Zach Fox keeps stirring the pot – where did he learn that?
From his SNL blog:
On the crucial question of whether underwater borrowers will continue to pay their mortgages or walk away, Luigi Zingales, a professor of finance at the University of Chicago Booth School of Business, told SNL that much could depend on whether a new business idea gets off the ground.
Zingales’ comments, which did not quite fit into the Block’s rundown on strategic default risks, suggest foreign entrepreneurs could play a large role with a new type of bank: a lender that specializes in giving new mortgages to high-credit quality borrowers who walked away from an underwater property.
Without legacy assets, the bank would have no fear of encouraging strategic default or cannibalizing its customer base.
“That would really be gasoline on the fire. The main reason why people don’t [walk away] is because they think they will have a very hard time getting a house in the future,” Zingales said. “But if somebody comes and says, ‘You know what, you have always had a good credit, you’re in a bad situation today, I’m sort of going to give you that offer,’ then I think [strategic default] might become irresistible.”
Although Zingales declined to offer any detail on who might be considering such a business idea and noted that it remains purely hypothetical, he said the idea has been floated.
“It makes perfect sense,” he said. “If I am a new lender, that’s the way to do business.”
If it does happen, the fallout could verge on pandemic; Zingales’ latest study indicates that 74% of borrowers consider a good credit score “very important.”
Zach’s blog post from Friday also covered more about strategic defaults – click here.