So, lets say I’m a bank and I loan 200K to some guy and his payment is $1000 for a while, then it jumps to $1500 and he defaults.

I’m thinking I want the guy out so I can sell now and get as much as I can for it. If I wait and things get worse, the guy may default anyway at $1000/mo. Then, not only do I have to go through the foreclosure process anyway, but I have have to sell the house for less than I could if I had foreclosed earlier.

Basically, a default to a bank means – this guy is bad news and I want out of the deal.

If it is an interest-only or neg-am loan, the principal isn’t coming down at all anyway and I am 100% owner of a property that has declining value. Or, I am continuing to loan money to someone who has shown they can’t pay it back.

Plus, if I could have $180K back to invest at the prevailing rate, and the prevailng rate is much higher than the rate the guy signed up for, even though he is paying on $200K, I may be better off investing less capital at a higher rate than taking the smaller payment.

i.e. if I can invest any gains from the sale of the house at 8%, I don’t want the 4% teaser rate some guy paying me.

Also, when I said “they would learn nothing” – I meant the banks as well as the borrowers.