Housing Debacle - Squatters

[chinaco]

The person identified as Lynn in this piece...


I have absolutely no sympathy for her. She just pulled all of the money out of her overvalued house and lost it. Doesn't say what the business was... how much do you want to bet that it was something to do with houses??

She seems to be working, is not paying any of her mortgage obligation, and is hoping to get bailed out her $600k business failure??

No wonder banks are not clearing the books... these situations will probably break a few more banks!

Foreclosure limbo: Staying without paying. - Jun. 9, 2011

At a minimum that woman will get hit with federal income tax for any loan forgiveness... it seem that the federal act only protects certain people in certain situations.

http://www.alperlaw.com/mortgage_fcdef.html

In December, 2007, Congress acted to protect many debtors from income tax liability associated with foreclosure avoidance. The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgage liability if and to the extent the mortgage proceeds were used to buy or improve their primary residence. There is no income tax shelter from foregiveness of mortgage debts for investment property, vacation homes, or mortgages used for businesses or to pay off credit card balances. You should speak with an attorney or CPA familiier with the new law to see if you qualify for income tax protection.

Since Florida does not seem to have anti-deficiency protection... she will probably be on the hook for some of that debt she accumulated when she extracted it from the over-inflated value of the house!



http://www.foreclosurelawfirms.com/topics.cfm/anti-deficiency-laws.html

 

[mystang52]

I saw this article before and I have extremely little sympathy for the people discussed. I feel bad for anyone who has gone through hard times, but these people make themselves out to be pure victims, never acknowledging how they are taking advantage of the system, now.

 

[pimpmyretirement]

She owes 600k secured with a 235k property. Is her credit score worth 365k? I doubt it. Her path is the rational one. The bank made a gamble and lost.

 

[Texas Proud]

I think the below quote from the article is the one that should be looked at by most as the most telling.... if you do not have any savings after not paying mortgage for how ever long... then you can not afford the place no matter what the amount of the mortgage....

(my underline)

"Martinez, still struggling to find work, has little in savings despite the missed payments. He's earning some income as a pastor and consulting for a non-profit family counseling organization."

 

[Backpacker]

These people are sickening; if you won't or can't pay your payment; get out! What crazy planet are they from that they think they should be allowed to live for free? If they would willingly and quickly move out most lenders right now would pay them to move out. The whole "we got defrauded" is bunk; read what you sign people.

 

[chinaco]

She owes 600k secured with a 235k property. Is her credit score worth 365k? I doubt it. Her path is the rational one. The bank made a gamble and lost.

I am not sure that is was rational. Let's see:

1. Took out a huge loan for a business and lost it (probably a poor business risk to begin with).
2. Owes $700k+ and will be put out of the bank's house... probably soon.
3. If her employer (a financial business) finds out she will probably lose that job. But her credit record is shot. Good luck getting a job... now days the first thing they check is a credit reference. Financial service companies are very unforgiving in that regard... not responsible in your personal life = not responsible on the job!
4. She will lose everything and be in debt to the IRS and others. They may deal it down to clear it... but still...

Sounds like a poor business decision and ultimately a poor life decision. What was rational about it?


The problem I have with it is that we are ultimately stuck paying part of the bill for her bad decision. No matter how you look at it most of us are investors and taxpayers.


More than likely the bank sold it (the loan) and it wound up in an MBS and sold to some investors or wound up on Fannie Mae's books.

 

[pimpmyretirement]

The rational part is staying in the house as long as she can without paying the loan. There is no benefit to her for trying to pay that off.

I agree her decision making was otherwise terrible.

 

[MissMolly]

“The bank made a gamble and lost” – I really don’t understand statements like this. The bank did not “gamble”. They were not betting in Vegas. The bank is in the business of loaning money. They have legal documents signed by the borrowers promising to repay the loan. At the time the loan was made the property was worth $750,000. The $600,000 loan was 80% of the (then) value of the property – not an unreasonable loan to value. The bank does not control the value of properties and you can be sure the bank did not anticipate the falling values in the housing market nor the rampant unemployment we have seen over the past 3 years. These people have failed to keep their promise. These people made poor decisions with their lives and with their money. How is it that the bank is the bad guy?

 

[clifp]

“The bank made a gamble and lost” – I really don’t understand statements like this. The bank did not “gamble”. They were not betting in Vegas. The bank is in the business of loaning money. They have legal documents signed by the borrowers promising to repay the loan. At the time the loan was made the property was worth $750,000. The $600,000 loan was 80% of the (then) value of the property – not an unreasonable loan to value. The bank does not control the value of properties and you can be sure the bank did not anticipate the falling values in the housing market nor the rampant unemployment we have seen over the past 3 years. These people have failed to keep their promise. These people made poor decisions with their lives and with their money. How is it that the bank is the bad guy?

Actually the banks did make a gamble, just like anybody who loans any money to anyone is making a gamble. There are many bet involved when loaning money, inflation, your need for the funds in the future, but the primary one is will the person or institution you loaned money to pay you back?

Pretty much everybody on the forum agreed that loaning money to your sister-in-law with a gambling addiction is a dumb loan/bad gamble. In contrast, loaning money to a bank in the form of 1 year CD isn't much of a gamble, because even if your bank fails, FDIC insurance will be there to bail you out. But still there is a tiny tiny risk that FDIC could go broke so it is a gamble but probably no more than driving.

However, banks are in the business of loaning money, and they are well aware that sometimes people don't pay loans back. In fact anytime they loan money they are required by law to set aside a portion of the loan as allowance for bad loans. The secret to being a profitable bank is to properly assess the risk that people will pay you back and charge an appropriate interest rate to compensate for that risk. Clearly during the financial crisis most banks did a lousy job of this, and many did a spectacularly horrid job, went bankrupt, and helped trigger this crisis.

The banks and borrowers signed a contract. In general mortgages are pretty one sided contracts written by the banks. Like all contracts there are penalties to both sides if they fail to perform. Obviously one penalty if you stop paying is the bank can foreclose on [-]your [/-] their house. However, in most states (CA being a notable exception but only for some mortgages) banks can not only foreclose on your house but they can sue you to collect the money that is owned. In most cases this will result in the person being forced into bankruptcy, but even after bankruptcy in many case the banks will be entitled to future reduced payments.

The problem is that we are trying to use moral argument to influence financial transactions. Now it is easy to do the right moral thing when the cashier gives you $10 in excess change. It is a lot harder to do the "moral" action when we are talking about several hundred thousand dollars. There is a plenty of blame to go around, but as a start it would help if we changed the laws and the actions of the banks to make it financially far less attractive for people to walk out on their mortgages.

 

[Mulligan]

My opinion has changed on this.I used to be infuriated by the people who walked away from their loan. But I believe now it's a business decision. Businesses walk away from their real estate loans all the time without blowback. If everyone had to have their traditional 20% downpayment it would make it harder to walk away and we might not have had an overheated market to begin with. The smart ones in Vegas would buy the same house across the street in same subdivision for less than half what they owed on theirs THEN would walk away from their first home after the other loan was secured. That infuriated me when I first read about these people, but maybe they were the smart ones.

 

[chinaco]

Actually the banks did make a gamble, just like anybody who loans any money to anyone is making a gamble. ...

A more accurate description: systemic breakdown.

But to use that analogy... Most Banks aren't "gambling" now! That is why those loan modifications are few and far between.

 

[Backpacker]

The concept of consumers that "it is anybodys fault but their own" is the part I really don't get. They invested in a house with expectation that it would go up in value; it went down instead so they expect a "pass" and should just walk away. I don't think that because my 401k went down in value that I can expect someone to make me whole again. That's the risk I take; it's part of life.

Every single car I've ever owned went down in value and back when I borrowed to buy them I was probably upside down on every one - doesn't mean I was defrauded by the bank or the car dealer; or that I should walk away with impugnity. Or worse be allowed to keep drivign the car for several years without paying for it.

 

[clifp]

A more accurate description: systemic breakdown.

But to use that analogy... Most Banks aren't "gambling" now! That is why those loan modifications are few and far between.

Systemic failure I agree caused in no small part by banks vastly overestimating the willingness and ability of borrowers with poor credit ratings and/or income to repay loans.

Actually banks are making a very dangerous gamble right now. They are betting that they can convince people with underwater mortgages to continue paying on these mortgage despite a constant stream of media reports that point out the financial benefits of strategic defaulting. The one common thread we read in all of these stories is that borrowers ask the banks for loan modifications and were told no we can't make them until you stop paying.

By offering neither a carrot to make it more attractive for people to continue paying on their underwater loans, nor any type of stick threaten consequence beyond foreclosures the banks are driving an increasing number of people into strategic default.

Let me use an example. Imagine a young professional couple who bought a house in 2007 near the peak at $500K. They could only put 10% down and borrowed 450K @6.5% with their scant credit histories. Mortgage payments are 2850 lets say that HOA, taxes, and insurance make their total payments $3400. They have student loan payments of $600/month, or total of 4K/month in payments. Fortunately they have income of 10K/month so 40% of their income goes to debt repayment high but well within lending guidelines. Fast forward to 2011, they are two years into paying off a car loan @$400 when they suffer income reduction from 10K/month to 8K/month. Now suddenly they have $4400/month payments on 8K income possible but pretty tough. Meanwhile the value of their home has dropped from $500K to $250K. They notice that their same house model is available to rent for $2K/month down the street. They also see that 30 year mortgage rates are down to 4.5%.

What banks and "they have a moral obligation to pay" crowd hope/think they should do is continue to pay their mortgage. But realistically this couple is living paycheck to paycheck and has a very hard time saving for retirement, kids college, or even building up an emergency fund.
Strategically defaulting looks awfully tempting. First of all they get to live rent free for typically 2 years, this is a saving of almost 50K. Then they can rent the house down the street and save ~10K+ (counting the tax benefits of owning) year. In 5 or 6 years their credit will probably have recovered enough to buy their old house back especially if they use the 100K+ in savings as large down payment . In fact if housing prices remain relatively flat they can get the old house with a 15 year loan and own it free and clear faster and at considerably lower cost than making the old payments.

No don't get me wrong I don't have a lot of sympathy for what these people are doing. Even worse these defaults cost us as shareholders, taxpayers, and home owners a lot of money. However, the banks are making matter worse by being extraordinarily inflexible. In the example I gave if the bank cut the interest rate from say 6.5% to 4.5% it would cut their payment by $560/month making renting look far less attractive. I am just not aware of banks doing this very often

.

 

[lets-retire]

I have considered the strategic default, but only as a future option. Currently the DW and I are both government workers. We are severely upside down in our house, however we have no plans to default unless we are unable to pay the bill. With all of the benefit reductions being proposed in Congress, if they go through we will walk in a heartbeat. We will go from having a decent amount leftover at the end of the month to running a serious deficit for the next 5-10 years. All of our savings would run out in about two or three years (not counting the increase in cost such as health insurance). We would literally have to cut just about everything out of our budget to get the savings we would see from walking from the house, which also happens to be about what we would have to cut in order to have a balanced budget. So the options are very easy, cut everything out, except food and water, and be able to afford to live where we do. By everything I mean everything (phones, internet, cable, gasoline, car insurance, electric, gas for the house, car payment, entertainment). The only other option is to walk from our house and rent a place a lot cheaper, but just as nice, and still have the ability to afford the basics. I can rent a larger house in my neighborhood for literally 1/2 of my mortgage payment.

If we could refinance we would be able to lower our house payments, pay for the increased cost of benefits, and still be able to live a lifestyle very similar to our current lifestyle. The only thing standing in our way, is we are the "rich" so we don't get any help. The government seems content to help those who can least positively affect the economy, then wonder why nothing is helping the economy recover. The government is helping those who are running a deficit every month get their payments in line so they have a balanced budget. Unfortunately, this results in no increase in spending. Something that is sorely needed to improve the economy. If the "rich" we given an opportunity to increase their monthly excess, it will do more for helping the economy than helping those barely getting by. It has been proven that when people feel they have more money, they will spend more money. If these "rich" middle class people were allowed to refinance their upside down mortgages to a lower interest rate it would literally increase their disposable cash, and improve the likelihood of more spending. The government could encourage the refinancing of existing mortgages by increasing the allowable loan to value limits for refianance on the various government guarantee programs. The cost to the government would be minimal when compared to the fiasco of the mortgage modification program, since the government would only be guaranteeing the loans not making them and not giving money away.

 

[BigNick]

Living in this foreclosure limbo is "Hell," Lynn said. "I feel like I'm locked in a box. I work for a financial organization and if this came out, it could cost me my job."

Can we at least find out which financial organization that is, so I don't put any money with one which employs people who have so little clue about money ?

 

[ziggy29]

She owes 600k secured with a 235k property. Is her credit score worth 365k? I doubt it. Her path is the rational one. The bank made a gamble and lost.

But it's not only the bank that "lost". To the extent this bank was taken over by FDIC, other deposit institutions bailed their bad choices out. To the extent Uncle Sam bailed them out, the taxpayers lose too.

As long as these businesses don't operate in a vacuum, there are more losers than just a business making a bad decision.

 

[Texas Proud]

/snip/
No don't get me wrong I don't have a lot of sympathy for what these people are doing. Even worse these defaults cost us as shareholders, taxpayers, and home owners a lot of money. However, the banks are making matter worse by being extraordinarily inflexible. In the example I gave if the bank cut the interest rate from say 6.5% to 4.5% it would cut their payment by $560/month making renting look far less attractive. I am just not aware of banks doing this very often

.

One of the problems that most people fail to realize is that they might not be able to make this change...

Someone owns the mortgage... most likely NOT the bank... if it is in an MBS there are various covenants that were put in the docs on how many loans that could be changed, what changes could be made etc. etc... and sending out to all bondholders to get a vote to change these is expensive and probably not going to pass anyhow....

Because of the way mortgages are structured today, making a change that might make sense to you and me might not be able to be made due to the legal docs... unless this is changed.... we are stuck with what we have...

 

[sheehs1]

One of the problems that most people fail to realize is that they might not be able to make this change...

Someone owns the mortgage... most likely NOT the bank... if it is in an MBS there are various covenants that were put in the docs on how many loans that could be changed, what changes could be made etc. etc... and sending out to all bondholders to get a vote to change these is expensive and probably not going to pass anyhow....

Because of the way mortgages are structured today, making a change that might make sense to you and me might not be able to be made due to the legal docs... unless this is changed.... we are stuck with what we have...

Agree Texas Proud. Often in the article and discussions, the investor that bought that mortgage backed security is not mentioned.
Do you know by chance ...if when the mortgage becomes a non performing asset...if the investor still gets paid? And by whom? The Insurance companies that insured or backed that loan...like MBIA or others?

And if the investor is still getting his money...there is no incentive for that investor to agree to the write down or take the loss.

And from what I understand in most cases....even if the home owner suffers a loss, the banks or other entities on the other side of the fence are protected for the difference ....as so many loans were backed by the federal government. For those, we tax payers get to absorb the homeowners loss and the bank or other entity's loss. Again no real incentive....

What a mess....

 

[sheehs1]

Oddly enough I am looking at "maybe" making an offer on a piece of investment property that is a short sale. The realtor just sent me this link talking specifically about the deal banks made with the FDIC.
Thought I'd share.

YouTube - ‪fiercefreeleancer's Channel‬‏

 

[MissMolly]

If a loan is insured – either by FHA or PMI companies or guaranteed by VA or Rural Housing, then yes, the investor recoups a large portion of the loan, but not all. For those loans that are uninsured, the investor eats the loss. Banks/mortgage servicers do not like to foreclose on properties. The foreclosure process is expensive and time consuming. Then the servicer has a property in inventory to maintain and sell. Also expensive and time consuming.

In my 30 years experience in this industry, I can tell you that by and large, most borrowers default on their mortgages due to overextending their credit. They buy a house that they qualify for, then they buy a new car, a big screen TV, expensive new furniture, etc. They max out their credit cards, they take second and third mortgage out. They whine to the mortgage company that they can’t afford their house payments and what is the company going to do to help them out? We had one borrower who demanded we modify their loan because they spent all their money on beauty pageants for their daughter and could not afford the payments. They claimed they were investing in her future. Another took a two-week vacation to Tahiti and couldn’t make their payments. Many others demanded a loan modification so they could buy a new $25,000 car. Others quit their job because the boss was mean. And on and on. You would not believe the excuses people have for not being able to afford their mortgage. And yet the mortgage company/bank is the bad guy. I am not saying all borrowers are like this, but the majority simply make bad decisions with their lives and their money and then expect someone else to bail them out. They feel entitled because "President Obama says you have to help." Because the media tells them it’s OK to walk away – after all it’s not their fault.

Sometimes life is a struggle. There were years we did without luxuries. We didn’t have cable TV, we didn’t go on vacations, we didn’t go out to eat, we didn’t buy a new car, and we didn’t buy new clothes. We hunkered down, took second jobs and worked at making it work out. However, no one is expected to do this anymore. Now they can just put their hands out and the government will pass a law and make somebody somewhere fill that hand.

 

[pimpmyretirement]

But it's not only the bank that "lost". To the extent this bank was taken over by FDIC, other deposit institutions bailed their bad choices out. To the extent Uncle Sam bailed them out, the taxpayers lose too.

As long as these businesses don't operate in a vacuum, there are more losers than just a business making a bad decision.

The system has problems, I am paying for them with everyone else, no doubt. Personal responsibility goes both ways though. When I bought property near the peak of the bubble, when I bought shares of these banks through my index fund, I condoned the actions of the bank. I assume the risks by participating in the system.

Why would someone in her situation to tough things out and pay off the loan? The personal hardship of doing so would be massive, with very little tangible benefit.

 

[tryan]

Interesting that the towns have not foreclosed for back taxes. Are the banks keeping the taxes - and insurance - current?

THAT's why the banks will settle (sell short) ... to stop the bleeding. Might take a few TOTAL losses (ie. fires, liability law suits, tax lien sales ...); but they'll come to thier senses.

 

[eridanus]

My opinion has changed on this.I used to be infuriated by the people who walked away from their loan. But I believe now it's a business decision.

My opinion has changed as well. It's a business contract. The banks make the loan in the expectation that the lendee will pay; if they don't, they foreclose and the lendee takes a credit hit. That's how the system works.

 

[Backpacker]

Interesting that the towns have not foreclosed for back taxes. Are the banks keeping the taxes - and insurance - current?

THAT's why the banks will settle (sell short) ... to stop the bleeding. Might take a few TOTAL losses (ie. fires, liability law suits, tax lien sales ...); but they'll come to thier senses.

Yes we keep taxes current (at least in MI), If we dont pay them as we go we just have to pay at the closing table when we ultimately sell.

 

[Backpacker]

My opinion has changed as well. It's a business contract. The banks make the loan in the expectation that the lendee will pay; if they don't, they foreclose and the lendee takes a credit hit. That's how the system works.

Don't have a problem with all that; it's all part of risk and reward. The hang up I have is once the borrower is in the position that they can't afford it, they continue to live in it for free. I don't think less of a person if life throws them a curve (divorce, health, long term unemployment), but to live in my house for a year and not pay one red cent...?