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Default spike

When did defaults spike and who should have known it?

Defaults began to spike in 2007 and anyone watching the markets should have known about it by mid 2007.

What has been done about it since?

Well, a lot has been done (this is an understatement). Unfortunately, almost nothing has been done that will address the problem of mortgage defaults.

What should have been done?

First, the country needs to return to the good old days of 80% loan-to-value ratios. If someone wants to buy a $100,000 house, they should contribute at least $20,000 up front. The sub-prime product is a disaster. While there are advantages of buying, the country needs to rediscover the advantages of renting. Many more people than currently rent should be renting rather than buying. It is probably a good idea to specify for the sake of disclosure that we have no interests in rental property.

Second, we should have a coherent plan for those contemplating default. Previous actions should determine the degree of assistance provided.

Those have used their mortgage as a piggy bank need a path to an affordable lifestyle. These are people who have refinanced multiple times, not just to obtain lower rates, but to increase their debt only to finance fancy vacations, bigger cars, and the like.

There should be help for those who have been trying to retire their debt. After all, it is in the interest of lending institutions to minimize defaults and foreclosures so as to not lose asset value during a vacancy period. One idea would be to create interest-only periods for good mortgage customers having temporary trouble making payments.

Third, non-recourse states might want to rethink that rule.

Finally, we should consider monetary policies that encourage stability in the economy. There will be much more on this topic.