I'm hearing a lot about mortgage assistance, foreclosure forbearance and all other euphemisms aimed at helping sub prime borrowers stay in their home. While I'm a capitalist at heart, I do believe that these borrowers, not all of which were excessive, greedy or stupid, deserve some help for making bad decisions. Some of these people, who aren't savvy investors, were simply caught at the bottom of a pyramid scheme, meaning that they purchased property under the assumption that they could either sell for profit or refinance based on increased equity in the future. Is this their fault, YES, do they deserve help, YES.What I haven't understood, until this morning, is why the banks and investors who owned these mortgages were loathe to renege and help them out. After all, banks want cash not foreclosed property don't they? I mean isn't it easier to say to Mr. and Mrs. Jones that hey we know you owe us $1000 per month, but we can renege and bring that down to $600 or we could foreclose and get $0...as a consultant it would seem like easy advice to my client, that is until this morning.
At the gym I factored in something that I hadn't previously thought about, that is the unemployment rate. More importantly how the banks are viewing the unemployment rate. Most economist and analyst are predicting that the unemployment rate will reach as high as 10%, that's not good. What I think the banks are considering, and what I would also advise that they consider is that if we reach that rate then that means not only sub prime borrowers will be in trouble (as they already are) but a lot of prime borrowers who now have good jobs and decent savings would find themselves out of work and possibly in trouble.
So if I'm a bank and I know I'm going to have to renege mortgages (and take a loss) at some point, do I want to renege with the Jones' who are sub prime borrowers and are already in trouble when the unemployment rate is 6%, which means that when the rate hits 10% they may not be able to payback even on the reneged terms? Or do I want to wait, take my losses with the Jones' and renege with the Smith's who are prime borrowers and are more likely to be able to stick to the renege terms with unemployment less likely to get any worse, meaning that the Smith not the Jones' would be in a better position to meet the renege terms and that I have a greater percentage to make money or lose less than I otherwise would.
I have a suspicion that there is a little bit of this thinking going on. To analogize, it's like investing, do I want to go long on a stock at $10 if it's going to hit $5 before it hits $15, or do I want to buy at $5 and then ride it all the way up?
