that at some point, the bank has an incentive to write loans that they know are not going to be repaid, because they buy only part of the asset, receive a stream of cash payments for it, and then get the full asset anyway when the borrower defaults. It's like a call option that you get paid for instead of paying for. Seems a bit roundabout. If they want to bet on appreciating assets, they can just buy those assets directly? > Come to think of it, I wonder if this is why we got NINJA loans with the 05-07 housing bubble. There was no housing bubble. Only a big housing 'burst'. See eg https://www.idiosyncraticwhisk.com/p/a-slide-deck-on-bubble-and-crisis.html https://www.idiosyncraticwhisk.com/p/a-slide-deck-on-bubble-... (and if you are really interested, I can give you some better material.)

MeinBlutIstBlau 5y ago

They're really only keeping the interest and principle up to that point. Long story short, pay your bill.

azth 5y ago

Just usury at work. Is anyone surprised?