I Lost on Jeopardy

I have been learning more than I ever thought I would about the world of real estate, lending, and borrowing.  As I have previously posted, what I have learned up to this point is nearly nothing, compared to the vast amount of knowledge there is to know.

The other day, my dad was talking about derivatives which is not real estate, but finance.  At some point all roads lead to finance, but I'm still confused about how real estate and finance connect (one thing at a time).  It is not important to know what derivatives are for this post, because his point is that you can count on one hand the folks who actually know what one is. (Knock yerself out at Wikipedia just to get a taste of the confusion).

I feel as if all the details there are to know about strategically defaulting on a home loan and influencing factors, is like trying to know about derivatives.  There are just so many details it is nearly a mystery.  I am trying to break it down for myself, because unlike derivatives (I think), this real estate stuff affects me.

So what is the difference between not paying my credit card debt, and not paying for my home loan?  This is something that we have had to grapple with, since we pay one, and not the other.  Like on Jeopardy, the answer is in the question.  One is consumer debt, and the other is real estate.

When I buy dinner out, or a stereo for my car with consumer credit, I've done just that, used something up. I have consumed it.  The burrito I ate 9 months ago and paid with credit, as with my stereo, are no longer of value.  The credit card company, for a price, will pay for me, until I can pay.  They do not care about the burrito after they have paid for it.  It does not have any value for me or them.  The value for the consumer is that if you want or need something now, you can pay more later.  The value for the credit company is that they, for the most part, take money hand-over-fist.

Real Estate is a bit different.  It is REAL.  When people get a loan for a house, the house itself is collateral.  It secures the loan and the signed contract sets the property as being equal to repayment of the loan (well even normally the loan is for 80% of the value of the house.. ensuring the bank can always get its value out of the property).  This is why there even exists such an option as foreclosure.  It is essentially a legal pathway to resolve the differences between a homeowners willingness/ability to pay, and the banks desire to get paid.  With consumer debt the bank "invests" in the individual, in the case of a home loan, the bank shares the risk in the collateral.  This is supposed to mean that when the property decreases in value because of the market, the bank should be just as motivated to solve the problem and keep the property afloat as the homeowner is...but because most of us think that we should keep paying out of our desire to be faithful people...the bank can afford to stall.

We have a contract, for my house, with Citi.  It is like a triangle, three sides:  lender, borrower, structure.  If Citi decides they want out of the contract, with my permission, they can give me the house.  If I want out of the contract, with permission, I could give them the deed in lieu of payment.

At this point, both Citi, and Tyson have lost money on this house because we have a contract together.  These are strange times.  It is strange that our home is a "black hole asset".  I am not going to pay for an asset, that by all accounts, will never be an investment.  I have the ability to give the real thing I am not paying for, to Citi.

I know that even my explanation of the situation is probably up for interpretation, or even wrong.  Like I said, I am just learning about something that is exceedingly confusing.  A blog is a pretty communal place, so let me know what you think.  Set me straight.  Let's let Citi worry about what a derivative is.