Will the Push for Short Sales Lead to Deeper Principal Mods?

A reader with considerable experience in real estate who has asked to remain anonymous pointed to an article in Housing Wire describing some possible unintended consequences of the Administration’s push for more short sales:

This past week, I received an email from one of my dearest friends that has really stuck with me. It illuminates perhaps one of the single largest shifts in borrower psychology likely to come from a push to short sales:

My neighbors are being foreclosed on….

The house and land (1.3 acres) was valued at $1.8m a few years ago. Now, they are behind on payments and the bank wants to force a short sale for only $700k. She told me that she tried to modify the mortgage twice already, and has been turned down. She is willing and able to make payments on the $700k amount, but the bank is refusing and would rather sell to someone else.

he message paints an interesting picture of a potentially hidden angle to the recent short sale push by the Administration, banks, and Realtors: a renewed call for broad principal forgiveness.

It’s not too hard to see this sort of thinking quickly becoming the norm among many distressed homeowners, as a push for short sales grows ever stronger and many ask themselves why someone else is getting the better deal. More than 11 million borrowers currently owe more on their mortgage than it is worth, according to CoreLogic—and this group of borrowers would love nothing more than to replace their current underwater mortgage with whatever the accepted “short sale price” is deemed to be.

I don’t know that such a response on the part of borrowers could be deemed irrational, either. Many will ask themselves why they have a mortgage at a higher amount, especially if the bank is willing to sell the house to another buyer for less money. Why does someone else get the lower purchase price? Isn’t easier for the bank to just give me that loan instead? I already live here.

The NC correspondent carries it one step further, and points to second lien holders as the likely impediment:

The real solution to the mortgage market problem is principal write downs of underwater mortgage loans. It’s behind discussions of cramdown legislation. It is what TARP money should have been used for because it would have had the dual impact of helping both borrowers and banks.

Second liens – and the JPM, Citi, Wells illusionary accounting – are a big obstacle to cramdowns, which is really total BS. These were high risk loans when made and should be treated as such now. Of course, the truth is, no one has any idea how to model how many 2nd lien borrowers will default over time. There is no reliable historical data and the current accounting conventions completely obscure the real value of second lien risk.

The Housing Wire piece makes an outstanding point about the ridiculousness of short sales and the absence of cramdown legislation. I wouldn’t be surprised if this is an area of future litigation. The only way the banks, their regulators and congressional lapdogs can deal with the issue is by ignoring it.

I doubt that the administration had this outcome in mind when they advocated more aggressive short sales (but it is a remote possibility). If they were unaware of the implications of a push to short sales for individual homeowners, you have to marvel at their blindness or cluelessness.

Finally, how does the Fannie push against “strategic defaulters” fit in? Perhaps, if they can justify that they have segregated “bad” defaulters from “good” ones, they can rationalize principal write downs rather than forcing the sale to other parties?

The political types are terrified of pissing off the “good” borrowers who have been paying their mortgages all along. As a result, the Administration may be trying to gradually get to the cramdown treatment, while avoiding looking like they exhausted all other possibilities first. Interestingly, they didn’t seem so concerned about a slow, measured approach when it came to bailing out the banks.

In the scheme of things, the overall economy would be much better off if the bulk of underwater mortgages were crammed down to levels borrowers can afford, so that more borrowers were kept in their homes, less housing turnover was needed, fewer foreclosure related expenses were incurred (and wasted on lawyers), and the shadow inventory was drastically reduced. For fairness, the crammed down portion of the mortgage can be subordinated so that any subsequent appreciation in value can be captured, in whole or in part, by the lender. The existing second liens would be toast, currently, but would have a further subordinated right if housing really appreciated a lot in the future.

I can’t see any public policy reason why our entire economy should hinge on rewarding second lien lenders, who knew they were undertaking speculative loans in the first place, at the expense of home owners, housing, etc.

Yves here. Sadly, I think we know the real reason for the continued pursuit of this “spare the second lienholders any pain” program. And it has nothing to do with sound public policy. It has everything to do with the fact that the biggest second lien holders, Citi, Bank of America, JP Morgan, and Wells, have simply massive holdings among them and are too big to fail. Admitting the magnitude of the second lien losses would also be hugely embarrassing to Treasury, since it would reveal what a farce its stress tests were, and that the big bank remain woefully undercapitalized.

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  1. bob goodwin

    Of course there is a major slippery slope to trying to engineer an alternative to price discovery in the face of large scale defaults. When principal writedowns are given in lieu of a shortsale/default, there is every incentive to game the system (on both sides). Could the owner have gotten a loan to buy the short sale (unlikely)? Doesn’t the owner then have the incentive to *decrease* the value of the mortgage by starting to look uncreditworthy?

    And then when defaulters are starting to get rewarded, there will be a howl from the populace to write down all mortgages, regardless of distress. Soon the government will simply underwrite 50% of the real estate market regardless of mortgage delinquency, or possibly even regardless of the presence of a mortgage.

    Clearing the market by default makes sausage of the finances of a large pool of investors. But so do all of the other choices. Which winners do you choose?

    I don’t want the government choosing, or the banks winning. But liberals may have a different slant.

    1. reality check

      “Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them. ”


      Soon? You’re about 2 years late on that call.

      1. bob goodwin


        there have been few mods. The government may be holding bad paper, but it has not forgiven the loans.

      2. reality check


        THEY ARE THE LARGEST SINGLE BUYER AND HOLDER OF MORTGAGES, AND MORTGAGE GUARANTEES. Add in the crap stuffed into the SBA, FDIC(and sure to come future FDIC holdings), and other agencies and the government is already the largest single player in the mortgage market, by a huge margin.

        Yet, you don’t want them to have any say on mortgage policy. This is the same logic that ensured that there were no restriction on how TARP was spent. In order to support the free market we have to give the market more free money, without any strings.

        You seem to confuse where we are with where you believe we should be. We are at this point, and there is no way to get back to another point in the past, unless you see the banking sector able to buy that stuff back?

        1. bob goodwin

          At this point in time, the vast majority of mortgages are intact. That will change. It has not yet.

          1. reality check

            Which, in the reality we are currently in, makes the buyers of mortgages the sucker.

            Why does libertarianism always depend on a sucker? Why, in this instance, is that sucker being funded by you(and me)? Not only are you and I finding that sucker, you are now demanding that said sucker remains willfully ignorant, in order to allow price discovery.

        2. Dan Duncan

          “Yet, you don’t want them to have any say on mortgage policy.”

          Government engineering of an alternative to price discovery goes well beyond the “government having a ‘say’ on mortgage policy.

          “This is the same logic that ensured that there were no restriction on how TARP was spent.”

          A ridiculous statement. No it isn’t.

          This is the same kind of logic that pukes on the notion of TARP, regardless of how the money was spent.

          Then, you finish the warping of the Libertarian position, with the following: “In order to support the free market we have to give the market more free money, without any strings.”

          Now it’s just getting pathetic.

          How did you make the leap from the first premise in Bob Goodwin’s comment: “I don’t want the government choosing price discovery”— to he (and Libertarians) stating: “The government should continue to support the free market with trillions of dollars and no strings attached”??

          C’mon, Reality Check. This isn’t even straw man worthy.

          But, since you are new here and looking to make friends and influence people, here’s some advice: You gotta really go for it! You gotta somehow make a Hitler or Nazi connection with an acceptable “intellectual” reference for support.

          Allow me:

          “Libertarians in the US, are like Nazis-Germany circa [1932]. For it was [Chomsky] who said the US government is a hegemonic fascist regime, hell bent on growing [The Empire of Mephistopheles.”]

          Then, just cut and paste the preceding paragraph and just replace the bracketed items with phrases of your choosing. Put it in any post. You will get instant respect and acceptance as someone “who gets it”.

          [I’m going to go ahead and put it in the other posts today. Everyone’s going to really find it profound and provocative. I can’t wait!]

          1. b

            Thank you, Dan Duncan, for putting the words to my thoughts about every Down South post I have ever had the displeasure of glossing over.

          2. ubu

            “Libertarians in the US, are like Nazis-Germany circa 52 b.c.. For it was Ronald McDonald who said the US government is a hegemonic fascist regime, hell bent on growing eggplants.”

          3. reality check

            How exactly does an entity involved in buying anything manage to stay out of the price discovery game?

            Now, the reality of where we are- the USG is the largest buyer of mortgages. How on earth does the largest buyer in any market manage to NOT participate in price discovery?

            This is a very simple question. Answer it.

          4. bob goodwin

            Freddy and Fannie already own all of the most seriously toxic mortgages. They have no one to sell them to, and there is no sign that the mortgage holders who are most distressed will exit soon. So there is no market. The government through Fannie can intervene in forgiving some of the loan balance. This may make economic sense for them, but so far there has been very little of this as it likely creates unfavorable marks. The legislature may try to force cramdowns on Freddie, which is not unrealistic, but this (per my earlier comments) creates an entitlement which will be hard to manage.

          5. reality check

            They do not have the worst of the worst. They have the best of the worst.

            The worst of the worst are people who could not take advantage of the recent low rates are refinance. They either had way too much house, or not enough income to qualify even under the “easy” terms now being offered. Those mortgages are still sitting in some pool of bad mortgages(probably at the fed), marked to fantasy also. The marginally better credit risk has been transferred to F&F, they only buyers.

            When F&F decide to realize the loss does not matter, the loss took place when they bought the mortgage. They should not have been paying that much for the mortgages that they are buying, regardless of what they think they are “worth”.

            You seem to be advocating that they shut up and keep buying mortgages at current prices, therefore passing good money to banks. I disagree.

            I can’t wait until they are forced (by whom I have no idea) to write down the “value” of these mortgages. The press is going to be all over them, F&F “loose” billions. Not true. They lost the money when they paid the current market price for mortgages. They are also setting the price for those mortgages.

            Again, why do I you and I have to overpay for a mortgage that we would ultimately be responsible for anyway?

    2. Tao Jonesing

      “Could the owner have gotten a loan to buy the short sale (unlikely)?”

      From the email, the assertion was that the current borrower could have afforded to pay at the $700K level without an additional loan. So, the answer to your question is, essentially, yes: the “owner” already had a loan that, if the lender acted rationally, the owner could have continued paying.

      “And then when defaulters are starting to get rewarded, there will be a howl from the populace to write down all mortgages, regardless of distress.”

      Dude, seriously? Our biggest defaulters ARE the TBTF banks. Where are the howls?

      “I don’t want the government choosing, or the banks winning. But liberals may have a different slant.”

      LOL! Best joke of the year. The government–like the rest of our economy– is run by the banks, so your choice is no choice at all.

      Useful idiots have nothing on useful intellectuals (i.e., the smart, self-professed “libertarians,” who, like other libertarians, embrace, as a practical matter, an approach wherein ALL ROADS LEAD TO SERFDOM . The private/government dichotomy is a false one. Hug that bugaboo all you want, but it is a fantasy.

      1. bob goodwin

        The banks and the government are mutually captured. The rest of us are the victims.

      2. Toby

        Hi Tao Jonesing,

        you wrote: “The private/government dichotomy is a false one.”

        Oh yes! So many dichotomies are false, all ballooning up like boils from the mother of all dichotomies, the Cartesian Split (which itself arose from a deeper split, but anyway…), but the ‘State/Market’ dichotomy has its head highest above the parapet and needs to be shot to pieces before it’s too late.


      3. NOTaREALmerican

        Jeezz. All you libertarians, socialists, and fascists; lighten up. The smartest amoral scumbags ALWAYS win. Deal with it.

        It’s time to figure out if you’re a peasant, vassal, or noble; the rest of the “isms” are just intellectual bullshit.

  2. Ivan

    Well, the short sale has one advantage vs principal mods: a lower moral hazard on the homeowner’s part. If the banks start allowing principal mods broadly it creates an incentive for homeowners to default; in the case of a short sale, the borrower at least bears the cost of losing the home, so there are disincentives not present in the mod case.

    With the banks and officialdom already in a tizzy about strategic default, unless the moral hazard issue can be addressed I don’t see principal mods replacing short sales. It’s a tricky problem.

    1. Tao Jonesing

      “With the banks and officialdom already in a tizzy about strategic default, unless the moral hazard issue can be addressed I don’t see principal mods replacing short sales.”

      The banks have ZERO problem with strategic default when they do it, as JPM recently did several months ago.

      Call it blowblack of the libertarian/neoliberal point of view that allowed the current situation to arise, but folks like Mish (who I’m torn about, frankly) are out there advocating strategic default. Mish seems to believe that people should be as amoral as the fictitious entities otherwise known as corporations. That kind of sociopathic thinking, while reasonable under the current circumstances, is the death of the very civilization that gave rise to limited liability coporations.

      The true “moral hazard” that is rearing its ugly head is that of limited liability corporations. That’s too bad, on a lot of levels.

      This will not end well. The hubris and arrogance are immeasurable.

  3. psychohistorian

    You may find this connection a bit obtuse but until there are one or more banksters in jail there will not be mortgage principal reductions.

    1. NOTaREALmerican

      HA! Yup. nothing else matters, really.

      And something tell me the peasants don’t really want to see the honest hard workin bidnessmen, who made this great and glorious country what it is today (bidness men who pay taxes on their hard earned pay, unlike those welfare queens)… and who are day putin in jail?! DA TAXPAYER, DAT’S WHO! DIS IS SOCIALISM. AND DAY HATE DA TROOPS TOO!

    2. Francois T


      Absolutely not! This is the kernel of pretty much all the problems we have now.

      As the excellent analyst Andy Xie wrote: [emphasis are mine]

      In previous financial crises, big shots who contributed to bubbles went to jail; Americans expect heads on pikes after a financial crisis. Jailing even a few crooks is extremely important because it resets the system with a new psychology. For example, after the junk bond bubble burst in the 1980s, junk bond king Michael Milken and top executives at many bankrupt savings and loans went to jail. And after the IT bubble burst in 2000, jail terms were ordered for top guys at Enron, Tyco and even some Wall Street analysts.

      The bubble that just burst was bigger than any in the past, yet none of the big shots went to jail. Instead, the president has dined with them and begged them to support his financial reforms. Americans see this as a farce. And if the Obama administration is unwilling to change, voters will choose someone else.

      In addressing the financial crisis, Obama’s team continued a Bush administration policy aimed at protecting the status quo. Obama didn’t have to, but the government needed a financial system to protect the economy. It could have let the system go down before nationalizing it, leaving a clean sheet for a new system without the flaws that led to the bubble. Instead, the Obama administration created an enemy to its own financial reforms by bailing out the existing system wholesale. No one could expect the same people who benefited from the system’s flaws to support abolishing them.

      This system which let the majority of us down so badly is still there, preventing any meaningful reform that would reboot, not the economy per se, but the psychology of the country as a whole. Without such a reboot, we are mentally and emotionally stuck in an Everest-sized grade-AAA steaming pile of libtard/reichpubliscum, libertarian/Keynesian, left/right, bipolar maniac bullshit.

      And of course, the economy won’t restart on a good footing if we can’t get our collective shit together.

  4. Paul Repstock

    If my memory is correct, this is quite an about face from the President, who in his first days in office urged homeowners to retain possesion of their homes regardless of the mortgage perils???

    As for the knockdown prices, this makes perfect sense to the lenders in those jurisdictions where the balance of the loan stays in force. The bank recieves a large repayment upfront and the original homeowner is still on the hook for the balance. Anything paid on the debt is gravy offset against write downs of the defaults.

    Please correct me if I have missunderstood.

  5. koshem Bos

    It seems to me that a short sale is the path of least resistance for the banks. Principal mod seems way more complicated for their pretend game. The latter requires a mechanism to evaluate the reduction, have solid arguments for it and a department dealing with it.

    A short sale makes the market decide on the price and the whole mortgage is written off.

  6. Neil D

    There are few innocent people in this debacle. I rent so I have little incentive to help the mortgage deadbeats or the banksters. The deadbeats are completely unworthy of assistance given their stupidity and the banksters are unworthy given their predatory nature.

    The banksters got their bailout, but are still stuck with deadbeat borrowers on 2nd liens. The deadbeats pretty much deserve their fate. Borrowers who took part in the HELOC orgy should be kicked out of their homes.

    That said, such a moralistic approach would doom the rest of us to years of stagnation. Sad to say, taxpayer bailouts of both the banksters and mortgage deadbeats are likely the less painful choice. Having never participated in the bubble, renters and those who have no mortgages will have to pay for the toys and vacations of the deadbeats. We’ll have to pay for the bankster bonuses.

    Can we at least bring back the scarlet letter? Americans should be ashamed of themselves.

    1. Vinny

      Aren’t you a little harsh on the “deadbeats” here? First, they didn’t get a raise in 20 years, their jobs were shipped out to China, and then they were sold ARM mortgages without proper explanation.

      And the banksters got their TARP and other freebies, from… guess where… yes, from the “deadbeats”‘s taxes.

      I’d say it’s unfair to the deadbeats.


      1. ubu

        As I sit here overlooking the South Pacific from my palatial estate on my private island, I raise a toast to the deadbeats of the world, those tax-paying suckers who we all love to hate, but who, let’s face it, pay for our luxuries.

        Heres to you!

      2. NOTaREALmerican

        Re: I’d say it’s unfair to the deadbeats.

        People who wanted a bigger McMansion because everybody else had one, willing drank the Kool-Aid too.

        Yes, I know that America itself is one big Kool-Aid machine, but morals are morals. I’m a peasants, my spouse and I worked in the corporate IT scam our entire life. We saved, we don’t have a McMansion.

        I have trouble understanding liberal guilt for the peasant scammers. This is a nation of scam artists, there are few innocents.

      3. Neil D

        Cut me a break Vinny – I said I was willing to help out the deadbeats, but I refuse to provide absolution. And those mortgage deadbeats don’t pay as much in taxes as I due to the interest deduction. So they screw up the economy and don’t pay enough in taxes.

        No sympathy here for any of them.

  7. wunsacon, angry renter

    >> Many will ask themselves why they have a mortgage at a higher amount, especially if the bank is willing to sell the house to another buyer for less money. Why does someone else get the lower purchase price? Isn’t easier for the bank to just give me that loan instead? I already live here.

    Dear homeower,

    Remember how you bid on a house you couldn’t afford or at least now say you can’t afford? Remember how you outbid me on the house, because I wasn’t willing to overleverage my finances the way you were? You got to enjoy something I couldn’t — not because I didn’t want to buy a little more space for myself but because you insisted *you* were entitled to the house, because *you* would pay the financing on it, at the price *you* pushed the market to.

    So, now, you’ve stopped paying your mortgage for a year or so. On that house. The house you recklessly insisted on “winning” at auction. And, now, you want the banks, whom we bailed out only by diluting the purchasing power of the US dollars in my pocket, to use their purchasing power to bail you out.

    Well, you know what? You don’t deserve the house. I do, back at the lower price where it originally made sense for me (and, in turns out, you) to buy it.

  8. anon

    Somebody’s got to say it so I’ll just jump in.

    The example cited pisses me off a bit. Frankly I have zero sympathy for anyone whose 1.8m property is now only worth 700k, but its a useful anecdote The size of the original mortgage implies a level of wealth and sophistication of the borrower that are not the norm for the masses of underwater mortgages. The coldly rational cluelessness of the Greenwich homewner complaining that “well, I can still afford 700k, why should you sell it to someone else for a song. It’s not fair they get to make a killing on ‘my’ lovely home.

    I’d like to see numbers, but if avg home price in US was 300k at the peak and they’ve dropped by 30% that means the average loss is about 90K. 90k is a fortune to the average homebuyer and likely the only ‘fortune’ they could ever hope to amass.

    I’ve been waiting for the moment to arrive when the upper middle class started suffering. That moment seems to have arrived and they are the one’s who will strategically default with no qualms.

    That means prime and jumbos are toast and the banks fear this class more than the larger number of underwater borrowers nearer the norm. The recent PR moves to scare the FNM FRE qualifing borrowers strikes me as ‘ Don’t get any ideas above your station’ in anticipation of a coming wave of high end strategic defaults.

    1. Siggy

      Nicely said. Can you get to developing class warfare from there?

      You really should consider it because that is what is imbedded in the situation.

      The short sale is preferable to the loan modification. Better yet bankruptcy followed by foreclosure that would be the best choice.

      You loan balance is larger than the current market price, hell yes default and move out, it’s a moral imperative in that it will make your income and balance sheets a lot stronger. You’ll become a better consumer.

      All the hullabaloo is about who gets gored. First loser, the guy who bought your note, next loser the guy who gave that guy a loan for the purchase of your note. Where the guys in this line are corporations, we wipe out the shareholders first, then the unsecured creditors and finally if anything is left we give the secured creditors a hair cut or the property.

      As to guy who defaulted, he gets a bad FICO and has to move. Maybe there’s a deficiency clause maybe not. Nonetheless the primary burden falls to the original lender, or the ultimate owner of the note. Did that current lender seek subprime paper so that a CDO to fail could be created because after all it was self evident that house prices were in a bubble mode? I wonder about that often and Lloyd’s remark that there were somethings he wished his beloved GS had not done.

      The big noise about all of this is that it will flood the market with vacant homes which may or may not be amenable to be rented. And in the excess supply there will be triggered a cascade of lower prices even where the home is owmed outright. Or, household net worth will be reduced pretty much across the board regardlless of the individual frigality and solvency of any other nearby household.

      Either way you have a current surpluss of housing at almost any price. I wonder when will someone will conclude that razing the house is a rational choice?

      1. Paul Repstock

        Siggy; there are already “Bulldozer” renovations in many communities as a means of curbing the supply. If it were not for the threshold costs of building and development permits, there would have been much more of it..:(

  9. Kid Dynamite

    hopefully a simple question: how does the banks’ second lien problem get solved if they do a short sale instead of a principal writedown? aren’t the second lien holders still screwed in a short sale?

  10. Tom Crowl

    Yep… It’s ALL true!

    Here’s my story:

    In 2005 I decided to build a little ‘granny unit’ for my house. (A legal granny unit btw under Cal ab 1866.)

    I was in my mid-50’s and there were interests I wanted to pursue. I figured that I could move into the granny unit, rent out the main house and thereby cover my mortgage so I wouldn’t need much other income and could sort of semi-retire.

    I had plenty of equity (then!) so I took out a HELOC with Bank of America to fund construction. I acted as my own contractor and built it with the help of a licenced and experienced contractor friend since I don’t really know what I’m doing other than how to swing a hammer and run errands to Home Depot and lumber yards.

    The plan worked great. For a while.

    It’s a beautiful little 500 square foot studio with lots of light, Mexican tile floors, French doors… really all any sane person needs if living alone. Which is what I’m currently doing. (And my current situation makes dating pretty much impossible… unless the lucky candidate wants to pick me up and pay for dinner! So solo I remain.)

    I had great tenants with the rent covering both the 1st and 2nd. It was looking like a modest but secure little vantage point from which I could pursue my humble interests in political and economic thought from an anthropological perspective.

    In fact, out of that freedom and time to ‘think’ I came up with an interesting business idea which I then decided to pursue. (I won’t go into that now but anyone who’s been paying attention will have some basic idea of my focus.)

    So anyway, I’m going along gung-ho trying to advance this concept I’ve got… patent attorney, website development, going to some conferences (made my first trips to NYC and D.C.)… all kinds of stuff.

    All on a shoe-string. No fancy website, no fancy hotels, no expenses to wine-and-dine hotshots. Just basics.

    But pretty much on credit cards. I had great credit. And men pursuing dreams don’t know how to NOT pursue them. And sometimes they even think they’re serving a greater good.

    Stepping back a moment… In the summer of ’07, early in this ‘dreamquest’ I’m on… I realized I was at some point likely to need a business loan. Or at least wanted a little cushion for launch and/or emergencies. During this time I had no income other than the rent coming in. Yes, this was very unwise… but also pretty much unavoidable unless I was willing to abandon my pursuit. Which I wasn’t. And I’m still not willing to. (Shame on me…)

    So I go to my local Bank of America to see how that all works. They say a business loan for a startup ain’t going to happen. I can’t really blame ’em for that. It’s a risky business…

    But they say… “GET A HELOC. It’s no problem and we don’t care WHAT you use the money for!”

    I say, “Well that sounds great in theory but I already used up my HELOC building this addition. And I don’t think there’s enough equity left for that.”

    And they say, “Don’t worry about that. We can do an appraisal and see. And it won’t cost you a cent to find out. So what’ve you go to lose!!!”

    So they got their appraiser and did their appraisal and whoa nelly!!! They managed to find another $65,000 of available credit in my house!

    My GOD! It’s Christmas in July!

    So the OLD line of credit was replaced with the NEW line of credit. And all of a sudden I have $65,000 worth of available credit!!!!!!!!!!!

    Now I know what you’re thinking… “Ah, so then you went out and wasted a bunch of money on trips and hotels and dinners and hookers and football tickets.”

    Nah. That’s not what happened. In fact, I never touched that line of credit at all.

    In summer of ’08 my tenant had a motorcycle accident. They didn’t have insurance. He couldn’t work. Rent stopped coming.

    Meanwhile the election was approaching and I hoped to at least launch my little idea for demonstration, maybe get a little publicity in the ‘silly season’.

    Thank GOD for that line of credit sitting there to get me over the hump till I could get out there and hopefully find some investors and partners!!!

    But Ooops!

    In August of ’08 I get the mail from B of A saying the line of credit was no longer available because of problems in the Real Estate market.

    Actually I can understand this well enough. But its starting to look like they had some inkling well before the Fall of ’08 that appraisals and prices were out of hand.

    In other words, the ONLY beneficiaries of this HELOC were B of A loan officers, appraisers and I assume their books at least for a quarter or two.

    When I seek some relief from B of A they say the only HELOCs they’ll re-instate even partially would be for someone in the middle of improving their collateral… in other words, in the middle of a kitchen re-modeling or something.

    B of A and the rest of the gang… fortunately have friends in high places. They’re being gently boosted over the hump. It must be because we need them so badly because of their wisdom.

    For me? I’m in foreclosure. No modification possible. The buyers get one hell of a deal since the rent WILL more than cover the payment they’ll have to make.

    I can’t imaging why I’d be dissatisfied with the social contract or how our government sees things.

    P.S. Should my little endeavor acquire legs, and I think it very well may… it could end up with some enormous trust accounts. I very much look forward to those account NOT going to large banks… but rather to community banks. Or other such banks as may be created.

    P.P.S. I believe B of A actions amount to control fraud. And we ‘small people’ have little recourse.

    1. Siggy

      Tommy, Tommy, love your tale. Is it a parable?

      Moral, you never should have quit your day job.

      1. Tom Crowl

        Nope. It’s not a parable. It’s all true. Current foreclosure sale date scheduled for July 14th. Though there’s a possible short sale situation which will hopefully delay that process. Meanwhile I pursue my project and hope for the best. At this age jobs aren’t likely.

        The first is now with Wells Fargo… which got it from Wachovia… which got it from World Savings.

        Look, there’s no doubt I made some mistakes. My borrowing was for capital improvement and an entrepreneurial endeavor. This is always a chancy thing. This I know… and knew then.

        But it seems there oughta be a way to share the pain. Frankly I believe my ‘investment’ decisions were then, and are now more sound than the banks however they turn out.

        Yet they continue to party… and I become homeless at 60.

        But really. I believe in what I’m doing.

        And I now have the added motivation of knowing that its success may itself serve to take away some bull-pucky profit sources of this financial sector.

        (It has to do with facilitating networked citizen political participation and a mechanism that I believe is an essential element for that – think x-box points for lobbying – and its implications on more than one level.)

    2. Paul Repstock

      Lol Tom; You were undeniably naive..:)
      Let me list the ways:
      1)You thought the ‘Bank’ was there to help you??
      2)You thought that the Golden era was the new norm.
      3)You thought that this was some mechanism which would allow you to grow your enterprize by ‘honest’ means…..

      I hope you never described your business venture to the bankers (But, ofcourse you did. We all do.) If you had a good idea, it won’t be your business any longer…:(

      As for lodging your dreamed of fortunes in community banks..how many hundred of them have now been destroyed and taken over by the mob. Remember, funds in small banks are not safe. They don’t get bailouts!!!!

      1. Tom Crowl

        You make good points. And in truth it does have its funny side. Which even I see at times.

        However they won’t be able to steal it. Or stop it. In fact they’ll wish it’d never been thought of.

        Do you know that according to the Center for Responsive Politics the financial services spent $2.3 BILLION dollars on lobbying over the last two decades? Actually I bet its even more. A lot more if you include the revolving doors and the rest of it.

        Wowie Kazowie!!! Its hopeless!

        Dudes and dudettes…

        $2.3 B’s works out to about $1/year/voter.

        I’m absolutely convinced that eventually (and I think soon) its going to be realized that a neutral system facilitating
        networked lobbying by regular citizens is both desirable and more than capable of sustaining itself.

        And that a viable micro-transaction is an essential element of that.

        And THAT leads to the evident advantages of a network facilitating that transaction by combining charity and political contribution (Commons Actions) through a unified dedicated account. And THAT leads to obvious monetization potentials.

        They could try to steal it. But it’ll provoke a scream. I’ve been picking up some notables on my LinkedIn network. And besides while the patent is still provisional… recent conversations with the patent office lead me to think… well, they like me… gee gosh darn willickers.

        (In fact even the bankruptcy trustee for the creditors wanted to take over administration rights. He thinks it could be valuable. He called my patent attorney and they had a long talk. My attorney managed to convince him it was only provisional so no value could be assigned to it. And, of course he could be right. Bankruptcy is now complete. However patent process continues. Of course no guarantees. But look… at least my life is interesting. I’ve never had that much concern for the material stuff most people slave away for. And only paying attention to people who ARE slaves to that mentality is a fatal mistake for a civilization. In my humbilatious opinion.)

        And besides I’ve been rich and poor. Either way. I still get up.

        And try to see the lighter side. It all really is rather ridiculous.

        I suppose I could’ve gotten rich designing exotic financial products. But you know what?

        I feel better this way.

        1. Paul Repstock

          Tommy Crowl, yur a good lad and I’m happy to have read yur story. As Canadians we haven’t felt the whole blast yet. I’m sure it is coming. As the old saying goes, ‘when the US sneezes, we get pneumonia’…:( rockpickattelusdotnet

          From one wannabe ‘inventor/entreprenur’ to another; I say best of luck (you will need it) In the meantime, enjoy. These efforts provide focus and meaning to our miserable lives..:)

  11. Tom Crowl

    Oh yeah… final note.

    Now with a bankruptcy and ruined credit I should undoubtedly consider myself a hideous drain on society and positively un-American. I’m certain I must be seen as awfully irresponsible by our Corporate and Governmental leaders.

    But somehow I just can’t come to think of myself that way.

    That’s something they should be concerned about. Because I think there’s millions of us.

    1. JTFaraday

      I take it, then, that you don’t want an official fedgov approved $8 an hour job from those charmers over at “the new ‘new deal'”?

      1. NOTaREALmerican

        A federal job is one of the good scam going tho.

        I got in on the corporate IT scam over 30 years ago. I’ve made a bundle participating in this scam.

        What other scams are left for average people to participate in? (disclaimer: I’m average)

        A federal job will get you good pay and good benefits. The last scam standing will be the federal government.

        Basic rule of life: If you’re not running a scam, or participating in one, you aren’t going to be successful (unless you happen to truly above average).

        We all get to choose to drink Merican capitalism Kool-Aid (or not). We also get to choose if we want to be a dumbass our entire lives.

        1. elo

          When you are a smart amoral scumbag, scamming is in your genes. Anything you touch becomes a scam of sorts. This is why the Fed’s highpower money needs to go directly to the amoral scumbags, because it is only the scumbags who will be able to scam America back to economic health. I hope that made sense and answered your question.

      2. Tom Crowl

        I hope I don’t need to. But there’s no shame in it. And there are plenty of things to be done within the Commons.

        That’s not a dirty word you know… the Commons.

        Even Adam Smith thought it was a fairly important area for attention.

        Look… BOTH Big Government and Big Business are seriously screwed up. And it has nothing to do with either being inherently ‘BAD’… well maybe it does actually… but its BOTH of em… dammit.

        I believe the technical term for the current state of our national decision systems on every level is a ‘Bullshit Explosion’… lot’s of color and noise, but it stinks.

        As does this whole Left/Right game our deceptive parties play.

        (Right-on ‘i on the ball’!)

        Civilizations, just like hunter-gatherers are constantly faced with balancing the individual and the group. That’s life. There’s no getting away from it.

        It’s going to be an eternal balancing act as long as we’re around.

        And every choice that has to be made will fall somewhere along that continuum. There’s no final formula that’s going to work which assumes either pole is the correct one.

        But our system, our media, our parties… all encourage an inane simplification which produces all kinds of good sport.

        “If we can just keep their lizard-brains occupied those higher-functions won’t kick in and we can keep selling ’em crap! But wait a minute we don’t want to have to pay ’em the wages to afford the crap. If we can pay ’em less… we can make more!”

        “hmmmm… I know!!!! We’ll LEND ’em the money!!! Problem solved!”

        I’m not a conspiratorialist… and I don’t really think it happened that way…

        But it happened because it’s in the narrow interest of each of those constituencies… but NOT the people as a whole… and that’s whether your a conservative OR a liberal.

        It must be our American Exceptionalism that blessed us with such cleverness. Oh Lordy… bless the whiz-bangs that developed these complex and magical financial products and gerrymandering and loopholes in thousand page bills that aren’t read. Surely their bonuses and prizes are well deserved. We’re so fortunate that our best-and-brightest are looking out for us!

        P.S. You think things are screwed up now? Just wait for the student loan fiasco which will hit sooner-or-later. And its not the money… so much as what it’s doing to the social contract. A nation of indentured servants with limited futures is going to get cranky.

        1. elo

          They won’t get cranky if you tell them (and keep telling them) they live in the best of all possible worlds.

    2. anon

      OK, This a joke post, right?

      You took a risky loan to fund a risky project and it turned out to be too risky for you.

      Your’s was a bad business decision, not a housing decision.

      1. Tom Crowl

        Yep. Clearly the banks made better decisions: get in a position where your bad decisions don’t matter and are even profitable!

        However I don’t think my little concept will die.

        And now I get to be a polemicist!

      2. Tom Crowl

        and ‘anon’ (great name by the way… where’d ya get it?)

        I’m not looking for a bailout or modification. And that’s despite living there for 18 years and a whole lot of labor and remodeling all through the house.

        Though I’d at least like to be able to rent my little bungalow I built with my own two hands at a fair price and not be on the street. I can afford that probably but not the whole house.

        As for future equity. Hey… tell you what…
        You can have that. Where do you want it sent?

        1. Skippy

          Isnt equity like the little whores (banks) whisper…I love you big man….come too me and I will make it bigger.

          Skippy…rise above it tom…seems you already have.

          1. Tom Crowl

            That’s because instead of becoming a victim…

            I become a warrior!

            For better governance, for an economics that recognizes its true purposes and and deals with the paradoxes in human nature that create these recurrent imbalances, and most of all for systems that promote a strong and wise citizenship within a culture of civic engagement.

            I may be naive. But I’m smart naive. And we are the sorts that DO change the world.

  12. Friedman's Ghost

    While I do not agree with everything Mr. Taleb says, over three years ago he said one way to solve this would be to convert debt to equity. Why not.

    As for all of you who are ripping on the person short selling or looking for a modification or whatever:

    As financial complexity has increased it has become apparent consumers’ ability to understand it has lead to dire circumstances. In response, we feel education turns consumers into “responsible” and “empowered” market players. They become motivated and competent to make financial decisions.

    However, this belief lacks empirical support.
    The velocity of change, the lack of consumer skills, personal bias and the infinite ability of financial firms to reach consumers leads to harm.

    Biases are resistant to change, particularly under the conditions presented by most personal finance decisions.
    Telling consumers they must think more carefully before making a financial decision will have no effect on unconscious biases.

    Consumers might increase their conscious attention and effort, but they will do so in the same biased way.
    People are often unable to recognize their biases and prevent the effects of these biases on their decisions, even when taught about them.

    American culture has long viewed personal finance decisions as reflecting character traits of responsibility, trustworthiness, self-control, industry, frugality, and wisdom.

    Financial decisions are either “good” or “bad.” Financial behavior is either “responsible” or “irresponsible,” “healthy” or “unhealthy.”

    Consumers with late payments, like juveniles who commit crimes, are “delinquent.” Poor financial behavior is seen by some as reflecting mental instability.

    Financial literacy education as a policy tool blames the consumer for her own plight, but shifts from an indictment of raw moral character traits to the consumer’s “choice” about whether to attend classes and use the information and skills purportedly taught.

    1. Paul Repstock

      Well Ghost;
      A good first step in this “Financial literacy” might be to require all contracts to be written in plain english and to have a succint one paragraph header which describes the spirit and the intent of the agreement.

      Not 24 pages of legaleze which ordinary people are assured is just ‘pro forma crap’…

      1. Friedman's Ghost

        Paul: I completely agree. Recently I did a readability scale test on a Bank of America Credit Card Agreement and a standard issue mortgage closing contract. The readability test on the credit card agreement came out to a 10.6 (about junior in high school) so most (but definately not all) could at least read it and have some understanding.

        The readability test for the mortage closing contract toped out at 16.4 so you would need at least a Masters degree to even read the dam thing, much less understand it. I am sure all those folks sold HELOCs, ARMs, and Alt-A’s COMPLETELY understood the terms.

      2. NOTaREALmerican

        How would this benefit the smart amoral scumbags who own the system? If it doesn’t what process would allow for something like this to happen?

        1. Friedman's Ghost

          Paul: Unfortunately, you are correct and I do not have a good answer. Perhaps there is an answer in look back at how these types fo transactions were completed BEFORE the scumbags developed the tools of their trade?

    2. Piero

      I’d like to let the average person off the hook with the excuse that things are too complex but personal experience won’t let me.

      Let me explain. When I bought the condo in which I live, there was a typically risible process at closing. Documents were shoved in front of me like chocolates going by on the conveyor belt in front of Lucy and Viv. But I demanded to know the exact significance of every single one. At one point, there was this exchange:

      Attorney: And, here, sign this one.
      Me: What’s this?
      Attorney: It says that you’ll carry (some kind of)insurance on the unit.
      Me: Uh . . this says that I guarantee that.
      Attorney: Right. Just sign.
      Me: Uh . . doesn’t the condo association do that?
      Attorney: Yeah. Just sign.
      Me: But . . I don’t control the condo association. There are something like a hundred fifty other owners.
      Attorney: Here, use my pen.
      Me: Wait. I can’t guarantee something like that. It’s logically impossible. I can’t guarantee that I can make the majority of the association do anything.
      Attorney:(exasperated)You’re the first one who ever complained about that!

      1. Friedman's Ghost

        Piero: Thanks for sharing this. THIS is the process tha VAST majority of Americans (if not most people in the west) go through at a closing. Such a HUGE agency problem with so many standing to gain.

  13. Ronald

    “The house and land (1.3 acres) was valued at $1.8m a few years ago. Now, they are behind on payments and the bank wants to force a short sale for only $700k.”

    This is the situation Calif today, millions of overpriced property with few buyers able to purchase even at the short sale price. The howls for cram downs will get louder as the housing crash hits the white upper class. Its fine to have a price clearing mechanism for the poor neighborhoods and convert them to rentals all owned by white investors but when foreclosures and short sells start hitting the white suburbs it suddenly becomes a tragedy!

    Real price discovery in the white exclusive neighborhoods causes alarm bells to ring in D.C. as modern economic segregation patterns have created stranded high end homeowners stuck with huge mortgages created not only by high priced property but endless refi’s and home equity withdrawals to support a uncommon lifestyle of expensive cars,travel and food but their dreams of selling out for bigger bucks to cover these various equity draws and keep the lifestyle intact are finally hitting a financial wall.

  14. DR

    “biggest second lien holders,”

    Do have any idea how much these recourse loans could be sold to credit collection agencies? These loans aren’t dead in the water….

  15. dr

    ““The house and land (1.3 acres) was valued at $1.8m a few years ago. Now, they are behind on payments and the bank wants to force a short sale for only $700k.””

    The bank has a contractual right to force this just as the mortgagee has the contractual right to walkway.

    Lets stick with the rule of law….

    1. Paul Repstock

      The “laws” have been carefully rewritten so that the homeowner does not have the right to walk away. If the homeowner cannot get a principal reduction they are still liable for the entire amount in many cases. If the homeowner walks the bank or other lender can sell for any price they choose and demand payment for the balance PLUS COSTS!

      The reason the government is so desperate to delay this is the fear in financial circles of a mass “Walk away” which would deflate this bubble (still strong) wth a pop! Their financial empires would then collapse (regardless of bailouts)

  16. Robert

    I lead a specialized department for a large regional RE brokerage in Ca. I deal with this issue everyday. I deal with the borrowers, the agents and the investors in preforeclosure activities. I teach our agents to understand that short sales are principal reduction programs. Same house, new loan terms, different borrower. If the lender is going to face a situation where they cannot escape a principal reduction, why would they extend it to a borrower who is already in distress and perhaps (just a theory of mine) has already lost the fear of default and instead bring in a new borrower (not sure that this is right or fair, just my interpretation of what is happening). In todays lending landscape, that new borrower will face much more stringent qualifications and underwriting to qualify for the loan, making them a better credit risk going forward than the current borrower. The lender’s actions reaching out to agents to help them contact clients in distress who need to consider alternatives to foreclosure (short sales), always with the understanding that they work together whenever possible to try and recapture the loan through the new buyer made me realize this a long time ago. Only when we run out of well qualified new buyers, will we possibly see wide-spread principal reductions for current borrowers in distress.

  17. Vinny

    They’re grabbing on for straws. This whole crooked fiat financial system is crushing down on the banksters and their illegitimate government like a ton of bricks. They’re desperate, pathetic, and know they’re doomed.

    All we need to do is laugh watching them run scared like a bunch of chickens without a head… and if possible default on a mortgage or two… just for kicks…LOL


    1. ubu

      To reword it slightly differently: the banksters are about to crush you (non-banksters)) under their whole crooked fiat financial system. They will be laughing as you queue up in front of insolvent banks, looking for the loot that they made off with long ago,

      1. Vinny

        Not me, personally, my friend. My gold and silver is safely buried away.

        I’m just sitting here, shooting the breeze, sipping on my cappuccino, waiting for prices to drop to near zero, so I can buy up the whole West Coast from San Diego to San Fran on a few gold coins… :)

        PS — some of you may remember me as a Florida guy. Well, thanks to BP, I think I better hang it up with Florida.

        1. NOTaREALmerican

          If you can “get the hell outa Dodge”, why don’t you go to New Zealand? South Island, Nelson in particular, would be a great place to watch the collapse happen. They’ve got good wine, food, and a low population. Can’t ask for much more than that.

  18. Ronald

    “Only when we run out of well qualified new buyers, will we possibly see wide-spread principal reductions for current borrowers in distress.”

    Excellent point Robert and given the mortgage balances at least in Calif those days are fast approaching.

    1. Vinny

      I’m a qualified buyer, yet I’m waiting… and waiting… and waiting… until the banksters blink.

      And they’ll blink, trust me… ’cause I’ve got all the time in the world to wait ’em out… and there are millions like me out there.


  19. jedwards

    The reason why they want to change borrowers is because they can package the mortgage back up and sell it to Fannie and Freddie, or some private.

    The value they could get for the same mortgage to a prime borrower at these interest levels, with a much lower chance of prepayment risk since interest rates are at rock bottom, means that they can sell the mortgage for much higher than if it were left in the hands of the defaulter.

    1. Ronald

      “The reason why they want to change borrowers is because they can package the mortgage back up and sell it to Fannie and Freddie, or some private.”

      and fees?

  20. dr

    I live in an area where house values have decrease around 20-30%. The ones who won’t pay have already walked away. The ones that want to stay are receiving a combination of principle forbearance (20 year balloon payment along with a standard interest rate 4.5%+(before they couldn’t refinance because of an underwater mortgage. Most of these are young people that might see their income rise. Their new payments aren’t far from equivalent rent.

    This isn’t a bad workout as both banks and borrower are taking on risk.

    1. Vinny

      “Most of these are young people that might see their income rise.”

      They better get in line for a work visa in China, if they want their incomes to rise in this day and age…


  21. Eric

    In hindsight, the problem with second liens was predictable. If you hold something that isn’t worth anything, except that it is worth something to someone else if you were to formally acknowledge that it has no value, then it has some value. Sure it is a case of second lien holders asking “What’s in it for me?”, but since when isn’t that a legitmate question?

  22. Jim

    Which am I, a “good borrower” or the alternative, a “predatory borrower”? Had an 810 FICO, paid 25% down, got a $450k pay option ARM, got a $75k home equity line of credit a few months later, and spent it ALL on improvements and landscaping (I have the receipts, no vacation, or new car). Then I became unemployed in a small NV town 75 miles from Las Vegas, NV. My Minimum Payment was larger than my 30 year payment after three+ years. I had NO NEGATIVE AMortization when I asked for a mod on the 1st. BofA services my BofNY note; they RAISED & FIXED MY INTEREST RATE for 60 months, but allowed me to pay interest only from my pension which lowered my payment $882/month so I could afford to stay awhile apparently to ride out the storm. Unemployed but barely able to exist with the 1st payment, I could no longer make the 2nd payment (Chase/JP Morgan), The 2nd lien holder’s Collections Dept threatened me unmercifully. I contacted their Mod Dept, but was told they would not do a principal reduction or write-off the loan, so I did not complete the paperwork as it was predetermined to be a useless waste of everyone’s time. Their Collections Dept finally wrote to me informing me they intend to FORECLOSE, yet property values here have gone down about 40-50% from peak. The foreclosed properties in the neighborhood have sold on average for $100 to $140/square foot, making this property valued at $321k to $448k, or less than the 1st. Chase/JP Morgan the 2nd lien holder will have done what it knows how to do. I’ll be out on the street sometime in the future, probably with a 480 FICO. I see no advantage of a short sale. I am still paying the 1st mortgage, and my friends ask me why?

    So am I a “good borrower” or “predatory borrower”?

    1. Paul Repstock

      Jim; I feel so bad for you and others in your position.(I’m not there…yet!)
      You are a perfect example of the ‘Real Target’ of the subprime meltdown scam. 25% down in an obscenely inflated realestate market!!!!! The have stolen your money and your future. The people who bought and financed at ‘zero down’ were merely place holders and a justification for inflating the prices. You had all that ‘lovely real cash’…I don’t know why you are bothering to make payments either…Some missplaced sense of honesty probably..:(

      I truly hope that you can somehow resolve your situation. Just remember that your only ‘crime’ was to believe the lies you were told.

      1. Paul Repstock

        Well Yves; I see this blog has now come full circle..:)
        We are back where you started…”Econned”

        The purpose of the entire scam, “To remove money from the hands of hardworking prudent people and return it to the ones in power”.

      2. Jim

        Thanks for the sympathy. My disabled wife is the reason I stay here and make 1st payments …. waiting for the future, whatever it will be, totally out of my control. About that “sense of honesty” you mentioned, as I am a retired U.S. Marshal, I do suffer from it. My wife is aware if and when we get kicked out, like it or not, I am taking us out of the country. No, I am NOT joking. My pension and her small social security disability check are not big now, and will be smaller when the inflation explodes, but we will be able to live cheaper somewhere else. I will not get any social security for years and then only about $150/month, and at 63 now, I see no chance of starting life over. Maybe we will be living in a second world country, but when the dust settles here in the good old U S of A, the middle class will be significantly smaller permanently, and most American citizens will have little net worth (except the Wall Street Corporate citizens) … in our new second class country. The waiting is not easy. I feel like a sort-of-death-row inmate with an option of exile.

        1. Paul Repstock

          We seem to be the only ones talking on this thread now. Unless you have a better idea, I will give you my email address here in a few hours so we can communicte directly.

          1. Paul Repstock

            Jim, you know that there is probably nobody posting here who can really solve your problem. The best I could do is provide moral support and perhaps some ideas. The last thing you or your wife really want is “Some third World Country”. To leave everything thatcheckabove is familiar and the network you have, is not only psycologically and physically dangerous; it is also very expensive in ways you can’t imagine???

    2. bob goodwin


      PLEASE stop paying your first mortgage. Nevada is a non recourse state. If you are facing foreclosure use the rules to your advantage. Mortgages are an option, and you legally can (and should) exercise that option. Why are you even bothering to make a moral (predatory???) argument.

      Use the money you are saving to pay an attorney to maximize the time until you go into foreclosure, so you can live rent free.

      Do as the banks do…. take care of yourself to the fullest extent of the law.

  23. Yawn

    Please. Give us a homeowner’s Chapter 11. Everyone else has it – think that any of those Pier 1 stores hung around the dying strip malls because they had a “moral obligation” to pay their commercial real estate mortgages?


    You can write down everything else – cars, yachts, refrigerators, any purchase-money financed purchase, no matter how “good” or “bad” you think the purchase was. Court doesn’t care if your yacht was a frivolous purchase or not – just how much it is worth now, versus how much it was worth when you bought it.

    The only reason we are having this argument is because the law has the homeowner over a barrel. Heaven forbid the hoi polloi have the same rights as business entities.

  24. steelhead23

    The article asks the question why not simply offer a principal write-down as opposed to a short sale? I cannot answer this question with any certainty, but I have several hunches. 1) a short sale would involve a new debtor with spiffy clean credit while a principal write-down would involve new paper for an unclean borrower, making it more difficult to market the mortgage, 2) fess baby, fees – the servicer would get more fees from a new mortgage than it would from a refi, and 3) moral hazard and precedent – there are lots of people paying on mortgages with principals in excess of value (aka underwater) – if they catch wind of principal reductions for deadbeats, they might just stop paying.

    The very concept of TBTF is anathema to capitalism. The big banks have already failed, we’ve merely put the brain-dead on life support and grossly enriched their executives who presided over the risk-taking which was designed precisely to maximize their bonuses, not long-term profits. While I truly feel for those who paid too much for their homes and I support federal actions to soften their pain, I feel no tenderness for the banks or the banksters who run them. Let them fail.

  25. PJ

    “It’s time to figure out if you’re a peasant, vassal, or noble; the rest of the “isms” are just intellectual bullshit.”
    Marshall McLuhan said the post industrial (post literate) society would end up just like this. A new Middle Ages/Renaissance.

  26. Paul Repstock

    Jim; My convo with Tommy ‘above’ was interesting. His situation like many others seems to be very similar to yours. When the cards are stacked against the individual, the best we can do is stick together through communication so that the avalance does not destroy us..:)

  27. Peter T

    “principal write downs of underwater mortgage loans … It is what TARP money should have been used for because it would have had the dual impact of helping both borrowers and banks.”

    … at the cost of the rest of us. No thanks. If borrowers want to reduce principal, they should be forced (and allowed) to go through bankcruptcy, to show that the house is less worth now and that they can’t pay the old but can pay the new price.

    1. Paul Repstock

      LOL. Now that’s a “Dog in the manger” attitude on steroids..:)
      You would rather see the banks and the mortgage companies get the money than your neighbour??? Doh!!!!

      Do you work at a bank? If so, understand this: There are still two levels in the food chain above you and your employer! Your days of grace and glory are numbered by how long you are needed. Have you noted how easily they cast the clever front men to the wolves…Read (Rogue Trader) LOL

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