Wednesday, November 3, 2010

Banks have always leveraged the use of personal gurauntee

The banks have always had the leverage of forcing mortgagee to talk out a loan on real estate in there individual name.  This has provided, in theory, stability to the housing market when it was done in conjunction with the issuance of non recourse loans.  Both parties have a stake in the continuation of loan payments.  The banks know they will take a loss if  foreclosure becomes necessary and the home owner or guarantor, knows their personal credit is on the line if the do not pay. 

The caveat of non-recourse loans is that the bank either gets to go after the homeowner to take back the property or they can go after the home owner to pay the loan.  According to Martin Feldstein, Harvard professor, the use of non-recourse loans was a way to keep the banks in check from being over zealous in their pursuit of collateral. 

In the past, when banks would hold loans in their own portfolio, the non recourse loan was beneficial to the market and it protected home owners against unnecessary foreclosure initiations.  The banks were, in effect, held in check by the non-recourse loan laws. 

this is just one more of the hidden truths banks don't want you to know.

No comments:

Post a Comment

your feedback and opinions welcome.