Modifications,Short Sales,Deeds in Lieu,WriteDowns

Strategic Defaults

Posted on Monday, January 25, 2010

What’s the problem with strategic residential defaults?

• Ethical issues; Presumably shopped for, negotiated and agreed to loan terms. Had opportunity to ask questions, understand (goes to shared responsibility for these mistakes/do we want to hold borrowers responsible for their own choices and, if not, then who?). Voluntarily signed loan documents agreeing borrower and repay funds (presumably based on belief they cold ive in a beautiful home and make a killing). Didn’t turnout as planned. Since when can borrowers unilaterally decide not to honor obligations?

• Moral Hazard; Lack of consequences encourages future risk taking. People like to say, if borrowers had made money would they be wanting to share the profit with the banks the same way they want to share the losses now? Are people who invested in stock market abel to do that? Since when do investors get to just walk away?

• Contagiousness; as proven by recent studies

• Adverse Feedback; Threatens more foreclosures and value decreases.

• Social Responsibility: Neighbors pay with plighted home and reduced property values. Deficiency sum is the real hot potato – the money didn’t just disappear, no one is offering to give it back. Leaves the loss to the rest of us to pay; FDIC take-overs cost us all $, FHA (10% default rate,costs us all even more $ , pending tighter rules), FNMA/Freddie ($300 billion, $100 billion a quarter), Higher rates, etc.

• Goes to fundamentals of “American Dream”
? Dream lost original meaning; truly own free and clear as opposed to borrow, buy within means to home as ATM
? Entitlement?
? Benefits of owning v. renting; community, nest egg, not good purely as investment

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