Of homes and loans

Imagine this.

Own a piece of prime location real estate.

No money down. Yup, Bank lends up to 100% of the selling price.

If the property price goes up, you sell the property and pocket the profits.

If the property price goes down, you return the property to the Bank, dust your feet and walk away.

Not a bad deal right?

I think so too.

This fits into the typical, no risk investment that we all love. Aka your I-want-to-make-a-lot-of-money-but-not-lose-a-cent kind of deal. (which incidentally, none exists in the market today, except for what I'm about to tell you)

No downside. I mean, you don't even have to come up with a cent! How wrong can it get?

If it's heads I win, tails the bank loses, it's very well worth the gamble.

Of course, to discourage people from walking away, the legislators wag their fingers and warn that your credit score will take a hit if you do so. And people will think poorly of you.

That's all.

In hard finance, credit scores mean little if I can be forgiven of hundreds of thousands in debt. Yes, go ahead and think poorly of me.


Want to know where you can do this?

Can't believe there is such a thing?

No government would be that stupid you say?




Welcome to Jingle Mail (they even have a cute name for it!), the name coming from the sound of keys as they are returned to lenders in the mail.

In the US, it appears that when the Bank lends you money for that house, the Bank is only a secured lender, while you remain the homeowner. (This differs from our conventional thinking that the Bank owns the house until you repay the loan.)

To put it simply, you need money and the bank lends you the money. In exchange for lending you that sum of money, you guarantee it with your property. Only.

What do I mean? It seems most US (especially California) mortgages are de facto non recourse**, meaning the Banks have no recourse to the borrower even if he does not declare bankruptcy. (like huh??)

(** If the borrower defaults, the issuer can seize the collateral, but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. This is where the borrower does not have personal liability for the loan)

So what's there to stop one from walking away from their mortgages when faced with negative equity? The math isn't difficult even for a primary / elementary school kid.

Sure, the Banks may file a delinquency judgement, but they do not appear to favour this course of action for some reasons.


On the macro front, do you think this sub-prime initiated financial crisis will go away so quickly, if the next wave ie homeowners-who-can-service-their-loans, start defaulting as well?

On the micro front, after reading this, are you thinking what I'm thinking? :)