Mailing Back the Keys
Feb 8th, 2008 by John Stodder
The banks who so helpfully loaned money to unqualified buyers are suddenly feeling house-poor themselves, says City Journal’s Nicole Gelinas in the Wall Street Journal.
(S)ome borrowers, even those who can theoretically afford to keep their homes, realize they owe much more than what comparable houses in the neighborhood are selling for — and think that prices won’t rebound anytime soon. So they’re walking away, according to anecdotal reports as well as recent statements by top executives of both Wachovia and Bank of America.
In most cases, once a homebuyer splits, the mortgage-securities investors are stuck with the loss. In some states, including California and Arizona, this provision is the letter of the law. In others, the bank forgives the balance of the loan — a common practice that’s unlikely to change now, given the criminal and civil investigations banks are already sweating through.
Essentially, mortgage-bond investors, seemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. Moreover, prime borrowers in many markets face the same incentives.
Yes, this behavior is new — but only when it comes to houses. Americans have long been able to cut their losses from bad investments and start over. It stands to reason that when the market made houses into yet another speculative investment, Americans would do the same.
Yes, it hurts your credit rating, but Gelinas says the damage “may be discounted.”
If hundreds of thousands of people with decent work histories are going to have less-than-stellar credit because of foreclosures this year and next, they won’t suffer so much as in the past. Many walkers are going to want to buy houses again some day; and when they do, lenders are going to want to make money lending them money to do so (hopefully requiring a good down payment). Investors searching for yield likely won’t bypass what could be a large pool of borrowers.
Gelinas’ point: Government intervention to help those who got into a home via a subprime loan isn’t necessary. The market — and human ingenuity — is taking care of it. And the lenders, scapegoat for the looming recession, are the ones getting stuck.
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