1. Bank seizes collateral property
2. Bank sells property at auction
3. Bank applies sale value to total debtor owes
4. Debtor now has remainder of loan period to pay back remaining amount that was borrowed, but not recovered by auction

If debtor was able to qualify for original loan surely they would have no problem paying the reduced amount. Just the fact that the payments wouldn’t include fire insurance nor property tax might be enough to help them meet their contractual obligation.

The bank depositors get all their money back. The failed house flippers get to keep their credit ratings. The housing market is free to set price based upon supply and demand.

Unfortunately the Bushtard has signed legislation removing taxation on the canceled debts. This was exactly opposite of what should have happened. Joe Blow now has every incentive to walk away from his $400k loan on his $200k house, then purchase the nicer $205k house across the street using his spouse?s, uncles, mother?s, sister?s clean credit.

Congress and the Bushtard should have placed a 105% tax on canceled debt, with the proceeds from the tax going to pay FDIC insurance claims of failed banks.

By the way, great article Morgan and I agree with about every word. This is a fantastic overview of the different things that have factored in to clouding the current picture of the economy and I greatly appreciate the insight.

The idea that the government, who contributed to this mess, is the answer in any way is laughable. That being said, perhaps the more apinful the landing, the better off everyone will be. At least until memories fade, and a participants are dead, and a new cycle begins.

But is getting the credit game back on track really what we need? Has easy credit been good for the populace as a whole? As people spend every dime they have servicing debt for things they couldn’t afford with cash, no one is actually putting money into good old-fashioned bank accounts. At least mortgage lending standards have tightened up, but I’m really not a fan of easy credit (credit cards, same as cash, etc).

From patrick.net post “Staring Into the Abyss”, “The economist Ludwig von Mises is more succinct in his analysis:

There is no means of avoiding the final collapse of a boom brought on by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

I’m a newbie to both mortgage origination and macroeconomics, but this is pretty straightforward. Just like Morgan.