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HELOCs Even More Worthless



May 29, 2008 – Comments (0)

Great discussion at Calculated Risk of a recent ruling that sets a disturbing precedent (at least if you hold HELOCs or MBSs based on them.)

BK Judge Rules Stated Income HELOC Debt Dischargeable [more]

Basically, even though these people lied like crazy to get their stated-income HELOC, the judge found that the bank could not reasonably have believed the garbage on the application, and therefore it must have been betting on the valuation of the underlying asset (the home), and that, having done so and lost its butt, well, too bad.

The judge found the debt dischargeable despite the obvious fraud on the borrower's application -- something that departs (according to this discussion) from the usual.

Me thinks many of those Alt-A mortgage backed securities out there are going to go from 20 cents on the buck down to a nickel.

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