I like this story, it makes us all think about what’s right and proper.
Jason called me on Tuesday this week asking for some advice on whether he should lend a friend of his some money. The friend (who we’ll call Sam) it seems has several properties that are worth less than the mortgage amounts he owes. Several are rented, and Sam’s income from them is less than his payments. Yes he did buy them in the past few years when everybody was doing the same and yes he figured values would continue to climb as they were at the time he purchased them. They didn’t, unwise investment assumption for Silicon Valley real estate or for that matter property anywhere.
In his search for cash flow relief and to stop the burn rate of his dwindling savings, Sam hears about ‘Loan Modifications’. He investigates and finds an attorney backed modification company, one of many appearing on the landscape of public opportunities for the financially stretched, and is told he may be able to reduce the financing on all of his properties to 80% of CURRENT value. WOW! Sam does some quick numbers in his head and figures that would make his property positive cash flow and reduce his debt by nearly 50%. Sam has a good high paying job in a profession that will not experience lay-offs any time soon, and has excellent credit. By the way, the money Jason was asked to lend Sam was the $14,000. the modification company requested to “see what could be done”, no promises but if it didn’t all turn out Sam would get a refund.
In his book Capitalism and Freedom, Milton Friedman asserts that the great achievement of capitalism has not been the accumulation of property or wealth but rather the opportunity men and women have to develop and improve themselves. He further states that great advances have never come from centralized government edicts or direction but come from individual genius or even minority beliefs within a social climate that promotes variety and diversity for all.
Let’s define integrity as being whole and complete inside, or with a background of, a context or way of being in life that produces workability for all involved.
And we’ll consider ethics a philosophy encompassing right conduct and good living behaviors where at best all benefit, and at least nobody is harmed.
INTEGRITY AND/OR ETHICS appropriate, you make the call!
If the lenders agree to reduce Sam’s mortgages and possibly even his interest rates, they take a big hit financially. Would you do it if you were Sam? Is this a break in integrity or ethics?
What if the lender passes the losses on to our central government as part of our recent bail out plan. Would you do it if you were Sam? Is this a break in integrity or ethics?
Would you lend the money to Sam if you were Jason? Is this a break in integrity or ethics?
MY BUSINESS:
Being committed to transforming peoples experience of personal finances I confront more & more issues like these every day. They are difficult to advise but my yardstick is always does anybody get hurt or loose as a result of my advice and more important, will my client win?
Please give me your thoughts & let’s discuss it.
Dan
December 4th, 2008 at 4:16 pm
Nice site. There?s some good information on here. I?ll be checking back regularly.
December 4th, 2008 at 5:12 pm
Thank you Susan, always welcome new visitors.
Want to voice your opinion on this topic?
DN
December 5th, 2008 at 4:29 am
1. My personal opinion is that the lender would be foolish to give Sam a loan modification on his rental properties. It’s an investment loss, not putting a family out of their home. (That begs the question: can he reasonably claim that the renters would be put out of their homes and what are the specifics of their rental agreements?)
2. I think Sam is acting in his best interest in a way that — while it is within the bounds of a capitalist society — ignores his personal responsibility for his actions. Where capitalist societies don’t legislate, they have checks and balances: in this case the approval process.
3. I think Jason would be risking his money by loaning anything to Sam. If Sam were at risk of living on the street, by all means, take him into your home, lend him money, what have you.
Sam simply made a poor investment decision and now he’s looking for two handouts, one from the lawyers and one from his friend. To any creditor, this can’t be a good sign.
Large loans between friends are messy — better to gift or writeoff than to loan.
Your client has been put in a lose-lose situation: probably lose the cash, possibly lose the friend, maybe both. If you list the possible outcomes, the question is which would your client prefer?