Sticky debt

Sometimes it is easy to see why some people rage against banks, bailouts and politicians. To a large extent, they were protected while average citizens are not. A recent example of a harsh reality called the "deficiency judgment" comes from the Wall Street Journal (WSJ) on Oct. 1-2, 2011, page A1, A12 (online article here).

Here is how a deficiency judgment comes about. A person buys a house, the value of the house drops, the homeowner can't maintain the mortgage, the lender forceloses and sells the house for less than the loan amount and then sues the former homeowner for the difference to get the deficiency judgment. The former homeowner now owes the lender the differnce between what he paid for the house and what it sold for after foreclosure.

IED jammer - Afghanistan - December 2011

In a hypothetical example, say a buyer paid $400,000 for a house, then lost his job two years later and defaults on the mortgage because he couldn't sell the house. The lender then sells the house for $200,000 and gets a deficiency judgment for the remaining outstanding balance, about $200,000. That's pretty nasty. In those circumstances, declaring bankruptcy may look appealing to the shell shocked consumer.

Of course, circumstances vary for each borrower. Some were speculators and flippers. Some were not. Some people just needed a place to live and had sufficient income to maintain the mortgage. Some didn't. Some were naive and/or irresponsible, while some weren't. Some borrowers are "strategic defaulters", who simply walk away from a mortgage once it is obvious it makes no economic sense to continue paying the mortgage.

Marine with local child - Helmand province, Afghanistan

December 2011

The housing market was overheated and everyone involved, including real estate agents, loan originators, appraisers and lenders, were all pushing sales as hard as they could. Each sale made them money. The entire industry didn't care if the borrower could repay or not. They didn't care if what they were doing could damage the economy or not. That's why liar loans came about - people could simply lie about their income and still get a loan. All that helped grossly inflate home prices.

Marines - Helmand province, Afghanistan

December 2011

Where's the homeowner's bailout? There is none. For consumers in trouble, its caveate emptor and you are on your own. For powerful industries particularly including the financial sector, when trouble is on the horizon, its time to unleash the lobbyists, make a few "campaign contributions" and relax. Under the circumstances, there is no stigma when a consumer just declares bankruptcy. Its just business.