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July 13, 2008

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Kimball Corson

Speaking of being able to sue or not, consider this. Fannie Mae, Freddie Mac and the US banking system are still in big trouble because of that issue.

The Fed now allows Fannie Mae and Freddie Mac to borrow cheaply at the federal discount window, a new and the major part of the "bail out" program for the two. I think the government taking an equity interest in the two that would dilute existing shareholders, who have already been hammered, is not at all likely, partly because the government is not like a shareholder and doesn't want to run or control private companies.

But here is the real scary part.

If housing prices have much more downward adjustment to go, having only dropped 16% since their peak, when a 30% to 50% drop is required to get in them in line with the CPI and other key and relevant indices, then even many of FNM's and FRE's conventional mortgage loans and virtually most such loans owned by others become seriously at risk of default and write-off because those loans are non-recourse loans. Mortgagors can cut their losses, give up their houses and walk away from them without paying those loans or being liable for payment when the amount of their mortgage loans become much higher than the value of their houses. They can instead rent. Rents are relatively cheap. It is all very likely to happen. This is the real problem that isn't being talked about. We can face a major crash if this scenario plays out.

You read it here first and all by way of considering whether to allow suits or not.

Kimball Corson

Someone please tell me I am wrong here and clearly explain why. We don't need this prospective mess in our country.

Kimball Corson

I hear from a friend, who is a real estate lawyer, that not all conventional mortgage loans are non-recourse, just very many. It depends on applicable state law whether a deficiency judgment is permissible. Because of this many lenders now are insisting on mortgage insurance. Get that barn door closed now that the horse is gone. Too, some day might such insurers go bust facing a scenario like this. Should such insurance take the borrower or mortgagor off the hook in a broader number of states? What kind of solution in these circumstances is mortgage insurance?

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