Yeah you got it.
you buy a house 500k

you can’t afford it so you go into default

Bank then allows you to sell it fror 400k as a short sale

You buy it off the bank for 400k.

This would never be kept a secret for long nor would any shareholders stand for this. It’s just a rumor.

I think it would be a pretty boneheaded idea. It would set an extremely bad precedent. For a 20% discount why not default on your loan? And if I correctly understand how this works, you wouldn’t be taking the ding to your credit because it was a short sale and not a foreclosure.

And what about 2nd mortgages or HELOCs on the house?
Don’t those have to be paid off when the house is sold?

This all has the stink of disaster.

If the FBs could pull this magnificient stunt off a few times over, they could eventually buy the house and own it outright, for free. What a country!

Sounds like lipstick on da pig to me. Of ALL the people on the planet to give a massive discounted house to, it should NOT be the one’s who originally stopped paying for it in the first place.

As crazy and bizarre as it sounds, this MIGHT be the best strategy for all concerned. As Mr. Brightside noted, it probably results in the smallest and “easiest” loss for the bank.

The issues are as follows: (1) By doing this “short sale-re sale” strategy CW is still lowering the comps for its REO properties (and other properties, generically), (2) CW still has to take enormous hits to its capital to absorb these losses (and the hits may turn out to be too great), and (3) Are other lenders going to follow suit with a similar strategy.

If I were running CW, this is probably the strategy I’d try to use, which is simply a variant of, “What can we do to keep you in this house so that you can (probably) actually make payments that aren’t completely ridiculous relative to your real income?” It probably means lowering the mortgage by 10%-30% and/or lowering the interest rate somewhat. All of this absolutely sucks for CW, but it’s probably better than the alternatives. Which just goes to show you how screwed up things really are.

I wonder how Bank of America feels about this strategy?

Let me say it again (with a bit more development of the thought):

We must quit kidding ourselves here: the people living in homes that cost $400K today are NOT making $114,000 in income (the income required to support a 3.5 times income buying ratio) and therefore NECESSARILY will default again.

pepsi,

1. CW doesn’t care about moral hazard in the generic sense. They are trying to survive. They could implement this program and STILL not survive, but moral hazard is not something they’re concerned with right now. They’re just trying to figure out a way to maybe, just maybe, live to fight another day.

(The larger issue is that they will come under pressure from other, more creditworthy borrowers to get better terms and conditions for their mortgages as well. Don’t get me wrong, this strategy would lead to a HUGE mess, but it might be a smaller mess than just “letting the market work,” so to speak.)

2. Forget about “qualifying,” “credit,” etc. These would be irrelevant. The only question in this situation would be, “How can we structure a mortgage that these people can (perhaps) repay?” If CW goes down this road it will be about survival, plain and simple, in the generic sense, not about optimizing the terms and conditions of each individual loan.

Now I’m going to say this again – this will still lead to a messy bloodbath, but it is probably better than just simply foreclosing on everyone and letting the market decimate all concerned. It’s hard to imagine, however, that CW’s balance sheet would survive this strategy.