The reason I said “morals aside” is to show that STRICTLY as a business decision, continuing to pay in that situation was foolish. And I never said the borrower was cheated. I think that the borrower does have a responsability to read the contract he signs and know what he is getting into. That really doesn’t matter though. The foreclosure laws in CA are set up to ensure banks require the borrowers have some skin in the game. If banks don’t require money down, they are putting themselves at great risk to have a default on their hands. It’s sort of like a no-fault policy in CA, regardless of who commited the fraud, the banks takes the financial hit, the borrower takes a credit hit, and they go their seperate ways. Simple as that. And you misspoke in your post above…”if the borrower was cheated, then it’s the bank’s problem”. No. It’s the bank’s problem no matter what the reason for the default. It just may not be their fault.

Keep up the great work MM. You make me look smart.

1. Banks lent money to people with no money down, no documentation and in many cases no job.
2. People lined up for these loans to buy homes that the world screamed would only go up and they would never go down.
3. The unsustainable market crashed as expected by many including myself.
4. People with no money in the game see a legal escape clause and take it.
5. Banks tumble in value due to the party being over.
6. Congress finally wakes up and takes tax payer money and throws billions to try and prop back up the markets.
7. Congres, Feds, and Treasury fail miserably because that was what caused the problem to begin with. You can’t fix a problem when the solution is in fact the problem to begin with.
8. Tax payers take it in the shorts.
9. Elections arrive.
10. If we are lucky we see each and every incumbant get voted out of office for their incompetence.

HOw is that J? See how this works? Yes, they are smart to walk and you would too if your smart. Why stay? Screw the moral hazzard the banks and Congress have that sewed up already. They are just legally saving themselves from economic disaster. I say that is pretty damn smart when you consider the alternatives!!!

Would the jury look at the loan products and lending standards or would they look at the borrower as being the chief culprit?

Now have some video with your blogging….

http://www.break.com/index/how-we-got-into-the-subprime-mess.html

I can see where you are coming from but I have to disagree. Yes, many home buyers over the past few years bought beyond their means. I think the reason in a lot of cases was that it was a no risk investment. They could potentially make an incredible profit on their no money down investment and if the house declined in value, they could walk away with no cost to them. But on the flip side, the bank was making an investment as well. They knew the risks of lending with little or no money down. They knew the buyer could walk and leave them holding the bag. But they made the loan.

Regarding the intelligence of these decisions, I would have to say people who pay more than double for their mortgage than they would for rent are making an intelligent decision. It may not be popular, but it in their own best interest to do it. Morality aside, would you argue that paying $4000 a month to essentially rent your own house is a smarter move than paying $2000 to rent one which you don’t have to pay prop tax on or fix anything that breaks in the house? Additionally, renters have the flexibility to move on fairly short notice. Severerly underwater homeowners do not.

As a side note, since overextended credit (whether valid or fraudulent) is really the root of this entire crisis, isn’t a foreclosure a step in the right direction? It seems to me like some forced financial discipline to those who have not lived within their means is just what the doctor ordered. Now these people will only be able to buy what they can pay cash for and whether they like it or not, they will learn a lesson in financial responsability.

It is the banks responsibility to protect itself, its shareholders and its depositors money. To that end, the banks should require a significant down payment, credit score and debt to income ratios. These are the items that need to be adhered to high standards. In addition, the non recourse provisions in the law leave the bank with the property in the event of default.

If the lenders stretch the guidelines to allow mass numbers to enter the housing market by lowering standards and introduction of exotic loans, it forces up demand which increases housing prices.

The increase in housing prices increases the risk to the loan by the fact that a change in lending standards (tightening) and removal of exotic products forces down the pool of available buyers decreasing demand.

Blaming the buyer of the homes for defaulting would be like a trucking company with poor hiring standards blaming the employees for a high number of accidents.

At the same time, there also has to be regulation of lending products. You cannot expect banks to stand buy and lose business if another player has more saleable product. Banks have to make loans to stay in business, so banks need to operate in a level playing field that allows them to make sound loans without undue competition which encourages them to make bad loans to keep market share.

The unfortunate part is that the taxpayer is going to end up footing the bill for lack of oversight.