To start out, the homeowner bought something that was overvalued and is not likely to return to that price in the next decade. The value today might be $300,000. This leaves the buyer with a net worth of negative $200,000 to start. Once their NINJA loan trips from the teaser interest rate to an at market interest rate they can't afford to pay the monthly mortgage. What makes the government think they will be able to pay a $300,000 mortgage? Wouldn't they be better off renting an apartment (or for that matter a house) they can afford? I often think, where did these buyers come from in the first place? Were they a first time buyer that was enabled by the "scam" being perpetrated in the housing market? Did they sell an existing home and put the gain down on the new, bigger, inflated home (not likely)? Are they credit worthy at any price?I finally read a good article about the so called housing bailout over on the Wall Street Journal.
Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.
If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.
Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.
Why Be a Nation of Mortgage Slaves?
*****NINJA loan--no income, no job, no assets
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