Walking away: The new American way?

Brief and scary: The Financial Times reports that banks are being advised to play "jingle mail" on a very large scale. "Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.  This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals."

Note: On first blush, the health, behavior and political desires of big financial institutions are beyond the scope of this blog. But on further review, as they say in the NFL, the play stands as called. All of this comes back to the ability and willingness of mortgage lenders to lend. And that is as important to the California real estate market as personal income.

Thoughts? Comments? I know, the link goes to a registration page. I suspect one of the readers is smart enough to find a full version of the story and post a link.

Comments

[mike]

who exactly owns all these forclosed homes?

[Probe]

When Japan real estate bubble bust, Japanese homeowners committed suicide (lot of pride). I'm just saying, may be this is easier way out..........

[MyLessThanPrimeBeef]

Just look at the frozen $360 billion 'auction rate' securities market. Banks are walking away there too.

[ProblemWithCaring]

I think simply: the change in focus from down payments to monthly payments has led a good number of homebuyers to be comfortable with the idea of walking away from their houses, even if they can work out new financing to stay in them.

Fast and loose credit changed many American’s views on "homeownership" and in many ways, the dubious policy obscuration of "greater homeownership for all," consequently watered-down the personal responsibililty of the indiviudual.

[LeavinLA]

Walking away is the new black.

[sunsetbeachguy]

Peter just may have a point here for the angry Cassandras.

Tanta at Calculated Risk did it better with a little fiction substituting bank for homeowner.

If large scale walking away is the norm look out below, as I will be buying my next OC house for cash!

Be careful what you wish for, you just might get it.

[William Jones]

I guess what's good for the big guys (walking away from huge buy-out commitments) is good for the little guys (walking away from bad mortgages).

I wonder what will happen in the long run. Francis Fukuyama wrote a book called "Trust" - the subtitle is very important "The Social Virtues and the Creation of Prosperity." He argued that what made capitalism work in some countries and fail in others was the willingness of people to keep their obligations, and the fairness of mechanisms to "punish" thow who did not keep their obligations.

If we have massive defaults on both a macro (buy-out) and micro (individual mortgage) level, will this affect the system on which our prosperity is built? More a question than a conclusion, but worth pondering.

[confused]

Why is this "scary"? Would the world be any worse off if any of the massively leveraged buyouts of the last few years hadn't happened? (Is the LA Times a better paper for it? Are reporters better off?)

In a global market where our cost of living makes us less competitive, aren't unleveraged corporations and cheaper houses a good thing?

Refusing to lend money to anyone who doesn't have significant skin in the game seems to me the essence of a correction and return to rationality. Am I missing something?

[mike]

who owns these places?

[SuferNate]

To mike:
The banks/individuals that buy them at the courthouse steps.

[JohnnyB]

It's definitely important as this all ties together... nothing's happening in a vacuum.

Thing’s are happening in back rooms, behind the scenes, under the rug, behind the curtain, screened from view, out of ear shot, in private, in secret, between pals, without public scrutiny, void of oversight, without regulations and under the guise of… but not in a vacuum.

Ten billion here… 25 there… a trillion up, a trillion down… who can keep track these days… that’s why DERIVATIVES have been such a windfall for wall street, private equity and sovereign wealth funds.

But, walking away should have CONSEQUENCES if it breaks any laws. Like setting a good example for the kids…

[LA-renter]

Off topic, but...

Does anyone contemplating privatizing Social Security now understand why it's great theory but bad reality?

Imagine all the lambs exuberantly pulled into the financial slaughterhouse.

Ron Paul's unshaken, I'm sure.

Hey, maybe we have a source for the next bubble.

[toby]

What did Banking think? Why do you think they DIDN'T give loans to all of those people for all of those years?

They got stupid for a reason. What that reason is, that's for us to figure out.

[LeavinLA]

JohnnyB: In most cases, these people are walking away within th terms of the contract BOTH sides signed.

We'll loan you the money for this house.

If I don't, you take it back.

I can't pay.

Okay, we'll take it back.

Nothing illegal there.

[Vectorpedia (Rick)]

I hope the financial bubble isn't about to burst and we head for a 1929 depression.......but all indications point this way

[Enlightenment]

Need to increase the amount of time bad information is kept on credit report to 10 years!