What the Banks Fear

Great stuff from the LA Times, via Calculated Risk:

A homeowner who can’t sell his house tells the L.A.Times, “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on.” Banks and lenders fear this kind of thinking — that walking away from a house could be the smart economic move — appears to be on the rise.

This is the big fear… that getting foreclosed on or declaring bankruptcy will no longer be seen as a financial & moral sin of the first order.

More from the article:

“I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions. 

“I don’t really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal.”

I can’t argue with that logic.   Personal bankruptcy has long been seen as something shameful here in the USA.  If you’re forced to declare bankruptcy, you’re a loser.  You can’t manage your money, you’re too lazy to work enough to stay solvent, and you are more or less resigning your role as a person in this materialistic society we live in.   Banks and other lenders encourage this sort of mindset, naturally.  It’s in their best interest to keep people locked into bad financial decisions for as long as possible.   Why allow them to wipe the slate clean and start over when you can keep them behind the monetary 8-ball for the next few decades?  Allowing people who made bad decisions to take a hit and then move on with their lives  would hurt the profits of the same banks that are currently getting hammered for making bad decisions in their investing and are now screaming to Washington for help.

I think we’ll see more of this line of thinking pop up as the housing market & economy continues to worsen.  Even people who made decent (i.e. well-accepted for the time) financial decisions with regards to housing will get caught up in this.   We have a few REO houses in our development that are being marketed right now.  The banks are offering them at below-market value to try and dump them fast.  This will set a new, lower pricing standard for my development, which will hurt the next wave of sellers that will crop up.    More homeowners will end up being underwater on their loans, and the cycle will continue until things finally bottom out.

If nothing else, now we have a clearer understanding of why the “Bankruptcy Reform Act” was hammered through in 2005.   Someone saw storm-clouds on the horizon.

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