Friday, December 08, 2006

For your consideration

This talk by Dmitry Orlov, "Closing the 'Collapse Gap': the USSR was better prepared for peak oil than the US", has been getting considerable play about the Internet in the survivalist/prepper communities. I've given it a once-over, and it does raise some interesting points.

One conclusion he arrives at, based on the fact that most people in the US do not own their home--the bank owns it and they're making payments-- is that in a major economic collapse, a lot of people are going to find themselves thrown out onto the streets when they can't make the payments.

I have to wonder about that. Right now, if you stopped making the payments on your home loan, you would indeed lose your house. But what if it wasn't just a relative few people, spread around the country--let's say 1/3 of all American homeowners suddenly started defaulting on their loans. Could (and would) the banks and other loaners of money begin a massive orgy of repossessions?

You see, banks are not in the real estate business, and in general have no interest in being so. Banks are in the banking business. When a bank repossess a house, the bank usually isn't the one to actually do the work--it's farmed out to a company who specializes in it. The defaulted loan is sold at a loss, and fairly quickly the whole thing becomes someone else's problem. That someone, who is now in possession of property they've bought at a hefty discount, then sells it, usually for less than market value, to someone else.

I have a bit of first-hand experience in this area, because that's how we bought The Freehold V2. It was a repro. We didn't buy it from from a bank, we bought it from a holding company, who bought it from another holding company who bought it from the bank.

These holding companies are in business to make money, not to help out banks. My thought is that if a huge number of people should default on their home loans, you can bet the real estate market is probably not going to be good--houses will simply not be selling. These companies will stop buying these repro'd houses, and the banks will be stuck with them--and in the real estate business, like it or not.

At that point, I think they would be far more likely to work with borrowers to keep them in the houses. This would protect the house from the sort of damage that normally occurs with vacant properties (protecting the bank's investment), and would serve to keep any squatters out. (Think about it, in this scenario, there will be a refugee population moving about.)

The banks would probably offer some sort of sweetheart deal to the borrower, deferring interest, principal or perhaps the entire payment, hoping that things would get better and that they would eventually get their money.

Of course, I could be way wrong on this.

I still think the best best, if you believe there will be an economic collapse, is to get all your debts paid off soon. Store supplies of all sorts to see you through the coming dark days.

But it is an option to consider.

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