Lender beware. Don’t lend money that you don’t expect to get back.
By Daniel at 3 January, 2010, 12:58 am
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Financial institutions have the resources and abilities to assess the risk of lending money against a home as a form of collateral. It is the responsibility of the lender to lend money that the institution expects to recover. Individual borrows can’t be expected to make complex financial decisions like properly assessing a property’s value.
It is incredibly important that home mortgages remain no-recourse as they are in most(?) states. In a normal lending environment, this keeps lending in balance with the real value of the property. If an institution knows that, at any time, a borrower can stop making payments and walk away from the property, then the lender will only lend an amount that reasonably represents the amount that can be recovered from the property in the event of a default. It’s a safety valve that is installed to help prevent irresponsible lending.
Over the past decade, lending got out-of-hand, and lenders overestimated the value of the underlying collateral. (Keep in mind that “lenders” includes those who purchased securitized mortgages.) For this error, they made a bad investment, and they deserve to take a loss on irresponsible lending.
Unfortunately, the simplicity of that free market is complicated by the implied government guarantees for banking institutions. Much of the funds lent out came from FDIC-backed deposits, and from other deposits that should have been invested by the bank at lower risk. Those making the decisions about what should and shouldn’t be lent weren’t necessarily the ones to deal with the consequences when the loans went bad. The organizations that should have been keeping FDIC-backed lending in check weren’t keeping close tabs on the inappropriate valuation of the underlying assets.
For any borrower who walks away, the borrower is in no way wrong to take such action as long as he’s not damaging the house in the process of moving out. It’s critical that borrowers have this opportunity to walk away, as the populations of borrowers need to have institutional lending restrictions that prevent them from buying a property for more than it’s worth. Again, the institutions have the expertise to manage this risk–individuals don’t. It’s the borrower’s right to make this decision, just as it was the lender’s right to choose what amount of money to lend under what terms.
If you want to blame anyone, blame lax oversight and loose regulation for organizations that are, effectively, lending taxpayer money (FDIC-insured funds, Fannie/Freddie, etc.)
- Collateral
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