Banks Expect People To Default

Remember when you were taking your accounting class in high school, and you were told to account for something called “bad debts”? More often than not, these were where a debitor failed to make a payment on his account, meaning that you had to accept a loss.

Amazingly, this is probably one of the most realistic things that you learnt in school. Indeed, bad debts need to be accounted for in almost every business throughout the world. Banks are also included in these businesses.

However, as you adjusted for $20 or $50 in school, banks will be adjusting for $20 million or $50 million in real life – per city. The fact of the matter is that banks expect people to default on some of their mortgages, and hence this is written into the bank's business reports and financials.

Why Would People Default.

It is a fact of life that situations change from day to day. One day, you might be having a great time – the next, might be the worst day the ever had in the entire year. The same applies to employment, income, and the ability to service things such as your mortgage.

Someone who applied for a mortgage in the past based upon a significant level of income and equity may not have expected that they would lose their job 12 months down the track.

The bank probably wouldn't have expected that either.

However, the reality is that this happens on a daily basis, and it leaves people in a state of financial shock. Not only is this shock a bad thing for a person to deal with, but it can also have tangible effects on their lifestyle.

For example, if somebody is unable to pay the mortgage – this would qualify as a default, and could ultimately result in the foreclosure of a property.

Whilst it would be almost impossible to have predicted this outcome on an individual basis, the fact that it does happen too many people throughout the world (as a function of the employment and labour systems that we currently have), allows banks to aggregate their predictions, and therefore allow for these situations to happen on an overall level.