Walking away from your mortgage

[professorscott]

This is a complicated topic! Here is what I know.

First of all, it is almost never a good idea to just walk away from a mortgage. Nowadays banks are often willing to work with a distressed owner, and there are things such as short sales that weren't common a few years ago, and which have much less of a negative effect on the homeowner's credit rating.

Second, if you owe [[say) $100,000 on a mortgage, and the bank takes the house back [[by foreclosure or by you sending them the keys or by any other matter), and they sell it at auction for $50,000, you are still on the hook for the other $50,000: you borrowed it, and you still owe it. Fact is, though, nowadays it is rare for a bank to go after the deficiency as they call it. In a short sale sometimes - not always - you can get the bank to agree to settle for the sale amount.

Now: "fraud"? Hardly. The house is security for the loan, and if you don't pay and the bank gets the house back, that's just following certain provisions of the loan agreement, all completely legal.

In late 2009 there are a lot of programs by which a distressed owner can either figure out how to keep a house or figure out a reasonable way to work with a lender to get out from under a house. Walking away is not usually the best solution.

All this of course is just in your Professor's very humble opinion. Call your accountant or attorney for actual advice. Don't believe what I post on the internet any more than you'd believe what you overhear in the barber shop

Cheers and Happy Thanksgiving to all! May 2010 only suck a little bit.

Prof. Scott

[MichMatters]

If we were dealing with benevolent, or even halfway honest, corporations, there'd be no debate as to where I'd fall for someone walking away. Time and time again, these companies have rigged the game so well and so shamelessly, I don't even care when someone who has gotten in over their heads pulls out. Hell; they actually plan for people to walk away because they know how predatory their practices are.

Perhaps, I won't cry for many greedy homeowners, but I'll sure as hell not shed a tear or a single ounce of sympathy for these corporations.

[rid0617]

I do not see it as fraud but do have a couple comments. Being an old fart I remember when your home was not an investment. It was a place to live and if you made a little selling it that was an added benefit. The reason you bought a home was to get something out of it when you moved compared to renting where you get nothing.

Never understand people who bail on their house because they are under water. So what? It still provides you with a place to live and if your under water you just live in it longer. Your still getting your monies worth because you bought it for a place and neighborhood to live in.. If you bought it solely as an investment you bought it for the wrong reason.

Now if the person cannot afford the payments anymore I do not feel it is fraud to walk away from it and get another place to live. Is the person who can no longer afford his mortgage supposed to live in his car so it looks appropriate?

[xphillipjrx]

I have been a mortgage banker since 1997. I have been on the front lines and I have see it all. I think ALL the parties are to blame. Lenders created programs that allowed stated income, no income, 1-day after bankruptcy, interest only, and minimum payment loans. All of these loans seem crazy today, but they made perfect sense up to 2007 when they were in full swing. Stated and no-income were for the self-employed borrower who could demonstrate through assets [[and a 680 FICO score) that they had the capacity to pay the loan. 1-day after BK was a way to allow somebody who had hard times to still own a home. Minimum payment and interest-only loans allowed people to get lower payments for their loans and then pay more per month during the times of year when they have more money. This was great for people on commission.

Another thing that seems absurd today, but was in effect in 2007 was that max debt-to-income for a full documentation loan was 64.99%. Prove your income for two years, show 60 days of bank statements and have a 580 score and that used to allow you to borrow 64.99% of your gross income.

People like to point the finger at lenders, but nobody forces borrowers to sign. Refinance transactions are required by law to close three days after documents are signed. There are households that were earning crazy overtime and then used that OT money to qualify for a larger mortgage. Now the OT is gone and the mortgage payment is too much. Were there any companies out their that told their employees to save the OT money? Every mortgage customer signs an application. There are lots of community organizations that will explain the process to borrowers who have questions.

What it's all about now is who is left holding the bag? If you bought after 2003 or 2004 then you own a place that's worth less than what you paid. Sometimes it's the developer who couldn't unload his units. Sometimes it's the bank who's foreclosing.

I think another issue is car loans. You would not believe the number of people who have $400+ payments on a car. Consumers get mad when mortgage rates are above 7-8%, but a person with damaged credit is going to have 9-13% on a car loan.

Sorry to jack the thread since the original topic was the ethics of walking away, but I just wanted to give my .02.

[devman1983]

It's the manipulation of interest rates that causes these bubbles. The housing bubble was created largely by the fact that so much money was available for lending to people on a variety of economic levels. They were able to get large amounts of money therefore willing to spend that money on these properties driving up their valuations. It is not the job of the person accepting the loan to realize that the house they are buying is artificially inflated by a market that has been manipulated by the large financial institutions and lending groups.

It all comes back to the American mind-set. Socialism is a dirtier word that fuck in this country. We literally trust for-profit companies to run our economy over elected officials which is pathetic. If the markets were regulated to the point where the value action of commodities was kept in line with reality [[this applies also the short-selling attacks, "cooked book" effects on the market, ect) then maybe you could blame the idiot who couldn't predict Ford would fire him after 25 years before he took the home loan, but when a person believe they have a certain amount of equity in a an asset and then finds out they have been totally fooled its simply not right. We're not talking about a devaluation of a few thousand dollars here. Prices in Detroit are down -- what -- something like 75%? That's like buy a Cadillac and finding out it has the resale value of a Taurus. Its bullshit.

[bartock]

If they can make the payments then they should stay.

I know it isn't their fault that the homes value dropped but they knew the terms when they signed.

I don't ever remember signing a mortgage that guaranteed the value of the home was going to go up after I purchased it.

I am tired of everybody saying things like these loans never should have been written in the first place. They paid fair market value at the time.

Why don't they buy the house down the street anyway and rent it or their current home out? That would actually help the block.

I agree with this and 016's post. The value of my home has been hit badly by two intentional walkaways on our block. I say "intentional" in the sense that they were solvent and "walked away" as a finance strategy. There are obviously exceptions to this.

Yeah, lenders were irresponsible, there are commercial property owners and landlords who commit fraud, etc., but if you can stay afloat or struggle to make payments, that is what you should do. Just because some insurance companies, Wall Street bastards, etc., were "bailed out" by the government; just because the Madoffs and other Ponzi schemes of the World stole millions and billions in investments doesn't mean that I'm going to turn to a life of white collar crime. If I fall victim to some shady business practice, I'm not going to try to dupe the next person I see. The World I was raised in was "two wrongs do not make a right." Not sure where that went...

[Lowell]

Good points xphillipjrx and hardly a thread jack. Nonetheless, I would like to take some issue with the concept expressed throughout this thread that the fault lies with the borrowers. Yes we all know it does in a perfect world, but it is a bit like leaving a new laptop on the hood of my car and then charging someone for theft if they take it.

A large proportion of Americans are weak, have little financial sense, are lazy in keeping up with dizzying details and tend to be over-optimistic. It is why casinos can make profits of 25%+ when the odds are only 1-5% in their favor. It is why payday loan shops can make annual rates of 1000%+ interest.

Law needs to recognize that and protect borrowers against exploitation of those weakness. In the case of debt and complex financial products, the breakdown lies in that fact that we do not really regulate usury and set absolute limits on amount of interest that can be charged and not forcing the initial lender on the hook for any loan that fails.

Frontline this week had a very good and related documentary [The Card Game] on the rise of the credit card, its role in debt accumulation and it legally usurious rates.

The central interview character was Shailesh Mehta, a charming evil genius behind the infamous subprime lender Providian Financial. Providian was the first company to put credit cards in the hands of the little guys and established the road map for the formula of fine print penalties and excessive interest rates. When those got clamped he invented zero interest checking tied to debit cards that were allowed to overdraft.

He was very frank and unashamed. He violated no laws and basically said people were stupid and he was smart to recognize it.

A lot of that credit card debt got rolled over into mortgage debt during the housing bubble. Refinance a mortgage based on an inflated house price with a loan one really should not qualify for, pay off the credit card debt, squander the rest and snowball just keeps rolling until hit slams into the rocks in 2008.

[Trumpeteer]

Nonetheless, I would like to take some issue with the concept expressed throughout this thread that the fault lies with the borrowers. Yes we all know it does in a perfect world, but it is a bit like leaving a new laptop on the hood of my car and then charging someone for theft if they take it.

and that wouldn't be THEFT? and yes the borrower does bear responsibility for their actions no matter how stupid they are. Lenders do as well.

[detroitbred]

There are very valid points in what many of you have said. My spouse was in the mortgage business for many years until recently. In the "good old days" of banking there were rules and criteria for qualifying for mortgages. If you didn't meet it [[ and therefore couldn't afford it ), you didn't get a mortgage. When lenders started with all that creative financing [[ "no document " loans, etc. ) many people were able to obtain homes who never would have been able to. Dangle a piece of the American Dream of owning your own house in front of people, who think they are getting "expert" advice from a " professional", who can blame some of them for believing they could have it.? Should they have known better...probably. But the lenders knew full well that these purchasers didn't have a snowball's chance in hell of keeping up with this responsibility, and didn't care. In my husband's instance, he went toe to toe with his "superiors", arguing that the buyers didn't qualify for their loans. He was over ruled and told to go ahead with these "bad" loans, or loose his job. Those "superiors" were the very people getting huge bonuses for approving as many loans as they could. Like many of the people in the trenches, my husband received no such bonus. The foxes were in charge of the hen house. I would bet if you spoke to many of those higher ups, if they were honest, they would tell you that they expected the bottom to drop out one day. Many knew, none cared...someone else's problem to worry about. A relative of ours has recently had to walk away from his condo. He agonized over it for months, is shamed and embarassed, but was unable to do anything else. He still has a job [[ but could lose it any minute ) has undergone several pay cuts, increases in payroll deductions and simply can't afford now, what he could afford when he purchased. To walk away, and move back home with mom and dad, in your 30's ,was not a decision taken lightly. The whole situation is a mess and is far from being over with.

[artds]

Uhhhhh...where is the fraud on the part of the borrower? The condition of a mortgage is "if I don't pay as promised, then the bank gets the house". That's the whole point of a loan secured by the house, otherwise known as a mortgage. The paperwork does not say, as long as I have a job and adequate income, I will pay you no matter what.

This is a common misconception.

While the mortgage is secured by the house, the house is not the ONLY thing securing the mortgage. Home owners are PERSONALLY LIABLE for their mortgage obligations, which means the banks' remedies are not limited to repossession of the house. They can come after your personal assets to make up the difference if the value of the house doesn't cover your obligation.

You ofter hear uninformed people say things like, "Well, if the bank doesn't want to work with me, then I'll just give the house back to the bank." The flaw in that line of reasoning is that the bank never bought the house. You did.

All the bank did was provide you with a loan which you happened to use to buy a house, and in order to reduce the risk of the loan [[not to mention provide you with a lower interest rate), you and the bank both agreed that the loan would be secured IN PART by the house.

[14509glenfield]

I often wonder how a fish feels when he has been hooked?

[DetroitDad]

I often wonder how a fish feels when he has been hooked?

Most bass, walleye, carp, or perch don't know they're in a pond, or that anyone views them as fish.

[jiminnm]

With respect to your mortgage it is a "non-recourse" debt which means the bank's only recourse on the lien is to acquire the house. However, for a "second mortgage" or home equity line of credit, you are entering into a recourse debt [[much like a credit card) wherein the bank can come after you personally for the debt owed.

This is likely true for commercial mortgages, but not for residential mortgages. Michigan is considered a recourse state, which allows mortgage lenders to go after other assets of the borrower. The home owner here needs to read his mortgage and note to determine what the specific terms are in his situation.

[Jimaz]

Check out the Wall Street's Naked Swindle, by Matt Taibbi link to learn how naked short selling works: Wall Street's Naked Swindle.

[shovelhead]

I'm not and have not been in the mortgage business, just observations from a dumb consumer.

My wife and I were turned down for a re-finance in '02 as we wanted to cut our interest rate. We were declined as we did not owe ENOUGH to make it worthwhile to write the loan. Yes, exactly what we were told by our mortgage company. And unless we took money out of our equity it was not worth writing and it was not going to happen.

Fixed them, changed mortgage companies. In fact, we still have been getting "fishing" letters from them, until a couple of weeks ago. I e-mailed them, specifically telling them that I was not interested in a mortgage, and if I was that they would be the LAST company that we would deal with, thanks to their great customer service.

In '03 -'04 we were again in the housing market. We had a figure we wanted to spend, and told various agents how much we were willing to spend. Kind of p***** us both off when they wanted us to "set our sights higher". Then of course use their mortgage company with "creative" ways to accentuate the American dream. Yeah sure, interest only for ten years and other innovative plans.

We too have had some financial setbacks, but you make adjustments. Our house has dropped in value tremendously, but we did not buy it as an investment, but a place to live. Hence the equity in our eyes anyhow does not exist. It's something there, but it's not there. And as retirement gets closer for both of us, this gets to be more important to have that debt go away.

And just another remark on the down side of walking away. Our neighbor did just that. Tried to short sale at 75% of what they paid for their house three years before. Could not, gave it back to the mortgage company. Now the fun begins. It was a federally insured loan, so the federal government, HUD, gives the mortgage company the full amount the house was financed for back. Then puts it up for auction. Sold at auction for LESS than one third of the original sale price.

Guess who's money paid for that, yes, you and me, the taxpayers. So just remember, the financial institution you are sticking it to may be yourself.

[softailrider]

This is likely true for commercial mortgages, but not for residential mortgages. Michigan is considered a recourse state, which allows mortgage lenders to go after other assets of the borrower. The home owner here needs to read his mortgage and note to determine what the specific terms are in his situation.

I've heard the exact same thing several times in the last year or two, I just haven't heard of any instance of banks or mortgage companies actually doing it.

[Zacha341]

Excellent points! What a nasty business this became... I knew people who temporarily stepped into the 'er-uh "mortgage" business in Southfield right about 2004-06 [[the heyday closing years before most went bust). In the end it was incredibly ugly, fraudulent and greed based on all parties. These little fly-by-nights had the ethics of a drug house. They had peeps in cheap suits writing mortgages, with shady bosses doing the final sign-off with their added "fine print" ala balloon payments and pending escrow's up the kazoo! On the selling end becoming a "lender" was touted as a "get rich" scheme for everyone involved. Come one come all. It was touted as something anyone could do! It was all about the commission!!

If you had any ethics this was not the place for you.

Anyway, the scheme/ scam flim-flam went like this: friends and family were referred and culled based on relationships to the newbie army of commission-hungry loan "writers". Everyone was in on the fix. People who had homes free-and-clear or with little left to pay were "talked" into refi's they could never repay, thus lost their homes. Others who could never have qualified got financing via "creative" writing: interest only ARMs, balloons and escro, etc. let their houses go knowing they would at the beginning. I was told of a inane situation where the mortgage writer and the home owner "split" the loan commission on a re-fi. The "rub" is that she's stuck with the increased mortgage long after the commission cut was spent.

Alot of these people were never held accountable for their blatant fraudulent business practices.

Most of these store front "mortgage" companies have long since closed their doors [[and their newbie army of mortgage lenders off to their next "hustle".) along with the big boys up on the hill [[down Northwestern Hwy) like MCA and Andy Jacobs.... etc. ETC.

There are very valid points in what many of you have said. My spouse was in the mortgage business for many years until recently. In the "good old days" of banking there were rules and criteria for qualifying for mortgages. If you didn't meet it [[ and therefore couldn't afford it ), you didn't get a mortgage. When lenders started with all that creative financing [[ "no document " loans, etc. ) many people were able to obtain homes who never would have been able to. Dangle a piece of the American Dream of owning your own house in front of people, who think they are getting "expert" advice from a " professional", who can blame some of them for believing they could have it.? Should they have known better...probably. But the lenders knew full well that these purchasers didn't have a snowball's chance in hell of keeping up with this responsibility, and didn't care. In my husband's instance, he went toe to toe with his "superiors", arguing that the buyers didn't qualify for their loans. He was over ruled and told to go ahead with these "bad" loans, or loose his job. Those "superiors" were the very people getting huge bonuses for approving as many loans as they could. Like many of the people in the trenches, my husband received no such bonus. The foxes were in charge of the hen house. I would bet if you spoke to many of those higher ups, if they were honest, they would tell you that they expected the bottom to drop out one day. Many knew, none cared...someone else's problem to worry about. A relative of ours has recently had to walk away from his condo. He agonized over it for months, is shamed and embarassed, but was unable to do anything else. He still has a job [[ but could lose it any minute ) has undergone several pay cuts, increases in payroll deductions and simply can't afford now, what he could afford when he purchased. To walk away, and move back home with mom and dad, in your 30's ,was not a decision taken lightly. The whole situation is a mess and is far from being over with.

[Huggybear]

Unless you have one foot in bankruptcy already, walking on a recourse debt is the best way to maximize your exposure. Example:

You owe $100K. You walk. House is sold by the bank for $10K. Now you have a bank with a $90K [[more likely $95K) suit - which it may pursue or may sell to someone else. I wouldn't count on banks forgetting about this stuff, since the amount of money at stake is going to draw the attention of the federal regulators.

You're far better off short-selling if you can. But that's relative, since short sales and deeds in lieu of foreclosure are almost as damaging to your credit as a default.

It's amazing that anyone would disregard a credit report hit like that [["it's just 7-10 years"). Maybe if you credit is already shot... but in this economy, it's not great to have poor credit - since even people with good credit have issues getting loans. Bad credit impacts your ability to get housing, a car, utilities, and historically in Michigan, insurance.

I've heard the exact same thing several times in the last year or two, I just haven't heard of any instance of banks or mortgage companies actually doing it.

[pudsy]

This is a common misconception.

While the mortgage is secured by the house, the house is not the ONLY thing securing the mortgage. Home owners are PERSONALLY LIABLE for their mortgage obligations, which means the banks' remedies are not limited to repossession of the house. They can come after your personal assets to make up the difference if the value of the house doesn't cover your obligation.

You ofter hear uninformed people say things like, "Well, if the bank doesn't want to work with me, then I'll just give the house back to the bank." The flaw in that line of reasoning is that the bank never bought the house. You did.

All the bank did was provide you with a loan which you happened to use to buy a house, and in order to reduce the risk of the loan [[not to mention provide you with a lower interest rate), you and the bank both agreed that the loan would be secured IN PART by the house.

This is why I find the question of "can the bank go after your assets if you walk away?" so maddening---you get five different answers.

I have never heard of a bank go after someone's assets in Michigan but I can't find a definitive answer of why they don't--

The best answer I have gotten is "well they just don't"

[DetroitDad]

This is why I find the question of "can the bank go after your assets if you walk away?" so maddening---you get five different answers.

I have never heard of a bank go after someone's assets in Michigan but I can't find a definitive answer of why they don't--

The best answer I have gotten is "well they just don't"

I'm not sure, but all the people who I know who went into foreclosure didn't have a whole lot of personal assets to go after, they had lease cars, and paid off furniture, all now sitting in someone else's house, with no proof available that they own it, or much of anything really. Would the banks be able to find out who was worth going after, or would they just be paying expensive legal fees for shots in the dark and educated guesses. It seems to me like the banks don't have enough money to do that either.

Or...

They are doing what those predatory vikings do at Capital One [[don't let their commercials fool you, they'll do whatever it takes to get "what's in your wallet"), wait a little while until you think you are back on your feet and stupidly bought things worth going after?

Doing a google search will find that waiting a few years for the kill is the common practise of at least Capital One, and possibly the great BoA.

[Thames]

The banks won't go after the homeowner, they'll just go back to the government for more bail out money to cover the loan. Then, they'll sell the house for a fraction of what it's worth and keep that money too.

The banks have no incentive to work with the homeowner as long as the government keeps bailing them out. I have been trying to refinance under the HARP program. What a fucking joke that program is, especially if your loan is backed by Freddie Mac.

[artds]

This is why I find the question of "can the bank go after your assets if you walk away?" so maddening---you get five different answers.

I have never heard of a bank go after someone's assets in Michigan but I can't find a definitive answer of why they don't--

The best answer I have gotten is "well they just don't"

The fact is, they do. It doesn't take much to locate and seize control over someone's savings account.

If a bank chooses not to pursue their available remedies, it's often because the money they would spend on attorneys fees is greater than the $10k or so they are owed, or greater than the $500 or so that they're likely to recover from a broke person's bank account. In that case, they just sell your debt to a collection agency for pennies on the dollar, which then has the legal right to collect the full amount of the debt form you.

[devman1983]

At least we don't have debtors prison, like Dubai.

[shovelhead]

The fact is, they do. It doesn't take much to locate and seize control over someone's savings account.

If a bank chooses not to pursue their available remedies, it's often because the money they would spend on attorneys fees is greater than the $10k or so they are owed, or greater than the $500 or so that they're likely to recover from a broke person's bank account. In that case, they just sell your debt to a collection agency for pennies on the dollar, which then has the legal right to collect the full amount of the debt form you.

Like the calls we still get for the previous holder of our phone number. An new round every six months or so. This has been going on for over five years now.
Politely we tell them we are not them, do not call back. Once one DEMANDED I tell them my name. Does a four letter word followed by a three letter word ring any bells? I definitely rung that one's bells that evening.............

[Lorax]

From today's NYT- an interesting article laying out the reality behind the lack of loan modifications, and why.

http://www.nytimes.com/2009/11/29/bu...html?th&emc=th

There is no incentive for banks to modify loans, since they really do want the properties, regardless of condition.

Mainly due to the fact that most loans held by troubled banks, or bought by "investors" such as the hedge fund known as "One West Bank" stand to gain more by allowing foreclosures due to insurance policies backed by the FDIC, as well as the original investment in the loan, which in most cases is around 50 cents on the dollar, as is the case with the former Indymac, now called "One West Bank."

This firm is particularly interesting since it's just a group of investors headed up by John Thain, George Soros and Henry Paulson.


When the FDIC shut IndyMac all hell broke loose if you can remember that far back. In the hurry to get things back to normal, the government announced a buyer [[OneWest Bank) for the failed thrift but it seems they have had some difficulty closing the deal.

I guess the fact they had to cobble together a bunch of private equity big-wigs and promise them a huge amount of government support.

The private investors are listed to include Dune Capital, LLC, J.C. Flowers & Co., Paulson & Co., MSD Capital, L.P., Stone Point Capital, SSP Offshore LLC and SILAR MCF-1 LLC….a veritable “Who’s Who” of Wall Street Fat Cats.

These Wall Street insiders obviously know how to negotiate. Case in point: This deal gives the losses to the government…read “you and me as taxpayers”…allowing them to keep any profits.

The FDIC fact sheet states:

“The FDIC has agreed to share losses on a portfolio of qualifying loans with New IndyMac assuming the first 20% of losses after which the FDIC will share losses 80/20 for the next 10% of losses and 95/5 thereafter.”
If I read this right…Uncle Sam takes on 100% of the first 20% of loan losses, then takes 80% of the next 10% and finally takes 95% of any and all losses after that.

Wow!

Uncle Sam [[us, we) got our butts kicked on that one. The Fact sheet states “Barclays Capital and Deutsched Bank Securities served as financial advisors to the FDIC.” If this was the deal they negotiated, the FDIC got rolled by their own advisors.

Now we know who gets to pay the bad debts for OneWest Bank. Now let’s look at what they get to keep in terms of assets and income.

The Fact Sheet states,
“The retail bank headquartered in Pasadena, CA, with 33 branches located
primarily in the Los Angeles MSA with approximately $6.5 billion in deposits;A loan portfolio of $16 billion and a securities portfolio of $6.9 billion;
A servicing platform with mortgage servicing rights [[“MSRs”) representing an
unpaid principal balance of $157.7 billion; andA reverse mortgage platform, Financial Freedom, with $1.5 billion of reverse
mortgages and MSRs representing an unpaid principal balance of $20.2 billion.”
If I read this right, the newly formed, Wall Street insider owned, OneWest Bank gets to keep billions in assets.

To date, One West has modified only 2.8% of qualifying loans, and I use them as an example of the lack of interest in the federally mandated loan modification program, since they were the first large bank to fail in this crisis, and have little to show for bringing relief to the homeowner facing foreclosure.

This program also pays One West when loan modifications are successful, but this incentive is much less than the value of squeezing the homeowner out of the property in the first place.

Hopefully the feds can clamp down on the apathy in the banking sector, however, I hold little hope for any real change, as the values of our homes will no doubt continue to decline.