You're missing something that is important: When a person gets a mortgage it's secured[debt] against an asset - in this case a house. When the value of that asset dips below the note value the difference becomes unsecured debt. Lenders are in deeper than most of their telephone mortgage salespeople realize. Assholes. Regards,
So who would benefit the most from this kind of travesty (did they even pull this type of crap in the great depression?)? Surely not the banks who would have to take the losses, maybe service companies like CFC? How much harm would be done to the US markets by such a move? Would foreign investors really want to buy US securitizations if they know that going forward the rules can be changed on them mid contract? Seems to me that while such a windfall for underwater, and frankly in 90% of the cases stupid and/or greedy, homeowners will have a great deal of collateral damage for the rest of society that hasn't been talked about yet. Better solutions would be a combination of (A) increasing the loan term to a max of 50 years, (B)allowing the loan to become interest only at prime rate untill the note and appraisal value matched (ie no longer underwater) and which time they either sell or make regular P+I payments (C) foreclose on those that couldn't even afford the above two options. Would keep the system intact, keep most people in their homes, and flush out the hopeless cases. The property has to be your primary residence in order to be eligible for any of the above cures. Keep in mind that all this is happening against the backdrop of US homeowners being at close to record high levels of home equity.
That is music, the first comprehensive and workable solution I have seen. Many are staying in denial that the problems even exist seemingly...
This is huge. Major bank failures are on the table, IMO. Look at the home equity news that just came out: What the Fed sees is a cascading real estate crash that could realistically take down the entire banking system. How it plays out: 1) Home prices continue to drop (we're -15% off market top). 2) >Millions of low equity homebuyers walk away from now-negative equity or no equity mortgages made when they bought at or near bubble top. 3) Banks are forced to liquidate >millions of homes. 4) Real estate prices tank further as banks scramble to sell - oversupply. 5) Banks and CDO holders get saddled with the loss - difference of note value (purchase value) minus liquidation value of the house (say, -15% from purchase). 6) Now, with market prices suppressed at 15%, a whole NEW TIER of homeowners -- whose invested equity of 10% made them stable bets 2 years ago -- are now facing NO EQUITY or UPSIDE DOWN MORTGAGES. The process repeats. Start again at step 2. At the end of the day, its the CDO holders (funds, IB's, and mostly banks - like BoA, Citi, UBS, etc) that play bag holder for the evaporation of US RE equity they helped create (good on them). After of few iterations of the loop, losses continually mount (by the tens of billions), and eventually, the Big Guys go under --- save Government intervention. Given the housing bubble was created by the infusion of massive credit and little else (no demand side fundamentals - ie rapid population growth, nascent real wealth explosion etc.), prices could go back down to 2001 levels - 35% *lower* than where we stand now. Ironically, we've only dropped 16% from market top. And look where we are now. Major Banks are claiming Tens if not Hundreds of Billions in write downs. Now compound and apply those losses we've seen by 200%. Well, how much retained earnings do Citi and BofA have to suffer draw downs?? All this to say the Fed will print like theres no tomorrow. And the banks will have to forgive principle if they want to stave off a RE cascade and a shot at saving their own a$$. Short financials. Long commodity. Short durables and consumers.
Good point. I wonder why the regulators did away with that little rule? The whole credit market freeze just compounds the problem. Rating agencies fudged credit, American banks looked the other way, then repackaged and sold the radioactive CDO's to unwitting dupes (including themselves - caught in their own trap!). Now, nobody trusts American underwriters. And even if they did, wouldn't buy from them regardless since all the bond insurers went belly up from the bad mortgages banks made to begin with! The credit crisis is their own fault. They destroyed their own creditability for greed. What were they thinking?
"what were they thinking" They were thinking of themselves at the expense of others. In a full blown moral hazard banking system you can walk away with generational wealth for presiding over a ponzi scheme for just a few years. ONeal was allowed to keep the money even though it was clear the Ponzi scheme that generated it had collapsed. No one will answer for this.
Quote from gnome: All that was needed was federal regulation which prohibited the mortgage writer on conforming loans from disposing of the loan for 5 years. Qualifications and loan underwriting would have been entirely different. Here's a simpler solution - all that is needed is a gold standard or at the very least the Treasury, not the banks, should be the only ones allowed to create $ out of thin air. Do you honestly think bankers would have lent out their own gold to high risk borrowers? No, but if it is just funny money created out of thin air, who cares? You can take your profits for as long as the bubble lasts and then just wait for the Fed to bail you out by turning up the money spigot even higher.