Tuesday, 13 April 2010

Inevitable Underwater Propertites - Bank's Role in the Current Housing Situtaion -

The Los Angeles Times has reported that executives of Washington Mutual Bank (failure of the bank is now under investigation) knowingly created a "time bomb" by making sub-prime loans, then packaging them into securities and selling them off. Even in loans containing fraudulent activity, such as misstated income, the bank still funded the loans and sold the loans to investors without disclosing the fraud.

One factor mentioned in the article is the compensation system for loan officers and processors - pay and bonuses based on how many mortgages written. It appears that it  quantity vs. quality - quantity won out and then was sold out, wihtout disclosing the quality.

One can see how this practice has led to problems in today's real estate market. Early in this decade,  the desire to purchase real estate was high,  a person could essentially write their own purchase ticket (stated income loan application), and bidding wars were common place. Without thinking of long term repercussions, people purchased properties as speculators, assuming that bidding high, without the long term abililty to pay, would be smart, as property values would only increase. The banks went along, happy to write loan after loan, only to pass on the risk.

Ask the prices got too high, loan practices tightened, and personal incomes dropped - the bottom fell out. Left standing are millions of people who are "underwater" in homes, owing more than the current value of their homes.  This obviously compounds the problem - does someone willing sell their home at  loss when their income is down already?

 See dealing with underwater properties, an article written by a Dennis Shea, a Santa Barbara Attorney with over 25 years of experience for detailed information about home prices, foreclosures, and bankruptcy. 

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