How so? Your neighbors house will be worth less, the bank will suffer a loss, the bank will raise mortgage rates to borrows to offset the loss, neighbor pays more for future loan.

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Posted by Crbello4Hiceman

Lurking

Member since May 2011

502 posts

Posted on 10/12/12 at 10:18 am to C

If the bank is writing loans to people that can't afford them, it is the bank's fault for screwing everything up, not the borrower. The bank shouldn't take the loan if they don't have enough of a downpayment, equity paid in by the borrower, and comfort that the borrower has a good track record of financial decision making. Banks should be writing loans to the point that defaults are rare and they don't run the risk of collapsing if they occur on occasion.

As for hurting neighbor home values, if the neighborhood is desirable, when the property hits the market there will be multiple offers. This will lift the price up to the "best" offer the bank gets. This recently happened for me. I bought a foreclosure. I had to offer more than they were asking since there were multiple offers and I wanted to make sure I got it.

As for rates going up, if banks are writing bad loans, they will collapse and get bought (in theory) by good banks. The spike in interest rates would be temporary.

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Posted by ZereauxSum

Lot 23E

Member since Nov 2008

10176 posts

Posted on 10/12/12 at 10:34 am to C

quote:
Your neighbors house will be worth less,

Then maybe they should default as well?

In all seriousness, it's interesting how people demonize people for driving prices down, but no one says anything about the people who drove them up were they didn't belong in the first place.

Also, at the end of the day, who's really responsible for the low price of a distressed sale? Doesn't the bank have other options than just dumping their REO inventory onto the market, much if which is in disrepair?

quote:
the bank will suffer a loss,

Yes, but banks have Private Mortgage Insurance, which borrowers pay for. Plus they have loan loss reserves and capital requirements.

quote:
the bank will raise mortgage rates to borrows to offset the loss

This is not true. When a borrower
defaults, his risk of default was already calculated and priced in when the loan was originated. Banks are a lot more proactive than that.

If mortgage rates were dependent on default rates, then why do we currently have the lowest rates in generations after all the defaults we had in the last 5 years?

The bottom line is that the banks know what they're doing. They write all of the verbiage in the mortgage. They write the note. They assume a risk when they lend money and should price that risk accordingly. If they fail to its not the fault of the borrower.

This post was edited on 10/12/12 at 10:53 am

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