First off California, as the basis for this article, may not be the best example of a nationwide trend. Housing prices were more inflated in California than probably anywhere else in the country, so the dynamic of people walking away from houses on which they owe much more money than they're worth doesn't translate quite as well to the rest of the country, still a valid point, just not as dramatic as the CA example.

The big problem alluded to here though also is the deflationary mentality. It is what has hurt Japan so badly. When people get of the mindset that prices must fall, and they expect that to happen, and base their purchasing decsisions around that, then you have a real economic problem.

Now otherwise this is the flipside of the moral hazard of throwing money at people. If you are in the business of creating assets through lending money, notes are after all assets, then you should damn well make sure that those assets will be worth something. After all you are going to be showing them on your balance sheet. So if you lend money for something which you know has an inflated price then you are a perfect fool, you are selling away the integrity of that balance sheet. Now of course you are competing with other lending entities and by God they are showing huge returns, so should you, but don't cry when it becomes clear that you lent x amount of dollars for something that in the real world is worth y amount of dollars. And by that token dont cry when people say, oh geez, why should I pay so much above what something is worth for the next 30 years, plus the interest on that fictional amount.

what do you think will be the hit nationwide from this "crisis" - do you think it will amount to a "crisis"? I agree, it will make a dent, and added into the overall picture, it spells continued disaster; but do you think this merits the header on the article?

I think a lot of people will sell down and eat losses just so they can buy into the lower market; which will not hurt the banks (they will take the hit, not the bank) and I think that type of action will buffer the market from some of the pain... but the overall economy still drops, there's no escaping for the GDW (Gross Domestic Worth - I just made that up)

Days,

Yeah I agree. And no I dont think it merited the hype it was given in the article. The author seems to brush off the implications just walking away from a mortgage has a persons credit also. I think most people need to be looking at a pretty deep hole to make that choice. Not that it may not be getting to be that way in California, but I think California is a lot different than Ohio, or Idaho, or Georgia, you cant just extrapolate something like that on the rest of the country.

This will make a humungous impact. You need to look at impact of Clowifornia to US GDP.

If it was a country, it would be in the top 10. Wipeout here, will take down financial institutions. Florida, Arizona are following.

As for Credit record, would you trade a 200k loss for poor credit score hit. I would.

where there is a clear cut no money down investment into a $200,000 loser, yep they are going to walk away, credit be damned. But there are variations on that model; you have the homes that have lost $130,000 but were bought with $50,000 down; and the people love the home and want to live there; they don't need to move just because of where values are in today's market.

Also, don't kid yourself, a foreclosure on your credit is far more devastating than just a low score.

This was a good article; we've been talking about walk aways in bottomline for a year now, it is relevant and serious, it will add more fuel to the foreclosure fires, but I don't think that every upside down home in California is going to produce a walkaway.

I agree that the lenders who knew that the loans were unsound should be accountable. A recent Wall Street Journal article neatly captures our government’s approach to problems it helped create. Aptly titled “Washington Takes On the Mortgage Mess,” it describes how, over the past decade, our nation’s leaders encouraged subprime lending as a way of boosting homeownership among persons who possessed scant ability to honor loan obligations. Now, in a dramatic about face, these same officials condemn what they once so enthusiastically supported, and propose that taxpayer funds be used to bale out the participants.

At this point, everyone seems to have gotten into the act. President Bush increases FHA-guaranteed mortgage limits while urging legislation to stem the rising number of foreclosures. At the same time, Treasury Secretary Henry Paulson encourages lenders to freeze interest rates on some loans and place a moratorium on foreclosures. Meanwhile, back on Capitol Hill, Chairman of the House Financial Services Committee, Barney Frank (D-Mass), advocates $300 billion in new FHA loan guarantees to back troubled loans, while almost in lockstep, Senate Banking Committee Chairman Christopher Dodd (D-Conn) urges expenditure of massive sums to assist families facing foreclosure.

Not to be upstaged, all three presidential contenders tout their approaches to the problem. Senator Clinton endorses federal legislation to guarantee restructured mortgages as one part of her broad multi-billion-dollar mortgage relief plan. Senator Obama proposes a $30 billion economic stimulus package that includes a foreclosure prevention fund. Senator McCain advocates a $10 billion plan to replace adjustable loans that homeowners cannot pay with less expensive 30-year federally-guaranteed fixed rate loans.

Most assuredly, the public till will be tapped to provide financial benefits to groups and individuals who are as yet unidentified, this in keeping with Victor Hugo’s assertion that “There is nothing more powerful than an idea whose time has come.” Other ideas that similarly captured this nation’s warped imagination include Prohibition in the 1920s, concentration camp internment of Japanese-Americans in the 1940s, and nationwide busing to achieve school integration in the 1970s.

I’ll now offer my solution to this imbroglio. The government should simply abstain and let the matter resolve itself—one mortgage at a time. Borrowers may expect to honor their obligations or lose their property. Financial organizations that acquired unsound loans deserve to choke on them. Those involved will negotiate as they can and the market will adjust. The taxpayer must not become the patsy.

Posted by Al Jacobs author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. www.onthemoneytrail.com.

Well we need to seperate simply propping up the status quo and maintaining the solvency of the system. The solvency must be maintained if people want the world as they know it to carry on, since the alternative is massive reshuffling of theglobal financial markets as we know them. Should taxpayers have to ante up for solvency? I would say yes, they aren't completely without responsibility in this mess, and taxpayers pay for lots of things that allow a continuation of a certain standard of living, one might say that taxpayers aren't responsible for proper r&d on drugs so why should they pay the FDA to look after that, well it's got to be done and someone has to pay for it. Ultimately the taxpayer benefits form stability in the system, so it's a worthwhile cost. That being said the status quo should not be maintained. If the government has to step in to prop up something it is something that should have probably died anyway. You just dont want to sink the whole bloody ship in the process.

The problem we face here is the implications on the national balance sheet as it were. We have long lived on debt, debt beyond our means. But we traded a lot of that debt for supposed assets, both on the lenders and, importantly for this point, the borrowers. Now a lot of people were going to need to extract wealth from those assets to pay for the aging of the population, so that is going down the tubes. At the same time the tax base of the pubic sector is eroding. The debt is not lessening, but the value of the assets is. The FED can do it's damnedest to inflate away the debt but that only works against the leveraging ability of those who hold current assets. How does one make up this gap on the eve of huge publicly required expenditures? You need to prime the pump of basic economic function, you need to take the lead in future technologies. We like to talk about the powers of free enterprise here but a lot of the middle class was built around public initiatives, be it the interstate highway system or the energy infrastructure. Its about time we talked about making this not only a 21st century country but a 22nd century country, with the infrastructure and policies to prosper in the future, not just today.

Soon the tax base to do that may not even exist. We have done well to prosper as both lenders and operators of the development of the emerging economies. That has masked the fundemental problems in our own economy, allowing our corporations, and shareholders, to benefit from the growth of basic economic function in other parts of the world. But those people aren't fools. And the lesson they know is to exploit the U.S. not as a lender or plant operator but as a consumer. We need to get this house in order fiscally and from a economic policy standpoint, before our usefullness as a capital supplier is spent, because when they dont need us for that, and when our consumers cant buy, it will indeed be not only the end of empire, (which is inevitable), but the end of quality of life as well.