The Hostage Fable

Once upon a time, there was a man who owned a home. And on this home, he had a mortgage.

Actually, he had a mortgage, a home equity line of credit, and a couple of credit cards. He and his wife had been living in the house for years. They had refinanced a couple of times. And they had taken out the equity line of credit a few years back before the real estate market crashed. When home values did fall, they found themselves, not "under water," but close. They were treading water. They were making all their payments on all the debt. And they were covering their regular bills as well, they just weren't putting a dent in the debt.

The decided that what he really needed in order to get himself out of debt, was to borrow some more money, invest it and increase his income such that he could start to pay down some loans. So went to the banker who held the mortgage, the equity line and his credit cards. He told them of his plan and asked if he could get another $25,000 to fund his new venture. But this was something he had done before.

He had originally taken out the line of credit in order to fund his investment, but later decided to remodel the house instead with the first $25,000. Then he had taken another $25,000 (on his line of $50,000), but bought a new car and went on vacation. Now his line was maxed out. So he asked the bank if they could see their way to increasing his line of credit. The bank took a look at his history and his balance sheet, and said, "We don't think more debt is what you really need right now. We think you should look for ways to cut your spending, and try and work that debt down first. If you were to do that for a year or two, maybe prices recover and we can find a way to increase your line later."

To which the man said, "Oh, yeah? Well, I'll tell you what, if you do not give me another $25,000 loan right now, I will stop making payments on my mortgage, my line of credit and my credit cards. I will default on all my debts and I will immediately file for bankruptcy. You'll be stuck selling my house at an auction, and I will make sure you spend big legal fees to pursue my other debts."

So. Who is holding whom hostage? Who is being the proverbial "suicide bomber?" The banker or the man?