Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar.
True story: friend bought house in 2005, he’s OK, no problem paying the loan, everything fine, right? Well, he just refinanced to take advantage of lower rates and noticed that the mortgage broker inflated his income by 40% on the original application. Now, he’s not about to do anything about it, and I’m sure everything will turn out OK for him (he’s got a good job and everything), but think about it for a minute: here is a super-prime guy who’s stunned to find a serious misrepresentation on his loan documents. Want to bet how the subprime / option ARM / stated income / no doc applications look like? Please! Fraud was absolutely overwhelming in those years.
And another story, this time about “morality”: another friend bought in 2005, sold 2008 due to relocation, lost a lot of money in the process. He didn’t short sell, but took out an unsecured loan to pay off his original lender, and he’s now paying back that loan. He’s got very good income, too, but he could have very well walked away. Whether it was a moral or business decison on his part I don’t know (maybe he judged that it’s worth paying to avoid damage to his credit). But here you have it: someone who could have easily walked away, but instead decided to bite the bullet.
