Memoirs of a Former Fat Cat Executive

If you owe more than your house is worth should you simply walk away?

Last post we talked about FAT CAT Bank loan servicers, and FAT CAT Investors going to war with each other, with homeowners in the middle as collateral damage.  The bank loan servicers don’t want to reduce their servicing fees, increase their expenses for loan modifications or have to take the chance of buying back the mountain of crappy loans they crammed down the throat of FAT CAT Investors who should have read the fine print a little closer when they forked over hundreds of billions of dollars.

Where does that leave potentially millions of homeowners whom desperately need a loan modification but likely will not receive it?

Many will lose their homes. Some whom have the financial means will “grin and bear” higher mortgage payments. Others will simply walk completely away from their properties.

For those who tough it out, another danger faces them: I call this the Real Estate Upside Down Syndrome or RED for short. 

When these folks try to sell their home or refinance they are going to being seeing RED. (Don’t try to steal my witty anecdotes- they are copy protected and trademarked) because the home may have lost so much value that it’s impossible to qualify for a refinance or sell for what is owned on the loan.

Home sweet home becomes, home owner bites off more than he can chew (HOBO) syndrome causing great long term financial harm. 

Soon we are going to have many HOBOES’ seeing RED.

According to Reuters the percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March 2009.  Imagine that nearly half of all homeowners in the United States will be upside down on their home.

In fact, I’ll go out on another limb here and estimate within the next 24 months a goodly number of HOBOES’ seeing RED will simply walk away from their home making the nastiest financial crisis since the great depression much worse than it needs to be.  (Being locked away in prison gives me a certain perspective that does not allow greed to cloud my judgment)

The first wave of foreclosures came from those who probably in most cases had no business owning a home by means of the subprime lending debacle. The second great wave of foreclosures will come from those who are much more responsible financially, setting off a domino effect whereas 3-4 years down the road instead of half of all homes experiencing the Real Estate Upside Down Syndrome or RED for short.  ¾ of all homeowners or more could be in the RED zone.

If you have an $350,000 loan on a house only worth $250,000 would you stick it out?  Would you stay?

Maybe or maybe not and that’s why the real estate crisis may show a few improvements here and there in the short-term but it will likely get progressively worse. (By the way foreclosures are up significantly compared to last year’s horrendous numbers)

Here’s the bottom line: FAT CAT Bankers, FAT CAT Investors, and FAT CAT politicians can’t seem to see the writing on the wall so they are doing what they do best- protect their short term interests without any regard to the long term future.

Filed under Banking.
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