In many markets that have seen drastic declines homeowners have seen the value of their property drop by 50-60%. Many of them are not going to keep paying $4K a month in housing expenses for a home that is worth $160K and that they could rent for $800 per month. If you are in that situation, its a pretty easy calculation to make.

Now, the reality for the loan servicers and their investors is that in a foreclosure the best can expect to net is about 50 to 60% of the current market value. (not the original value). What is a better deal for the investors in that situation? What would you want on your balance sheet - $80K after a 1 to 2 year legal battle or a performing asset valued at $160K that is generating about $1K per month income?

This is an economic issue, not a moral issue. That a realtor or mortgage broker would try to infuse ethics into this argument is laughable and their conflict of interest is palpable.

IMO, Bernanke is cutting losses quickly. I also take issue with agent and lenders who want to throw around the responsibility blame card. Let a neutral 3rd party vet all your transactions, and if yo can show that you walked from all transactions that shouldn’t have gone down, then feel free to cast the first stone.

I have literally several dozen people who are simply victims of a falling market and a few bumps, or pot holes or real tragedies derail their responsible lives.

In situations where the borrorer would like to hold on to the property but only if debt reduction occurs, the banks have choices -
1. foreclose and lose, while dragging down the market comps and adding to the distressed inventory,
2. approve a short sale that has roughly the same effect,
3. see a savvy BK attorney get what is now an under-secured, therefor unsecured 2nd discharged and the borrower stays in the home paying the 1st

or

4. Forgive that same debt that they’ll write off anyway. Agents don’t like this option because it takes them out of the picture.

There is no perfect blanket answer to the situation, but there are options that don’t have to be worst case.

When people have to resort to “Affordability Products” like Neg-Am loans and Interest only loans to make the payments on their houses, then things are way out of hand. There’s a reason they increase interest rates when the economy is booming. Because excessive unchecked growth leads to crashes.

Bernanke came in too late to do anything. I honestly feel bad for him. I do wish he would talk less though.

Most lenders/investors would like to have an assurance that the money they lend is coming back in accordance with the agreement. If you put $10,000 in a CD, you expect to get your 10 grand back plus interest. The CHAIRMAN of the FED is suggesting that the banks, pension plans, your 401k, and all other lenders might just want to take a big hair cut on their investors’ money for the Gipper.

I can see it now: Ben Bernanke announces that all the retired policemen, firefighters and teachers in the country will have to take a 20% monthly pension reduction so that Citibank can pay its dividend and keep “Wall St.” happy.

As Kris said: Crazy talk, but “It’s the Fed Chairman.” he said in disbelief.

Also note: Bernanke wrote the book on the Great Depression: He knows what he is facing, he just needs to stop babbling when the microphones are on.

You’ve heard of those services like “Just walk away” right? That leveraged equity that people were cheering on about when prices were going up is working in the opposite direction now. I read an anecdotal story recently of a gentleman who purchased a house across the street (track homes) that was identical to his for over $100,000 less. Then he rented it out for the 8 months while his current home went into foreclosure intending to just go across the street.

In other words, for 8-10 months he gets an effective 30-50% reduction in his mortgage payments (collecting rent on one place while not paying on the other) followed up by a permanent reduction in debt and a payment structure lower than what he was originally paying. What’s sad about what he did is that it’s not even illegal. To prove fraud, you’d have to prove that he didn’t intend to pay off his loan when he signed the documents. Which he probably did.

What Bernanke is suggesting is morally wrong and unfair, but it may be the lesser of two evils and the best choice for the bank. Foreclosure expenses, sales commissions, and carrying time for an nonperforming asset are way worse.

In my little cow town, Houston, it took almost 20 years for some neighborhoods to recover 1980’s pricing as a result of the Oil/S&L bust, and that was about half the size of the bust we are looking at today: 200 billion vs 400 billion. I am not counting the 15x leveraged margin calls in the hedge funds where not even Bernanke knows what the numbers are.

That is why our clients buy very carefully to this day-they purchase as if they might be in the home quite a while. Of course, here in Texas, we tend not to day trade our homes, we live in them.

If you don’t believe Mish, buy a house this year. The FHA lending limits were just raised as eye candy for the election year and FHA loans are easier to qualify for. A 6% rate is low by historical standards, and if the sky really is falling, you will be able to rapid refi (an FHA feature) at 4% and 2% as we deflate. If we inflate banana republic style, and rates go to 18% 1980’s style, you will have an assumable 6% loan. (I think I just stumbled on my next blog post.)

BTW, every time I read Mish I have an urge to sell everything and short the market and stock up on canned goods. It’s dangerous stuff.