Wednesday, December 09, 2009

FHA: Helping the affluent buy housing

The Federal Housing Administration exists in part to make housing more affordable for low-income families. However, with the advent of the financial crisis the FHA has experienced mission creep. The first of its new missions is to help prop up housing prices, thus preventing housing from becoming affordable. The second of its new missions is to help high-income Americans buy homes. Since the FHA is currently on financially shaky ground, these new missions could end up coming at taxpayer expense.

The Washington Post explains the latter of these new missions:
CREATED DURING the depths of the Great Depression, the Federal Housing Administration has a long history of supporting homeownership in the United States. In recent decades, its mission has been to enable lower-income Americans to tap otherwise inaccessible mortgage credit. ...

What must be debated, and indeed challenged, is the stepped-up use of the FHA to boost demand for, and hence the price of, houses in the current crisis. This is true not only because of the fiscal implications; the FHA's reserves are currently below the statutory minimum, raising the specter of an eventual taxpayer rescue. It is true also because of the regressive distributional implications; the FHA is increasingly helping people who are decidedly not poor to buy houses that are anything but modest. ...

Even some fairly fancy condo buildings are now trumpeting FHA financing. As the New York Times reported recently, among those buying property with little or no money down, thanks to FHA, are investors and well-off people who could have come up with more equity. ...Whatever the additional risk may be, the federal government is assuming it in a way that facilitates the upward transfer of wealth.

When adopted last year, the higher FHA loan limits were billed as a temporary fillip to the housing market. But temporary subsidies have a way of enduring. ... This might help build a floor under the still-shaky housing market, as intended. But it would also complete the mission creep of the agency from one dedicated to upward mobility to one that also produces middle- and upper-middle-class enrichment.
The Wall Street Journal explains that Congressmen of both parties want these new missions to become permanent:
Lawmakers from high-cost housing districts, for example, want to ensure that the FHA doesn’t disappear from their neighborhoods. They’ve introduced a bill that would make permanent the higher loan limits that Congress temporarily expanded last year. ... [Barney] Frank said he thinks limits should be increased to around $800,000. ... Other lawmakers, meanwhile, want to bring back programs that allowed borrowers to receive FHA-backed loans without making down payments.
A traditional rule of thumb is that the price of the house you buy should be roughly three times your annual income. (Many of the homeowners who ended up underwater recently ignored this rule of thumb, looking only at their monthly payments instead.) Using this 3X annual income ratio, an $800,000 FHA loan would allow people earning up to $266,667 per year to qualify. Using a far more generous 4X annual income ratio, people earning up to $200,000 would qualify. These income levels are way above the U.S. median. Even in America's three wealthiest counties as of 2008—Fairfax County, Virginia, Loudoun County, Virginia, and Howard County, Maryland—these income levels are at least double the median household income.

So here's a question for readers: Since the FHA is knowingly offering huge mortgages with very little down payment (3.5%), and knows that such behavior led to massive defaults when banks recently did the same thing, is it morally ethically acceptable for a borrower to walk away from an FHA loan—leaving taxpayers with the bill—if he ends up underwater on his home?

84 comments:

  1. Given that previous threads have questioned by whose moral standard "morality" is judged, I'd say the morality question falls to that of the borrowers own conscience.

    The rest of us all all just relegated to hapless enablers, given that we elected (and continue to elect) the people who have formulated the rules.

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  2. "James said...

    America's three wealthiest counties as of 2008—Fairfax County, Virginia, Loudoun County, Virginia, and Howard County"

    Wow - that article you linked is interesting. Of the 3,140 counties in the US, 10 of the top 20 are in the DC area:

    #1 Fairfax
    #2 Loudoun
    #3 Howard
    #8 Montgomery
    #9 Arlington
    #11 Stafford
    #12 Calvert
    #18 Prince William
    #19 Alexandria City
    #20 Charles

    No wonder housing is so expensive around here!

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  3. I disagree that morality is subjective. An entirely subjective morality is devoid of meaningful content.

    However, I agree that the rest of are hapless enablers who have elected and continue to elect these twits to public office.

    Remember the show Green Acres, where Eddie Albert played the New York lawyer who moved to the hick town? He was the only rational, reasonable person there -- everyone else was an ignorant, irrational moron.

    Every other November, I feel just like Eddie Albert.

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  4. "I disagree that morality is subjective. An entirely subjective morality is devoid of meaningful content."

    In some countries, its completely moral for gays to marry. In another its completely moral to stone to death someone gay. Morals are subjective. The only people who dont think so are the ones wanting to dictate their morals on others.

    I hope everyone walks away from their FHA loan. Let the tax payers pay for the home, they voted for this...let em get what they want!

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  5. Subsidized housing is good for all income levels. Whether your rich or poor, you need a roof over your head. Let the children's children worry about the bill later. We only have one life so why not live it now?

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  6. "Subsidized housing is good for all income levels. Whether your rich or poor, you need a roof over your head. Let the children's children worry about the bill later. We only have one life so why not live it now?"

    Is that a joke?

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  7. As has been said in other threads, morality does not enter into the equation. These are contractual obligations in which both parties understand the risks. We can't apply arbitrary moral standards to one side of a contract (the consumer) while the other side (whatever corporate or government agency) is exempt. No one expects citibank to consider the morality of foreclosing on a mortgage or making a loan. And to make the game fair, the consumer has to use the same decision making standards. Its the invisible hand of the market acting rationally. I'm surprised that a libertarian such as yourself would continue making these types of morality arguments.

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  8. "In some countries, its completely moral for gays to marry. In another its completely moral to stone to death someone gay. Morals are subjective."
    ---------------------------------
    Just because something is an accepted practice does not mean that it is moral. Likewise, even if something is widely considered moral or immoral, that does not make it so; perhaps the majority is mistaken.

    Under your standard, anon, morality seems to be "do what you feel."

    At any rate, there is nothing inconsistant about judging someone elses's actions as immoral yet declining to compel them to live up to your standards. For example, I think that it is wrong for anyone to go through life perpetually drunk or stoned, yet I would not presume to chasitze those people or attempt to force sobriety on them.

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  9. Kahner, why is it odd that a libertarian would appeal to morality? Isn't the non-aggression principle, the very foundation of libertarianism, at is heart a moral principle?

    I do agree with you, however, that morality does not enter into this particular equation -- walking away is just fulfilling the terms of the contract. However, trashing the house and then walking away is an entirely different matter . . .

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  10. kahner said...
    As has been said in other threads, morality does not enter into the equation. These are contractual obligations in which both parties understand the risks.

    Exactly. And, don't the recipients of the mortgage investor's money have to buy mortgage insurance?

    If not, then shame on the investors for not requiring it.

    If so, what a perverse nation we are when we require the borrower to insure the investor -- and then still blame the borrower.

    If there was anything immoral it was

    1. Investors putting their money into something they didn't understand (derivatives).
    2. Insurers (Credit Default Swap and PMI underwriters) not recognizing the risk *when it was their jobs to do so.
    3. Ratings agencies who overlooked the house of cards which derivatives were based upon.
    4. The top 5 banks going back to record levels of unregulated derivatives just months after going into receivership to society.

    If someone comes to me and says they're willing to give me money regardless of my ability to pay, based upon their own assumptions about the value of the item (which the money will be used to purchase), and provides a way "out" where I can let them have the property... I've done nothing worse than the person did who had the responsibility to protect his own money.

    The notion that borrowers had a greater responsibility to protect the interests of investors is a form of Moral Hazard. Investors will continue to be careless with their money if their patted on the head and told "poor thing, those nasty borrowers stole from you."

    Mark

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  11. I'm really enjoying the abdication of responsibility from borrowers by you guys. That's cute.

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  12. Tangelo, I guess it is dependent on definitions of morality. I don't consider the non-aggression principle something with origins in morality. Instead I think of it as a pragmatic idea espoused by those who desire independence and freedom of action. Similarly I don't think the idea of contractual obligation is inherently moral, merely practical to allow efficient economic transactions. Perhaps ethics is a better term for non-aggression principal from my perspective, at least as is applies to the economic and financial situations. Others may view it differently, of course. I was also basing my comment on the perception which I have that most libertarians see the business world as a place where morality is not applicable, only contactual obligation and business ethicacs. Thus all players act rationally and efficiently resulting in optimal resource allocation and useful productivity.

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  13. By the way, I said "libertarians see the business world as a place where morality is not applicable, only contactual obligation and business ethicacs. Thus all players act rationally and efficiently resulting in optimal resource allocation and useful productivity."

    But don't take that to mean I agree with the libertarian viewpoint on this. Thats just what I think they think.

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  14. kevin, there is no "abdication or responsibility" here. The borrower is responsible to pay his loan or to move out of the house. if the bank made a loan for more than the house was worth to a person who stops paying then they lose money. thats called risk. its why borrowers pay prime+risk premium. this is how loans and investing work. pardon me if i don't shed a tear for the poor bank who just didn't know that their stupid loans might default.

    perhaps when everything was going smoothly in 2007 the banks should have made the "moral" decision that their borrowers had made a bad decision in overpaying for the house and dropped the principal amount? Or the seller could have come back and said "my bad, i totally overcharged you so let me pay you 200k. that's the moral thing to do". I don't remember anyone here advocating that. But it sure would have be moral and responsible of them.

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  15. "Subsidized housing is good for all income levels. Whether your rich or poor, you need a roof over your head. Let the children's children worry about the bill later. We only have one life so why not live it now?"

    "Is that a joke?"

    No it's not. Wake up and realize this is the world we live in. You want me, a guy who bags 180k a year to save a put down 15-20% down payment? Are you kidding me? I got better things to do with my money. Did you see that new Porsche? It will be mine in a few months. Here's something eles to chew on. I am heading to Paris in a few weeks for New Years. So eat your heart out. But don't think I am not entitled to my fair share!!!! And don't ruin my good time!!!!

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  16. Anonymous said...
    "In some countries, its completely moral for gays to marry."

    If I had it to do over again, I would have used the word "ethical" in the original post, rather than "moral". "Ethical" is what I really meant. I think ethics is less subjective than morality.

    The dictionary definitions are equivalent, but the two words are generally used differently. Cheating is considered an ethical issue, while homosexuality is considered a moral issue. And yes, they do teach business ethics in some business schools.

    I don't feel there should be different standards of conduct for businesses than for individuals. Businesses do have an ethical responsibility to uphold their end of agreements and to deal with their customers honestly.

    For the record, as a classical liberal I wholeheartedly support gay marriage.

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  17. kahner said...
    "The borrower is responsible to pay his loan or to move out of the house."

    Wrong. The borrower is responsible to repay his loan, period. Foreclosure is simply a way for the lender to recoup much, but not all (due to substantial foreclosure costs), of the loan if the borrower shirks his responsibility.

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  18. Mark F said...
    "If someone comes to me and says they're willing to give me money regardless of my ability to pay, based upon their own assumptions about the value of the item (which the money will be used to purchase), and provides a way 'out' where I can let them have the property... I've done nothing worse than the person did who had the responsibility to protect his own money."

    Let's clear up two things. First, in most cases mortgage lenders don't go to home buyers, home buyers go to mortgage lenders asking to borrow money. Second, the collateral doesn't reduce the responsibility of the borrower to repay the loan. It just reduces the risk to the lender. Lenders offer lower interest rates for collateralized loans than for uncollateralized loans in exchange for the lower risk. The responsibility to pay remains constant.


    "The notion that borrowers had a greater responsibility to protect the interests of investors is a form of Moral Hazard."

    Nobody is arguing that borrowers had a greater responsibility to protect the interests of the lenders. We are arguing that borrowers have a responsibility to uphold their end of the agreement. Lenders still have full responsibility to protect themselves from loss. That's why I have argued that lenders, including the FHA, should require 20% down payments on all mortgage loans. There is no moral hazard here.

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  19. Does an employer have a responsibility to retain an employee who loyally performs his job duties but the financial bottom line mandates that the employee be terminated? Do the New York Yankees have a responsibility to retain Hideki Matsui because he was MVP of the 2009 World Series? James, you are treating a mortgage contract as if it was an agreement with God. Are you against bankruptcy? The mortgage agreement itself is drafted by the lender and not the borrower. It is a one-sided agreement where the borrower has no leverage to negotiate the terms. At least let him walk if he wants to walk.

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  20. Anonymous said...
    "Does an employer have a responsibility to retain an employee who loyally performs his job duties but the financial bottom line mandates that the employee be terminated?"

    In most cases, an employer has no more responsibility to retain an employee than an employee has a responsibility to keep working for the employer when he'd rather work somewhere else. If however, the employee and employer sign a contract that says otherwise, both parties have a responsibility to uphold their end of the contract.


    Anonymous said...
    "Are you against bankruptcy?"

    Are you dense? In my original post on this topic, I clearly wrote:

    "I can completely understand not paying back a loan if you lose your job and are unable to pay back the loan. I can also understand if you get sick and end up with huge medical bills that make it impossible to pay back a loan. I can even understand not paying back a loan if the bank deceived you regarding what your payments would be.

    However, if you decide not to pay back the loan simply because you overpaid for your house, then I consider that the moral equivalent of theft."


    Some readers are confused between being unable to pay and being unwilling to pay. Bankruptcy is only for people who are unable to pay. If you've got millions of dollars in net worth and you just don't want to pay your car loan, you can't get out of it by declaring bankruptcy.

    Also, again, if the bank deceived you about the payments, I have no problem with walking away. Why be honest and trustworthy if the other party isn't. However, that is not the issue at hand. The issue at hand is if you chose to pay a ridiculous price for a house during the bubble, and it fell in value, whether it is ethical for you to force the loss onto the lender.

    Some of you say it's ethical to stiff the lender because the lender should have been more careful about protecting itself. I agree that the lender should have been more careful, but that doesn't mean it's ethical to stiff them. If someone leaves their keys in their car, they should have been more careful. That doesn't mean it's ethical to steal the car. (The ethical person would inform the owner that they left their keys in the car.) This whole "they should have been more careful" argument that Mark F and others are using is also often used by thieves to justify their theft.

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  21. James, you live in a fairy tale world. There are breaches of contracts everyday. Why not comment about those unethical villians. You see James, we live in a world that is based on contract "law" not contract ethics. And there is redress avaliable through the courts and not ethics panels. You weep for the lenders and curse the borrowers. You have that luxury. You have the luxury of not knowing what I know, that borrowers defaulting while tragic, probably is financially wise moves for the welfare of those people. And that such behavior while grotesque and incomprehensible to you, saves financial lives. I have neither the time nor the inclination to explain myself to a boy who lives in a fairy tale bubble posting blogs, then personally attacks my intellect. I would perfer that you said "thank you" and went on your merry way. Otherwise, I suggest you go to your local courthouse and listen to the stories of these people. Your statement that "[b]ankruptcy is only for people who are unable to pay" is incorrect. Bankruptcy is for people who completely wrong. Many coporations are able to pay their debts but use Chapter 11 as a financial life-line. There's a difference...James! Bankruptcy is for a fresh start. We do not stone people here in the U.S. if they walk away from their mortgages.

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  22. "Just because something is an accepted practice does not mean that it is moral. Likewise, even if something is widely considered moral or immoral, that does not make it so; perhaps the majority is mistaken.

    Under your standard, anon, morality seems to be 'do what you feel.'"

    do what you feel is not my standard, dont build strawmen because you dont have a counterpoint.

    If morals arent what is socially excepted, I guess they are subjective to the person right? Oh sh*t! THATS WHAT I SAID PREVIOUSLY!!!

    You may think its perfectly fine, moral and just to support capital punishment. I think its immoral to murder for any reason at all, even murdering a murderer. Its subjective. see?

    I dont think its immoral for someone to stop paying their mortgage and have their house reposessed as stated in the contract. The banks wrote the stipulations, the borrower is in line with the contract. There is that subjective aspect again.

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  23. James, why don't the lenders just insert a provision in the mortgage agreement that does not allow the borrower to walk away from the house? Do you the answer to that question? Because there is an answer. Let's see how bright you are.

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  24. The story of the American dream. See link.

    http://online.wsj.com/article/SB126040517376983621.html?mod=WSJ_hpp_MIDDLETopStories

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  25. So here's a question for readers: Since the FHA is knowingly offering huge mortgages with very little down payment (3.5%), and knows that such behavior led to massive defaults when banks recently did the same thing, is it morally ethically acceptable for a borrower to walk away from an FHA loan—leaving taxpayers with the bill—if he ends up underwater on his home?

    No it is not...because ultimately the borrower HAS THE OPTION to get a 30 year fixed loan. No one puts a gun to the borrower's head and say he or she MUST take out an FHA loan.

    The greed of the borrower leads him/her to take out a loan that is most desirable to him/her. IF the borrower states he/she didn't know...9/10 times they are lying. That 1/10 are simply too stupid and should be buying anyway.

    This is getting silly. This whole housing deal issue is turning into the idiots who blame McDonald's for getting fat. Yes..McDonalds makes utter crap food...but ultimately Ronald isn't shoveling that shit down anyone's throat.

    I think we should pass laws that state that unless you have unequivocal proof that you are in a bind, walking away from a house you can still pay for or you willing knew you couldn't afford is grounds for blocking you from buying another house for the rest of your life. Period.

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  26. Excerpt from WSJ article

    Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.

    Moral or not, the individuals who want to shed their mortgage debts are quickly transforming the Palmdale real-estate market.

    Adam Robbins, who runs the local Realty World franchise and manages about 80 properties, says about 90% of his prospective tenants are people in Ms. Richey's situation. So he and other rental managers are loosening rules to accept people who have been through foreclosures.

    "Those are all good people," he says. "They just got bad loans or bought at the wrong time."

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  27. James, the whole rationale behind the loan is that the bank should be ambivalent between the repayment with the correctly set rate of interest and the house which is used as collateral. It is the bank who is "shirking" their duty doing due diligence in underwriting the loan. Yes, there may be no explicit language stating default as an option, but as in all contracts there is a choice between performance and non-performance. In the event of non-performance, the lender forecloses on its security interest and sells the house. As any rational actor, the borrower has to examine the pros and cons of performance and non-performance, and make the decision that is most congruent with his interests. I really don't know why you think there's some special ethical duty attached to a mortgage as opposed to any other type of secured loan. Nor why you think this ethical standard exists only on the consumer side.

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  28. "I think we should pass laws that state that unless you have unequivocal proof that you are in a bind, walking away from a house you can still pay for or you willing knew you couldn't afford is grounds for blocking you from buying another house for the rest of your life. Period."

    Change "the rest of your life" to "ten years" and I agree completely.

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  29. KAHNER:

    Because this is an industry where one's actions affects someone else's choices.

    Why should I...as a responsible homeowner or wood-be owner...have to pay the penalty of extremely difficult financing, extremely tight lending, highly scrutinized background checking and credit checking, etc....because some dumb irresponsible idiot decides to buy a home he/she cannot afford and makes lenders weary of lending because they feel the next guy will do the same?

    If the borrower's actions are isolated and do no harm to anyone but him/herself, then let them knock themselves out and kill themselves for all I care.

    But the reality of it is that my actions affect you and visa versa.

    A home purchase should be viewed with higher moral standards because it's a HOME, not some jerkoff flipper's wet dream to get ric quick.

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  30. Hey Noz, no one is forcing you to be a homeowner! It's plain and simple. You don't like the rules to the game, don't play. Lemmy

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  31. It is very simple! If you have the money to buy. Do it. If you can't afford, then keep renting. Renting is so much cheaper now in DC area.

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  32. Noz, very nice post. full of lots of derogatory references to "idiots" and jerkoff's and righteous anger.
    "A home purchase should be viewed with higher moral standards because it's a HOME". Um, yeah, thats a cogent argument. Its also very easy to expand to all kinds of useful areas. "X is this way because its X." "I should get paid a million dollars a year because I'm ME". Well, case closed.
    Unfortunately the only actual argument you make for why mortgages are special is because it would be helpful for you and people defaulting makes you mad. Contract law, and our economic framework in general, aren't here to make Noz happy. Every action in our economy affects everyone else. That has no bearing on whether we should make some special (and unwritten) moral exception to the way we handle mortgage law. As anon said, these are the rules of the game. if you don't like, tough.

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  33. What about people who are not paying there car loans. How come Noz and others are outraged over those individuals? How about small business loans where it is easier to close shop than pay the loan. Do they piss you off too?

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  34. Anonymous said...

    Hey Noz, no one is forcing you to be a homeowner! It's plain and simple. You don't like the rules to the game, don't play. Lemmy

    December 10, 2009 3:12 PM


    Sounds like you're fishing for a bailout....next time read your contract before you sign...

    Funny you mention playing the game by the rules...if that's so, then don't buy something you can't afford and then come back crying like a little school girl.

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  35. Unfortunately the only actual argument you make for why mortgages are special is because it would be helpful for you and people defaulting makes you mad. Contract law, and our economic framework in general, aren't here to make Noz happy. Every action in our economy affects everyone else. That has no bearing on whether we should make some special (and unwritten) moral exception to the way we handle mortgage law. As anon said, these are the rules of the game. if you don't like, tough.

    Ahh...I see...so the economy is better off due to the housing crash and what not...it's a healthy thing you say?

    OK....you make a lot of sense.

    It's no wonder we have this problem...some of you apparently have absolutely no concept of cause and effect...even when it's happening right in front of your faces. What you don't understand is people who are renting or not even in the housing market are being affected by this mess...and they didn't play your game. So why should they pay the price for it?

    The problem is people like you who believe in your line of thought really aren't paying a big enough price for your indiscretions. Once some of you really pay the full price for what you lack in responsible behavior, you won't dare do it again.

    A lot of you want a free ride under the guise of "we played the game..." whatever the hell that means. I guess I should be an irresponsible douche as well and "play the game."

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  36. Anonymous said...

    What about people who are not paying there car loans. How come Noz and others are outraged over those individuals? How about small business loans where it is easier to close shop than pay the loan. Do they piss you off too?

    December 10, 2009 4:18 PM


    Yeah what about them? You think they should be given a free ride too? Why the hell do you think bankruptcy laws were modified some years ago? Because idiots were raking up their debts and not paying them back and filing chapter 11s.

    I guess us "responsible" folk should have also "played the game."

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  37. Noz, you really don't seem to understand the position of those who disagree with you. Of course people who borrowed to buy way overpriced houses fueled a bubble. Of course that was part of the cause of the problems we have now. Lots of things people do cause lots of problems. That has absolutely no bearing on whether or not its immoral to stop paying a mortgage and let the lender foreclose. I hate to repeat myself, since this has been explained many times above by myself and others. But that is how the system is designed. Banks lend money with mortgages at a risk premium on an asset that is supposed to be worth what they lend. It is their duty to make sure that the assets they lend against + the income from interest in aggregate are sufficient to cover their losses in case of defaults. This is WHY they lend at Prime+risk premium. Its the essence of the business model. If they fail to do this correctly it is not the borrower's responsibility, it is the lender's. Certainly, both sides of the transaction (stupid lending and borrowing) along with many other parties were responsible for creating a huge real estate bubble. And that bubble burst and caused lots of problems. But that HAS NOTHING TO DO with the supposed "morality" of default. Its a contract just like any other, and in our economic/legal system all parties are according to their best interest in business dealings. You "responsible" folk thought it would be a bad idea to buy so you didn't. Should I blame you for refusing to sustain the real estate market and bursting the bubble. Of course not, because you acted in what you percieved to be your best interest. Or what of the guy who bought and sold in time to make a bundle? Is he immoral? Is the bank immoral because they made a stupid loan? Once you start throwing arbitrary moral standards around in the world of business transactions the whole system blows up because no one is acting "morally". We act according to a set of very detailed and strict rules developed over centuries. Everyone has access to those rules and should understand them when they do business. You clearly do not.

    By the way, your posts are so full of childish lines like "come back crying like a little school girl" or "I should be an irresponsible douche" that its obvious you're quite immature and simplistic in your world view. Its sorta hard to even take your posts seriously since they have no real content outside of boilerplate "people need to be responsible, not irresponsible". If you wrote like a grownup and actually addressed others points instead merely deriding them you'd be better off.

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  38. kahner said...
    "James, the whole rationale behind the loan is that the bank should be ambivalent between the repayment with the correctly set rate of interest and the house which is used as collateral."

    That is wholly incorrect. The lender prefers repayment of the loan. That's why the risk premium rises as the risk of default rises. If the bank was ambivalent, then the risk premium would NOT rise as the probability of default rises. That's where the importance of ethics comes in. A society in which people feel an ethical responsibility to repay their loans will have lower risk premiums, and thus lower interest rates, than a society in which everyone happily skips out on their loans whenever they can. When some borrowers behave irresponsibly, they force up the interest rates of those who behave responsibly. That's why walking away is unethical. The borrowers who walk away raise the costs for future borrowers.


    kahner said...
    "Yes, there may be no explicit language stating default as an option, but as in all contracts there is a choice between performance and non-performance."

    Again, non-performance is not a "choice" or an "option" in the contract. The contract simply specifies the consequences of failing to uphold your end of the agreement.


    kahner said...
    "I really don't know why you think there's some special ethical duty attached to a mortgage as opposed to any other type of secured loan. Nor why you think this ethical standard exists only on the consumer side."

    Now you're just engaging in dishonest debate. Show me where I ever said such things. Quite the opposite, on December 9 at 8:32 PM I wrote the following comment above:

    "I don't feel there should be different standards of conduct for businesses than for individuals. Businesses do have an ethical responsibility to uphold their end of agreements and to deal with their customers honestly."

    You, Mark F, and others on your side of the debate keep making fake claims about what I believe. You're claiming I've made arguments I've never made. You guys are doing this repeatedly. You're not even debating ethically!

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  40. James,

    You and Alan Greenspan should have lunch together. You could talk about ethics in finance and he could tell you all about how modern markets are so rational that they can be counted on to disperse risk and police themselves. And then the two of you can ride off into the sunset to Neverland and say hello to Peter Pan. Lemmy

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  41. James "That is wholly incorrect. The lender prefers repayment of the loan. That's why the risk premium rises as the risk of default rises. If the bank was ambivalent, then the risk premium would NOT rise as the probability of default rises."

    You have is exactly backwards. yes, the risk premium goes up as risk of default goes up. That's exactly why in aggregate they are ambivalent. When one risky loan defaults, they are compensated by the high interest rate they charge on risky loans in aggregate. Borrowers pay risk premium and lenders are supposed to structure their loans and loan portfolios to make money. If they screw up by making too many bad loans, then they lose. I keep saying it, but that's the essence of investing. You allocate your capital and take risks. Banks made bad investements. they lost. So did the borrowers, and they lost whatever equity they had paid into the house.

    As to your second point, all I can say is that's how contracts work. That's in fact why people are walking away. Its our legal system. If you think its immoral, then lobby congress.

    And third, you seem to hold this in some special category based on all the arguments i've already made. Just because you don't say something explicitly, its possible to infer it from other statements, which is what I did. if you disagree, fine. but i think its BS to call me dishonest to make the argument. And i hope the line about not debating "ethically" is a joke. otherwise, i think you need to get a grip. You and noz are both getting too worked up over this.

    ReplyDelete
  42. Kahner said...
    "Banks lend money with mortgages at a risk premium on an asset that is supposed to be worth what they lend. It is their duty to make sure that the assets they lend against + the income from interest in aggregate are sufficient to cover their losses in case of defaults. This is WHY they lend at Prime+risk premium. Its the essence of the business model."

    That is stated far more correctly than you stated it the first time. I still have some quibbles with your description, but we are not walking dictionaries so I'll look past it. In debates like this it can be difficult to know whether a person doesn't understand a concept correctly, or whether they do understand but have difficulty explaining it precisely.

    A key word in your second description that was missing from the first one is "aggregate". A rational lender sets the risk premium to compensate for the aggregate risk of default. However, a risk premium is a form of moral hazard. The borrowers who fulfill their obligations pay the risk premium to compensate for the borrowers who default (assuming an equivalent initial credit risk). What you overlook is that societal attitudes toward the ethics of strategic default affect the future rate of default. The rate of default in turn affects the future risk premium. There is a causal relationship. Strategic defaulters today will cause future borrowers (like Noz) to have to pay higher risk premiums. Those who today get the benefit of strategic default push the costs onto future borrowers.

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  43. Anonymous said...

    kahner, Noz should pay you a fee for that consultation. Noz, it's bedtime....


    If only you had a clue....you could start by not being a pansy and have a name....

    ReplyDelete
  44. kahner said...
    "I keep saying it, but that's the essence of investing. You allocate your capital and take risks. Banks made bad investements. they lost. So did the borrowers, and they lost whatever equity they had paid into the house."

    I think a key source of our disagreement is that you are focused on the past while Noz and I are focused on the future. The decisions of today's underwater borrowers will have a causal effect on future risk premiums.


    kahner said...
    "Just because you don't say something explicitly, its possible to infer it from other statements, which is what I did. if you disagree, fine. but i think its BS to call me dishonest to make the argument."

    Fine, then what statements of mine caused you to infer that I held those positions? You made two claims:

    1) "...you think there's some special ethical duty attached to a mortgage as opposed to any other type of secured loan."

    I don't remember the subject of non-mortgage loans coming up. If you inferred that position simply because non-mortgage loans weren't mentioned, I will remind you that THIS IS A HOUSING BUBBLE BLOG. There was no reason for non-mortgage loans to come up.

    2) "...you think this ethical standard exists only on the consumer side."

    Here your claim is the complete opposite of what I had previously stated earlier in this thread. I understand that you may have overlooked what I had said, but I don't believe there's anything I've written that could lead you to your inference. Mark F kept making this false claim, so if you believed him your confusion would be understandable.

    After having one false accusation after another hurled at me, yours was the straw man that broke the camel's back.

    ReplyDelete
  45. Anonymous said...
    "Noz, it's bedtime...."

    For those who may be new, I will point you to the blog comment policy. Those who choose to post as "anonymous" have substantially fewer free speech rights than those who use a consistent username. Snide remarks toward others are grounds for having an anonymous commenter's comment deleted.

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  46. Noz, .....that has absolutely no bearing on whether or not its immoral to stop paying a mortgage and let the lender foreclose. I hate to repeat myself, since this has been explained many times above by myself and others. But that is how the system is designed.

    Sorry...the system is not designed for that as a norm. That is meant to be an exception...not the norm. Unfortunately, it has become more of a norm because of the change in behavior and attitudes of people. So what else do you want to buy and borrow money for and not pay back? You may as well do it with everything.


    Banks lend money ....along with many other parties were responsible for creating a huge real estate bubble. And that bubble burst and caused lots of problems. But that HAS NOTHING TO DO with the supposed "morality" of default.


    Again...you are confusing two different issues. You seem to think I don't think the banks are at a fault. That's not what I said. What I said was that if a borrower goes into a contract knowing full well what he or she is doing (and you pretending they did it with good intention is a laugh), that part of the responsibility is his or hers. Walking away is break that responsibility...particularly when you can pay for your obligations.


    Its a contract just like any other, and in our economic/legal system all parties are according to their best interest in business dealings. ..... We act according to a set of very detailed and strict rules developed over centuries.


    AND AGAIN....you do not seem to be able to understand the link between the actions of people who were responsible and people were not. The people who chose not to buy are still getting shafted by the actions of people who did buy and lost out.

    What sort of a nonsensical statement is "should I blame you for not buying????" Honestly...listen to yourself.

    Seriously...do you understand the concept of what others do affects you? Just answer that for starters.



    By the way, your posts are so full of childish lines like "come back crying like a little school girl" or "I should be an irresponsible douche" that its obvious you're quite immature and simplistic in your world view. .... you wrote like a grownup and actually addressed others points instead merely deriding them you'd be better off.


    Oh please...get off your mighty high horse will you? Your attempt on placing some sort of moral ground representation for such people who's cop-out actions you condone isn't working.

    People who did this don't deserve to be called any less or respected anymore. They are the equivalent of the charlatans and crooks who work the welfare system to get benefits checks they don't deserve...only to cut into the benefits of people who really do need help.

    So save us the parental talk and grow up a little when it comes to accepting responsibility and debt you wrote your John Hancock on the line for. Blaming the banks won't lessen your responsibility but nice try.

    I'm shocked and disgusted by the lack of responsibility and self-entitlement people here have yet not surprised by it since I now see the results.

    ReplyDelete
  47. Oh, noz..i'm tired of arguing with you. i clearly think you're wrong and childishly petulant, but its gotten tiresome instead of intersting or even amusing. but i will point out that you have concluded, based on nothing, that I bought a house and walked away from the mortgage. once again you're wrong. I found it quite obvious housing was overpriced and kept on renting. i am in fact very upset about the housing bubble in general and those who blew it up, including stupid borrowers and stupid banks. its been very inconvenient for me, and destructive for others lives. however, unlike you, i don't base my arguments about morality, ethics or business law on how i happen to feel or how it happens to affect me. you apparently don't have the emotional maturity for that type of reasoning.

    cue Noz to tell me i'm irresponsible and coping out and don't understand while not actually making any sense but being very outraged.

    James, i'm also tired of arguing this point with you although I think you are actual making points in good faith. we just disagree. so i won't try to respond to your last post in detail. however, i do mostly agree with this:
    What you overlook is that societal attitudes toward the ethics of strategic default affect the future rate of default. The rate of default in turn affects the future risk premium. There is a causal relationship. Strategic defaulters today will cause future borrowers (like Noz) to have to pay higher risk premiums. Those who today get the benefit of strategic default push the costs onto future borrowers.
    But I didn't overlook it. there are many cause and effect issues in the economy and the actions of others are often deleterious to my own interests. i just don't think that makes those actions immoral. And with good underwriting practices, it really shouldn't have much of an effect on future lending rates for low risk borrowers. current rates are historically very low, despite the defaults. its just alot harder to qualify and downpayment requirements are much higher. Good. thats exactly what is needed to help prevent another bubble. and a super reliable, smart borrower like noz should have no problem getting a mortgage at a great rate because of course people as smart and responsible as him have a perfect credit record and tons of liquid assets.
    But its 10pm and i'm still working and this has become a non-productive distraction. But it would be nice if in the future you didn't call me unethical and dishonest when i disagree with you.

    ReplyDelete
  48. Kahner, while on the topic of inferences, I'll remind you of the question I asked in this blog post:

    "Since the FHA is knowingly offering huge mortgages with very little down payment (3.5%), and knows that such behavior led to massive defaults when banks recently did the same thing, is it ethically acceptable for a borrower to walk away from an FHA loan—leaving taxpayers with the bill—if he ends up underwater on his home?"

    I infer from your comments that you feel it would be ethically acceptable. If I'm wrong, please explain why you feel directly screwing taxpayers is different.

    ReplyDelete
  49. kahner:

    I agree...arguing with you is quite pointless because you resort to a higher moral ground which you have no business taking.

    It's quite obvious from your statements that you are one of the typical people out there who believe you are entitled to drop your obligations when it pleases you...regardless of the cost to others...forget the cost to yourself.

    You clearly show you have no understanding of consequences and cause/effect issues that are ripping the financial system in this country a new one.

    The fact that you claim you don't own a home doesn't get you off the hook about your understanding of these concepts. Very unfortunate that is.

    How you can detach obligation, moral or otherwise, from this whole situation says more about your thinking than the actual problem. James is 100% correct by saying that the contract has nothing to say about walking away...the results of walking away are the consequences....not part of the contract. You really need to slow down and understand that concept.

    It is clear that with the think you have exhibited, multiplied by millions, has resulted in the ridiculous clusterfrak we now call the housing market. Greed, irresponsibility, entitlement, selfishness....all contributed to this mess from the consumer side.

    Again, no one forced any borrower to not take a 30 year mortgage...that option has always been there. Anyone making excuses regarded that is simply trying justify his/her mistake and wants out of his/her obligation.

    When your actions don't affect mine, then knock yourself out and walk away as much as you want...until then, you have no moral high ground to stand on. Making yourself look "adult" like doesn't quite take the stink away.

    ReplyDelete
  50. Kahner said...
    "But it would be nice if in the future you didn't call me unethical and dishonest when i disagree with you."

    I didn't call you unethical and dishonest because you disagree with me. I did it because you made false claims about what I believe. If you did it in error, then it was not dishonest or unethical. However, after having several people repeatedly misrepresent my position, I felt I needed to call someone out, put them on the spot, and challenge them to back up their claims with actual quotes. You just happened to be that guy.

    I understand that reasonable people can have legitimate disagreements about what is moral and what is ethical. And I respect the opinions of a renter who is defending homeowners more than a homeowner who is making excuses for why he is justified in taking the money and running.

    ReplyDelete
  51. noz, blah blah blah. you bore me. nothing you say is productive or insightful in the least. everything everyone does in the economy affects everyone. to say "do whatever you want as long as it doesn't affect me" is to say don't ever do anything. the economy isn't a vehicle designed to your liking or for your convenience. its the aggregate of every member's economic decisions and activity, which all interact. within a framework of laws, we all affect each other with some people winning and others losing advantage. how can you not understand that?

    James, yes i think that's ethically acceptable. i do not, however thing the FHA policy is smart. nor is taking out a loan you can't afford. so don't take my position on morality as equivalent to approval. but there's a difference between stupidity and immorality. this does screw taxpayers, which i am not happy about. but that's a question that must be addressed by congress in their oversight capacity of FHA, and voters in their oversight capacity of congress. now please can we stop on this topic. i have work to do but when you post a specific question for me i feel obliged to respond.

    ReplyDelete
  52. James, I think you personally attacked someone in a prior post. So if you are going to set the standard, then adhere to it and don't use it when your position is being challenged. It's a clear sign of weakness.

    ReplyDelete
  53. kahner...

    blah blah blah...you disgust me.

    ReplyDelete
  54. Anonymous said...

    James, I think you personally attacked someone in a prior post. So if you are going to set the standard, then adhere to it and don't use it when your position is being challenged. It's a clear sign of weakness.

    December 10, 2009 10:57 PM


    The hypocrisy of remaining anonymous....

    ReplyDelete
  55. oooh, you GOT me noz. keep it up with the smart commentary. we're all impressed. as your posts devolve into completely meaningless comments you're becoming a little more amusing again.

    ReplyDelete
  56. kahner,

    Regardless of what I say, it still doesn't change the fact that you represent the irresponsible, arrogant, self-entitled cross-section of this country.

    It's disgusting and disgraceful.

    ReplyDelete
  57. Anonymous said...
    "James, I think you personally attacked someone in a prior post. So if you are going to set the standard, then adhere to it and don't use it when your position is being challenged. It's a clear sign of weakness."

    The standards are different for people who post as anonymous than for those who use consistent usernames. It's a written policy that anyone can read. The standards are different because those who comment as anonymous fight an unfair fight. They happily attack others while hiding behind their own anonymity. It takes five seconds to type a username. There's no legitimate excuse for not doing it.

    Besides my scuffle with Kahner (which I believe we have settled), I asked an anonymous commenter if he was dense after he asked me a bunch of loaded questions. I have little tolerance for loaded questions.

    ReplyDelete
  58. by the way, can you configure the site to skip the word verification for logged in users? not sure if that's possible but it would be nice.

    ReplyDelete
  59. This comment has been removed by a blog administrator.

    ReplyDelete
  60. As you said earlier, if you don't want to play the game....get the hell out.

    ReplyDelete
  61. "Kahner said...
    as your posts devolve into completely meaningless comments you're becoming a little more amusing again."

    Kahner - if you want to see amusing, ask Noz to fill in the DC Case Shiller values between where we are now (CS @ 180.45) and where he says we will be by the year 2013 (CS @ 135).

    He will tap dance around the question and call you an idiot, stupid, a knifecatching homeowner, etc, and demand you go out right now and buy as many houses as you can.

    Try it - its quite fun!!!

    ReplyDelete
  62. Yes Partisan...while prices are still dropping, you're still driveling...I see nothing has changed.

    ReplyDelete
  63. Oh and as I've suggested MANY a time for you Partisan, since you are so sure of yourself, you should be buying up everything in sight...but but but...wait...

    Oh yes..I remember...you are hypocrite #1 when it comes to putting your money where you driveling mouth is...

    Ah yes. Now I remember...you're the tool who thinks you have it all figured out but you're too much of a chickenshit to act on it. Now there's a vote of confidence for ya!

    So did you buy a bunch of stuff yet Partisan? As I recall, you've been dancing around issue since I asked you 6 months ago or so. What's the verdict big guy? Have you finally mustered up some courage?

    ReplyDelete
  64. Sorry forgot to add my name!

    "Actually, yes I am under contract. Just a place for me though - I think prices are too high to be much of a value.

    Anyhoo, thats the first time you asked, and you can now consider it answered. Now back to what you wont answer:

    CS in DC is now at 180 (it has RISEN for the last 6 months btw).
    Futures (which have risen also) say the next 3 years will be like this:

    Feb 2010 - 165
    May 2010 - 163
    Aug 2010 - 167
    Nov 2010 - 179
    Feb 2011 - 177
    May 2011 - 168
    Nov 2011 - 177
    May 2012 - 168
    Nov 2012 - 177
    May 2013 - 168 (Noz says 135)

    So what do you think guys. Last time I did this, I got noz to dance around this for 7 or 8 times in a row. Will he answer the question or will he continue to tippity tap tippity tap all around it?"

    ReplyDelete
  65. kahner said...
    "by the way, can you configure the site to skip the word verification for logged in users? not sure if that's possible but it would be nice."

    I wish I could. The lamest thing about blogger.com is that it's comment options are fairly inflexible. I can have word verification on or off, that's it. I can't have threaded comments like WordPress users can. I can't turn off anonymous commenting without forcing everyone to log in.

    However, I do monitor link spam through other means, so perhaps I can try turning off word verification and see if the amount of link spam increases.

    ReplyDelete
  66. 5secondAnon said...
    "Now that you all know who I am, attack back and I will make a new username in 5 seconds to defend this one."

    Ahh, but I also have a policy against sockpuppets. If you start switching your username, I'll notice.

    ReplyDelete
  67. Partisan:

    Nothing to dance around. I stated a number and I stick to it.

    So why don't you answer my question now? So did you buy as much as you could?

    Or are you still the hypocrite you always were? What's it been now? 6 months? 8 months since I asked you this?

    I said it before....and I'll repeat it here....put your money where you mouth is. If you have that much confidence in CS, you shouldn't even hesitate for a minute to buy up properties.

    So...what's your excuse now?

    ReplyDelete
  68. Oh Partisan...I forgot to add...it's not the first time I've asked this...it's about the 100th time...lying won't earn you any points.

    ReplyDelete
  69. Thats one! Lets try again

    CS in DC is now at 180.
    Futures say the next 3 years will be like this:

    Feb 2010 - 165
    May 2010 - 163
    Aug 2010 - 167
    Nov 2010 - 179
    Feb 2011 - 177
    May 2011 - 168
    Nov 2011 - 177
    May 2012 - 168
    Nov 2012 - 177
    May 2013 - 168 (Noz says 135)

    You said we get to 135 by 2013. Lets see if you can man up and fill in the 2010-2012 values to explain how we get there.

    Will Noz answer this time, or will my precious little toy keep spinning around and around? We shall see!!!

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  70. Partisn:

    The onus is on you. You claim prices won't come down. Put your money where your mouth is. You've got a lot more to gain than I do...so...answer the question for the billionth time and stop dancing around other issues.

    IF YOU HAVE that much faith in CS numbers....why aren't you buying everything you can? Can you answer that simple question?

    Or are you going to try and deflect it back to me because you've not been able to answer this for the past 6-8 months? How much longer will it take??

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  71. OK Nozzle - for the 2nd time in this thread I AM UNDER CONTRACT. I am not that wealthy, so THIS IS ALL I CAN BUY.

    Now back again to you:

    CS in DC is now at 180.
    Futures say the next 3 years will be like this:

    Feb 2010 - 165
    May 2010 - 163
    Aug 2010 - 167
    Nov 2010 - 179
    Feb 2011 - 177
    May 2011 - 168
    Nov 2011 - 177
    May 2012 - 168
    Nov 2012 - 177
    May 2013 - 168 (Noz says 135)

    You said we get to 135 by 2013. Lets see if you can man up and fill in the 2010-2012 values to explain how we get there.

    Will Noz answer this time, we shall see?

    DANCE PUPPET DANCE!!!

    ReplyDelete
  72. It's funny....I looked up this same question I asked you back in an August thread.

    And you expect people to believe you that you are under contract when you've lied so many times Pansyass? Of course you're suddenly not wealthy...and this is all you can buy...boohoo.

    If you are serious about your beliefs, you'd have borrowed to the hilt to buy as much as you could have since you are 100% sure about CS numbers....right??? Right?????

    For the record, I told you my result prediction. It's 135 as I've always said. What happens between then and now I DON'T CARE....so why are you making such a big issue of it?????? Probably because you have no argument left.

    But to the clown, here you go:

    2010 - 155
    2011 - 135
    2012 - 115
    2013 - 110
    2014 - 100
    2015 - 50
    2016 - 1

    Oh by the way pansyass - it's still 135 @ 2013.

    Any questions?

    How can anyone take you seriously when you're such a big hypocritical lying clown?

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  73. Did I mention you haven't answered why you haven't purchased as many properties as possible since at least August?

    Oh that's right...you're poor and can't afford much. I got it.

    I was afraid of digging up more stuff on you...I don't want to make you look too stupid. It wouldn't be fair.

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  74. Ahh nozzie you finally did it - you finally made your predictions. Good for you.

    It will be fun tracking these in the months and years ahead as they fail one by one by one...

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  75. So pansyass...AFTER 6 TIMES of asking you about why you you're such a mammoth hypocrite and liar...are you going to answer the question of why you've not bought up everything in DC???

    I doubt you will but it'll be fun watching you claim all sorts of crap coming out of your driveling mouth.

    Hec...we've waited OVER 6 months for you to same something about that...since you believe so much in CS numbers...6 MONTHS...

    LOL...under contract my ass...lol

    I hope you enjoyed my make-believe numbers;)

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  76. By the way...just to count..this is the 7th TIME on this thread I'm asking you to answer...

    7 and counting.

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  77. Nizzie - what do you want to know? Other than I am under contract and that I dont make enough to buy more than I am trying to now.

    Seriously, what else can I do for you? You (finally) answered so candidly - I want to do the same...

    ReplyDelete
  78. Of course you're under contract.

    We believe you.

    And again...you know exactly what question has been asked of you a million times over...

    Given your believe in CS numbers, you should be out scrambling to get money any way you can to buy up stuff since you believe in it...

    What...now you suddenly are acting like a mouse and don't have any money?

    Sounds like more of your bullshit to me.

    Oh pansyass, 6 months and counting...and you can't put your money where your mouth is....

    No one can take you seriously after this debacle.

    ReplyDelete
  79. oh noz, you're like a caricature of the scared, overcompensating and possibly homophobic moron. Every post it about "pansies", "pansyasses", "douches" and "big guys". Its just amazing that you continue to post this kind of nonsense and (i guess) think you sound smart and/or tough. feel free to continue cause its no skin off my nose and i really do find you funny (particularly all your CAPS EXCLAMATIONS and extra ???????????'s). but really, dude, for your own sake, stop embarrassing yourself. I mean, really, "pansyass"? you sound like a lame comic strip character from the 50's. grow up.

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  80. Well...sounds like your up against the wall and nothing else to say....drivel drivel drivel...

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  81. "Its just amazing that you continue to post this kind of nonsense and (i guess) think you sound smart and/or tough."

    Hes the ultimate keyboard cowboy isnt he. Have to assume he regularly got his butt kicked in highschool.

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  82. i doubt it ended at high school. but c'mon, he's tough cause he doesn't post anonymous. Noz ain't no pansyass. he got me "up against the wall" like a tough guy. haha. good lord.

    ReplyDelete
  83. kahner,

    You're too cool...what can I say.

    ReplyDelete