To me this is a good thing. One of the aspects of this crisis that has not been given enough sunshine is the fact that the supposed experts in determining credit worthiness, the banks, took on huge amounts of risk, voluntarily. Yes, yes, no one sign up for something they obviously can't afford.
However, there are two parties in a loan and the banks are the ones that have vastly more experience in terms of what kind of income and debt ratio it takes to successfully pay back a mortgage. Most people only buy two or three houses in their entire lives, but banks make millions of mortgage loans a year. The presumption of fault has to fall on those who are more expert.
So, it seems that the bankers are going to have another set of chickens come home to roost. They are in a box that they themselves constructed. By over-pumping the housing market with predatory loans and poor practices they created a bubble.
When the bubble burst the value of the property they loaned money on has fallen, costing them pretty big. Then their intransigence on mortgage modification made for more defaults and foreclosures.
The glut of houses on the market has pushed home prices down, making more mortgages fall underwater. Now some sensible folks are deciding that it is in their best interest to let the banks reclaim the houses that are not worth even close to what they agreed to pay.
Which will mean more foreclosures and more houses on the market, pushing the price down even further.
There is a solution to this, principal reduction. It would keep million of people in their homes and it would save the banks money in the long run. Too bad the banks have successfully purged their management ranks of anyone that can think long term. They have sown the dragons teeth and now they are going to reap the whirlwind.
The floor is yours.
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