This level of strategic defaults is a cancer on the mortgage industry and economy. It seems that the penalty for defaulting is paltry. If this level of strategic defaults is not devasting the mortgage industry, we must now be experiencing government control of the industry. In a rational world, future mortgage terms would reflect the losses from strategic defaults. It seems that the ability to escape bad mortgage decisions has become another entitlement. With the already crushing weight of existing entitlements, new entitlements are even less sustainable.
The penalty is what the banks set it at. As a result of the 2005 bankruptcy “reform” legislation (which was passed by a GOP congress and signed by Bush), the hierarchy of loans on which you can or should default goes like this now:
1. Your mortgage. You can default on your mortgage easier than...
2. Your credit cards, which you can still get adjusted in a BK filing, unlike...
3. Student loans. These are now non-discharge loan obligations in a BK proceeding, so the bankers have effectively elevated student loans over mortgages on the scale of what will be the highest quality loan out there.
Bankers also wanted low to no down payments on mortgages, so when the ruthless default happens, they get less money and are completely exposed to price changes in the housing market.
The bankers brought this on themselves. They’ve stepped on their own cranks while wearing golf cleats. They *asked* for this outcome.
Well, they got it.
These are a result of artificially inflated home prices.
Banks puffed up rates to sell the notes.
The contract is the contract. The land and house was the guarantee. The banks are now saying they don’t want their guarantee? makes no sense.
unless, the valuations on these house are even worse than they are letting on. so in that case the house prices should crash HARD to 10%-20% of what was the peak.
“It seems that the ability to escape bad mortgage decisions has become another entitlement. With the already crushing weight of existing entitlements, new entitlements are even less sustainable.”
The entitlement “relief” goes to the borrower and the lender.
The banks and their highly paid experienced and wise managers, lost little.
The borrowers are penalized for a few years.
And the full economic cost goes to our grandchildren, if they pay off the national debt to our Chinese and Japanese creditors.
The ball has been kicked into the future, at taxpayer expense.