Term of the Day: Hostage Value

by James & Miel on April 29, 2009 · 0 comments


Hi All,

Here is a term you might not have heard: hostage value.

Hostage value is when a lender loans you more than the value of the underlying collateral. For example it used to be common practice that a lender would lend you $10,000 and secure it with $2,000 worth of household goods. The lender would then demand full payment of the $10,000 by threatening to take you to court – in effect, using your assets as leverage to get you pay more for something than it is worth.

TARP bailout watchdog Elizabeth Warren says hostage value is the reason so many lenders don’t want to participate in mortgage renegotiation schemes (CreditSlips).

This is a serious issue. A fellow blogger of ours, J Money, is underwater by $60,000 on is place in DC (BAS). How much incentive does the bank have to negotiate with J? Not much. J is being held hostage by his bank.

Best,

James

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