In a post on the blog Credit Slips, the writer notes a development in Massachusetts. There, the supreme court essentially held that a home loan that was designed to be refinanced instead of repaid is inherently predatory and can’t be foreclosed on.
One of my favorite I don’t really feel guilty about it at all pleasures is watching Judge Judy. One type of case that comes before her a lot is where person A loans money to person B who had no job and no income. Ms. Sheindlin often rules against person A in those cases. “Well how did you expect them to repay you? Magic?” If you expected magic, then you really didn’t have a loan. You made a gift.
The situations described are similar and bring up something I hadn’t considered before. If the bank was expecting magic then they weren’t really making a loan, they were making a gift. And that’s the rule in Massachusetts now. If the person had the income to pay the loan terms, it’s a valid loan. If the person’s income at the time of the loan origination was insufficient to make payments, it’s a gift. The bank expected the value of the house to go up, the house to be refinanced, and they’d get their money out of the increased equity. In other words, Massachusetts says that is “magic.” Which has stopped happening pretty much.
The parallels between the home loans and the personal loans handled by Judge Judy aren’t complete of course. Judge Judy’s loans have no explicit collateral. And the amount in question is a lot greater. The Credit Slips blog post says the banks have to rework the terms under the ruling. So there has to be some incentive even under it for a home owner to re-work as well. Normally that’s foreclosure. If that isn’t available, I don’t know what is.
But it’s still interesting.