Subscribe Feed (RSS)The era of the smart defaulter
October 11th, 2008 by admin | Filed under Daily News, Global Credit Crisis, Mortgages.Now that the US government has backed up all the bad and about to go bad mortgages with almost $1tr of tax payers money, what’s going to happen to the people who struggle to pay their mortgages?
The answer is that the mortgages will be sold to the tax payer once they get into trouble by the financial institutions that hold them. The financial institutions will rightly figure out that they will get more money by selling it to the bail-out fund that they will get from foreclosing on it. So they will keep the good, money making loans and sell the bad loans as they turn bad.
Joe Public struggles to pay his mortgage. He speaks to his bank, tells them about his trouble and they immediately sell the loan to the taxpayer. Joe stays in his house without making any payments on the loan for about a year until some government employee comes by and asks what the issue is. Joe tells them. The government employee then says, well, if we re-negotiate your loan so that you owe us half of what you originally owed us, and we fix your mortgage rate at 4% over 30 years, will you consider making payments to us again?
“I’ll think about it” says Joe…”when I get a job”. Joe basically has a chunk of his debt forgiven in exchange for not handing back the keys. Tax payers, who have saved, borrowed responsibly and work hard end up picking up the tab for Joe’s recklessness. The debt forgiveness is the critical point. That’s what the objective is…to prevent the market price discovery from working. This is meant to be a capitalist economy…let the market decide the value of mortgages, homes and banks. When the government steps in this way, we cease to have capitalism…we have the “S” word and a price fixing economy.
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