Friday night topic: The other side of the mortgage lending fiasco

— 9:46 PM on September 26, 2008

The liquidity problems of major banks have been much in the news lately, but more intriguing thing to me is how we got here: a whole lot of people who shouldn't have gotten housing loans did, and then they defaulted on the loans for various reasons.  At least, that is a large part of it, as I understand the issue.  I've heard a few good stories about such folks in various conversations lately, and the I'm wondering whether you have, too.

A buddy of mine was telling me about a half-million-dollar house in his neighborhood (that's a pricey house here in the KC metro) where the "owners" were failing to make payments and otherwise running afoul of the law.  Eventually, the guy cut a hole in the side of the house to remove the hot tub, so he could sell it in order to bail his wife out of jail for writing bad checks.  In the end, the house was trashed, the bank foreclosed, and now it would take tens—or maybe hundreds—of thousands of dollars to repair the damage to the place.  Probably wasn't a good idea to loan those folks a half-million dollars.  I'm just sayin'.

I heard another story about a family that owned pretty nice house in a great neighborhood, but decided to build a new, larger house elsewhere.  Because of the housing downturn, though, they weren't able to sell their first house quickly and couldn't meet both mortgage payments simultaneously.  Their strategy?  Default on one of the loans in order to extract themselves from the situation.  This one may be more of a hard-luck story, but at the end of the day, it's the same basic sort of thing.

Which makes me wonder: Just how common was it?  Have you heard many similar stories?  Discuss.

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