More California homeowners walk out on mortgages

Fresno Bee ^ | 27 May 2010 | Tim Sheehan

[Lorianne]

In areas hardest hit by plunging real-estate values - including the San Joaquin Valley - some people who can afford their mortgage are opting to walk away from their loan and let their bank repossess the house.

"It's very stressful to get to that point," said James Graham, a 48-year-old power-plant worker who walked away from his home in Bakersfield last fall. "You're raised up to do the right thing and pay your mortgage, pay your bills."

"But when you get to that point where it's time to walk, it's time."

It's called "strategic default," and experts say it stems from frustration with home values that have plummeted since buyers bought or refinanced at the peak of the real-estate boom, and banks dragging their heels on loan-modification requests.

[NVDave]

Since you mentioned farmers, I’ll bring up some other little tidbits from the ag sector that are instructive.

In the mid-80’s (that would be 1980’s, kids, I’m not that 90+), there was a horrible crash in commodities pricing, land prices, etc in the ag sector of the US economy. A lot of farmers defaulted on land payments and a lot of bankers ended up in the land business when they had no desire to be.

As a result, two things happened:

1. Ag lending became a very specialized part of the banking industry. Most banks and bankers want nothing to do with ag lending now, they don’t pretend they do, and they won’t twist themselves into a pretzel to do any ag deal.

2. Down payments on the typical ag land loan went from 20% to 35%.

35% down payment. Anyone care to estimate just how many people would do a “ruthless default” if there were 35% down payment requirements on a house?

That’s right. About 0.0%, that’s what.

The problem is, the residential mortgage industry, along with their bought-and-paid for “big hearted” slimeballs in Congress want a very low downpayment requirement for residential loans.

Second effect coming out of that huge down payment requirement: Ag land appreciation slowed down a lot for land with no improvements in many areas of the country. We’re talking just raw cropland. Unless the land is in a county where they have high yields and high farm program payments, (eg, the guys farming their mailboxes in Iowa, Arkansas, etc), farmland rates of appreciation slowed considerably. The loss of the leverage provided by the bank loans with lower down payments kept the rate of price increases down.

Lesson #2 here is that the more money provided to go buy an asset class, the higher that asset class’ price will go. I know most people here on FR will go “Well, duuuuuuh... thanks for the tip, Sherlock!” but it bears repeating in another way: The more we keep trying to “get more people into homes” with “affordable housing initiatives,” the higher the price of housing will go.

BTW - I disagree with the “neo-criminal” adjective in your post. There’s nothing “neo-” about them. They’re flat-out criminal in their behavior, starting with fraud.

[NVDave]

The upper midwest (ND, WY, rural MT, SD) also have been largely unperturbed. There was little price run-up in these areas outside oil-patch housing boomlets, and there’s been little downward price drift (like 5%, at best).

[Poison Pill]

They signed papers that they would repay the amount of the loan in FULL.

That's not exactly true. Your point would be valid if they lived in a recourse state. California is a non-recourse state. So, their loan papers said they could either make their mortgage payments, or they could stop making payments and give the property back to the lender without recourse against their other assets. Since both sides agreed to this, there is no moral or legal obligation to repay.

[codercpc]

The guy in the story did not buy an overpriced house. He bought in 2003 for $160,000, and refinanced 2 years later for $320,000 (to pay off other debt, among other purchases).

He is now walking away from that (but gets to keep the big screen TV). This is not some schnookered down on his luck homeowner. This, in my opinion, is a scum bag, "I got mine, screw you" homeowner.

[raybbr]

The husband and wife would have to go to the hearing not just the wife. Something is missing in that story.

Maybe the house was in her name? Just relating what the guy told me after he got off the phone.

[crz]

In the long run you will be better off. You will be forced to pay as you go in life and will have learned a lesson nobody wants to learn.

I tend to blame the reality and the appraisers for a lot of this. Funny, when you want to have your house appraised for whatever the dam thing isnt worth it. Yet when the new owners wanted to borrow for that place, it was worth every penny.

Case in point. My place in AZ, which I built, was appraised that considerable less than the county had it at. The appraiser claimed he couldnt find any comps. I built it per N Mi specks and the guy had no idea. So, when we wanted to get a conventional loan to get away from the construction loan, the appraiser wouldnt give the proper value to the place. The land alone was worth about 80 grand. He appraised the whole thing, Brand new house and the land at 90 grand. So he was saying the house was worth just 10 grand. The county assessment was at 110 grand..or half of what the sale price would be.

Oh we got our loan-no problem. And we pay the loan each and every month. Yet, we lost value in the end because of one guy...a real typical shyster appraiser.

Now if we go to sell that place and the new owners go to borrow for the place, the bank will say..”But it was appraised at 90 grand! GD them assholes! It was their friggan appraiser! THEY SET THE SALE PRICE!

[Trailerpark Badass]

You don’t understand contract law.

I understand it perfectly well.

A "contract" is not any one of its terms and conditions, but its entirety.

Either way, what you are condemning is an efficent breach of contract.

Perhaps you think that people should fulfill contracts to their detriment. I don't.

A handshake, a deal made on one's word, with no stipulated legal recourrse for non-performance, certainly.

Contracts exist for the VERY PURPOSE of allowing me to do business with someone without having to gamble on his purported "character."

[Chunga85]

Walk Away News: Morgan Stanley Gives Properties Back to the Lender

http://blogs.wsj.com/developments/2009/12/17/walk-away-news-morgan-stanley-gives-properties-back-to-the-lender/

Still waiting for an answer on how this differs from the CA family.

I understand if you’d rather not talk about it. It is a little awkward.

http://www.foreclosurehamlet.org

[kaila]

You are right. This is not a honest person who bought a house which lost value. This dirtball had a decent priced mortgage, but refinanced to pay off debt.
I wonder what his debt was. He was probably using credit cards to pay for trips, and toys. The article did not explore the debt issue in more depth. I hope he is never allowed to borrow again - these people are the scum of the earth who helped this country fall into a recession.

[AzaleaCity5691]

We’re in a depression not a recession but I can’t fault the guy for doing it back to the banks.

Far as I’m concerned, any bank that took taxpayer money deserves this to happen to them.

[DB]

I wasn’t specifically talking about the housing thing in that one statement. More specifically the attitude in all our interactions that eventually leads to the nanny state...

But I guess we’re already there...

[krogers58]

do you walk on water too? get a grip. Housing prices are gone. It is not just lower tax areas. The ONLY places prices did not collapse was in DC because all out tax money went to new gov. workers. Walking away makes TOTAL sense. The bank gets the house, there is no deficiency income throught 2012 based on the temporary law. The credit rating will come back. If they do a bankruptcy they begin to rebuild in MONTHS not years. A new mortgage can be had in two years from a fed agency and from a regular source at any point they have a down payment. Banks are pushing modification scams and some people I have seen have put forth the papers three times because the banks play games. This is the contract. The bank recieved the house rather than the payment EXACTLY as promised.

I don't suppose I was speaking to you, but it does appear that you do need to assuage a guilty conscience, so I'll help you a little, and won't charge you a dime for the ethics lesson. Every argument you make about how bad the banks are, and how the defaulting person is offering the collateral for the bad loan etc, are simply attempts at moral relativism. Banks are bad, so there's no honor among thieves, I guess is the way I'd view your argument, but notice the defaulting party is amongst the thieves in that type of relativism. Banks have the house as collateral, in the event of a person defaulting on the loan, its not the situation that the banks wants the home, nor are they in a partnership with you, when you take out a mortgage. As has been previously written, nobody ever gave the banks a share of the profits when their homes sold for more than they borrowed, but now expect that the banks should take the losses due to the bad markets. That is simply, and as plain as could be, immoral. For these facetious, relativistic arguments to even be made, is in fact indicative of the decay of our moral fabric. This is not a victimless crime, as we all can see the costs of the bank bailouts, and the costs each of us pay in increased interest on our loans, much less the huge deficits that our children and grandchildren will have to repay. The shocking thing, in the end, is that these arguments about strategic default could even be made, much less entertained by any freepers.

[PLMerite]

“This, in my opinion, is a scum bag, “I got mine, screw you” homeowner.”

That may be, but if he’s abiding by the terms of the contract and the laws of the state he’s in...

I don’t have much sympathy for either side in cases like this. The people are stupid for biting off more than they can chew, but the banks/corporations have lots of lawyers and they’re never shy about enforcing the terms of a contract to the letter when it’s in their best interest.

My new favorite story is about this couple. Legal immigrants, with typical new-immigrant jobs - cleaning crew and landscaping. Bought a house that cost $330k, financed all of it. Monthly PITI payment alone is $3k and they need another $2k per month for other expenses. Guess who’s in over their heads.

In my book, both sides are at fault. The bank could not possibly have done due diligence on these people, and they could not possibly have thought they could afford that lifestyle unless they were counting on flipping the house quickly.

I feel sorry for anyone who’s in a bad situation, but just damn.

[DB]

Look, I didn't say that there's never a reason not to breach a contract.

I said:
“Penalties/repossession is the result of BREACH of contract.”

And you responded:
No, idiot, burning the house down on your way out is BREACH of contract.

What I said was factually correct. And you called me names for being factually correct. Now you want to call it “efficent breach of contract” as if that's some how a way to save face...

An apology?

[webstersII]

“People that can afford their mortgage and just walk away from it ought to be jailed.”

You guys are such great statists.

The contract says you don’t pay, you have to forfeit the house. They forfeited the house; why should they go to jail?

[crz]

“We followed the bank’s instructions to the letter, complied with every document request, idiotic as it may have been...and all we got was a very nice (sarc) form letter from them saying “sorry, your ‘mortgage vs income’ ratio doesn’t qualify you for the Federal program, and because you haven’t been paying your full monthly payments for 6 months, now you’re not eligible for our own in-house program and we’re notifying all the credit bureaus that you’ve fallen behind on your payments.”

They are forcing you into default..if you havent already.

Think of it this way.
Harvard, Princeton and Yale-Banks, Bullets and Bombs.

Lawyers plus Bankers lead us to war.

I really feel bad for people like you. They have a good Job, grab a piece of the dream and then lose their jobs and its your fault because you now cant afford a place you could afford before.

[Chunga85]

I guess now would be a good time to shoot the greedy homeowners.

It’s crystal clear. From the very beginning the homeowners have gamed the system. They started by tricking the property appraiser (lender’s agent) into submitting an outcome-based appraisal.

Then, millions of homeowners shrewdly conned the “lenders” into dismissing all agency and fiduciary responsibility in the underwriting process....going so far as to force the “lenders” into forging documents.

Then, the greedy homeowners forced the “lenders” to securitize the loan in such a fashion as to bifurcate the mortgage from the note.

On top of that, the homeowners secretly cooked up the concept of “Credit Default Swaps” and forced the “lenders” to insure the collateral at the full (outcome based) value 30X over.

Having successfully pulled the wool over everyone’s eyes - these irresponsible homeowners showered themselves with well deserved bonuses.

Realizing they were too big to fail, these irresponsible, reckless homeowners lined the pockets of legislators and received enormous sums of taxpayer bailouts.

The result of these cunning maneuvers by the fraudulent homeowner scheme has them sitting fat and happy in the cat birds seat. Yup, that’s how they did it. And they’re getting away with it.

Savings drained - check, 401ks all gone - check. Kicked out of their homes - check. “Lenders” made whole many times over via Credit Default Swaps - check. Homeowners foreclosed and “lender” buys back property for pennies on the dollar - check.

Follow the money and you’ll find the culprit. It’s about time we hold these homeowners accountable.

Good call. The website below is sponsored by a well-healed, politically connected, PR machine of greedy volunteers...and contains detailed information on how the collusion on Main Street has ripped off Wall Street.

Don’t look though...it’s just spam.

http://www.foreclosurehamlet.org

[DB]

“The bank could not possibly have done due diligence on these people”

Well in this particular case they did. The borrower can afford the payments and readily says so. It just isn’t in his financial interest to follow through with his obligations.

[investigateworld]

Great post!

[DB]

Well said.