Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Neighbors getting bailed out by the banks
Old 06-28-2008, 05:28 PM   #1
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Neighbors getting bailed out by the banks

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.
__________________

__________________
laurence is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-28-2008, 06:09 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
HFWR's Avatar
 
Join Date: May 2005
Location: Lawn chair in Texas
Posts: 12,964


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...
__________________

__________________
Have Funds, Will Retire

...not doing anything of true substance...
HFWR is offline   Reply With Quote
Old 06-28-2008, 06:14 PM   #3
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Yeah, I started to explain the concept of "moral hazard" and that is what elicited the colorful metaphor response.
__________________
laurence is offline   Reply With Quote
Old 06-28-2008, 06:19 PM   #4
Thinks s/he gets paid by the post
ladelfina's Avatar
 
Join Date: Oct 2005
Posts: 2,713
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.
__________________
ladelfina is offline   Reply With Quote
Old 06-28-2008, 06:38 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
bbbamI's Avatar
 
Join Date: Dec 2006
Location: Dallas 'burb
Posts: 9,039
Quote:
Originally Posted by laurencewill View Post
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.
__________________
There's no need to complicate, our time is short..
bbbamI is offline   Reply With Quote
Old 06-28-2008, 07:22 PM   #6
Thinks s/he gets paid by the post
maddythebeagle's Avatar
 
Join Date: Jun 2005
Posts: 2,450
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
__________________
- Hurry! to the cliffs of insanity!
maddythebeagle is offline   Reply With Quote
Old 06-28-2008, 07:23 PM   #7
Thinks s/he gets paid by the post
Spanky's Avatar
 
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,046
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.
__________________
May we live in peace and harmony and be free from all human sufferings.
Spanky is offline   Reply With Quote
Old 06-28-2008, 07:32 PM   #8
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
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.
__________________
laurence is offline   Reply With Quote
Old 06-28-2008, 08:14 PM   #9
Dryer sheet wannabe
Shafer239's Avatar
 
Join Date: May 2008
Location: Tampa
Posts: 17
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.
__________________
I am not afraid of flying, it's the crashing and burning that worries me.
Shafer239 is offline   Reply With Quote
Old 06-28-2008, 10:24 PM   #10
Thinks s/he gets paid by the post
ladelfina's Avatar
 
Join Date: Oct 2005
Posts: 2,713
shafer, yes.. you nab the second new house before questions come up on the first one (again, klnd of anecdotal, but has happened).
__________________
ladelfina is offline   Reply With Quote
Old 06-28-2008, 11:37 PM   #11
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 284
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.
__________________
A854321 is offline   Reply With Quote
Old 06-29-2008, 02:29 AM   #12
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
Quote:
Originally Posted by Shafer239 View Post
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
__________________
Finance Dave is offline   Reply With Quote
Old 06-29-2008, 02:41 AM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
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.
__________________
chinaco is offline   Reply With Quote
Old 06-29-2008, 03:02 AM   #14
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
Quote:
Originally Posted by laurencewill View Post
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..


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
__________________
Finance Dave is offline   Reply With Quote
Old 06-29-2008, 08:00 AM   #15
Thinks s/he gets paid by the post
BunsGettingFirm's Avatar
 
Join Date: Jan 2004
Posts: 1,502
Quote:
Originally Posted by laurencewill View Post
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.
__________________
BunsGettingFirm is offline   Reply With Quote
Old 06-29-2008, 09:01 AM   #16
Thinks s/he gets paid by the post
Tadpole's Avatar
 
Join Date: Jul 2004
Posts: 1,170
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.
__________________
Tadpole is offline   Reply With Quote
Old 06-29-2008, 11:42 AM   #17
Moderator
Walt34's Avatar
 
Join Date: Dec 2007
Location: Eastern WV Panhandle
Posts: 16,539
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?
__________________
I heard the call to do nothing. So I answered it.
Walt34 is offline   Reply With Quote
Old 06-29-2008, 11:48 AM   #18
Recycles dryer sheets
ikubak's Avatar
 
Join Date: Dec 2007
Posts: 391
Quote:
Originally Posted by ladelfina View Post
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.
__________________
Retire date Jan. 10, 2018
ikubak is offline   Reply With Quote
Old 06-29-2008, 12:29 PM   #19
Thinks s/he gets paid by the post
Bikerdude's Avatar
 
Join Date: Jul 2006
Posts: 1,901
I don't like paying my own 'stupid' tax but I REALLY don't like paying 'stupid' tax' for someone else.
__________________
“I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said” Alan Greenspan
Bikerdude is offline   Reply With Quote
Old 06-29-2008, 01:07 PM   #20
Thinks s/he gets paid by the post
ladelfina's Avatar
 
Join Date: Oct 2005
Posts: 2,713
ikubak, I didn't put a value judgment on it. It just "is".. and "was".

The gov. is not delaying foreclosure on these properties, it's the banks' choice. They get to make some numbers look healthier and they have someone in the house to maintain it, probably paying HOA and taxes, too, which would otherwise be on the banks' dime.

(The gov. is doing other, different, stupid things like reducing capital requirements for FNMA/FRE, taking on $730k jumbo mtgs., continuing with no/low downpayment programs, etc.)
__________________

__________________
ladelfina is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Bernanke wants the banks to do what?! amy5708 FIRE and Money 16 03-09-2008 02:10 PM
Banks Ain't What They Used to Be tangomonster Other topics 13 02-06-2008 10:36 PM
Why do my neighbors have their home in Trusts? murg FIRE and Money 29 09-04-2007 10:35 AM
How not to get along with the neighbors... Nords Other topics 8 02-17-2007 10:49 PM
What are the Banks thinking? ESRBob Other topics 4 12-20-2004 06:38 AM

 

 
All times are GMT -6. The time now is 07:02 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.