Jingle Mail, in Practice

Jan. 3.08 | About: Countrywide Financial (CFC)

A textbook case of jingle mail:

I got an agreement of sale today from a realtor looking for a prequal on a shortsale, the buyer lives next door, he has a current mortgage for $800,000 on a home he purchase in 2005 with no money down, the home he has under contact is right across the street from his present home, the offer is for $500,000 and it looks like the bank will accept it
The borrower plans to buy it as a primary, once he moves in, they will stop making payments on the $800,000 loan that they have with Countrywide
He qualifies full doc and has a 770 FICO , he figures letting his credit tank is not a big deal when he is lowering his mortgage debt by $300,000 .

In English, I live in an $800,000 house I bought with no money down. I can buy an identical house across the street for $500,000. My credit's great, since I've never missed a mortgage payment. But as soon as I buy the house across the street, I have every intention of never making a mortgage payment on my present place again. Since my mortgage is de facto non-recourse, and since I don't need to pay taxes on forgiven debt, the cost of default is basically zero, while the benefit of default is $300,000 in lower total indebtedness.

The loser here is Countrywide (CFC), which lent $800,000 to a man with good credit and will now have to sell his house, out of foreclosure, for maybe $500,000 if they're lucky. After costs, they could easily be sitting on a loss of $400,000.

Alternatively, the loser is whomever ultimately bought Countrywide's loan.

I don't know whether this is fraudulent or not, and frankly it doesn't really matter. Note that this has absolutely nothing to do with subprime: everything in this scenario is a prime loan. There are a lot of people who would be more than happy to wreck their prime credit in return for hundreds of thousands of dollars. Credit score simply doesn't appear in the formula:

Negative equity + Non-recourse debt = Very nasty price dynamics and mortgage losses.