Posted by: Kevin | January 29, 2008

We Haven’t Hit Bottom Yet

Although I haven’t been posting much lately, I’ve been following the ongoing sub prime mortgage crisis with interest.  Without getting into too many details (something I might do in a seperate post) we’re facing the inevitable consequence of charging/paying more for a home than the economy will support.  Personal income has been largely flat for 7 years yet home prices and home sales have accelerated fueled by credit.  Home prices will continue to fall until the reach a point more in line with long term averages of home price to income.  In other words this is a correction, a really big one, but a correction all the same.

 So where is the bottom?  I don’t know but this new businesscame as an interesting surprise.


For $1,000 you can buy a package of foreclosure advice and help from a company called You Walk Away.  The basic message is that it may be a smart move to simply default on your loan in some circumstances.  There are laws which exist to help the homeowner in the event of default.  the decision to continue to pay your mortgage should be an informed business decision.

This represents a terrifying prospect to banks.  What if it becomes socially acceptable for an individual to simply walk away from their home and mortgage if they’re underwater?  As a student of finance, it makes sense for some individuals to do exactly that.  Walking away from bad investments is something that corporations do all the time after all.  But it hasn’t been very common in the mortgage industry because there is a stigma attached to losing your home.  That’s starting to change as banks are beginning to see people opting to default despite their ability to pay.

If this catches on, banks are going to be in a very uncomfortable position.  Even loans that were considered “safe” because the customers can comfortably live up to the terms, are much less safe if falling home prices have put the costumer underwater.  You Walk Away is only active in California right now but I’d wager on their business model going nationwide soon.

Hat tip to Balloon Juice


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