The Second Shoe Is About to Drop on the Banks
By Jeff Clark
"I live in luxury and I haven't made a mortgage payment in almost two years," Don bragged. He sipped his chardonnay, leaned against the country club's bar, and shared with me the story of his real estate prowess...
"I paid $3.4 million for the house in 2006, and it was worth every penny at the time. It's 6,700 square feet with a pool and a one- acre lot. I'm on the hill overlooking the fourth fairway, and I can see all the way to [the next city] from my bedroom window," Don continued.
"Wachovia Bank loaned me $3 million, and the developer took a second for $400,000. I don't have any skin in the game – so to speak. I made my mortgage payments for a while, but when prices started to fall, it just didn't make sense anymore. I mean, why should I pay anything when I'm the only one with nothing to lose?"
"But," I asked, "hasn't the bank tried to foreclose or force a sale of the house out from under you?"
"Ha!" He crowed, and his tone emphasized the naiveté of my question. "Why would they do that? The house is worth less than $2 million right now. So if the bank forecloses, it'll have to recognize a $1 million loss. And if it writes my loan down by that much, how many other loans do you suppose it'll have to write down? It can't force a short sale [where the bank sells the house for less than the loan amount] on me either because it'll have to take care of the second note holder by offering him something just to get out of the way. So Wachovia is screwed. It's cheaper for them to let me keep living there for free. And the best thing is, I can more than afford to pay off the entire loan right now." Don let out a sinister kind of chuckle, like a man who just squashed a bug and got some warped sense of delight from doing it.
"Wow," I responded. "There used to be a time when being a deadbeat was frowned upon. But you seem to wear it as a badge of honor."
"Listen," Don turned aggressively and pointed his index finger at me. "You think I'm the only one doing this? You think I'm the only one taking advantage of the situation? I'll bet half the people in this room are doing the exact same thing." He waved his arm across the bar. "And the other half are thinking about doing it."
"Besides," Don continued, "banks have been screwing people like us for so long it's about time they got a taste of their own medicine."
His words hit me like a Louisville Slugger across the forehead.
We no longer live in a time where men are bound by honor to repay their debts. As sad as it is, people feel justified welching on their agreements.
And the banks have played a big role in this transition. They charged 29% interest on credit cards while paying 0% interest on savings. They knowingly lent money to people who could not afford to pay it back. They used taxpayer-funded bailouts to pay million-dollar bonuses to their corporate elite. And they shipped all of their service-center jobs overseas.
Let's face it: The banks most of us do business with today aren't like the Building and Loan George Bailey operated in It's a Wonderful Life. Our banks are faceless, nameless, brown bag institutions whose only concern for the customer is to make sure he pays the $10 monthly account service fee.
It is that business practice that has fostered the resentment of people like Don and made him feel justified breaking his agreement. Like it or not, agree with it or not, Don's opinion is gaining popularity.
And as that sentiment grows, it is likely to provide the weight that pulls the second shoe down onto the industry.
Best regards and good trading,
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