Do you want to pay for the Sub-Prime freeze?

[Texas Proud]

Seems reasonable. The lender does not get stuck with a house that can't be sold to cover the loan. The buyer gets to stay in the house. Each give a little, take a little.

Doesn't the lender have this option? To re-negotiate the terms with the borrower, if they both agree?

I wonder if they would get bad press though - some might say that they are just getting these poor people deeper in debt?

-ERD50

The problem is that a lot of these loans are not at banks, but in CMOs...

The servicer has a contract on how to service the loans for the CMOs... mostly using 'industry standards'... and some do not allow to renegotiate unless a loan is in default... and since the CMOs are held by many many people and would require 100% of them to agree to make a change... that is not going to happen either...

The plan seems to be saying the 'industry standard' is to give a 5 year freeze if all these other things are met... we will see if that stands up in court when someone sues a loan servicing company.

So, the people who are 'controlling' (servicing) the loans today do not have the ability to do what people think is smart and will not do it because they would get sued... and the people who can change the rules are scattered and you could not get them to agree... a catch 22 if you will...

 

[Retire Soon]

BofA is afraid that it's different this time:

Calculated Risk: BofA: Attitudes Changing Towards Default

There's been a change in social attitudes toward default

IMHO, I believe our biggest problem now is not how much interest these subprime borrowers are going to pay if the rates are renegotiated, or if they're entitled to all of the equity in their home if prices eventually go up, but whether or not they even choose to repay their loans. We seem to be taking it for granted that people are going to take the moral high ground and continue to make their house payments. But, as Barbaras pointed out, someone who has paid $500,000 for a $200,000 home has a problem on their hands.

As is eluded to in the article that Twaddle mentioned in an earlier post, these borrowers may have an entirely different attitude on "default" than what has been the past norm. What happens if these "cash-strapped" borrowers decide that it's more important to keep their car payments and credit cards current, than it is to make that expensive house payment, as this WSJ article suggests?

If indeed, there has been a change in social attitudes toward mortgage defaults, we could end up having tens of thousands of borrowers who give up and simply move in the middle of the night or mail their house keys to the mortgage servicer. It would be a very scary situation indeed that could very quickly spiral out of control. Who knows where the bottom in house prices would be under these circumstances.

I know that this scenario sounds very pessimistic, but bear in mind that it was only six months ago when many people on Wall Street and in Washington were telling us there was nothing to worry about in regards to the subpime mess. If social attitudes toward mortgage default change on a national basis, there will not be a darned thing anyone can do about it.

 

[audreyh1]

Social Attitudes toward Mortgage Default:

We have gone through periods before where people left the house and mailed the keys to the bank. Happened big time in Texas in the 80s.

I don't see any "changes in attitudes" - it's simply how much straw will break the camel's back. When people get caught in a bad enough upside-down situation, they walk.

Audrey

 

[tryan]

If the past is repeated, the excess inventory created by "jingle mail" will be auctioned off with in a couple years and the healing will have begun.

Save your pennies ... where there's chaos, there's opportunity.

 

[jazz4cash]

IMHO, I believe our biggest problem now is not how much interest these subprime borrowers are going to pay if the rates are renegotiated, or if they're entitled to all of the equity in their home if prices eventually go up, but whether or not they even choose to repay their loans. We seem to be taking it for granted that people are going to take the moral high ground and continue to make their house payments. But, as Barbaras pointed out, someone who has paid $500,000 for a $200,000 home has a problem on their hands.


If indeed, there has been a change in social attitudes toward mortgage defaults, we could end up having tens of thousands of borrowers who give up and simply move in the middle of the night or mail their house keys to the mortgage servicer. It would be a very scary situation indeed that could very quickly spiral out of control. Who knows where the bottom in house prices would be under these circumstances.

.

While I understand the popular notion that borrowers should 'face the music' for thier bad behaviour, it also occurs to me that one way to foster $500,000 houses (that were actually NEVER 500k) becomming $200,000 houses is to let foreclosures mushroom throughout a neighborhood. On the other hand, if these borrowers are barely hanging on and keeping current on thier payments at the teaser rates which are in the 7-9% range (and they ARE the only ones eligible for THE PLAN), it probably DOES help the rest of us that may eventually be affected even though we have made better decisions with our mortgages.

The lenders sold the loans emphasizing that 'you can just refi when the rates go up' and anybody buying a bond of any sort looks at the 'call features' on the bond....these have no prepayment penalty so what lender expected marginal borrowers to pay 12-13% for 30 yrs? The mortgage industry is complicit in both the problem and the freeze plan. Im more afraid of the unintended consequences especially since only a handful will even qualify for this freeze plan which is more political CYA than anything else.

 

[youbet]

Social Attitudes toward Mortgage Default:

it's simply how much straw will break the camel's back. When people get caught in a bad enough upside-down situation, they walk.

Audrey

I'm getting a little confused about this "walking" or "mailing the keys to the bank" concept we've been discussing.

Am I just being old fashioned in thinking that some of the old fudy-dudy credit guidelines and rules still apply? Despite the owners fleeing in the middle of the night to avoid having to pay the balance owed on their house after the bank forecloses and auctions the property, wouldn't the banks still go after them if they could find them? Wouldn't their credit be totally shot and it would be a long, long time before they could borrow a nickle from anyone, including their loving mother?

If you "mail back the keys" leaving the bank to foreclose and auction the house, would you ever be able to lead a normal credit life and obtain another mortgage or credit cards, etc ?

Or, have things changed? They mail the keys back and are immediately forgiven?

I agree with Audry, it must be tempting for folks significantly upside down in their homes to want to just walk away from obligation. But would they really want to just disappear and mail back the keys? Would they be better off declaring bankruptcy and doing things formally?

One other thing......... If there are 100,000's of foks disappearing while owing big bux, isn't this going to be a huge boon to the collection agencies who will looking for and hounding these folks and trying to repossess anything/everything they can? Or at least get a brick on their checks and collect a fee for doing so?

 

[samclem]

Youbet,
Maybe this is how we foster a new generation of people living within their means. I can imagine a family mailing back the keys and moving out, but being current on the BMW payments, the credit cards, etc. Sure, their credit is shot now, but they just cleared themselves of maybe 100K in liability (for the upside-down house). They rent a cheaper place (quick, before the lender gets wise. Rental prices will be bvery low), drop 5K in the bank (maybe via a low-interest cash advance on the credit card--while they can) and they can get a collaterilized credit card. Okay, no one will loan them any new money, but they have a credit card to use in renting cars, etc and they are forced to spend only what they earn. With all the defaults, they are counting on the bank to settle for pennies on the dollar (eventually) and when the housing prices start back up, they'll have years of on-time credit card payments to show the newly-hungry lenders and maybe 10% to put down on their new home. The American dream reborn (and only that bad old lender and all the stockholders payed the price).

It might not work out that way, but I'll bet some folks will try.

 

[twaddle]

Am I just being old fashioned in thinking that some of the old fudy-dudy credit guidelines and rules still apply?

Yes, you are. The driving concept behind "subprime" is that creditworthyness doesn't matter anymore. Anybody can get still get credit no matter what they do. In fact, lenders and credit card companies actively seek out people with bad credit because they think they are a more profitable class of borrower.

The world has changed, but maybe the pendulum will swing back.

 

[youbet]

Youbet,
but they just cleared themselves of maybe 100K in liability .

I'm just wondering if amounts are that large ($100k), if banks aren't going to wind up selling the $100k debt to collection agencies for a few pennies on the dollar. Then, Mr and Ms "Mail Back the Keys" wind up having a close, personal relationship with Brutus and Scar Face from the Acme House of Debt Collection who make their lives miserable until they pay nickles on the dollar..........with Brutus and Scar Face pocketing the difference.

I'm just having trouble imaging the defaulting borrowers not being actively attacked, as opposed to the usual passive techniques of harrassment such as giving you a bad credit rating. Letters, phone calls, visits, etc. occur until they are forced to declare bankruptcy to get some peace. I'm not saying the banks or other financial institutions would attack. Rather that the collection agency business will have a heyday buying default loans for next to nothing and then going after people who still own BMW's, etc.

 

[youbet]

. The driving concept behind "subprime" is that creditworthyness doesn't matter anymore.
The world has changed, but maybe the pendulum will swing back.

Swing back in the sense that stocks with no earnings that were so popular in the dot.com boom have lost a little of their luster these days?

 

[tryan]

In fact, lenders and credit card companies actively seek out people with bad credit because they think they are a more profitable class of borrower.

The world has changed, but maybe the pendulum will swing back.

AND, in ~20 years, swing back again .... luring another crop of subprime borowers with another magic show. The more things change, the more they stay the same.

 

[Zoocat]

The lenders sold the loans emphasizing that 'you can just refi when the rates go up' and anybody buying a bond of any sort looks at the 'call features' on the bond....these have no prepayment penalty so what lender expected marginal borrowers to pay 12-13% for 30 yrs? The mortgage industry is complicit in both the problem and the freeze plan. Im more afraid of the unintended consequences especially since only a handful will even qualify for this freeze plan which is more political CYA than anything else.

Not only is the mortgage industry complicit, so are the banks who created SIVs, CDOs, that packaged these mortgages and sold these mortgage-backed bonds to investors. The insurance companies that rated the bonds AAA are also complicit. This mess goes all the way to the top to the FED that kept interest rates so very low for so very long for who knows why.

 

[twaddle]

Strange, but I haven't seen much press or blog coverage on this:

Fact Sheet: The Mortgage Forgiveness Debt Relief Act of 2007

This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed.

It's the first [-]taxpayer bailout[/-] tax break in this mess and was signed into law Friday.

 

[Gumby]

It's not as if the federal budget was counting on that income anyway, so I see no problem with it.

 

[twaddle]

True, it's not a big deal revenue-wise. But that 1099 used to be the only real penalty somebody got if they received the "gift" of forgiveness from their lender. I thought this would have raised more ire. It's sort of a "get out of jail free" card for people who renege on their debts.

 

[audreyh1]

I guess I see it more as tacit admission that home prices would never have run up as they did if lenders/security industry/mortgage brokers hadn't created the financial products that are now going belly up. In addition, in some cases it appears that the lenders were even complicit in high-ball home appraisals. There was some real funny business going on. The person who really got the "get out of jail free" card was the seller of the overpriced property, not the buyer.

Audrey

 

[Texas Proud]

I'm just wondering if amounts are that large ($100k), if banks aren't going to wind up selling the $100k debt to collection agencies for a few pennies on the dollar. Then, Mr and Ms "Mail Back the Keys" wind up having a close, personal relationship with Brutus and Scar Face from the Acme House of Debt Collection who make their lives miserable until they pay nickles on the dollar..........with Brutus and Scar Face pocketing the difference.

I'm just having trouble imaging the defaulting borrowers not being actively attacked, as opposed to the usual passive techniques of harrassment such as giving you a bad credit rating. Letters, phone calls, visits, etc. occur until they are forced to declare bankruptcy to get some peace. I'm not saying the banks or other financial institutions would attack. Rather that the collection agency business will have a heyday buying default loans for next to nothing and then going after people who still own BMW's, etc.

Youbet...

As someone had informed us (and me) in an earlier post... a lot of states do not allow the banks to go after the people... the house being repoed is all they can do (except send a 1099 for forgiveness of debt).... you mail back the keys and you owe NOTHING... ever...

So, yes, you are thinking 'old fashion'....

 

[Hamlet]

Except that these are usually the people that are actually trying to do the right thing, rather than just throw up their hands and tell the bank to foreclose.

They lost money on their house, and are trying to work with their bank to avoid a foreclosure. There is no good reason to slap them with a giant tax penalty for a non-existent "gain".

We should be writing the laws to encourage short sales over foreclosures. I think this is a good change.

True, it's not a big deal revenue-wise. But that 1099 used to be the only real penalty somebody got if they received the "gift" of forgiveness from their lender. I thought this would have raised more ire. It's sort of a "get out of jail free" card for people who renege on their debts.

 

[cute fuzzy bunny]

Well, they sort of did get a "gain". They got pardoned for the loss they experienced while taking on a financial risk.

Perhaps they were screwed over by professionals that they trusted to have at least a little of their best interest at heart. But if thats the metric, I'd like to apply to have a few hundred thousand in investment losses handed back to me!

 

[Zipper]

Swing back in the sense that stocks with no earnings that were so popular in the dot.com boom have lost a little of their luster these days?

If you have a paid off mortgage and own your own home you will be OK.

 

[Hamlet]

Typically they still end up losing a fair amount of their own money. And they lose their home. I'm not a softy, but taxing them on this "gain" really seems like kicking people when they're down.

Take the couple I bought my house from. They had taken money out of the house to finance a business they bought. The business was not as good as they had been led to believe by the sellers (shocking, I know). They had let some maintenance issues pile up on the house, and ended up owing more than it was worth.

The bank picked a number that they were willing to accept to settle the debt, and they put it on the market for that. I came along, foolishly decided that it was a good deal, and bought it

The bank takes a small write-off instead of going through the foreclosure process, the couple loses everything they have but avoid the black mark of foreclosure. This was not a happy day for them and their two kids. I felt bad for them, even though they had made several bad decisions to get to that point.

There is no good reason to pile a tax liability on top of them. All that tax liability does is create another incentive to just default entirely. Why help the bank work out a short sale if you are actually going to be worse off that you would be just defaulting?

This is a good rule change.

Well, they sort of did get a "gain". They got pardoned for the loss they experienced while taking on a financial risk.

Perhaps they were screwed over by professionals that they trusted to have at least a little of their best interest at heart. But if thats the metric, I'd like to apply to have a few hundred thousand in investment losses handed back to me!

 

[Texas Proud]

Typically they still end up losing a fair amount of their own money. And they lose their home. I'm not a softy, but taxing them on this "gain" really seems like kicking people when they're down.

Take the couple I bought my house from. They had taken money out of the house to finance a business they bought. The business was not as good as they had been led to believe by the sellers (shocking, I know). They had let some maintenance issues pile up on the house, and ended up owing more than it was worth.

The bank picked a number that they were willing to accept to settle the debt, and they put it on the market for that. I came along, foolishly decided that it was a good deal, and bought it

The bank takes a small write-off instead of going through the foreclosure process, the couple loses everything they have but avoid the black mark of foreclosure. This was not a happy day for them and their two kids. I felt bad for them, even though they had made several bad decisions to get to that point.

There is no good reason to pile a tax liability on top of them. All that tax liability does is create another incentive to just default entirely. Why help the bank work out a short sale if you are actually going to be worse off that you would be just defaulting?

This is a good rule change.

You seem to think that if they just default they would not get a forgiveness of debt gain... they would...

And... this 'gain' is real.. it is not fake... they only have to pay the taxes on the gain so they are ahead...

Let's give an example... they bought a house for $200,000. They owe $190,000 but the house drops all the way to $100,000. If they sold, they would have to cough up $90,000 cash to sell the house. If they had a repo and it was sold for $100,000 then they did not have to pay the $90,000 in cash so they really had a gain.. and paying the taxes at 25% or so means that they only are out about $23K. Which is better for the homeowner?

 

[Robert the Red]

Let's give an example... they bought a house for $200,000. They owe $190,000 but the house drops all the way to $100,000. If they sold, they would have to cough up $90,000 cash to sell the house. If they had a repo and it was sold for $100,000 then they did not have to pay the $90,000 in cash so they really had a gain..

A few such gains and they'll have to commit suicide.

 

[Jay_Gatsby]

Take the couple I bought my house from. They had taken money out of the house to finance a business they bought. The business was not as good as they had been led to believe by the sellers (shocking, I know). They had let some maintenance issues pile up on the house, and ended up owing more than it was worth.

[snip]

This was not a happy day for them and their two kids. I felt bad for them, even though they had made several bad decisions to get to that point.

These are the critical points that stand out in my mind.

1. Took money out of their house to buy a business, rather than save the money needed to buy the business (or paid part or all of the purchase price of the business out of the profits of the business).

2. Didn't do their due diligence on the business to ensure its profitability (if it was a profitable business, the owners might have been willing to let them buy it using future profits).

3. Didn't have an emergency or maintenance fund to keep their house from falling into disrepair.

4. Didn't have an emergency fund that would allow them to stay in their house and ride out tough spells in the business.

I'm a firm believer in fiscal responsibility and sound decision-making. If you fail to exercise either, then the repercussions are your own.

 

[Hamlet]

Maybe we should bring back debtor's prisons, or would cutting off their hands punish them to your satisfaction?

They've made serious financial mistakes, and have been dramatically punished for it.

The bank make a serious financial mistake in loaning money beyond the borrower's ability to repay, and beyond the value of the collatoral. Both parties came to a mutual agreement to resolve the debt.

Why exactly do you think the government should get paid for this?

These are the critical points that stand out in my mind.

1. Took money out of their house to buy a business, rather than save the money needed to buy the business (or paid part or all of the purchase price of the business out of the profits of the business).

2. Didn't do their due diligence on the business to ensure its profitability (if it was a profitable business, the owners might have been willing to let them buy it using future profits).

3. Didn't have an emergency or maintenance fund to keep their house from falling into disrepair.

4. Didn't have an emergency fund that would allow them to stay in their house and ride out tough spells in the business.

I'm a firm believer in fiscal responsibility and sound decision-making. If you fail to exercise either, then the repercussions are your own.