Tales of shame and degradation

Last week I related the story of a friend who's looking to buy a foreclosure with no money down for far less than the current loan. I wondered whether the bank would replace a loan gone bad with another high-risk, no-down loan.

Now Slate tells us that, if the bank is Countryfried, my friend is probably in luck:

When it comes to its own foreclosed properties, that's most assuredly the case. Take this two-bedroom starter house in San Diego's Linda Vista subdivision: a Countrywide foreclosure that sold for $330,000 in August and was financed again with a 100 percent mortgage from the folks at Countrywide. Or the house in Palm Springs, Calif., that sold not long afterward, in September, for $275,000. Who knew you could get a house in Palm Springs for less than $300,000? Even better, according to mortgage records, the new mortgage from Countrywide was for the full $275,000.

The rub, of course, is that in the heady days of mortgage free love, all those zero-down mortgages tended to come with unpleasant side effects, such as high interest rates and prepayment penalties. And they often went to people who, not being able to afford to put any money down, were very optimistic about how much they could pay each month.

We won't know for a while whether the loans in this go-round are any less toxic than the ones that came before. But if the experience of other booms and crashes is any indication, there's every reason to think that however low standards went on the way up, they can go even lower in the last ill-fated efforts to keep the game going on the way down.

This is a mixed bag for transparency and resolution of the of the financial crisis. Yes, Countryfried is taking big writedowns as it sells at a big loss, but it's originating the new loans on terms that no sane lender would ever make in normal circumstances. If property values continue to fall, these zero-down buyers will have every incentive to walk away, starting yet another round of foreclosures and writedowns.