Worse than subprime?

[karim0028]

Re: Worse than subprime?

There was a CNBC video posted here a bit ago where a man told his tale: he put down $300,000 on a $700,000 house in CA in 2006. So at the time he had a $400,000 non-recourse mortgage. The house is now worth about $300,000. Thus he has -$100,000 invested in this house. If he walks he is back to zero.

Is it irrational to walk away from -$100,000?

Exactly, not to mention that in AZ and Cali the law mandates that if its a purchase money loan then all the bank gets as collateral is the house.... Meaning they cant come after you for their loss, they accept that risk and supposedly factored it as a cost of doing business... The banks knew this full well and they accepted that risk... Is it so bad when someone cuts his loss but it seems to be fine (not just fine, its demanded) when a business does the same thing? If a business didnt cut its loss and mitigate its risk it would most likely be sued by shareholders for malfeasance; think of it as the same thing but on a single share holder level....

Its simply a contract, if you dont pay as per the contract the bank takes back the house... Your obligation has been kept. The bank takes the house, you accept any monetary loss you had sunk into the property.

[karim0028]

Re: Worse than subprime?

Servicers require information before approving a short sale. That information often includes:

Bank Statements
Pay Stubs
Tax Returns
Hardship Letter

Under Karim's posted scenario a short sale would in most cases NOT be approved due to lack of hardship. The lender/servicer would expect payments to continue or other assets tapped to make up the shortfall.

Bingo, if you have cash or access to cash equivalents and the bank finds out about it (through their draconian paper reqs, bank accts, 401K, income, taxes, etc, etc...); they will expect you to tap your 401K to make payments... Which is about the dumbest thing i have heard of....

And in all cases i have seen of colleagues asking to renegotiate loans (they have income and cash); banks wont even talk about it until your in default..... So either way your credit is fucked..

And if you foreclose instead of going the shortsale route, you get to stay for ~ 1 year rent free and then take that cash cushion.

I also tried going into negotiating shortsales as a side business last year but it was a pain in the @ss so i dropped it, with broke folks the bank rep (country wide) actually told a lady i was working with that may be her kids should eat a little less "as it may be better for their overall health" and that she would be a good member of society by making up the interest and principal on her loan and "maybe we can help save your credit"...

What a crock of shit.... These banks deserve everything they get, there is no good will negotiation its pure bull, they attempt to suck you dry and either way if you come current and re-default you will lose it all anyway (but this time without a cash cushion), so alot of times is better to make a clean break...

[swgprop]

Re: Worse than subprime?

And if you foreclose instead of going the shortsale route, you get to stay for ~ 1 year rent free and then take that cash cushion.

Get creative and you can push it out to 2 years easily. :cool:

[vinoveri]

Re: Worse than subprime?

Its simply a contract, if you dont pay as per the contract the bank takes back the house... Your obligation has been kept. The bank takes the house, you accept any monetary loss you had sunk into the property.

ah yes, so far so good, but you forgot the next step in the process, which has becomse a sticking point ... when the bank becomes insolvent because of many of these bad loan write-offs, instead of going bankrupt and into receivership and managed by the FDIC, according to the law, wiping out shareholders and a good many bondholders, the bank gets bailed out by taxpayers to continue in existence.

no one trusts "anyone" anymore, and the moral hazard which has been perpetrated and elevated as a result of what's going on means our society is going to rapidly devolve into gambling, fraud and graft, and generally "whatever I can get away with, I'm going to do" mentality.

[aaron]

Re: Worse than subprime?

Get creative and you can push it out to 2 years easily. :cool:

Care to elaborate?

-Thanks

[Kadriana]

Re: Worse than subprime?

Care to elaborate?

-Thanks

A lot of banks are letting you continue to live in your house even if you're paying such a small amount because it's cheaper for them to have you keep up the house and wait for things to turn around instead of having the house go in disrepair and sell it for nothing.

[aaron]

Re: Worse than subprime?

Keep in mind im not advocating it; im simply telling you what IS going to happen.... You talk about the option arms and im just telling it as i see it from within the folks in the income bracket i mentioned... Which will only add to the glut of properties coming on the market.

And, these more expensive houses will raise the median home sale price in the short-mid term. So, MM will report things are improving, when in fact they are getting worse.

( e.g.: A short sale of a formerly $1 million dollar home for $500,000 raises the median home sales price, but hides the truly enormous loss. This will be one of the "green shoots".)

[aaron]

Re: Worse than subprime?

A lot of banks are letting you continue to live in your house even if you're paying such a small amount because it's cheaper for them to have you keep up the house and wait for things to turn around instead of having the house go in disrepair and sell it for nothing.

Can you define a small amount? Is this negotiated before the home goes to foreclosure, or after?

[Kadriana]

Re: Worse than subprime?

Can you define a small amount? Is this negotiated before the home goes to foreclosure, or after?

I think it was as low as $50. I forget where I read it. I'll try and find it again. I'm not sure if it was before or after foreclosure. I'm starting to feel like we're the dumb ones sometimes though where we're still paying on our house that we got in 2005.

ETA: I can't find it anymore. I ust remembering reading some where that if you were at least paying a partial payment, that banks weren't in a huge rush to kick you out where they already have a huge supply. I don't know how accurate that is where I can't find the original source.

[aaron]

Re: Worse than subprime?

I must admit, I am really happy to hear that people are starting to walk away from their houses. It gives me hope that there are people out there who still know some basic math.

FIRE advertised, promoted, lobbied for, and lied to get people to believe HOUSE = SAVINGS = INVESTMENT
Well, FIRE can now enjoy a million enlightened "investors" who will cut their losses and walk.

I believe there is a side-effect to all of this: extra money goes into the consumer (real?) economy for every foreclosure. If you can live rent free for a year, this may be as much as $50,000 dollars in extra cash flow spent into the economy. And then when you do start renting, your payments are 50 - 75% of your former mortgage. You might even be able to afford that new car (to keep up appearances). Of course, the net effect for the country is more wealth concentration, but the temporary boost to our economy might not be inconsequential. Or, this extra cash might be used to 'invest' in the stock market now that it has "corrected" and there are "green shoots". Or, these higher earners will just spend like normal (best chance). This would be inflationary as best I can tell.

1 million homes * $20,000 in free rent spent on crap = $20 billion power-inflation-money. Does every foreclosure save a U.S. job?

[karim0028]

Re: Worse than subprime?

ah yes, so far so good, but you forgot the next step in the process, which has becomse a sticking point ... when the bank becomes insolvent because of many of these bad loan write-offs, instead of going bankrupt and into receivership and managed by the FDIC, according to the law, wiping out shareholders and a good many bondholders, the bank gets bailed out by taxpayers to continue in existence.

no one trusts "anyone" anymore, and the moral hazard which has been perpetrated and elevated as a result of what's going on means our society is going to rapidly devolve into gambling, fraud and graft, and generally "whatever I can get away with, I'm going to do" mentality.

I agree; but, that is what the govt set in motion, to play by the rules when the rules just got rigged is plain stupid, bc everyone else will make out like a bandit and the person who played by the rules ends up broke.... When J6P finds out that he is screwed either way; he will walk. The money the banks got would have been enough to cancel almost every mortgage in the US, but instead the banks simply get to have it....

Debt that cannot be repaid will not be repaid. My friend at work was just telling me yesterday that he feels like he got screwed by playing by the rules, has a good high paying job, bought house, paid 30% down, now underwater by 80K and his colleague just told him that he walked away and bought a house in his wife's name and credit... While he sits there trying to negotiate w/ the bank about simply changing to 30 yr fixed (not asking for shortsale or principal reduction).....

He is loaded up on gold and has cash, now he's contemplating walking...

Another house on the market in an upper middle class area....

If banks start to aggressively go after people for the mortgage debt i would venture to guess that we would have a large scale migration to other countries in order to escape debt servitude.

[swgprop]

Re: Worse than subprime?

Care to elaborate?

-Thanks

The automatic stay provisions of bankruptcy law stop a foreclosure from proceeding to sale. By filing chapter 13, filing the required documents, disclosures, submitting a plan etc. will extend matters by months. Once a repayment plan is confirmed, should you fail to stick to the plan another few months will go by before the trustee files an order for dismissal or the servicer files for relief of stay.

Now the foreclosure resumes. Now you get creative. The Bankruptcy Abuse Prevention and Consumer Protection Act, passed in October 2005 presents some barriers but the system still gets gamed. Here are some examples of system abuse in an article written prior to the 2005 act, however these types of delaying tactics still continue - at least from what I've seen in CA.

I'm not advocating frivolous BK filings, I'm just pointing out what I've experienced.

[aaron]

Re: Worse than subprime?

I think it was as low as $50. I forget where I read it. I'll try and find it again. I'm not sure if it was before or after foreclosure. I'm starting to feel like we're the dumb ones sometimes though where we're still paying on our house that we got in 2005.

ETA: I can't find it anymore. I ust remembering reading some where that if you were at least paying a partial payment, that banks weren't in a huge rush to kick you out where they already have a huge supply. I don't know how accurate that is where I can't find the original source.

Thanks.

I hope you are not alone. I realized how dumb it was a few months ago. Moreover, I do have some moral qualms about feeding FIRE before my own kids. I know some might cry that the bankers have to feed their kids too. That is what TARP is for (and the trillion they've fleeced from us over the past decade). In other words, fuck them.

I am not sure how long non-recourse will be non-recourse. Contract law does not seem to apply in the U.S. anymore, and I am especially worried now that most loans are owned directly, or indirectly by our government. So, not only do I think that walking away is a good thing, I think the window to do so may not be open forever. (think Mortgage Czar working out of the IRS)

[aaron]

Re: Worse than subprime?

Servicers require information before approving a short sale. That information often includes:

Bank Statements
Pay Stubs
Tax Returns
Hardship Letter

Under Karim's posted scenario a short sale would in most cases NOT be approved due to lack of hardship. The lender/servicer would expect payments to continue or other assets tapped to make up the shortfall.

And, don't forget to mention that it is virtually impossible to settle on a house in a timely manner when you have to get in line to beg your bank's "investor" to allow the short sale.

[Sharky]

Re: Worse than subprime?

The ongoing flood of mortgage resets, people walking away from their homes, foreclosures, etc. is the main thing that makes me wonder whether serious inflation is on the horizon.

Don't we still have a huge amount of debt deflation ahead?