Sunday, November 28, 2010

From The Department of Perverse Incentives....

According to the Wall Street Journal, the average borrower (notice I did not say "homeowner") in foreclosure hasn't made a payment in 492 days.  This means that the average default-er can expect to stay in their house--rent free--for 16 months.  This is ridiculous, and it adds to the current fashion of walking away from mortgages that one can truly afford.

It is time to punish those who break the rules and reward those who play by them. 


NavyAustin said...

As a guy who has never missed a payment, just playing devil's advocate: How is it any worse than any simple breach of contract? On day 1 of contract law class, every lawyer is taught to evaluate the cost of breach. If the cost of walking away from my 500k loan is the bank taking my 300k house and bad credit rating, why not? Even if I can make the payment, why pay for 27 years for something that might not recover value in 50 years? Business does this every day.

As far as the banks go, some are not eager to realize those losses on their balance sheet so quickly, and if that means delaying on foreclosure, then the delinquent borrower gets free rent.

Finally, when it comes to foreclosing, many banks sold those loans to Wall Street, and are merely servicing them, collecting payments at a tidy profit. BUT THEY DON'T HOLD THE DEED, and have no right to foreclose. The chain of custody on the deeds, in many cases, is so sloppy that they can't establish who actually owns the deed, making it hard to prove that a mortgage even exists.

The Wall Street wizards who put these crap investment products together failed in their fiduciary duty to file the deeds properly. In some cases, like Magnetar Captial, they were creating CDOs made of horrible loans to attract investors who didn't know that Magnetar had a huge, invisible back-end bet (credit default swaps) that they very CDOs they were creating would fail.

If a bank sold my loan and the investment bank that bought it failed to register the deed.

Many highly profitable and solvent small banks are run by high school or state college grads who only make loans to highly qualified borrowers on sound properties. Many investment firms were run into the ground by Ivy Leaguers who pushed for bad loans that no banker would EVER dream of writing. The bondholders of these toxic assets have lost much, if not all of their value.

I don't have sympathy for those who took loans, but I don't have any sympathy for those who wrote the loans. And I have less sympathy creating some ex-post-facto laws to enable the banks to go after the negative equity, IF those laws weren't in place when the loan was signed.

A deal's a deal. Here's your house. Thanks for playing, bank.

The Conservative Wahoo said...

NA--an interesting position, but one I don't find compelling.

The primary difference between the foreclosure issue and standard breach of contract is that in business, you are right. Businesses break contracts all the time and they pay the penalties associated with it. If you screw me, I also stop doing business with you.

There is however, no huge advocacy organization screaming for their protection, or for government aid to the aggrieved party. There is no constituency in Congress that seeks to demagogue the issue. Roll your dice and move your mice--it's the law of the jungle in business, right? Screw the other guy and you'll find yourself in court.

Would that it were this way in the mortgage world. The contract breakers in this transaction are sob stories dominating the press and causing Congress to take action to make the market less free. If the mortgage market were more like the business world you compare it to, these would be open and shut cases and folks would be tossed out of the bank's house with alacrity. It isn't that way though--the "homeowner" is a privileged party--emotionally, societally, and before the law.

It may appear like a simple "breach of contract", but it really isn't--especially when the thumb of government is all over the scales of justice on this one.

Mudge said...

Bravo CW. Bravo.

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