Neighbors getting bailed out by the banks

[laurence]

Could someone explain to me the particulars of what's going on?

This morning our next door neighbor comes over to chat like she usually does on Saturdays. She and her fiance bought the their house at pretty much the peak for $560k (North county San Diego) with a no money down interest only loan locked for some few years. They've been freaking out because they are now underwater by 200k and the loan resets next year. Now, their house has only fallen to 400k at the worst but they also cashed out for nice trucks/suvs etc. so between the 1st and 2nd they owe 600k.

Well, she announces her friend just got he mortgage re-sized(?) by the mortgage company to what his house is currently appraised at, cutting 200k off of his loan, and she is now going to do the same. In fact she let on without knowing it that she's going to shop around for an appraiser to sandbag her value. I said something about personal responsibility and who ultimately pays and she said something constructive back - I think it involved phrases like, "Just because it's not cocaine doesn't mean it isn't hustling" and "I could give a #%^!@ about anybody else". Real constructive. I managed to pull us back from the emotional edge and change the subject (I do have to live next to them). But I have to say I'm pretty pissed. They have been living in a nicer, bigger house and enjoying a more luxurious lifestyle all the while making payments the same as ours. Now they are going to essentially hit the lotto?

Anyway, did I miss a law being passed? Is everyone just able to do this now? If you are upside down can you just go get your principle reduced? Does your credit take a hit for this? What will be the ultimate ramifications of this? Are taxpayers taking a bath or are the banks simply reporting another bad quarter/year?

I guess I'm the idiot for playing by the rules. It's not much solace to know you are on the path to FIRE if you have to carry your neighbors on your back as well. I guess I'm the fool here.

[HFWR]

You've just defined "moral hazard"...

I want $200k back on my house, too. I'll be mortgage free, plus they'll owe me an extra $55k...

[laurence]

Yeah, I started to explain the concept of "moral hazard" and that is what elicited the colorful metaphor response.

[ladelfina]

How widespread this is, or may become, is up for debate. There are many similar anecdotes here:

Calculated Risk
This site explores many of the recent debt/mtg./RE issues.

As to your immediate neighbors, there may be long term repercussions credit-wise, or not. (Banks seem to be schizophrenic these days in terms of selling credit). All I can say is that there are MANY home loans out there that will be overlooked, or may be re-negotiated as in their case. Banks can't afford expensive foreclosure procedures, nor to have "non-performing" loans or moribund vacant properties on their books. Reported foreclosures are a fraction of what they "should" be. I'm not sure how prevalent the syndrome of pure squatting is, but it widely reported anecdotally. Banks have already moved to report "non-performing" as 90 days delinquent vs. 60, or 120 vs. 90, etc., to improve their immediate balance sheets. So be thankful these neighbors may be paying at least something! The alternative is foreclosure, the bank's need for a write-off, and then the subsequent ills of vacancy, graffiti, outside squatters and looters, untended pools that breed mosquitos and reek, etc. Materially, as their neighbor, you're probably lucky (if you can put aside the resentment).

The "rules" are changing. Or rather now you see that there weren't very many "rules" at all. Vampires and the (financially) living dead have the upper hand.

You may be interested in my post on "lifting the veil".
There was money, and now there isn't. Some will win and some will lose as the scurrying around the musical chairs continues.

This is not a particularly grievous moral failing on the part of your neighbors; they are just taking advantage of what's on offer (and what's more free-market-American than that?).. the system requires them to play their part just as much as it requires you to throw yourself on their debt grenade (right, ziggy?).

This forgiveness and letting folks live in their mortgaged homes without payment is also a characteristic of the Great Depression.

[bbbamI]

Originally Posted by laurencewill

I guess I'm the idiot for playing by the rules. It's not much solace to know you are on the path to FIRE if you have to carry your neighbors on your back as well. I guess I'm the fool here.

I'm a member of your club. When I agree on a price of an item, I pay for it. Guess I'm too.

[maddythebeagle]

Wow, I have a hard time believing what your neighbor had to say...I really dont think there are programs out there now unless you are significantly late from a story that I saw on PBS this week...maybe it is PBS... Still maybe we should have just allowed FL and CA to form their own countries and the economy would be in great shape

[Spanky]

Let's look at it from a positive perspective: everyone wins -- your neighbor can keep her house, the mortgage company avoids a bigger loss from a foreclosure procedure, the value of your house may prevent further decline should she faces a foreclosure.

[laurence]

I want to say, I really like these neighbors and would hate to lose them, so in a way everybody wins. And you are right, ladelfina, let's see what kind of deal they actually get.

I would like to string up all the mortgage brokers who made a ton of $$$ on commission and then got to walk away from all those "stated income" etc. loans they brokered.

[Shafer239]

Talk about morals, have you heard about this one.... Say your house has a significant decrease in value, you go down the street pick yourself out new house, qualify for the mtg and buy it. Then let the bank foreclose or force a short sell on the the old house. Not sure what they call it, something like "buy and bail". Only for the people that can qualify for the new mtg. and not concerned about the foreclosure ramifications on credit. The monthy savings could be significant.

[ladelfina]

shafer, yes.. you nab the second new house before questions come up on the first one (again, klnd of anecdotal, but has happened).

[A854321]

It's all about me. Or, in this shifting values economy, it should be.

What will impact you home value the most?

You may like these neighbors, but you don't have to condone the way they live. The unfortunate part is that the next neighbors in that house may not be as decent. This is the current embroglio in my mom's ( previously nice) neighborhood. All it takes is one little foreclosure and everyone starts hurting. I never knew there were so many inconsiderate and devious people out there.

[Finance Dave]

Originally Posted by Shafer239

Talk about morals, have you heard about this one.... Say your house has a significant decrease in value, you go down the street pick yourself out new house, qualify for the mtg and buy it. Then let the bank foreclose or force a short sell on the the old house. Not sure what they call it, something like "buy and bail". Only for the people that can qualify for the new mtg. and not concerned about the foreclosure ramifications on credit. The monthy savings could be significant.

Even if a bank forecloses on your house, you still may on the hook for the amount they don't recover via a sale...unless you negotiate otherwise with them. In addition, there are tax implications as discussed here... Double whammy: Foreclosure and taxes (Page 1 of 4)

Scenario #1
Essentially, if you owe $400k on the house, get the bank to accept $350k, then the $50k is considered a "benefit" to you, and you owe taxes on that amount at the marginal bracket you're in...so if you are in a 25% bracket...you'd owe $12,500 to the IRS.

Scenario #2
In addition, if you have a "recourse" loan, you can't just "walk away" without being obligated to any amount the bank can't recover. If they foreclose and sell the house for $350k, you're still on the hook for the other $50k. If you can get them to take a deed in lieu of foreclosure...then you go back into scenario #1. You can only "walk away" if you have a non-recourse loan...and even then you owe the taxes as in scenario #1.

I'd find it difficult to believe that a bank would give a loan on another house for the people if they were already upside down on the first one...unless there is fraud involved.

Dave

[chinaco]

It only matters to me if I am paying for it as a stockholder or tax payer.

I suspect we are paying for it as a business loss or as a taxpayers bailout.

[Finance Dave]

Originally Posted by laurencewill

Could someone explain to me the particulars of what's going on?

This morning our next door neighbor comes over to chat like she usually does on Saturdays. She and her fiance bought the their house at pretty much the peak for $560k (North county San Diego) with a no money down interest only loan locked for some few years. They've been freaking out because they are now underwater by 200k and the loan resets next year. Now, their house has only fallen to 400k at the worst but they also cashed out for nice trucks/suvs etc. so between the 1st and 2nd they owe 600k.

Well, she announces her friend just got he mortgage re-sized(?) by the mortgage company to what his house is currently appraised at, cutting 200k off of his loan, and she is now going to do the same. In fact she let on without knowing it that she's going to shop around for an appraiser to sandbag her value. I said something about personal responsibility and who ultimately pays and she said something constructive back - I think it involved phrases like, "Just because it's not cocaine doesn't mean it isn't hustling" and "I could give a #%^!@ about anybody else". Real constructive. I managed to pull us back from the emotional edge and change the subject (I do have to live next to them). But I have to say I'm pretty pissed. They have been living in a nicer, bigger house and enjoying a more luxurious lifestyle all the while making payments the same as ours. Now they are going to essentially hit the lotto?

Anyway, did I miss a law being passed? Is everyone just able to do this now? If you are upside down can you just go get your principle reduced? Does your credit take a hit for this? What will be the ultimate ramifications of this? Are taxpayers taking a bath or are the banks simply reporting another bad quarter/year?

I guess I'm the idiot for playing by the rules. It's not much solace to know you are on the path to FIRE if you have to carry your neighbors on your back as well. I guess I'm the fool here.

No, you did not miss a law that I know of (there was one passed...but it was related to increasing the size of loans FHA could insure...not related to your neighbors). Banks have the ability to negotiate with homeowners. However, I find it hard to believe they'd allow THAT MUCH to go unpaid...so perhaps your neighbors don't fully understand what was offered. The bank is simply looking for the best economic outcome...and sometimes a "deed in lieu of foreclosure" is less costly to them than a foreclosure...which can be time-consuming and expensive to the bank as well as the homeowner. (see my post above).

There are several proposals being considered by Congress...here is one..

PROPOSALS IN CONGRESS COULD LEAVE TAXPAYERS FOOTING THE BILL IN - Video

and here is more info....although this is dated January 2008...
http://www.abanet.org/buslaw/committ...0803/bahin.pdf

Another article...
White House Presents Plan To Aid Subprime Borrowers - washingtonpost.com

And here is an NPR audio on the subject...although I don't like the way NPR slants many topics.
NPR Media Player

Complicated subject to be sure. IMO both the banks and SOME consumers are at fault...and they should suffer the consequences. Some banks used deceptive loan practices, and some borrowers either lied on their applications about income levels or were greedy in wanting more house than they should really have, thus leading them to interest only or 'reverse amortization' loans (loans where you only pay a PORTION of the interest...therefore your loan a year from now is HIGHER than it is today!!!).

Dave

[BunsGettingFirm]

Originally Posted by laurencewill

I want to say, I really like these neighbors and would hate to lose them, so in a way everybody wins. And you are right, ladelfina, let's see what kind of deal they actually get.

I would like to string up all the mortgage brokers who made a ton of $$$ on commission and then got to walk away from all those "stated income" etc. loans they brokered.

Anecdotal again, but from the NPR show a month ago, the big-$$$ mortgage brokers blew their $$$ on fast cars, B-list celebrity lifestyles, and recreational chemicals. That's what I heard. When it was that easy to make money ($120k/month), it was very easy to spend money. Another data point if you call it that is that the broker across from my old mechanic's shop all had Ferraris and Aston Martins in the parking lot.

[Tadpole]

If I remember correctly the government felt a need to throw a bone to the buyers because of the fallout coming from throwing bones to the financial institutions. But I'm not so sure that the bones being proposed to be thrown to the borrowers are as big as the neighbor's story. If true, it is something the mortgage holder is doing for whatever advantage they see.

The government proposals remind me of 9/11. To save the airlines, the government gave out large settlements with the families that lost breadwinners. Victims of tornadoes, floods, etc. get some help but not nearly as much even if they lose a breadwinner. The difference? The weather cannot be sued. I really don't think it is guilt for not protecting the nation from terrorists but is a shift in potential liability to the taxpayer.

[Walt34]

I think I'm starting to understand this. Since I paid cash for the house, I don't have a mortgage, and the house is still worth more than I paid for it but less than what it was two years ago, so I'm gonna sue the bank I didn't borrow money from for the money I lost by paying cash.

That's how it works, right?

[ikubak]

Originally Posted by ladelfina

This forgiveness and letting folks live in their mortgaged homes without payment is also a characteristic of the Great Depression.

It is also characteristic of our "victim" society. Getting burned on your risky real estate investment? Government will step in and fix it. Afterall, it wasn't your fault, it was those greedy mortgage brokers and appraisers. Granted, there are probably plenty of appraisers who valued houses based on the number the client needed. I am sure there were mortgages written knowing the appraisal was less than honest too. But most consumers know whether they are doing things above board and those who rolled the dice should pay when things don't go their way. If everyone gets bailed out, no lessons are learned......oh wait, there is a lesson here.....take your chances, lose, and wait for government bailout.

[Bikerdude]

I don't like paying my own 'stupid' tax but I REALLY don't like paying 'stupid' tax' for someone else.