Home foreclosure - sound business move?

[ChrisC]

Quote:

Originally Posted by Milton 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.

I think you might be oversimplyfying things here about the lending practices. I don't think the lenders are voluntarily agreeing to residential home loan mortgages whose payments are entirely secured by the collateral -- it's that there are some states that limit the lender's ability to pursue the borrower after the property securing the loan has been foreclosed. Some of these states say you do not have any recourse against the borrower, regardless of what your loan papers say, whenever you seize the collateral. There might be some Federal agency loan programs like VA or FHA that specifically have so-called non-recourse features, but I'm not aware of private lenders, banks, thrifts, credit unions or mortgage bankers, that have non-recourse mortgage loans. I could be wrong, but I don't think I am.

Irrespective of whether a lender can go beyond the collateral to obtain payment of a debt, the question remains is that right for a borrower to do that simply because he does not want to remain on the hook for the loan. The fact that some states might handcuff lenders or the VA or HUD might not pursue you beyond foreclosure of the property is irrelevant to me -- the borrower's obligation on the underlining debt still remains -- it's just that the lender has no ability to coerce the borrower to keep his promise! I don't see this as a moral problem for the borrower but others seem to be troubled by it.

[Milton]

Quote:

Originally Posted by ChrisC I think you might be oversimplyfying things here about the lending practices. I don't think the lenders are voluntarily agreeing to residential home loan mortgages whose payments are entirely secured by the collateral -- it's that there are some states that limit the lender's ability to pursue the borrower after the property securing the loan has been foreclosed. Some of these states say you do not have any recourse against the borrower, regardless of what your loan papers say, whenever you seize the collateral. There might be some Federal agency loan programs like VA or FHA that specifically have so-called non-recourse features, but I'm not aware of private lenders, banks, thrifts, credit unions or mortgage bankers, that have non-recourse mortgage loans. I could be wrong, but I don't think I am.

Sounds like neither one of us really knows much about the topic under discussion. Perhaps we are talking about mere semantics. Whether a bank includes dubious provisions in its own mortgage terms, or writes mortgages in states that impose dubious restrictions via legislation, makes little real difference, does it? In either case, the bank is setting itself up for failure.

Quote:

Originally Posted by ChrisC Irrespective of whether a lender can go beyond the collateral to obtain payment of a debt, the question remains is that right for a borrower to do that simply because he does not want to remain on the hook for the loan. The fact that some states might handcuff lenders or the VA or HUD might not pursue you byond foreclosure of the property is irrelevant to me -- the borrower's obligation on the underlining debt still remains -- it's just that the lender has no ability to coerce the borrower to keep his promise!

It depends upon exactly what promises were made. If the deal was "make the payments or lose the house", the mortgagee who bails out hasn't broken any promises; they've simply exercised an option.

I certainly don't like the idea of people skipping out on their debts. But in this case it sounds like people are playing by the rules, which they are entitled to do. Corporations and governments do it all the time ... why shouldn't little people have the same right?

The problem is a combination of lax lending standards, and legislation that promotes real estate speculation. Given such conditions, I prefer to keep well clear of American banks.

[aenlighten]

Let the borrowers be punished through their credit ratings and lenders be punished with their losses. It is the only way they are likely to learn. Nothing immoral about that.

[ChrisC]

Quote:

Originally Posted by Milton Sounds like neither one of us really knows much about the topic under discussion. Perhaps we are talking about mere semantics. Whether a bank includes dubious provisions in its own mortgage terms, or writes mortgages in states that impose dubious restrictions via legislation, makes little real difference, does it? In either case, the bank is setting itself up for failure.

Banks don't put dubious provisions in their mortgage terms that undermine the credit quality of an asset like a mortgage loan. They don't say we'll only take the property from you and not hold you accountable for the underlying debt if the collateral isn't sufficient to pay the loan. That was my first point. And in writing mortages in states that have "dubious restrictions" like strict foreclosure, election of remedy provisions or anti-deficiency judgment statutes, lenders are only taking what the playing field gives them and they make adjustments like requiring higher loan to value ratios or over-collateralizing debt, etc. So, banks aren't setting themselves for failure. Mortgage lending has traditionally been a safe and stable credit for financial institutions; it's the subprime lending that has gotten the balance out of whack.

Quote:

Originally Posted by Milton It depends upon exactly what promises were made. If the deal was "make the payments or lose the house", the mortgagee who bails out hasn't broken any promises; they've simply exercised an option. I certainly don't like the idea of people skipping out on their debts. But in this case it sounds like people are playing by the rules, which they are entitled to do. Corporations and governments do it all the time ... why shouldn't little people have the same right? The problem is a combination of lax lending standards, and legislation that promotes real estate speculation. Given such conditions, I prefer to keep well clear of American banks.

Now this is really legal semantics on my part. What you are talking about are promises that are made, broken, and cannot be enforced by the other party to whom the promise was made. I promise to pay you back the $100 you lent me plus interest over 5 years on a monthly basis and here's my house as collateral for that loan. This is the typical mortgage loan. If I don't pay back that loan to you, I have broken my promise to pay you the money I borrowed. If you take my house as collateral, and the house is worth more than the loan balance, then you owe me the amount that exceeds my debt to you and my promise has been fulfilled, right? If you take my house and the house is worth less than the loan, how has my promise to pay you been discharged or fulfilled -- I haven't honored my promise to pay you that $100 loan, right? And if the law, state law or federal bankruptcy law, wipes out that debt, my promise to you has simply been rendered unenforceable. You ever wonder why "bankruptcy" had such a moral taint to it when the bankruptcy system was first put in place -- I think it was viewed as a slightly immoral way of not fulfilling your obligations.

Yes, people are playing by the rules, but in some instances I can understand why other people, not me by the way, would think this has a moral aspect to it. Personally, I don't like stiffing other people or welching on a debt, whether it be owed to a human being or corporation. I've always told my children to always try to keep their promises.

[clifp]

Quote:

Originally Posted by aenlighten Let the borrowers be punished through their credit ratings and lenders be punished with their losses. It is the only way they are likely to learn. Nothing immoral about that.

In some ways I agree, although I have doubts if credit rating punishments are enough.

As a (recent) owner of Bank Of America, Wells Fargo and Countrywide, there is is good chance that California mortgage he is walking away from belongs to me. So part of the $100-150K he is gaining by walking away comes from me. In a very real sense he is stealing my money. Given that most people on the board own index funds and/or large cap mutual funds in some fashion he is also stealing all of your funds. Even for people without stocks, he is contributing to a big financial crisis which will have to be solved via some combination of government bailouts, higher inflation, or higher real interest rate, or a recession.
I think we can all agree that if you loan a friend a money, he refuses to pay you back while continuing to maintain an extragravent lifestyle he is acting immoral

What I think is even more important is I'd be willing to bet he is also acting illegally. There is an excellent chance that he lied on his second (and possibly his first) loan application. Most mortgage application require you to sign under penalty of perjury that all of the information is accurate.
I'd like to see a few high profile criminal prosecutions of borrowers, for perjury, loan fraud, or perhaps a creative federal prosecutor can nail them for bank robbery

Just like tossing folks from Enron, Tyco etc in jail had a positive deterence factor on greedy corp exec. I think a few jail sentences handed out to the worse of the mortgage loan liars would be good for society.

[Gumby]

Quote:

Originally Posted by ChrisC Banks don't put dubious provisions in their mortgage terms that undermine the credit quality of an asset like a mortgage loan. They don't say we'll only take the property from you and not hold you accountable for the underlying debt if the collateral isn't sufficient to pay the loan. That was my first point. And in writing mortages in states that have "dubious restrictions" like strict foreclosure, election of remedy provisions or anti-deficiency judgment statutes, lenders are only taking what the playing field gives them and they make adjustments like requiring higher loan to value ratios or over-collateralizing debt, etc. So, banks aren't setting themselves for failure. Mortgage lending has traditionally been a safe and stable credit for financial institutions; it's the subprime lending that has gotten the balance out of whack. Now this is really legal semantics on my part. What you are talking about are promises that are made, broken, and cannot be enforced by the other party to whom the promise was made. I promise to pay you back the $100 you lent me plus interest over 5 years on a monthly basis and here's my house as collateral for that loan. This is the typical mortgage loan. If I don't pay back that loan to you, I have broken my promise to pay you the money I borrowed. If you take my house as collateral, and the house is worth more than the loan balance, then you owe me the amount that exceeds my debt to you and my promise has been fulfilled, right? If you take my house and the house is worth less than the loan, how has my promise to pay you been discharged or fulfilled -- I haven't honored my promise to pay you that $100 loan, right? And if the law, state law or federal bankruptcy law, wipes out that debt, my promise to you has simply been rendered unenforceable. You ever wonder why "bankruptcy" had such a moral taint to it when the bankruptcy system was first put in place -- I think it was viewed as a slightly immoral way of not fulfilling your obligations. Yes, people are playing by the rules, but in some instances I can understand why other people, not me by the way, would think this has a moral aspect to it. Personally, I don't like stiffing other people or welching on a debt, whether it be owed to a human being or corporation. I've always told my children to always try to keep their promises.

This discussion reminds me of the "efficient breach" scenario from law school. For normal people -- efficient breach is a school of thought holding that if a company can increase its revenues by breaching a non-profitable contract after paying any contractually mandated damages to the non-breaching party then the company is obligated to its shareholders to breach the contract.

[kumquat]

Interesting discussion. I'm in Canada and most (I think) mortgages are of the recourse kind. That being said, why shouldn't someone abide by the terms of the loan? I think honobob had this in mind with his advice (which I disagree with) in this thread: http://www.early-retirement.org/foru...tml#post606050

I'm assuming (correct me if I'm wrong bob) that the risk of catastrophic loss will be shared because the lender has no recourse.

What do people think about this,a similar but inverse situation. In the early 80's my mother had a 30 year 4% mortgage. Interest rates hit about 21% here in the frozen north. Mortgage company sent here a nice letter telling her she could pay down the principle with no penalty. I suggested she offer to pay the entire amount at 50 cents on the dollar. She did, they accepted. Was that immoral?

[twaddle]

Quote:

Originally Posted by Gumby This discussion reminds me of the "efficient breach" scenario from law school.

It reminds me of the Costco return policy. It can be part of the normal cost of doing business until people abuse it en masse.

Of course, the lenders never thought California would see a 3.5% default rate (and growing).

[cashflo2u2]

California uses Trust Deeds (deed of trust), which are not exactly the same as a mortgage. This confuses many inexperienced mortgage brokers and Realtors. Relative to residential real estate 1-4 units...purchase money mortgages are non recourse. the lenders were forced to accept this element of the deal when they got the right to foreclose non judicially by way of trustees sale. the non judicial method is far faster so they must give up the right to a deficiency judgement when they elect to do so.

[Independent]

It wouldn't occur to me to walk away from a mortgage in this situation. But, now that someone got me thinking about it, I have trouble seeing anything "immoral" here.

Suppose the borrower were Corporation A. It borrowed money from Corporation B to buy an asset. The loan agreement explicitly stated that the only security for the loan was the named asset. The asset goes down in value, and A gives the asset to B. I wouldn't consider that immoral. I don't think that A's shareholders have "stolen" from B's shareholders.

If it's not immoral for A's shareholders to walk away, why is it immoral for an individual to walk away?

Certainly, in the mortgage case, any lender doing business in CA knows the laws. They may have assumed that the borrowers didn't know the law, but that's the risk they took. They made a business decision to sign a contract with an embedded option, the borrower made a business decision to exercise that option. End of story.


I'm treating this as "pure business". I could get to a different decision if the bank has a reputation for going above and beyond the letter of its contracts to help its customers or employees. I believe that some credit unions operate that way today. But I'd normally assume that any bank CEO would fire any employee and take any customer to court if it improved the long term bottom line. I'd expect his/her stockholders to support those decisions, maybe with bonuses. So I figure it's "all business" unless I see evidence otherwise.

[brewer12345]

I guess it wouldn't occurto me to walk away because it was financially attractive to do so because I would never willingly put myself in that leveraged a situation. I would walk away and stiff the lender if it meant being able to take care of my kids, though.

As for why anyone would invest in a bank, well, not all banks are created equal. Some actually remembered all that stuff about the "four C's" of credit and underwriting and stuff. Those who forgot about all of that probably won't forget again for at least the next decade, assuming they survive.

[ChrisC]

Quote:

Originally Posted by twaddle It reminds me of the Costco return policy. It can be part of the normal cost of doing business until people abuse it en masse. Of course, the lenders never thought California would see a 3.5% default rate (and growing).

And it can be another tragedy of the commons if negative equity pushes lots of people into foreclosures. Why negative equity matters - Paul Krugman - Op-Ed Columnist - New York Times Blog

[Independent]

Quote:

Originally Posted by ChrisC And it can be another tragedy of the commons if negative equity pushes lots of people into foreclosures. Why negative equity matters - Paul Krugman - Op-Ed Columnist - New York Times Blog

Good article by Krugman. Thanks for the link.

[Ishith]

Hey!

Thanks for sharing all this information. Truly interesting posts!

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Home foreclosure

[jclarksnakes]

I have had two careers in my life. I spent 20.5 years as an army warrant officer flying helicopters and am now 13 years into a second career as a registered nurse. Not being TOTALLY honest in either of these careers can cause serious injury or even death. When I sign a mortgage the small print probably does read like some of the points people have brought up here but the gist of the contract is that they agree to loan me money and I agree to repay it. It truly surprises me that so many of you are comfortable with a level of honesty that would be totally unacceptable in either of my careers.
Jeff Clark
CW4 USA (ret.)
RN, BSN

[Milton]

Hello Jeff,

The 'small print' in a contract is not inconsequential: any more than the fine print in instrument approach charts, or notes on a clinical chart. Relying upon such provisions has nothing to do with honesty or lack thereof.

Aviation and health care both involve professional ethics and high standards of behaviour. For better or worse, commerce is a different world, governed only by legal rights and obligations. Large corporations always rely upon the small print, and it's only fair that individuals can too. Keep in mind that (i) the banks drafted the contracts, and (ii) 99 times out of a 100, the small print is used to stick it to the little guy.

Quote:

Originally Posted by jclarksnakes I spent 20.5 years ... and am now 13 years into a second career.

What about ER?

[tryan]

Fortunately 90% of the upside down mortgage holders will suck-it-up and make the payments. Most will even live to see thier notes turn right side up.

Here's a decent link supporting the 90% number:
http://www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf

[Marquette]

Quote:

Originally Posted by tryan Fortunately 90% of the upside down mortgage holders will suck-it-up and make the payments. Most will even live to see thier notes turn right side up. Here's a decent link supporting the 90% number: http://www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf

Thank goodness there are always some scare stories to go along with reality, though:

Is America's suburban dream collapsing into a nightmare? - CNN.com

[jclarksnakes]

Milton,
...A fair amount of that fine print on loan contracts is there because of the truth in lending act and is specifically required to protect the consumer. I hope I do not sound like too big a fan of the lending institutions. They deserve the problems they have created for themselves. If I stopped to quibble about the right or wrong of the fine print on an approach chart or a medical chart people could die. I will not seperate my life into one part that believes in total honesty and another that believes in situational ethics. Most people do not read the fine print on a contract anyway. They sign a mortgage with their own understanding that they will repay it. To later decide to not repay when they can is a decision that makes their word and their signature worthless. If everyone's word and signature were worthless trade and commerce would come to an end.
...I have been working parttime for several years waiting for DW to retire. She is about 4 years away. She likes her job and also seems to want a lot more $$ in retirement than we will be able to spend. I will probably be totally retired within the next 12 months. I tell DW that I will send her postcards from my retirement.
Jeff

[Westernskies]

I think it boils down to a simple ethics question- "would you walk away from a contractual obligation that you could afford to pay?"

NO. Under this scenario I shook hands with them contractually and have the abilty to pay. It's my obligation, not other bank customers, their shareholders or my fellow taxpayers.

Just the way I was raised, I guess.

I hope the bank hunts them down and kills them with a thousand paper cuts.