The New Mortgage Revolution: Walk Away

aol.com ^ | January 25, 2010 | Alyssa Katz

[TheThinker]

Big real estate developers do it all the time - like yesterday, when the owner of New York City's Stuyvesant Town complex decided to stop paying its $3 billion mortgage. So why are you still writing a check every month on that mortgage that's much bigger than your home is actually worth?

Good question, University of Chicago economist Richard Thaler says. Thaler tells New York Times readers that it's not just alright to walk away from one's over-sized mortgage -- it may actually be a moral imperative. (An earlier Times article, by Roger Lowenstein, said much the same thing.) After all, lenders had no second thoughts about lending more than many borrowers could afford or than the homes might actually be worth. It's just not fair to expect borrowers to follow rules that the lenders don't.

But why stop there? Some commentators are now calling on borrowers to start a mass mortgage strike.

"Remember burning draft cards? Burn your mortgage," the blog DailyKos told readers recently:

"The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that's what we must do. Doesn't have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment....just walk away Renee. Morality has nothing to do with it. You are a cog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced."

Now the call for a borrowers' revolt is being joined by folks who know an opportunity when they see it: real estate agents. Over the past month, agents have been rushing to declare 2010 "the year of the strategic default." Here's Connecticut Realtor Minna Reid:

Loan modifications do not address the real problem of heavy negative equity and are sure to fail most of the time. Even if the homeowner lowers their current payment they are left more trapped than ever. There will be no quick recovery this time. Years later when there is a need to HAVE TO move, the original problem of being upside down remains and the modified homeowner is left to short sell or foreclose once again.

Isn't it better to just cut the losses upfront ?

I know many will consider strategic default wrong or immoral, but as for me, I stopped passing judgment long ago.

Reid is far from the only real estate agent using mass revolt against the banks as a sales strategy. San Diego broker Bob Schwartz asks, "How many homeowners will suddenly wake up to the fact that their home is now worth tens of thousands of dollars less than their mortgage balance? Only the naive will believe that their San Diego home's value will bounce back anytime soon.... Defaulting "strategically" can entice more walk-aways by buying all the major items they may need in the near future, such as a car or even a house, right before they take a hike. As long as you stay current with other mortgage lenders, one could potentially have a good credit standing in 2 years after the walk-away."

And Phoenix agent Bob Stahl joins the chorus, assuring borrowers that a strategic default followed by a short sale won't hurt their ability to get a mortgage in the future.

Many of the agents calling for a mass movement of strategic defaulters specialize in short sales -- selling a home for less than the mortgage on it – something that mortgage servicers will often only consider once a borrower has begun to miss payments. It's ironic that after years of helping push prices up to maximize commissions, real estate agents are now pushing borrowers to dump their properties in short sales, so they can jump in and close a deal.

Still, they may be on to something.

Calling for mass strategic defaults is the equivalent of shouting "fire" in a crowded theater, prompting a stampede to the exits, and stampedes can leave a lot of people hurt – in this case, all the homeowners who live next door to the borrowers who stop paying, and suddenly see their property values plummet.

But there's also potential for millions of borrowers to gain if strategic defaults occur on a large scale. Nearly one in four borrowers nationally owes at least 20 percent more on mortgages than their home is actually worth, and in Nevada and Arionza it's more than half. The Wall Street Journal reports that about 1 million borrowers deliberately decided to stop paying their mortgages in 2009, or one in four of all mortgage defaults. When a critical mass of borrowers stops paying, it makes lenders – really, we're talking about the investors in mortgage-backed securities -- a whole lot more receptive to the idea of lowering the principal borrowers owe on their mortgages to persuade them that it's worth continuing to pay.

"People are spending far more on mortgage and ownership costs than they would to rent the same unit and there is almost no realistic prospect that there will ever get equity in many of these homes," says Dean Baker, co-director of the Center for Economic and Policy Research and author of the book False Profits: Recovering From the Bubble Economy. "Walking away will save them money and also free up money for consumption, thereby providing a boost to the economy. Banks will likely be far more forgiving of people who default in this crisis than they would ordinarily be. This isn't altruism -- they want to be able to make loans."

[CA Conservative]

am I not still legally obligated to come up with $20,000 to make up the difference?

Yes, plus whatever fees and interest they see fit to tack on. On top of that, if they can show your intentions at purchase were to not pay it back or you fudged anything on your app, you have the potential to be charged with fraud. When you get into this situation, red flags go up and they scour your app for any irregularities.

As with most things, it depends. In California, for a "purchase money" contract, all they can do is take the house - the cannot get a deficiency judgment. Even if you have refinanced, they are limited by the "one action" rule. That means they can pursue a judicial forelosure, which allows them to recover a deficiency judgment, or a non-judicial foreclosure, which does not allow a deficiency judgment.

Probably 99.5% of the time they pursue a non-judicial foreclosure. A judicial foreclosure costs more, takes longer, and gives the borrower the right to redeem the property for up to a year - meaning that the lender cannot sell the property during that time. The borrower also has the opportunity to declare bankruptcy to eliminate the deficiency judgment,

[Wissa]

Yup, and those that lent recklessly are experiencing higher rates of default. I’m not arguing with that. What I’m arguing about is that people who can pay, but won’t, because the house price declined. No one forced a person to take a mortgage for 100% of the value. The borrower signed the papers.

The lenders likewise didn't have to loan money to people to buy houses to flip or buy houses they couldn't afford at no money down, but they did. Being in the business of making loans they should have reasonably been expected to know more about what the risks were than anybody. They voluntarilly signed the papers as well.

There was no invisible “moral obligation” to pay - the terms were in writing, and repayment was not contingent upon the value of the house.

The result of default was defined in the terms of the contract, and the lender gets the benefit and consequences of those terms, regardless of the reason for the default. If there wasn't a prohibition on nonpayment for some reason, then that prohibition didn't exist.

[anglian]

Buying Foreclosed Houses in NSP-Funded Counties and Cities

2010-01-23 Buying foreclosed houses in counties and cities that received the biggest grants from the second funding round of the Neighborhood Stabilization Program could be advantageous for two types of buyers: low-income families looking for affordable homes and investors looking for lower-priced units that have the greatest potential for price appreciation.

The cities that got the biggest funding from the second round were Los Angeles, which received $100 million; Chicago, which got more than $98 million; Phoenix, which was allocated $60 million; and Philadelphia, which received nearly $44 million.

The states provided with the biggest allocations were Florida, which received $348.31 million; California, which got $318.05 million; Michigan, which was granted $223.88 million; Ohio, which got $175.21 million; Illinois, which was given $160.15 million; and Arizona, which received $117.95 million.

Under the NSP grant program, recipient entities must spend the funds to revitalize neighborhoods through various schemes, namely purchasing lands and properties for redevelopment, demolishing dilapidated properties, creating land banks, buying foreclosed houses and rehabilitating them, providing down payment or closing cost aid to lower-income families buying homes.

The NSP also requires families receiving assistance to have home ownership counseling and to take out their loans from lenders implementing responsible lending policies.

In Michigan, which was eighth in rate of residential foreclosures in 2009, about 1,500 homes would be acquired and fixed, 2,500 units would be demolished and more than 4,600 properties put in land banks for future redevelopment.

Detroit, where most foreclosure auctions in Michigan occurred, would be getting the biggest share — $40.8 million. Lansing would receive $17.4 million and Pontiac would get $13.9 million.

Among the organizations that got the biggest share was Chicanos Por La Causa, a consortium that operates in Arizona, California and seven other states. It received $137.11 million.

The others were the Neighborhood Housing Services of South Florida, which got $89.375 million...
http://www.realestateproarticles.com/Art/11684/265/Buying-Foreclosed-Houses-in-NSP-Funded-Counties-and-Cities.html

[dashing doofus]

Absolutely. A debt is a two party agreement, with repayment terms specified, and default remedies clearly spelled out, as you state.

Reckless lenders should also have to pay the price. But, since the loans were mostly securitized, they were willing to book the upfront underwriting fees while not assuming the repayment risk.

But if you are arguing that people who can pay, but won’t, because it now comes out that the mortgage company engaged in overly aggressive lending practices, and the value of their home declined, I don’t agree.

[gloryblaze]

There is a rabid Obama fan on another forum I read. He wrote about how he had 80 thousand “go away” from his mortgage principal owed to Wells Fargo on a home in California. He had bought the house for cheap 25 years ago, dolled it up, never missed a payment and was invited by the bank to seek the reduction. Happy as a pig in slop. I think it’s a pure travesty.

[unique]

You are welcome.

It's interesting that regulators - our government - are allowing banks to basically space out the housing loan losses without any real disclosure to investors - if home loans were marked to market like securities need to be, we would see a total collapse of the banking industry as the offset to those book entries is a direct hit to capital.

Also, all of us who have done and are doing the right thing, financially speaking, are paying a huge price (specifically senior citizens) with any savings subject to such low market rates - the money being made by banks and wall street is basically our money - money that we've lost, money that the FRB is basically using to subsidize wall street.

[Wissa]

But if you are arguing that people who can pay, but won’t, because it now comes out that the mortgage company engaged in overly aggressive lending practices, and the value of their home declined, I don’t agree.

I'm not arguing that at all. People that are placing blame on the banks for their own bad decisions are just looking for a convenient scapegoat. Both sides made a bad bet on the future.

Reckless lenders should also have to pay the price. But, since the loans were mostly securitized, they were willing to book the upfront underwriting fees while not assuming the repayment risk.

The purchasers of the securitized loans are another party that was betting on property values continuing to go up. They underestimated the risk. The only ones that wound up involuntarily assuming risk were current and future taxpayers.

[MeneMeneTekelUpharsin]

I’ll promise to pay you back, really. So can you spot me $50,000 or so?

Sure. PM me your physical mailing address and I'll send a package to you. BTW, the entire house of cards is about to come down.

We are not allowed to make students in school learn responsibility in any facet of their lives. Parents will not allow it to happpen. How in God's name do you think that the generations coming up are going to be able to pay back loans. Almost no one will advocate disciplining children to be responsible, productive citizens. Loan repayment is a thing of the past as a result. Get a clue.

[Wissa]

Let me modify my last comment. I'm okay with people walking away from a bad investment because it makes financial sense, if the contract allows them to do that.

I'm not in agreement with people blaming the "evil businessman" for making him take the loan he's walking away from.

[dashing doofus]

I agree with everything you just stated, except the purchasers of the MBS assuming RE values would continue to increase.

There I disagree. Maybe some of them did, but others assumed they were protected by how the bonds were structured. The mortgages were sliced and diced into various “tranches” with varying credit risks. The lowest tranche would be the first to fail, and it was assumed, at historic default rates, that the AAA rated tranches were as safe as treasuries, since the lower rated pieces would absorb the losses.

The quants who modeled this stuff on Wall Street, the risk managers at the asset management firms who bought the stuff (including large, professionally managed pension funds like CALPERS who now argue they were naive - lol), and the rating agencies, were all incorrect. Historical default rates were a poor indicator, especially considering the new, never tested, “exotic” loans being sold and securitized into MBS.

[Oceander]

I don't have a problem with the "walk away from it" theory - because, quite frankly, sometimes the only rational economic response to a bad investment is to just abandon it rather than throwing good money after bad.

That being said, that's not what I really hear anyone really advocating (other than a few theorists who actually study markets and economics); no, what I hear politicians - particularly the crypto-soviets on the left - arguing is letting people walk away without any consequences whatsoever. That's not the same thing, and since it generally involves government using it's bully power to bear down on hapless lenders and use the threat of force to coerce the lenders into "going along" what's being advocated under a seemingly benign economic theory is, in fact, a very malign, age-old political ideology: socialism/communism.

No, if people rationally decide to walk away from a house, that's because the cost of continuing to pay on the mortgage is greater than all of the other costs, including the massive hit to your credit rating that you should deservedly get because you clearly are a very unintelligent borrower as you got yourself into an investment that turned out to be so bad you had to abandon it. That is not the sort of person whom we want lenders lending to at prime, or below-prime, interest rates.

[Vendome]

Your plan regulators are wrong. It is your money but you will pay a sizable penalty for early withdrawal.

You should absolutely look into it. I actually cannot believe anyone would be dumb enough to tell that.

[Vendome]

funny LOL

[Vendome]

Tell them to write you the F-ing check or you will get an attorney.

The choices are:

Disbursement and they do an estimated witholding

or

Disbursement and you are solely responsible for paying the penalty.

That’s it.

[VegasCowboy]

As a matter of fact my home has declined 50% through no fault of my own. It sucks. But, as long as I can make that mortgage payment I will. Each payment pays it down a little and eventually I’ll no longer be underwater. You see, I bought my home to live in, not as an investment. When I bought I made an economic decision that is was worth $X, and I took on a mortgage and the obligation to pay that amount to the lender over the next 30 years. That’s what I intend to do as long as I am able.

As to “what if you weren’t able to?” Well, if I lose my job and am unable to find another, then I may not have any choice in the matter. That’s perfectly understandable and is quite common here in Las Vegas. But that doesn’t justify other people walking away if they have the means to keep paying just because their home is underwater.

[VegasCowboy]

Bottomline - government regulators are allowing banks to keep these loans on the books at the amount owed versus market value even when loans are past due - only the worst case scenario loans are charged off and settled within the short sale environment each month to preserve capital - buyers are just left pissing in the wind.

Not true. If a loan is 90 days past due it must be marked down to the market value of the underlying collateral, or a loan loss reserve equivalent must be expensed. Bundled mortgage securities are a little different, but in general must be carried at the present value of the expected future cash flows. This calculation takes into consideration expected defaults.

[paul51]

But that doesn’t justify other people walking away if they have the means to keep paying just because their home is underwater.

OK> If you knew your home was worth 200,000 and you had a loan of $500K, would feel the same way? How about $100 and $600K?

[Theophilus]

Psalm 15
1 Lord, who shall abide in thy tabernacle? who shall dwell in thy holy hill?
2 He that walketh uprightly, and worketh righteousness, and speaketh the truth in his heart.
3 He that backbiteth not with his tongue, nor doeth evil to his neighbour, nor taketh up a reproach against his neighbour.
4 In whose eyes a vile person is contemned; but he honoureth them that fear the LORD. He that sweareth to his own hurt, and changeth not.
5 He that putteth not out his money to usury, nor taketh reward against the innocent. He that doeth these things shall never be moved.

[Diana in Wisconsin]

“Remember burning draft cards? Burn your mortgage,” the blog DailyKos told readers recently...”

What a SURPRISE that the LibTards would run with this, LOL!

[redgolum]

Major companies do this all the time.

A contract cuts both ways. If you are so far out of wack that you will never be able to get ahead, turning the house back to the bank is an option.

That is part of the contract. The outrage on FR over people doing this, while accepting the same when large companies do the same, is kind of funny.