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|User Info||Bloomberg's Editorial On MBS Failures; entered at 2012-04-30 09:26:32|
OK, I think I have it now. Back to the example.|
There is a house that has a 'liquidation' (meaning sold in a hurry in something like a week in actuality given that it takes a few days to do paperwork) value of $80,000.
Now, suppose I want to buy it. A "sane" bank will tell me "we'll loan you $70,000 toward the purchase of the house and you have to come up with whatever else is needed to buy the house." If I have $10,000 I can then offer $80,000, if I have $20,000 I can then offer $90,000,...
Then, if I can't make my payments the bank can liquidate my house for $80,000 keep what it is owed, and give me the remainder.
Such a policy would really keep a lid on the price of houses as it would prevent banks from lending in excess of the value of the house based on some appreciation model which says the value of the house will go up over time.