Mortgage Parables

Case #1

Mr. A buys a house for $400,000 when home prices are rising. Two years later the house is worth $500,000. Mr. A, feeling flush, buys a Mercedes, financing it through the dealer. This purchase is a stretch, but Mr. A thinks that if he has trouble making the payments, he can always refinance his house to pay off the car. As it turns out, sometime later Mr. A can't make the car payments but his house is again worth $400,000 and refinancing won't help. Is it fair to repossess his car?

Case #2

Mr. A buys a house for $400,000. Two years later he refinances it for $500,000, spending the $100,000 on a Mercedes. Now his house is only worth $400,000 and Mr. A can't pay his mortgage. Is it fair to foreclose on his house?

Case #3

Mr. A buys a house for $400,000 and two years later sells it to Mr. B for $500,000, financing it himself. Now the house is only worth $400,000 and Mr. B can't make the payments to Mr. A. Mr. A was going to buy a Mercedes but instead reduces the house price and the loan to $400,000. Is this fair?

Case #4

Same as Case #3 except that Mr. A had already bought the Mercedes and would have to sell it to reduce the house price. Is this fair?

Case #5

Mr. A buys a house for $400,000 and two years later sells it to Mr. B for $500,000, who finances it through a bank. Now the house is only worth $400,000 and Mr. B can't make the mortgage payments. The bank threatens to foreclose. Mr. B writes to Mr. A: "You're the only one who made money on this. If you give back your $100,000 profit, you'll still be even and I won't lose my house." Is this fair?

Case #6

Same as Case #5. Mr. A replies: "Sorry, but I already used the money to buy a Mercedes." Is this fair?