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Old 01-24-2008, 06:11 PM   #21
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Can you please elaborate some more on this Gumby? In another thread, I was told that in some states the mortgage lender is not allowed to come after your assets to cover the deficiency after foreclosure and auction. You're free, even if you have assets.

Are there other consequences of having the foreclosure on your credit record that could be painful while attempting to lead a "normal" life these days?
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Old 01-24-2008, 06:15 PM   #22
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Whether what that guy did was legal or not, I find the idea astounding and reprehensible. Maybe I am being naive about that. But in this case, I personally would hope the lender sues the guy and tries to collect all the money he owes on that mortgage. I am not a big fan of banks, but in this case the lender has not changed the terms that guy agreed to when he signed the mortgage. What changed was the RE market and there is no excuse whatsoever to punish the lender for it. The homeowner took a risk (afterall a house is an investment with a fluctuating value), and now that he is losing money, he is cutting and running. Disgusting...
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Old 01-24-2008, 06:16 PM   #23
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Somewhere I heard that home PURCHASE mortgages were non-recourse, refi's not. This could vary by state. This probably wouldn't prevent the lender from issuing a 1099 for the shortfall.
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Old 01-24-2008, 06:19 PM   #24
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You have hit the nail on the head. I believe that most mortgages are, in fact, recourse obligations. In my state, if the bank forecloses and sells at auction, it may recover a deficiency judgment if the property brings less than the mortgage balance.
I'm no lawyer, and Wikipedia ain't exactly something I'd depend on for such matters - but its foreclosure page indicates original home loans in CA are non-recourse debt. Which is significant - that's where the respondent in the article resides, and this tactic is likely more common in CA due to larger value drops.

Re-fi's, seconds and HELOC's have no such protection, again per Wikipedia:

"In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't."
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Old 01-24-2008, 06:37 PM   #25
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I'm no lawyer, and Wikipedia ain't exactly something I'd depend on for such matters - but its foreclosure page indicates original home loans in CA are non-recourse debt. Which is significant - that's where the respondent in the article resides, and this tactic is likely more common in CA due to larger value drops.

Re-fi's, seconds and HELOC's have no such protection, again per Wikipedia:

"In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't."
If that is correct, then in CA this tactic would work and the only downside probably would be the black mark on the credit history, a possible 1099 with all the income tax consequences inherent in that, and any sense of moral failure.

As Brat wisely notes, this area of the law varies a lot between states.
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Old 01-24-2008, 06:39 PM   #26
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California and Arizona and a few other states have anti-deficiency statutes for purchase money home mortgages. But most states allow a deficiency when there is a judicial foreclosure. Some states only allow a deficiency if the value is proved up in court.

VA mortgages require the option of a deficiency under federal law. There has been some push by lenders in California to repeal the anti-deficiency statute but as of yet, they have had no luck.

Back in the early 80s when a number of home loans were underwater in the midwest, lenders who previously sought no deficiency started to get and try to collect deficiency judgments. What ended up occurring was a lot of bankruptcies.

Back when I was a bankruptcy trustee, I also saw a number of people who ended up with deficiency judgments resulting after home foreclosures out east. They ended up filing bankruptcy too.

I don't know what the current market will bring and what lenders will decide to do. At least in California borrowers have no worries. (Though there are some exceptions, like fraud and "waste" of the property.) It is interesting that the anti-deficiency statute does not seem to effect the sale of the mortgages on the market.
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Old 01-24-2008, 07:50 PM   #27
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I mentioned in another thread that in the 1980's in Anchorage people were turning in their keys and walking away in droves. I always wondered why they didn't have to pay the deficiency. Now I think you've splained it.
At the time I wondered why the town didn't go up in flames, then learned that homeowner's insurance only pays you to rebuild the same house, it won't give you cash.
DH and I stuck it out because luckily our little house was ok, but many people were in new developments that after a couple of years became unliveable schlock moldering in wetlands, or nice condos that emptied out and then turned into rentals full of druggies. At that time in my generation we were young and believed "you couldn't lose" when you bought a house to live in, because we'd never known otherwise.
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Old 01-24-2008, 07:54 PM   #28
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ok, so if in CA the home mortgages are non-recourse debt then the homeowner is completely within their rights to walk. The awareness of this possibility would be known up front by the lender and the borrower, so I don't even see a moral obligation to pay, let alone a legal one. The certainly have an obligation not to trash the place in the meantime.
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Old 01-24-2008, 07:59 PM   #29
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ok, so if in CA the home mortgages are non-recourse debt then the homeowner is completely within their rights to walk. The awareness of this possibility would be known up front by the lender and the borrower, so I don't even see a moral obligation to pay, let alone a legal one. The certainly have an obligation not to trash the place in the meantime.
In a perfect market, mortgage loans in a non-deficiency state would be priced to reflect this difference, but I have no idea if that was actually the case.
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Old 01-24-2008, 08:57 PM   #30
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At least in California borrowers have no worries. .
Is the presence of a foreclosure on one's credit history such a minor thing that it's "no worry?" Things sure have changed since I was a lad!
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Old 01-25-2008, 06:27 AM   #31
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That may be so, but what about the banker's shareholders, and his employees, and his suppliers, and his landlord, and his other depositors, and his community?
That's my question too. When I sign a contract, I will honor my end of it. Doesn't matter who it's with, my sister or Citibank. Speaking of Citibank, a lot of people who invested THEIR hard-earned dollars are going to lose because of people thinking their obligations can be changed by changing circumstances.

I don't buy it.

And I have better sense than to take an ARM, remembering the inflation of the '70's and '80's.
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Old 01-25-2008, 07:29 AM   #32
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I find this fascinating. This tactic of walking away would never occur to me. I have always repaid debt, even when in a pinch. If pushed to the wall, I still don't think I would have come up with this plan on my own. My sense of obligation would not have let me create this option.

However, having read it somewhere else, the idea is now planted. Now, I wonder. How slammed would I need to be? Still doesn't change the sense of obligation I carry, but I am enough of a realist to recognize that when faced with bad and worse options people often make decisions they would not otherwise consider.
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Old 01-25-2008, 07:58 AM   #33
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So what is up here? The rapacious lenders who gave us NINJA loans and brought us this whole mess are now ready to finance somebody who bailed on their last loan? Something is wrong with this picture.
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Old 01-25-2008, 08:06 AM   #34
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That's my question too. When I sign a contract, I will honor my end of it. Doesn't matter who it's with, my sister or Citibank. Speaking of Citibank, a lot of people who invested THEIR hard-earned dollars are going to lose because of people thinking their obligations can be changed by changing circumstances.

I don't buy it.

And I have better sense than to take an ARM, remembering the inflation of the '70's and '80's.
Promises should always be kept, but I don't begrudge anyone who doesn't keep his promises, if keeping them would result in major financial difficulty. Sure, there is a moral aspect to keeping your promises -- it's not something I would cavalierly not do. I can't really see the major moral problem that you all see in someone getting off the hook when it's in their economic interest to do so. Keeping your promises is not a categorical imperative for me.

BTW, it's not the ARM that's the problem, it's the credit worthiness and lax underwriting that took place for subprime borrowers who took out ARMs. I have two ARMs and I'm doing fine with them.
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Old 01-25-2008, 08:32 AM   #35
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In a perfect market, mortgage loans in a non-deficiency state would be priced to reflect this difference, but I have no idea if that was actually the case.
I'm not sure any loan secured by collateral (whether a purchase money mortgage loan or consumer debt like car loans) prices the potential for going beyond the collateral if the borrower defaults. As pointed out, bankrutpcy can discharge the "deficiency portion" of a loan secured by a residential mortgage. So, the market might be pricing all of these loans correctly -- i.e. the value of the collateral is the value of the loan minus collection costs -- as the contingency for collecting a deficiency judgement, even in states that allow it, can be wiped out.
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Old 01-25-2008, 10:12 AM   #36
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That's my question too. When I sign a contract, I will honor my end of it. Doesn't matter who it's with, my sister or Citibank.
Obviously I don't know the specific contract terms, but from the sounds of it (??) these non-recourse mortgages expressly limit the mortgagors' obligations to the mortgagees. If so, it doesn't appear that there is any question of people not living up to their obligations.

The real problem is non-existent sloppy credit underwriting. Non-recourse mortgages! 'Liar loans'! Interest-only payments! Zero-down, 100% financing!

Why anyone would invest in an American bank is beyond me.
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Old 01-25-2008, 10:48 AM   #37
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That may be so, but what about the banker's shareholders, and his employees, and his suppliers, and his landlord, and his other depositors, and his community? ....

IMHO, a marketplace where contractual obligations are optional is a marketplace that's circling the drain.
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That's my question too. When I sign a contract, I will honor my end of it.
I think what you are missing here (and someone please correct me if I'm wrong), is that no 'contractual obligations' were broken.

The contract (in a non-deficiency state) basically says:

A) Make your payments and you can live in the house, and we will credit your principal per the rules, and at the end of the term the house is yours.

B) Don't make your payments, and you can no longer live in the house. We will sell the house to recover what we can.

Turn it around - in theory, the bank should be factoring this risk into the loan terms. So in good times, I end up paying this higher rate, and the bank gets to keep the money. They bank is not 'breaking promises' when they keep the money, but did not need it.

I certainly understand that on an emotional level, it seems unethical for these people to walk - but if the contract is written that way, I just don't see it as a 'real' ethical issue. Now, if they trash the house on the way out - then I have a problem. I think Martha alluded to this, that the occupants are contractually obligated to maintain the property (just like I am obligated to have insurance), and I would hope that the law provides recourse for the lender in that case.

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Old 01-25-2008, 10:49 AM   #38
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As far as "living up to the contractual promise no matter what" is flawed logic imo. A non-recourse loan specifically limits the lenders recovery in the event of a default to the underlying collateral. That's the deal going in. As someone recently said on the Kudlow show- "I don't know why banks keep inventing new ways to lose money when the old ways worked fine!" Can you imagine no down payment, teaser rate interest, no proof of income required (alt A), no personal liability if things go south and you can buy a house? Gad, the problem must be of gigantic proportions in CA.
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Old 01-25-2008, 11:18 AM   #39
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Depends on which American bank you buy. My favorite part of TCF's recent earnings call (they're a medium-sized bank based in Minneapolis):

"We would point once again the things that TCF didn't do, and doesn't do according to our philosophy. There are no teaser rates, sub-prime programs. We have done no option arms. We do not have any collateralized CDOs or SIVs, Structured Investments Vehicles or any other off balance sheet-type activities, which have resulted in a large charges that we've been seeing in other institutions."

These guys are doing fine. Their foreclosure rate actually went down in the most recent quarter.




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Obviously I don't know the specific contract terms, but from the sounds of it (??) these non-recourse mortgages expressly limit the mortgagors' obligations to the mortgagees. If so, it doesn't appear that there is any question of people not living up to their obligations.

The real problem is non-existent sloppy credit underwriting. Non-recourse mortgages! 'Liar loans'! Interest-only payments! Zero-down, 100% financing!

Why anyone would invest in an American bank is beyond me.
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Old 01-25-2008, 11:21 AM   #40
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Essentially, the banks gave people free money to gamble with:
  • heads, you win (the value of your home goes up and you can flip it at a profit);
  • tails, I lose (the value of your home goes down, you walk away and I'm left with the dubious security of a foreclosed house in a declining market).
I'm finally beginning to understand why so many Americans bought multiple houses, notwithstanding their very limited means and the adjustable rate terms of their mortgages: they had nothing to lose and potentially much to gain. The lending system promoted speculation on a vast scale.
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