There are lots of real estate loans that are underwater—i.e., the principal amount of the loan is more than the value of the real property. Someone will incur an economic loss as a result.
Who will it be? The borrower who perhaps was not wise for stretching so much on the loan? The bank or lender that was too aggressive in selling the loan? The stockholders of the bank or the lender who will lose as the value of their stock interest in the bank or lender declines because of the bank’s losses? The taxpayers who will come to the rescue of any of the above who incur a loss?
Question: Do we as a society have the ability and the right to tell a family of four that is moderate income and stretched on the teaser interest rates that they have to incur the loss?
Many of the stockholders in the banks and lenders are middle income earners who are stockholders through their 401(k) and pension plans. They are not the Gordon Geckos who we so love to pillorize. Are we creating a Grapes of Wrath environment?
There may be lots of blame to go around. But if we don’t have the capacity to tell the borrower too bad, we may be moving towards an environment where the family wins if housing prices go up, the family does not lose if housing prices go down, and the people who incur the loss have no ability to control their loss profile. Rather like having the family get insurance without having to pay for it.
We might compare what is happening on the mortgage foreclosure front with what happens to people who start small businesses—supposedly the engine that drives our economy. An extraordinarily high percentage of those businesses fail, taking family nest eggs with them, and there is no one to reimburse the small business owner for her or his loss.—Thomas MacEnnery