109 replies to this topic

[Kayjc]

Another article on the subject:

http://www.nytimes.c...-wwln-t.html?em

The Way We Live Now
Walk Away From Your Mortgage!
Chris Schedel

Published: January 7, 2010
John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.

Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His book “The End of Wall Street” is coming out in April.

[Mayor]

The problem I also see if along the way trashing your credit. In the end it's going to cost u a lot because now of the higher interest rates you get because of your 500 fico score now and no availability to get credit since you just trashed it. Personally, I wouldn't want to trash my credit especially if I had good credit before and give up the home. I dunno, to each his own with regards to there credit.

[flacorps]

A 775 FICO doesn't get you credit anymore.

http://www.huffingto...omment_37693269

Save your cash and $crew the creditors.

[acesfull]

bump

[Onwards]

The problem I also see if along the way trashing your credit. In the end it's going to cost u a lot because now of the higher interest rates you get because of your 500 fico score now and no availability to get credit since you just trashed it. Personally, I wouldn't want to trash my credit especially if I had good credit before and give up the home. I dunno, to each his own with regards to there credit.

Credit scores are overblown. The overall cost of the negative hit on your credit will come to a few thousand dollars over the few years it takes to rebuild it. The advantage of walking away is measured in some cases in hundreds of thousands of dollars. There is simply no comparison.

By the way, I filed for Ch7 and following the discharge my credit scores are 662-663 in all three agencies. So much for a negative hit (I started in the mid-7's). I got a new credit card 2 days after discharge. So much for credit issues.

We are currently considering taking the strategic default concept a step further. When I filed I excluded my wife, so while I am no longer responsible for the loans on our primary residence, she still is. What we're thinking is to stop paying on the HELOC second - not try to negotiate a modification, as our interest rate is really low already (2.3%), but just stop paying. And not because we can't pay, we definitely can (my Ch7 cleared up enough debt to put us in the black). As long as we keep paying the first, legally there is nothing the junior lien holder can do in California except a judicial foreclosure, which would be dumb considering the house is worth quite a bit less than the balance on the first. We would be betting that they will harass her for 6-9 months then charge the thing off, sell it to a collections firm, at which point we can negotiate a settlement for 10-20% of the balance. We would happily do that with the current lender but they don't negotiate as a rule (USAA; I never understood their non-negotiating position).

And yes, the only thing that's been holding us back is a sense of "it's not right". But we're slowly getting over that as the days go by. Not sure if we'll do it, but the mortgage relief act looms large; we need to do this before the act runs out so we don't get hit with taxes on the charge off. Yes, that law will certainly play a somewhat lopsided part in our eventual decision.

[caffeinekid]

A 775 FICO doesn't get you credit anymore.

http://www.huffingto...omment_37693269

Save your cash and $crew the creditors.

This has been the case for some time now. For example; In the time that I have been in the automobile consumer market, the standard went from one of selling cars to one based on financing. Naturally, it soon followed that proper credit risks weren't profitable enough and poor credit risks became the new cash cow. So, dealers went from moving brands and creating relationships to something much less respectable. As it turns out, auto dealerships were just the bellwether.

And I agree with your sentiments. Screw the creditors. This game is coming down and I believe that its better sooner than later. The real movers and shakers have already left the building and will never be held accountable. Everyone else INCLUDING many that we would consider "wealthy" aren't sitting as pretty as they thought they were. Some have figured it out, and some haven't yet. It is all just a matter of timing.

[Hanover]

All my credit cards are paid off or have low balances. I've been paying all my other bills on time. Even if I foreclosed and I started renting, I'm pretty sure by using my cards and paying them off, I'd rebuild my credit pretty quickly. The fact is, I'd have so much money left every month by getting out of my mortgage, that I could put a substantial amount in savings.

I'm going to let my lender know that I'm considering the fact that foreclosure is my best option, and see what they do. They'd definitely take a loss on my house if it got to that. The biggest problem on my loan is the PMI. If they'd just lower it from $500 to something normal, I'd definitely stay...but paying $6,000 a year for PMI is something I need to stop doing.

[Mayor]

How much is your loan.. PMI should only run around $100

[flacorps]

And yes, the only thing that's been holding us back is a sense of "it's not right". But we're slowly getting over that as the days go by. Not sure if we'll do it, but the mortgage relief act looms large; we need to do this before the act runs out so we don't get hit with taxes on the charge off. Yes, that law will certainly play a somewhat lopsided part in our eventual decision.

The arrival of a 1099-c form is never a sure thing and its issuance can be negotiated away (perhaps not legitimately, but collectors will do what they gotta do to get you to send the check).

And the act may get extended.

[Mayor]

The problem I also see if along the way trashing your credit. In the end it's going to cost u a lot because now of the higher interest rates you get because of your 500 fico score now and no availability to get credit since you just trashed it. Personally, I wouldn't want to trash my credit especially if I had good credit before and give up the home. I dunno, to each his own with regards to there credit.

Credit scores are overblown. The overall cost of the negative hit on your credit will come to a few thousand dollars over the few years it takes to rebuild it. The advantage of walking away is measured in some cases in hundreds of thousands of dollars. There is simply no comparison.

By the way, I filed for Ch7 and following the discharge my credit scores are 662-663 in all three agencies. So much for a negative hit (I started in the mid-7's). I got a new credit card 2 days after discharge. So much for credit issues.

We are currently considering taking the strategic default concept a step further. When I filed I excluded my wife, so while I am no longer responsible for the loans on our primary residence, she still is. What we're thinking is to stop paying on the HELOC second - not try to negotiate a modification, as our interest rate is really low already (2.3%), but just stop paying. And not because we can't pay, we definitely can (my Ch7 cleared up enough debt to put us in the black). As long as we keep paying the first, legally there is nothing the junior lien holder can do in California except a judicial foreclosure, which would be dumb considering the house is worth quite a bit less than the balance on the first. We would be betting that they will harass her for 6-9 months then charge the thing off, sell it to a collections firm, at which point we can negotiate a settlement for 10-20% of the balance. We would happily do that with the current lender but they don't negotiate as a rule (USAA; I never understood their non-negotiating position).

And yes, the only thing that's been holding us back is a sense of "it's not right". But we're slowly getting over that as the days go by. Not sure if we'll do it, but the mortgage relief act looms large; we need to do this before the act runs out so we don't get hit with taxes on the charge off. Yes, that law will certainly play a somewhat lopsided part in our eventual decision.

I dunno I see a lot of borrowers hit with low credits which I can imagine makes it hard in the future. In our system I can see a recent FICO score and most of the borrowers that go deliquent are having under 600 credit scores..
IE

CURRENT
FICO
599

FICO
DATE
111909
(MMDDYY)

This is on a borr who is 10 months behind.

[radi8]

I dunno I see a lot of borrowers hit with low credits which I can imagine makes it hard in the future. In our system I can see a recent FICO score and most of the borrowers that go deliquent are having under 600 credit scores..
IE

CURRENT
FICO
599

FICO
DATE
111909
(MMDDYY)

This is on a borr who is 10 months behind.

10 months of lates will do that. Seems a fair number of these folks aren't terribly interested in new credit for a while anyway, I'm not sure a damaged credit score is much of a deterrent.

[Mayor]

True, but that many months of lates happends when you hit FC.. Takes us sometime to FC depending on the state. I was just showing them how going into FC does dent you credit a lot.

[Hanover]

How much is your loan.. PMI should only run around $100

My loan was $150,000.

[Mayor]

How much is your loan.. PMI should only run around $100

My loan was $150,000.

That's a lot for that amount of loan.

[Hanover]

How much is your loan.. PMI should only run around $100

My loan was $150,000.

That's a lot for that amount of loan.

I think my credit score also had something to do with it at the time. But I DO have emails from my lender claiming I could reduce my PMI by raising my equity in 5% amounts. Meaning, for every 5% I could get an appraisal and they could re-negotiate my PMI. I found out later this was false...SunTrust no longer holds my loan, but could that email be used for evidence against Litton Loan?

[Mayor]

How much is your loan.. PMI should only run around $100

My loan was $150,000.

That's a lot for that amount of loan.

I think my credit score also had something to do with it at the time. But I DO have emails from my lender claiming I could reduce my PMI by raising my equity in 5% amounts. Meaning, for every 5% I could get an appraisal and they could re-negotiate my PMI. I found out later this was false...SunTrust no longer holds my loan, but could that email be used for evidence against Litton Loan?

FYI

EXPENSE ITEM DUE TM PRESENT NEXT DISB NEW DEP
MORTGAGE INS 05-09 1 167.08 167.08 167.08

PRIN BAL 318,214.96


I really do wonder why it is so high for you.

Edited to add: This is paid monthly so that's the monthly rate.

Edited by Mayor, 12 January 2010 - 04:35 PM.

[Hanover]

How much is your loan.. PMI should only run around $100

My loan was $150,000.

That's a lot for that amount of loan.

I think my credit score also had something to do with it at the time. But I DO have emails from my lender claiming I could reduce my PMI by raising my equity in 5% amounts. Meaning, for every 5% I could get an appraisal and they could re-negotiate my PMI. I found out later this was false...SunTrust no longer holds my loan, but could that email be used for evidence against Litton Loan?

FYI

EXPENSE ITEM DUE TM PRESENT NEXT DISB NEW DEP
MORTGAGE INS 05-09 1 167.08 167.08 167.08

PRIN BAL 318,214.96


I really do wonder why it is so high for you.

Edited to add: This is paid monthly so that's the monthly rate.

And basically that is why I'm saying that I'm telling Litton to either lower PMI, lower the payment somehow, or I'm not going to keep the house. I'll present them with the emails from the original lender showing the only reason why I accepted the mortgage was under this assumption I could pay 5% principal, re-appraise and lower my PMI.

[Mayor]

I do know on HAMP modifications that the adjust to 31% gross does not include MI. So you payment can be higher after the MI payment.

[KYBOSH]

Fabulous discussion folks.

[snax]

Ethics aside, the fact that cannot be ignored right now is that real estate is currently a very poor investment over the short term. Further, it has historically taken decades for real estate prices to recover from such crashes. This alone makes a very strong case for the idea of walking away if one's equity is significantly in the negative.

Credit trashed or not, how many people walking away today will be intent on purchasing real estate againg any time within the next 2-3 years? How many people walking away will not be able to cut their expenses and pay down or pay off other debt with the real estate monkey off their backs? Are they really likely to be seeking additional credit en-masse?

As one who has been seeking a modification for over a year now, I can tell you that we no longer care one lick about what our credit rating is. Walking away would do little damage compared to the months of late entries our current loan servicer has placed on our report. Our ONLY motivation to ride it out at this point is because WE HATE TO MOVE! Yet still, nearly 9 months after agreeing to do a modification trial for us, our lender hasn't put a thing in writing, all while they continue to trash our credit even further. Even so, if we were not officially in default on the original mortgage, it is increasingly looking like throwing good money after bad.

Logically, it's time to throw in the towel no matter how we look at it. Our insistance on staying is the only thing that doesn't make too much sense, as moving is little more than a logistical event with very little financial cost. Call us lazy if you must. That's all that most of us still sticking it out with negative equity really are.

[Mayor]

*shrugs*

Believe it or not I know IndyMac is working a great deal to offer modifications and we've started offering "quick mods" which are different from HAMP and give people automatic modifications -- even based off stated income. Trust me things are going to improve.

[SportsNut]

Excellent comments and perspective snax.

The more one reads and sees about these gawl-darned lenders and their inability or lack of willingness to play nice on upside-down mtg loans, the more it makes me think that they need to endure an unforgetable lesson. Lenders have really done little in the overall to truly assist with resolution of what has been a problem that they contributed into creating, like it or not. They took sizeable business risks that haven't panned out; now step up and take the medicine. Either make concessions with loan mods in a reasonable and humane fashion or move forward with foreclosures and suffer the reduced value and ultimate loan losses, but they seem to want to do neither.

[Mayor]

And all that will happen is banks will get more strict with loaning so it will be difficult for people to get loans for homes and be renting..The only person that going to hurt is people trying to get loans for homes. The banks will be in bussiness....

Edited by Mayor, 14 January 2010 - 05:06 PM.

[SportsNut]

And all that will happen is banks will get more strict with loaning so it will be difficult for people to get loans for homes and be renting..The only person that going to hurt is people trying to get loans for homes. The banks will be in bussiness....

I call B.S on that statement Mayor. Oh wait, I forgot that you work for a lender, right?

Banks are essentially already making fewer loans today; have you noticed that.?

Lets examine what has happened:
Banks have liquidity problems in 08.
FED opens discount window, floods mkt with overnight funding.
TARP lays Bn's of $$$ on most banks to stabilize banks and stimulate lending.
Banks sit with funds and fail to stimulate the mkt with new funds.
Consumer has liquidity problems.
Banks tell consumer... sorry Charlie.

Seems like your prophecy has already occured: "banks will get more strict with loaning"
Except this may not happen in the end, after consolidation: "The banks will be in business"

Commercial lending... that term is almost an oxy-moron and non-existent. Talk about something that is going to hurt the consumer, since small business people are also consumers, is the lack of capital being available to most small businesses today. Maybe a slightly different subject, but all part of the problem today.

[Mayor]

I been reading in the mortgage section it's getting stricter and stricter with mortgage loans. So, i am correct there just getting more strict with who they lend because of all the losses they have been expierencing. My other prob with all these people who go foreclosure route is that it's hurting there areas value of properties. The more forecloseures that in the area hurts the BPO for the property. My point is the banks are going to be there, your not going to get back at them just because you foreclose. A borrower may be on the streets but those banks building will still be there. It's the sad truth -- we can all see that from TARP.

IE. Maybe I come off strict or all for banks...but you have to understand I see these things on a daily basis...and I don't ALWAYS think the banks are in the right.

Edited by Mayor, 14 January 2010 - 07:56 PM.