I honestly don't think it's a good idea for banks to go into the real estate business, but that's what bankrupt homeowners are forcing them to do. Why? Because once they walk away from their homes, the bank can't come back to get more of their money : [1]
Foreclosure used to be a last resort, something that hard-pressed homeowners would scrimp and plead to avoid. But as the subprime lending crisis sweeps up millions of borrowers nationwide, some are deliberately choosing foreclosure as an early option.
As their home values tumble and their mortgages rise, these "walk away homeowners" decide to cede their houses to their lenders.
"It's throwing good money away after bad" to pay an escalating mortgage on a home that's plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February. They signed up with a new company called You Walk Away to help guide them through the multi-month foreclosure process.
What's astounding to me is that people like CNBC host Jim Kramer are saying that housing is "fungible" but not your credit card. WTF!
"I'm not distinguishing any more between subprime and prime. That's a meaningless distinction. When your house drops 20% in value, then it doesn't matter whether you're subprime or prime. It's better to walk away, even if you're wealthy, because you don't want to lose your credit card, and you don't want to lose your car. Your house is the one thing that's fungible. It's smart to walk away... If your home declines 20% in value, it's really important to walk away from it."
Fungible? FUNGIBLE [2]?
Interesting comment by Felix Salmon about Kramer over at Portfolio [3] :
What scares me is that this could be a rare and genuine glimpse into how traders actually think. In which case the Great Moderation and decline in volatility of recent years is doomed to die a sudden and extremely unpleasant death.
Wouldn't the bail out of Bears Stearns (due to hedge funds that invested heavily in ... ahem ...mortgage backed securities), constitute the aforementioned scary death?
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