Thursday, June 9, 2011

Miraculous Transfer of Wealth from Banks to Borrowers

Here is a well presented reason why the economics of foreclosure are beneficial to the overall economy.  Jim Cramer goes into some incredible comparisons between Bank of America and Capital One in regard to defaulters.  There is also interesting information on the economic buying power of defaulting homeowners.

My Law offices have been discussing the benefits of this strategy for a while and you can look back here on Why Strategic Default is Good for the Economy!

Cramer made the comment that strategic default creates a "miraculous transfer of wealth from banks to borrowers."  Credit card companies like Capital One and retailers like Costco are seeing the benefit of homeowners eliminating the largest single payment in their monthly budget and re-purposing that money to service other debts and make smart purchases.

The use of this freed up cash allows the homeowners to make economic choices that have more utility than being simply forced to feed the big banks.  This is why the banking sector as a whole is down 5% in trading but you see certain lenders like Capital One, which facilitates purchases with credit cards rather than mortgages has done well.  Homeowners want to be economic players, they like choice, the down turn seemed to take that choice away.  But now, the miraculous transfer is putting choice back in the homeowner's favor.

At the end of the piece, Cramer went on to put it simply, "You got to be nuts to pay your mortgage if its underwater, you got the government on your side."  I don't know that I agree the government is on your side, but we do see more politicians working on the homeowner's side as evidenced by the Foreclosure Fairness Act. The choice seems and if you clear away the emotional baggage, really is simple.  The transfer of that monthly mortgage payment, for whatever period of time you stay in your home is hard to overlook.

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