IMHO, the consequences will be allocated appropriately: his credit will be wrecked, and the lender (or CDO buyer) will get what they deserve, which is a huge loss due to their non-existent lending standards (or a huge loss on an investment they didn’t understand). The professionals in charge of managing the risk and who blew it will, appropriately, take almost all of the hit.
I doubt the consequences will be allocated appropriately. Some of these ridiculous mortgages were sold to hedge funds and in that case the risk is likely to be allocated appropriately. However, some mortgages were sold to pensions so it could be that some unsuspecting group of pensioners will have to take the hit on this. Possibly the pension manager will lose his job, but he won’t have to give back the salary and bonuses he made in previous years.
Another possibility is that one of the Federal Home Loan Banks is now holding this loan as collateral. The broker indicated somewhere in the linked thread that Countrywide wrote the original $800K mortgage. Countrywide has recently off-loaded hundreds of billions in mortgages that they owned to the Federal Home Loan Banks (the FHLBs have a quasi-governmental guarantee similar to Fannie and Freddie). If this loan was pledged to one of the FHLBs and Countrywide goes bankrupt, the American taxpayer now gets to take the loss on this loan. That’s not a fair allocation of risk at all.
Perhaps SD Realtor is right and mortgage loans in California need to be made recourse instead of non-recourse in order to better protect taxpayers. Personally, I would like to see 20% down become mandatory on all loans. If the borrower has a good chunk of skin in the game, he’s very unlikely to pull this crap and leave taxpayers holding the bag.
