Conundrum - in Repossession, Is More Debt Better?

GentleFolk - for when you all have an idle moment:

This scenario kept running through my head in the scratcher the other night and I can’t work out why it can’t be true - or can it?

Consider - in an upmarket estate there are 4 neighbours, with identical houses. They all bought at the same time for €500k. As it happens they all work for say Dull Computers who are going through a rightsizing prior to decamping to the Urals. Luckily Mr A works in Finance, and Mr B works in Human Remains, so they have quietly written their own contracts and will be expensive to fire. Mr B may have to relocate closer to Bogwall Road so he has had his property valued. There’s been a 10% drop in the whole market recently but the market has become fairly orderly and property is selling, if priced reasonably. At €450k he’s a bit unhappy but as he’s in no rush to sell he’ll sit tight for now. So - the house is worth €450k, right?

Mr C and Mr D have had that meeting with Change Management Consultants where they were told about the “Joys of Career Change”, “Problems are Opportunities”, and “Welcome to Personal Growth Experience”. They invested their less than Golden Parachutes on an ill-advised joint venture called Dellightfully Different Tech featuring solar powered laptops in pastel shades with mahogany keytops and wooden mice only to find their target market well served by Apple. Alas their lenders Aggressive Investment Bank have foreclosed on both of them and manager Mr. Austin Minor has come out to meet a potential buyer, Mr Cash King. So what are the houses worth? Well something South of €450K obviously since we know B’s is worth that, and Austin will be anxious to sell.

However, and here’s the nub of the rambling story, D was prudent and only borrowed 80% ie €400k, whereas C borrowed 100% ie €500k. CK knows there a 2 identical houses on offer, and that AIB will want to offload, and offers AM a cheeky 50 grand under “market” for either, cash on the nail, today, take it or leave it. Now look at it from AM’s viewpoint - he could refuse it, of course. He could sell C’s gaff, but that would leave AIB short €100K and having to chase C for the balance with no leverage. Or - he could sell poor old D’s place - result AIB gets all its money, with no need to chase D further, and AM has one less property overhanging the local market which probably improves the sale price for C’s and B’s houses in time.

C and D both end up with nothing, but poor D has lost the €100K he had prudently saved up, whereas C has a debt of €100K or maybe less which may or may not be satisfied.

So - when prices were rising C was “right” to be further in debt than D, and with prices down he’s “right” too - which seems a conundrum.

However the main conundrum ( available from the Conundum Shopping Centre, by the way) to me seems to be that 2 identical houses have different values even though they are owned by the same bank. It doesn’t seem to matter whether AIB owns both of the foreclosed houses by the way - D gets screwed either way. It also doesn’t seem to matter if the market is falling or rising - once they’ve foreclosed it’s out of the D’s control, and as usual the more you owe them the better they treat you - or am I missing something?


Hmm, not sure that is how it plays out. I don’t think AM cares which sells.
(I am in currently trying to buy a place as I’m kinda in CK position so other than obviusly being crazy I have thought through something similar)
The market price will only be set if a buyer and seller can agree on price.
if they do not then it will be set when someone has no option. A and B do not have to sell so can value their houses at whatever they like and can be forgotten about. If B wants to say that is 450 then he can but if it doesn’t sell, ie he has to sit tight, then he has over priced it.He is not actually in the market. ( I figure 80-90% of the private sellers are doing this right now btw)
If AM efectively owns both places and he is also out of pocket 900K, both places are worth the same; he does not care which he sells now. In fact there may even be less paper work to sell D’s place and who knows C may have a rich aunt who will bail him out and keep paying the mortgage a little longer.

If C and D are still involved then D probably is the one to sell as he is not in neg equity and can wrap up and move to somewhere where the grass is greener ( how green is the grass in the urals? at this time of year?)

D has done better. He is free to move and still has a good credit history so can buy another gaff when he finds his place in the sun,uhh snow.
What’s more the 100K he didn’t invest in houseing he had converted to physical gold and buried in the back yard where it has been gaining value slightly ahead of inflation. ( or any other relatvely neutral asset)

When prices were rising C was more heavily leveraged and so the 100K extra he borrowed was increaseing many times faster than D’s gold bar, when it dipped it wa loseing value many time faster than D’s gold bar.

CK obviously was renting and left all his extra money in Dull computers stock plan. The price went right up when they anounced the new plant with cheaper labor but unfortunalty it was valued in greenbacks so he would want to quickly convert it to a neutral asset. I hear D has to sell his gold reserve to pay the movers.

Well - I assumed that if AIB had foreclosed that they now had carte blanche to sell out from under C and D without any need to refer back to them. I assumed that AIB are entitled to take whatever they are owed, plus perhaps expenses and legal fees, from any proceeds and that all C and D can do is watch helplessly while their lives are determined by someone who doesn’t care. Yes my instinct was that AM should not care which he sells and that they should therefore be worth the same - and yet - assuming AM is a heartless bastard means he will sell D’s as it’s easier and cleaner and hope for better results from C’s.

You do raise an interesting point though in that there may be other wealth creation or loss going on with the money you have or have not borrowed from the mortgage provider.