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  #1  
Old October 13th, 2010, 02:32 PM
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So my buddy and I was talking about the horrible housing market here in Florida and he said his advisor told him something that totally blew my mind. They were talking about being "upside down or underwater" and that it made more sense to just stop making payments and let the bank take the house. He said you loose the house but its better than oweing the bank more than the house was worth. I can't seem to wrap my mind around this. How is this possible or even legal?
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  #2  
Old October 13th, 2010, 02:51 PM
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Its been all over the news since the mess began.
The Daily Show did a great skit on it the other night where the Mortgage Brokers of America (or some group like that) where trying to convince people to stick it out and stay in their homes. Funny aspect was that they (the mortgage group) had recently walked away from a mortgage for their high dollar office building that they were upside-down in and were now renting down the block.
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  #3  
Old October 13th, 2010, 02:51 PM
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Totally dependedent on the individual situation of course but in some cases it can be cheaper to default on the loan and face the hit to your credit than continue to pay for years and still lose money when you sell it.
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Old October 13th, 2010, 02:54 PM
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yeah a few options and not sure of exact details
short sale - your credit is screwed for 2 years
foreclosure - credit screwed for 7 years

Most of these people figure it is easier to walk away then pay for what they bought as it is worth less than they paid. They bought a house that wont be worth what they paid for more than 7 years in a best case scenario. YOu walk away and your credit is screwed but after the 2 or 7 years you are in the clear and don't own a house that's value went down. not saying it is right but people do it all the time
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Old October 13th, 2010, 03:05 PM
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Deed in lieu,
You actually live in the property without making payments, until the Lender sells it.
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Old October 13th, 2010, 03:16 PM
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Need to check if it is a deficiency or anti-deficiency state. BTW time from stopping payment to foreclosure in some states is averaging over 400 days. If you really tried you could probably live rent free for two years and then finally be kicked out (if at all with some of this poorly documented stuff and foreclosure moritoriums going around).

Figure upside down 200k, two years rent free (+50k), if you have no other assets for them to take in a bankruptcy (laws vary by state) or it is an anti-deficiency state (can't get money beyond taking the house), it makes sense to walk away.
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Old October 13th, 2010, 03:26 PM
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Quote:
Originally Posted by Rugbier View Post
Deed in lieu,
You actually live in the property without making payments, until the Lender sells it.
That used to work. I don't know if they're doing many REO's anymore though ("other real estate owned" account from which it's sold).
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Old October 13th, 2010, 03:28 PM
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With 26yrs (as of last month) in mortgage banking I have seen it all. When I started during the Carter Administration right out of college the prime rate was 19%. Desktop computers didn't exist-loans literally took months to get done and many trees died in the process.
Any credit blemish stays on your report for 10 yrs. You can claim bankruptcy every 7 yrs per Federal Bankruptcy Laws. FHA will allow you to get another mortgage 36 mos after a deed in leiu, or foreclosure, or short sale. Walking away results in a foreclosure and it makes better sense to surrender the house and get the clock ticking rather than have the lender go through the machinations of foreclosing since as Ron has pointed out that may well take over a year. Pride aside, it's hard to make sense of not to walking away when you are hundreds of thousands of dollars upside down in a home or commercial property- thats in value not amortized payments which would obviously be considerably more. This practice is actually prudent since or Housing and Urban Development's (HUD) government insured FHA lending platform will essentially guarantee you an new mortgage if you qualify in only 36 mos time.
Right now 1 in 7 homeowners is in trouble keeping up with their payments. 5 of every 100 home owners are looking foreclosure in the face. The problem is epic in proportion.

REO is a lender term for a property that has been foreclosed on and is part of its Real Estate Owned portfolio. Most lenders immediately initiate eviction proceedings as soon as a foreclosure has been approved by the local courts. So chances of living in a home while the lender trys to sell it are slim to none. They want you out and most lenders have initiated a program known as "cash for keys". Basically they offer you large sums of cash to get the flock out. This actually saves them on foreclosure costs, time, and damage to the property by exiting owners since they don't pay you until you have surrendered the keys and they have inspected the house to make sure you left the granite countertops and stainless appliances they financed.
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  #9  
Old October 13th, 2010, 04:43 PM
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A person I konw took a loan where he only paid intrerest for 2 years then the real payment came in.... He had issues and the banker told him that as long as he was making payments they would not re-fi. He was really struggling to make the payments but he did..

So he said fuck-em.....Obama will bail me out. So he did not make a payment for about 4 months then all of a sudden he got his interest down from 7% to 5% on a 30yr fixed. Now he makes payments and he lived mortgage free for 4 months...

total crap.
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Old October 13th, 2010, 05:24 PM
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Quote:
Originally Posted by 130Tdi View Post
This practice is actually prudent since or Housing and Urban Development's (HUD) government insured FHA lending platform will essentially guarantee you an new mortgage if you qualify in only 36 mos time.
And therein lies the issue. There is huge moral hazard risk here.
Basically, for 'Strategic Defaulters', (those who can afford to pay but choose not to) the consequences of walking away are minimal. The less skin they have in the game, the less they stand to lose by walking.

The dust hasn't even remotely settled on this whole debacle, and already there are TV ads with smilin' slick-willies pushing "no down" mortgage loans. Wash, rinse, repeat. The spiral continues.

(Meanwhile, XAU=-FX and XAG=-FX set yet another record today.)
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  #11  
Old October 13th, 2010, 10:52 PM
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Quote:
Originally Posted by JSBriggs View Post
Its really a ridiculous argument. If you have ever bought a new car the moment you drive it off the lot you are upside down: you owe more than it is worth. Over the term of the loan (or lease) your payments catch up with the value, all the while you get use of the car. I see walking away as not keeping your word. Regardless of what the market has done, the borrower said they would make the payment for 30 yrs. If you are unable to make the payments, that is one thing, but unwilling is entirely different.

-Jeff
A car generally requires some sort of down payment, unless they're desperate to move inventory, or your a buyer with a very good credit history. Buying a car is how you build credit history, and the odds of someone defaulting on a Honda Accord when they can actually make the payment is pretty small, which is how they (should) determine things like your interest rate and down payment. Why ruin your credit score for something that's a fraction of your yearly salary?

But again, it is an agreement - you stop paying, and the bank gets your car (and maybe more, depending on state laws). You could also say the same for a TV or a Big Mac.

Businesses make the decision to accept the penalty clause in a contract all the time; why shouldn't homeowners? The laws and penalties are known by both parties prior to entering the contract. If I was $200K or more under water on a home that I did not plan on spending the rest of my life in, I could easily see stopping my mortgage payments. It is a business agreement I entered into, not a moral one - I didn't ask the bank to marry me. Likewise, I didn't borrow money from a friend or relative at zero interest, I borrowed from a business that wants to make money.
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Old October 13th, 2010, 11:15 PM
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For all the morality talk, remember that the $$$ the banks lent for these properties was from funds that were ultimately accrued through the sale of falsely rated securities based on the grouping and resale of subprime loans. It wasn't real money to begin with. The houses were never worth the asking price, ever. The banks and brokerages got their bailout. Yet the foreclosures and short sales continue. So why should the unlucky homeowner be morally obligated to be left holding the bag of this scam?
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Old October 13th, 2010, 11:30 PM
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I wonder if the same standards of Morality are questioned and prosecuted to our Leaders, Financial Institutions, Auto Makers, etc.

As an investor, I couldn't care less if the Automakers went down, I mean you could buy an item that it was worth $ 1.00 for $ 0.01, but no the Moral Obligation for the employees and the Town, well maybe someone should have the same Moral obligation to a Borrower that can't keep up a Mortgage.

Years ago USF&G was liquidated and no one cared, why did we cared about AIG?
Years ago, creative financing was in place for Lenders to get fatter, no one cared then, why care for them now?

We could turn this into countless hours of debate.

At the end of the day , the Lender that takes a property back, will indeed force the Borrower into Bankruptcy as most states have a deficiency clause ( as Ron posted ), so if you surrender the house, you are still going to owe the difference of the sale price vs loan amount .

Don't think for a minute that when the did the 85/15 or 80/20 mortgages they thought of you, the property can be foreclosed and obtain the amount of the First Mortgage and you still will be sued for the 2nd Mortgage / Line of Credit.

I agree with Ren Ching, F@#K EM, they've done it to a lot of people while getting Fat
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Old October 14th, 2010, 10:36 AM
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Quote:
Originally Posted by Rugbier View Post
I wonder if the same standards of Morality are questioned and prosecuted to our Leaders, Financial Institutions, Auto Makers, etc.
You know what the answer is, Gustavo; we all do.
Fact is, moral hazard risk exists everywhere. (Fox guarding the henhouse.)
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Old October 14th, 2010, 10:52 AM
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Thanks for the insight guys. It must be legal because I just googled "strategic default" and there are law firms doing this for homeowners here in Florida. Moral aside, I don't see how this is possible. Won't the banks go after the rest of the money? Maybe repo a car or the rest of their savings account? Worse yet get thrown in jail. How can they just "walk away"? Legally?
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Old October 14th, 2010, 10:56 AM
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Originally Posted by JSBriggs View Post

The problem I see is that when people don't take personal responsibility for themselves, it gives the government an excuse to step in. This limits our freedoms. The irony in this case is that it was the government that had changed the lending requirements that created this mess in the first place.


Well put.
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Old October 14th, 2010, 10:58 AM
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Originally Posted by JSBriggs View Post
....No one forced him into it. He signed his name on the line saying he would make payments for 30 yrs. Its not the banks fault that he wanted the house he bought. I see it as a matter of responsibility rather than morality.
Jeff or anyone else in the know,

What if the drop in value was not the homeowner's fault. There is a huge investigation in orlando where the builder knew the area used to be a bombing range for the military. Did not disclose this information to the buyer, and now the homeowners are stuck with a depreciation in value because they have found live ordinance and ground contamination from the chemicals in the area. How can they resell the house now and get the market value? I'm not trying to argue the responsibility point but would this make a reasonable argument to "strategically default"?
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Old October 14th, 2010, 11:38 AM
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Most defaults are home wrecking events. As Gustavo pointed out, due to the lenders ability to pursue any loss as a deficincy balance and force the defaulter into court for a judgement, most borrowers surrender their homes in bankruptcy. US bankruptcy law requires that all of your worldly posessions be worth less than 12k, nothing is exempted from valuation, (think about that-12k isn't much) in order for the court to be able to approve the bankruptcy. Most people loosing their homes are not moraly deficient, they are broke and broken people.
Default has very signifigant consequences.

Strategic default by real estate investors and commercial property defaults by LLC's and corporations are an entirely different matter.

I agree that the fact that you can get a mortgage 36 mos after a foreclosure seems to be rewarding a borrower who defaults. This country has always pushed home ownership as part of our value system/ the American dream and that rule has actually been an FHA guideline for decades. Keep in mind FHA was created to promote home ownership for the less than fortunate and 98% loan to value loans are still available through this entity up to the zip code driven lending limits nationwide.

This housing debacle is one of our largest problems as a nation, right there with our 10% unemployment rate nationally. The current administrations rampant spending hasn't stimulated the economy from my perspective. On the contrary, this spending scares the hell out of me. I guess the greatest responsibility we all have is to vote for whomever you feel is most likely to turn things around- a seemingly insurmountable task. Not voting is irresponsible. The recent comment by Pelosi that "unemployment and food stamp benefits stimulate the economy" with no trepedations about those costs to us as a nation should scare everyone. Flame me out but thats what I think- I for one am scared for the US my children are going to inherit.
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Old October 14th, 2010, 12:03 PM
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Jeff, the government changed the lending requirements at the request of the banks, not the individual homeonwers. There has been a huge shift in banking standards and practices over the last two decades that was precipitated by the desires of large commercial bank executives to be able to play the markets in addition to providing the basic services to a community as they were traditionally doing in the past. The government loosened restrictions on these practices to allow them to do business as they wanted, i.e., the things that eventually led up to the financial crisis we are in. A perfect example of allowing a free market to run without a system of checks and balances to protect the end user, i.e the taxpayers, homeowners, single parents, working stiff etc.

You state that allowing gov't to step limits our freedoms, yet you are saying that you don't want people to have the freedom to break a contract. That is a basic freedom accorded any individual, business, or corporation. There are penalties, and the bank agreed to the terms just the same as the homeowner. So, when you break the contract you suffer some penalties, and in that way you are taking personal responsibility for your choice. And then you move on.

The banks asked for the lending rules to be relaxed in order to keep up with the home prices that were being artificially inflated by mortgage brokers that were selling unstable debt that was misrepresented. The gov't did not know about the lying by the securities brokers and allowed the price inflation to continue. When the banks realized that all those bad loans were never going to come in, they declared bankruptcy. So in effect, they walked away form their own responsibility, by your model.

Now you have a homeowner who is in a home that he purchased with an understanding that prices were very high at that moment. But what he didn't know was that the prices were built on a system of lies and deceipt that went to the highest echelons of the financial world. Now, because of that deception, there is a huge economic slump that has caused the value of his home to tumble, and he may be unemployed or underemployed in a lower paying job due to no fault of his own. Or maybe just in dire economic straits due to the unfavorable terms of his adjustable loan that may have been the only option for him at the time of signing. Or maybe everything is fine and he is able to pay the current mortgage with no problem. But...and this is the catch here...the house may NEVER be worth the amount that he owes on it. If he stays in the house he may be hundreds of thousands of dollars in debt for the rest of his life. But due to some abstract concept of "home", he should somehow be prevented from exercising the basic freedom to withdraw from the contract and suffer the penalties? Just because a bunch of rich, greedy MF'ers wanted to make their fortune by lying about the product (bad loans) they were selling. Where is the indignation about the violation of the sacred "home" concept there?






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Quote:
Originally Posted by JSBriggs View Post
Because its his home. He is the one who offered the price to the buyer. No one forced him into it. He signed his name on the line saying he would make payments for 30 yrs. Its not the banks fault that he wanted the house he bought. I see it as a matter of responsibility rather than morality.


The problem I see is that when people don't take personal responsibility for themselves, it gives the government an excuse to step in. This limits our freedoms. The irony in this case is that it was the government that had changed the lending requirements that created this mess in the first place.

-Jeff
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Old October 14th, 2010, 04:55 PM
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