I can only hope more people ... walk away

More stories of people walking away from their homes are making it around the news these days. My first reaction was that wow these people are irresponsible. Many of them knew exactly what they were getting into when they signed on the dotted line, but now that the house is going down in value they are walking away, even if they can afford the payments. The people i am talking about are generally not sub prime because they otherwise have good credit and as i said, they can afford the payments. In these cases they choose to not pay.

There is a pro and a con to this situation. On the one side the fact that these people walk away is a good thing. Look the fact is that for them to stay they will basically have to dip into or in many cases wipe out any meager retirement savings they have. This will just create the next big disaster when all these people reach retirement age and can no longer work, but have no money saved because they tried to save their house. There already are cases of this. Since your house is a liability and not an asset, giving up the few assets you have to save a liability is a recipe for disaster sure to be followed by a steady diet of dog food come retirement time.

The bad thing about this situation is that the investors must be pissed. Look if i bought a mortgage security with the understanding the rate was going up and it was low risk because it was "independently" rated AAA, how do you think i feel if you freeze my rate or the borrower just walks away even if they can pay? Furthermore how do i feel if you prevent me from foreclosing to try to recover my losses?

See what the dumb dumbs running the show are not telling you is that the last few years of the real estate boom were a lie. They were fabricated out of really easy lending standards and cheap money coming from foreign investors. Could you have had the boom without these foreign investors buying these securities? The answer is clearly no! So what do you think is going to happen when you try to go to all these investors that you are screwing over for more money? I'm sure you will get the middle finger.

The point is that the credit bubble is not going to be fixed anytime soon. The investor side of the equation is such that they will not lend again soon. I imagine many dumb pundits on cnbc would give some lame excuse why this is not so, but remember they are just plain liers. Even if they do start loaning again they must charge much more to cover

1. extra risk due to possiblity of the government freezing rates or changing the terms of the loan agreement after the fact.
2. extra risk due to the new acceptance of walking away
3. extra risk to cover legal costs to make sure you have actually recorded title correctly
4. extra risk due to lack of available 3rd party insurures.

Inspite of the negatives of people walking away i view it as a good thing in the long run for the country as a whole. The reason is that it highlights an acceptance of a misstake and a willingness to move on past it. Trying to hang on to a home that is depreciating even if your rate is frozen makes no sense. The home is not magically going to be worth more 5 years from now.

One interesting note the rate freeze proposals. Think about number 1 above. One of the key benefits of doing business with and in the US has always been our stable legal system. The rate freeze just wipes out one of the benefits of doing business in the US and makes it a liability. If you think about it how can you make an investment here if the government can come in after the fact and just invalidate your legal contract? The answer is you can't do business here. I think this under reported fact will effect our economy for decades to come

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