Hi folks. This post was inspired by Lenn Harley's excellent featured post "CALIFORNIA SUBPRIME BORROWERS MAY GET RELIEF? – More Questions than Answers. If you haven't read Lenn's post, you need to. Make sure to read all the comments as well. She has a great discussion going on over there.
Anyway, I had left a long winded comment on Lenn's post pointing out a few of the different types of Sellers I speak with on a daily basis and what they have done to create their problems. One of the things I pointed out was that Sellers in my area are just walking away from their properties instead of staying and fighting to keep them. Their properties are worth quite a bit less than what they owe on them and since they have no equity left there is no reason to stay.
Lenn wrote this in response to my comment: "There is, indeed, good incentive to make the payments – their good credit".
Lenn's response brings me to the reason for this post. In my opinion, Lenn's statement "nails" where the Lenders made their mistake. If Lenders had been dealing with folks that had proven their good intentions, by paying their bills on time, homeowners in default would indeed have, "……good incentive to make the payments – their good credit".
Unfortunately, a buyer with a 550 credit score, purchasing a home with no money down does not have the incentive necessary to secure the Lender's investments. The Lenders were basing their investment on one thing and one thing only, rapidly increasing property values.
Lenders knew, without a doubt, that these loans would default. They also knew they could make billions of dollars by writing these loans and selling them off on the securities market (mortgage back securities MBS). They also figured that when these sub-prime borrowers got into trouble they would be able to refinance them(starting the MBS process all over again) making more money. The sub-prime borrower would have an incentive to stay because they would have equity in their property.
The mistake, the Lenders made, was in thinking that values would continue to increase. A homeowner, who has already proven that they do not pay their bills on time (sub-prime borrower) is NOT going to stay and fight. They will and are walking away from the financial noose around their neck. They have NOTHING to lose. Their credit already sucks and there is no equity to try and save. Why try to keep their home by working out a loan modification? A loan modification would not change the fact that they are paying way too much for a property that has lost value. Why pay $1,800 a month when they can rent the identical house down the street for $800? To save their credit? Nope. To honor their obligations? Nope. If they believed in "honoring their obligations" their credit score wouldn't be 550.
The mantra, at least in my area, for owners in default is "Easy in….easy out!"
This post is one of the reasons why I feel "Big Gov" needs to stay out of this mess and let the market run it's course. It won't be easy and it won't be quick. But, just maybe, our new mantra will be "No pain….no gain".
This post is 100% my opinion. What's yours?
Here are a couple of links to related posts I had written earlier this year.
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