patrick.net

For all things I hate about banking.

They aren't a damn charity. They really aren't. I guess it's all about benovlance and the three major religions. And a homeless guy with a broken foot. Aw. If I did business like that I would be screwed. You have to make allowances of course. That I am familar with.

However I would not expect a bank to have a chapel where the employees go and pray for the people in collections. Take up donations to help them out and even a small one to put the subject kids through college.

Most. No ALL home loans are a bad deal. See. If you ad the figures up like you should do before you sign. You would figure out the vig on a home loan is closer to what the boys on Mott street in NYC charge. People that lend money on mortgages aren't nice people believe me. So if your looking for benevolance and a break there. It's not going to happen.

JG1 says

Because of people like you - or people like you who actually followed through - when buying a new house and keeping the old one as a rental, we had to move out and live in a rental for a number of months, so that the new lender would believe we weren’t intending just to get a new place and let the old place - not underwater but less than 20% or 30% equity that they wanted - I think they wanted 30% in this situation.
The loan you are supposedly preapproved for may actually have some strings like this attached, once they figure out what you are up to, i.e., that you are not selling the old place which a loan officer will likely initially assume you are, since that’s what most people do when they move.
I don’t have the exact info. you are looking for, but I was indirectly hurt by this by having to move twice and rent or add equity to a soon to be rental.

I told the loan officer that I plan to rent my old house. She said she couldn't include it in the debt-to-income ratio since I have no history of being a landlord. So they have figured in that risk as part of their calculation.

MinnItMan says

Mortgage insurance is fairly complicated in how it pays, and it depends on what type it is, an who is paying for it. PMI (single loan - paid by borrower) is different from portfolio insurance (multiple loans - paid by the portfolio, roughly speaking). FHA has its own insurance that is typically financed, so if there is an early default it’s more-or-less the lender paying it, even though the borrower is nominally paying it.

OK, now we're getting somewhere. I write one check to BofA every month. It includes my P&I plus PMI. There is no FHA in the picture here. So who OWNS the PMI insurance policy? Is that BofA or can it be someone else?

twd000 says

I don’t doubt there are bidding wars on foreclosed properties - if the listing price is low enough. I’m simply saying a foreclosed property sells at a steep discount compared to an owner-occupied comparable property.

http://www.chicagotribune.com/business/chibrkbus-3year-supply-of-foreclosed-homes-hurts-home-prices-20110526,0,1206605.story

“The average REO cost on average about 35 percent less than comparable properties, according to RealtyTrac.”

So why wouldn’t they allow a short sale in this case, when it is clear they will incur carrying costs plus a discount in sale price by taking possession of the property?

That article is completely bogus. RealtyTrac did not compare the cost of an REO to a "comparable" property, they compared the AVERAGE cost of an REO to the AVERAGE cost of a non-REO.

RealtyTrac's methodology:

""Avg. FC discount": the percentage difference between the average sales price of foreclosure sales and the average sales price of nonforeclosure sales during the quarter or year. In order to come up with the discount, RealtyTrac takes the sale price and divides it by the number of square feet in the home, to come up with the average price per square foot. Then it parses the numbers by property (those not in foreclosure, those in foreclosure, and those which have already been repossessed by the banks). Comparing the average cost per square foot gives RealtyTrac the discount rates. The company doesn't take into account the condition of the property or the type of property (i.e. a condo vs. a detached home)."

They are not considering any other factors that REOs have in common (location, condition, type of building). They're just taking the average ppsf. The use of the word "discount" is misleading here. REOs may sell for less on average, but that doesn't mean an REO sells for 35 percent less than its market value, or that the exact same property would sell for 35 percent less if it were an REO.

Which brings up the next point: It's not 35 percent. The author of that article obviously cannot read. Here's a quote from a different article:

http://abcnews.go.com/Business/ohio-illinois-steepest-discounts-foreclosure-prices/story?id=13692585

"Foreclosure homes are selling at a 27% discount to non-distressed properties nationwide, but discounts are far larger in some states.

In 10 states, average foreclosure discounts in the first quarter ran more than 35% below the average prices of non-distressed homes, says market researcher RealtyTrac in a report out today."

RealtyTrac reported that SOME states had a differential of 35%. That is not the average. The average is 27%.

Wrong. Wrong. Wrong.

When you default many things are potentiated:

1) Part of the loan is in portfolios, bundled with many other loans... the loss is counterbalanced against other assets
2) Part of the loanis profit paid through interest.
3) Part of the asset (your defaulted home) still performs: as a write off (loss,etc) as insurance boot (policy is paid) and... get this as an enticement for another down payment. Banks like down payments cause even if someone buys your default at a discount, its never the price that determines the value it is the financing.... after the next in line puts down twenty and pays almost 5%, it starts to add up.

Banks don't know where your loan is pardner.... Try this out: Aski your bank for a copy of your deed. In california you will get a note, technically a mortgage note (if the bank has it), not the property deed. Vis a vis they are two separate things and the mortgage note could be bundled, part of any portfolio anywhere at anytime.... thats a BIG problem right now.

Finally. Banks would much rather bundle sell. They could easily sell to anyone, grab a decent amount down, and resell if I default, credit be damned... they do not, there is a reason. Investors, hedge funds, rich realtors and other corporate entities get a first run at proiperties bought at discount and in bulk.

The awe shucks buyer wanting a 20% discount on an REO is not whom the banks are targeting as a buyer presently... probably because despite sentiment, anyone with any sense knows that buying wholesale and in bulk will allow real estate people to gain property and banks to sell it off.

Who owns the policy? For the PMI, the insured will be the mortgagee or its successor and/or ultimate assignee (that is, the owner of the secutity instrument) So, probably the securitized trust. But there might be other insurance as well, and "inurance-like" side deals, like a CDS, the loss payees for which could be anybody if they are wholly synthetic (meaning it's truly a side bet from a party with no tangible interest like a mortgagee/assignee in the transaction).

But, just because you pay the premium, doesn't mean you are the beneficiary. Nor does it mean that the insurer paying a claim for a loss caused by you isn't subrogated to (literally, "standing in the shoes for") the payee's claim against you.

Zlxr-BUT if you have equity and you get into trouble - they will make it impossible for you to qualify for a refi.

Not true Zlxr. Let me slice the conspiricy theory off of this for you. Banks do not want these houses. (Simple to tell by the discounting). They don't want your house or any house. They want the cash. It believe it or not is much easier to deal with than an asset for them. Clever but true.

Something like you just intimated might just mean this whole mess is lender cooking. It's not. They are in a bind now.

However they are not in so much of a bind that they are now lending money to any charity case that comes in for a home loan. I guess they got smart or caught which ever you prefer.

You can't explain all this to a neophite (Zlxr I am not calling you a neophite you make some good points) All I am doing here is telling fact. Nothing more.

Zlxr - I can sympathize with your experience. As I understand it, since I live in a non-recourse state, I don't have to declare bankruptcy in order to get out from under my home loan. And they cannot try to collect based on my other assets or wage garnishment.

twd000 says

vain says

Assuming your mortgage was $1100/month this whole time (which probably wasn’t the case), you’ve paid them ~$52k+ worth of payments already.

true - they have collected a ton in interest payments already. So you’re claiming that NO ONE loses money when I foreclose? Didn’t some financial institution have that future income stream on their books?

My take on this is to take interest out of the equation first. How much of the loan have you paid back to them via monthly payments? Any interest they lose is just as expensive to them as a restaurant giving you another plate of food for finding hair in it. Lost of their cost of goods (their depositors' interest. Currently at 0.01% for me). If you were the investor in this situation, you'd be happy just to cash out and get your money back; or wait in a declining market.

But since they can, they'll use accounting methods to make this a devastating loss, cry about it, and get bailed out. At the end the interest that they didn't earn from you will likely be printed. Or per the Fed, it's not money printing. They are just increasing your bank's balance with them as a 0% loan. No printers involved.

Zlxr says

And - let’s not forget that it’s our money in our Bank Accounts that allows the banks to loan out money in the first place. If everyone emptied their bank accounts - the Banks would have to change the way they treat their customers.

More than likely, the Fed will add several Zeroes at the end of the bank's account balance with them.

Or if they did not have connections, the FDIC will just seize them and sell it for pennies on the dollar to their connections.

Just comes down to simple math. Not a lot of borrowers are actually willing to follow through with a strategic default.

S = stratetegic defaulters, # of upside down borrowers willing to walk on the loan
P = pretend strategic defaulters, # of upside down borrowers who would pretend they would walk if they knew it worked
M = modification loss
F = foreclure loss

They won't modify loans until S * F > P * M

gameisrigged says

Say I’m a bank. If I forgive a huge portion of your mortgage so that you only have to pay back market value of your house, I’m getting that money slowly over the next 30 years. If I foreclose and sell the house, I have that money right now. And an underwater borrower is more likely to re-default after getting a modification anyway. A bird in the hand beats two in the bush.

I think this is the best explanation as to why banks would rather foreclose than reduce principal.

Odds are that we as taxpayers are the ones taking the loss. There are a few scenarios:

1) Your mortgage was bundled in an MBS which was bought back by the gov't to "provide liquidity" to the market, in which case, the gov't takes the loss
2) Your mortgage was backed by Fannie/Freddie/FHA, in which case, the gov't takes MOST of the loss
3) The bank had private insurance, such as AIG, cover the risk of mortgage default. AIG, and other insurers, were bailed out by the govt. Gov't takes most of the loss.
4) Some bank still owns the loan, and has received bailout funds from the govt or access to 0% borrowing while they use that money to invest in 1% govt bonds (a stealth bailout). Govt takes most of the loss.

See a pattern here? Yes, I am simplifying it a bit, but odds are, the govt is eating most of these losses (the banks and homeowners are eating the rest, but its a much smaller percentage). That translates into the taxpayers eating the losses in some form - whether that be higher taxes, a dead economy, or currency deflation as a result of QE. Either way, we are absorbing this loss as a group.

That's why the proper system needs to be setup to avoid a bubble like this in the future - crashes like these hurt everyone, not just the people who were involved.

Katy Perry says

No deals, or work around unless they can make more money on that deal.

Banks don’t do anything unless they make money (or think they do)

there is no good deal. if the bank agreed to it you’re getting F^%$$ed

Well said. True and to the point.

Dude watch the Oscar winning documentary "Inside Job" you will understand every thing.

It's impossible to say who will bear what parts of the loss without looking at all the specific contracts involved in you particular situation. However, there is one very important thing to know. When considering a strategic default, you should absolutely know whether or not you are in a "non-recourse" state.

A "non-recourse" state means that the state places an upper limit on the amount that the bank can screw you for. Specifically, it means that the bank can get the house, but nothing else. In a "recourse" state, the bank can go for other assests like your bank accounts (even if with other banks), any tangible or intangible property (cars, jewelery, stocks, bonds, etc.), and can even garnish your wages. Basically, in a recourse state, you're 'f unless you can get the bank to agree to a short-sale and let you walk away.

In a recourse state, a person might try to to fight foreclosure while not paying the mortgage in order to gain leverage over the bank and persuade it to accept a short-sale. However, this is a risky strategy and banks certainly have time on their side.

Florida is a recourse state. You'll have to check whether or not your state is.

I suspect that real estate prices in recourse states will far to lower levels than non-recourse states because people for the first time are realizing that such a risk exists and will demand lower prices to compensate for such a great risk. Before the housing bust, no one heard of the terms recourse and non-recourse.

twd000 says

I am trying to figure out why banks are not more willing to do serious loan modifications for homeowners who are strategically defaulting.

Because it will encourage more people to strategically default. The fact that these people can make their agreed-upon mortgage payments pretty much eliminates any claim that they deserve or ought to be offered a handout.

twd000 says

I bought a very modest ($200k) affordable house in 2007. I can still make the payments comfortably, but the house value is down something like 40% from what I paid. We are looking to move in the next couple years anyway

You bought for short-term profit, let alone in the midst of what was already identified at the time as a massive, collapsing housing bubble?

twd000 says

Please try to refrain on commenting of the morality of strategic default; I’m not interested in what you think of me personally and I promise not to tell you what I think of you! Just trying to figure out where the buck stops and why banks are slow-playing the default crisis instead of writing down principal.

It doesn't make any sense for them to do it. The only way they can make you not become a high-risk borrower is to reduce your principle to current market value. That is almost the same to them as letting you go into default and putting your empty house on the market. So if 30 in 100 people like you are going to walk, what incentive is there to bail out all 100 people?

If you want to be greedy and not take responsibility for your commitments, then by all means walk. But considering that you're probably going to take a govt-backed loan to gamble on another house while sacking the lender of your current loan (which is probably by some extension also the taxpayers), you're certainly going to be judged on the morality of what you're doing. This is worse than strategic default. You've clearly learned nothing at all from your previous mistakes.

twd000 says

Yeah, I get that the banks have done the math and figure that taking houses back is the better deal. But I just can’t see how the numbers work out in their favor. Given that a home resells for 20-30% less due to the “stain of foreclosure”, how can it be a better deal, compared to allowing a short sale at current market value?

It's not. Given the choice, they'll always opt for the short sale, but a lot of people don't want to do it. They are delusional and won't pay, but want a mod, and if they don't get a mod, they stick their heels in the ground and say, "Well then Im not moving." and force the banks to foreclose. Foreclosure is always more expensive, for the reasons you've outlined, and because they have to pay all the attorney fees associated with processing the foreclosure. They'll only resort to foreclosure over SS if you've basically given them the, "You want the house? Come take it asshole!" line.

The cost/benefit analysis they do is between a modificaiton and a SS/FC, not between FC and SS. FC vs. SS is always a win for SS. If they decide modifying you will get them more $$ in the end, they'll approve it. If not, they want the property back. At that point it's up the homeowner to comply (SS) or refuse (FC).

-There are cases where they will decline a SS applicaiton but it has nothing to do with the value and the offer, it has to do with the owner's ability to pay. Most investors refuse to approve a SS if the owner is proven to have a monthly surplus after all expenses. So if you show them your income documentation, and after all mortgage payments and CC's, food, gas, etc...you're still showing a $400 a month income surplus, they'll never approve that short sale no matter how great the offer is. This is how they root out the strategic defaulters who can pay but refuse to.

Now, I get what you're saying in that why would they cut off their nose to spite their face there, by taking less money on a FC when you've offered a SS? I guess it has to do with trying to 'stick it' back to a buyer who is completely sticking it to them by strategically defaulting. And mind you, this is the investor (Fannie, Freddie, etc) not the actual bank. BoA is not approving your short sale, Fannie Mae is. BoA is applying for it on your behalf. The investors don't want to encourage or reward SD, which is why a surplus of income disqualifies most people from a SS. (I know this is the case with FHA. I believe it's the same with FNMA/FHLMC, but I'm not positive)

Schizlor says

I guess it has to do with trying to ’stick it’ back to a buyer who is completely sticking it to them by strategically defaulting.

More simply, they'd encourage all underwater owners to seek loan mods. It would be like taking a somewhat restless beehive ('Bees, bees have hives, man') and whacking it with a stick. I doubt they care about sticking it to any one person or group of people. Rather, they'd probably like to convey a false sense of understanding and caring while collecting their monthly check. It's pretty hard to say anything except "no" to someone who can afford their payments but wants them lowered.

klarek says

’Bees, bees have hives, man’

Quit screwin' around!

klarek says

I doubt they care about sticking it to any one person or group of people. Rather, they’d probably like to convey a false sense of understanding and caring while collecting their monthly check. It’s pretty hard to say anything except “no” to someone who can afford their payments but wants them lowered.

Yeah, you're correct. They'd refer them for a modification if they could afford it. And at that point, they have 3 options. Modification, Keep Paying, or Foreclosure. They aren't going to give you option 4, which is not pay when you can afford to AND get out of the mortgage basically unscathed.

klarek says

Schizlor says

I guess it has to do with trying to ’stick it’ back to a buyer who is completely sticking it to them by strategically defaulting.

More simply, they’d encourage all underwater owners to seek loan mods. It would be like taking a somewhat restless beehive (’Bees, bees have hives, man’) and whacking it with a stick. I doubt they care about sticking it to any one person or group of people. Rather, they’d probably like to convey a false sense of understanding and caring while collecting their monthly check. It’s pretty hard to say anything except “no” to someone who can afford their payments but wants them lowered.

Yeah. I agree with that. I suspect that for every sd, there are several who "love the house, the neighborhood, etc", and have kids that have friends in this school district (the best!!), and they'll keep overpaying.

If they compromise on one, the whole neighborhood will want the same treatment, so why not just let people make their own minds whether to default or not, based on their own circumstances and hope that most keep overpaying?

I also suspect that the 1099 forgiveness on the taxes expires in 2012, because any fool who keeps it beyond 2012 has already made their decision. I mean, at that point you've had 5 years of the Government forgiving---what took you so long?

CL says

Yeah. I agree with that. I suspect that for every sd, there are several who “love the house, the neighborhood, etc”, and have kids that have friends in this school district (the best!!), and they’ll keep overpaying.

Correct. There are also people who aren't that badly underwater (like say 10%), believe their house is worth more than it actually is, or simply don't care about their underwater status. Their behavior will likely change when every neighbor who is underwater starts getting a massive give in the form of loan mods that they didn't need.

CL says

If they compromise on one, the whole neighborhood will want the same treatment, so why not just let people make their own minds whether to default or not, based on their own circumstances and hope that most keep overpaying?

Correct. I forget where I saw the stats, but people who strategically default have a ridiculously high likelihood of knowing other people who have done the same thing. The poll basically concluded that one's intent on strategically defaulting (or in this example, seeking loan mods they don't need) would be almost entirely based on what they know other people have gotten away with. Pretty much the same thing with the bubble build-up. Those who knew a lot of people buying (and subsequently becoming "wealthy") were much more likely to jump on the bandwagon.

you are correct in inferring I know people who have completed a SD in my (non-recourse) state (Arizona). One friend did it 2 years ago and has had no repercussions from what I understand, and another friend is in the process of doing it right now.

If I were in Florida, I would never go through with it since I have other assets they could seize.

just send the keys to banks. Stop paying immediately. That will fix all your issues. The rest is banks issue.

Zlxr says

why would they turn down offers of $400,000 and then turn around and try to sell the house for around $300,000 (this is in reference to a house out in Brentwood that I know of).

One reason is that the realtor the bank hired to sell the house might be corrupt. The realtor claims the house won't sell (ignoring the $400,000 offer) and then sells it to a friend for $300,000. Then they flip it at $400K and split the $100K profit. Bank loses.

It's our government lost the money, taxpayers are responsible for the debt (in long term). Our government is more favor to the rich than the poor. To turn this around is almost impossible.
Reference: Chinese history during 1940s (communist) that poor people taking everything from the rich people (regardless of their background), those rich people were GAME OVER!

Anyway we keep the freedom then keep playing the game (safely)!

The realtor claims the house won’t sell (ignoring the $400,000 offer) and then sells it to a friend for $300,000. Then they flip it at $400K and split the $100K profit. Bank loses.

One reason is that the realtor the bank hired to sell the house might be corrupt.

I reversed these sentences, for the lulz.

To OP: Us.

The realtor claims the house won’t sell (ignoring the $400,000 offer) and then sells it to a friend for $300,000. Then they flip it at $400K and split the $100K profit. Bank loses.

One reason is that the realtor the bank hired to sell the house might be corrupt.

Thats kind of an insidious flip. While I don't like that. On the face of it. (I don't practice flipping in the criminal sense ever). I don't approve of it either. If the bank is aware (which is left out here) of the lower loan amount which they would have to approve. See the bank would have to sit down and examine the loss they would be taking on the house. Approve that. In order for the sale to go through. Thats ok. Raising the value is bad business. Thats verboten with me. It's jailable and should be.

Look if someone is lazy enough to practice that kind of flip -raising value-. I would not want to know you. If your to lazy to go out and find a good deal. You need to find another business. Real estate takes throughness, work, attention to detail and diligence. A lazy eye on the dollar half a**sed person will always find themsleves in trouble in real estate. Having to participate in all kinds of half witted schemes. After they have made the wrong purchase so they can get on to the next one.

Real estate is like anything it takes a lot of learning. You focus your attention on the deal and the details. Not on the dollars you will be getting when the deal is done. You do that. Try to be honest. Take YOUR losses like a man. You will learn. Because guy your going to have to take some losses while you are learning simple as that.

Tenouncetrout says

And FWIW, 200K for any house in any town in America in ‘07 was a bargain.

There were (and are) lots of places in America where average house prices never reached 200k; the areas that did are in hot areas, generally near or in big prosperous cities in 'boom' areas. Remember, real estate is the ultimate "Local" market and varies significantly town to town, state to state.

Nomograph says

The actual loan underwriting process is *much* different and is very stringent these days. Your underwater house will be a big red flag when the underwriters make a deep dive into your finances. If they offer you a loan at all, the terms will look nothing like what you stated above; that I can promise you.

I keep hearing people talk about how tough the underwriting process is these days; can any of you give a first hand account of these difficulties?
I bought a house in 2005 that I sold in 2008; I put a contract in on a house in November 2010 and closed in January 2011 - my approval paperwork from the bank took LESS effort and time in 2010 than it did in 2005!
The reason it took 2 months to close was getting a new survey on the property, not anything to do with financing.

Non-recourse states and Deficiency Judgements

The way I understood Non-recourse states and deficiency judgements was simply that the mortgage holder (promissory note) in a non-recourse state was held liable for any deficiency between the original mortgage note and the final foreclosure price at auction. However, with that said, I also understand that they have only 90 days to claim the deficiency in their defense and file a suit. Nevertheless, in our state of Idaho (as far as I know) they do not practice deficiency judgements as a normal course of business. Although, there has been some talk of collection agencies stepping up to the plate and going after debtors with these potential deficiencies.

This of coarse can all become a moot point if the promissory note is not reaffirmed in bankruptcy and the note is then no longer valid. Even though the collateral of the home can be repossessed if you do not adhere to the terms of the original mortgage loan. I do not know how this all would work in a recourse state but it appears that it would open up a whole can of worms for all parties.

One reason is that the realtor the bank hired to sell the house might be corrupt. The realtor claims the house won’t sell (ignoring the $400,000 offer) and then sells it to a friend for $300,000. Then they flip it at $400K and split the $100K profit. Bank loses.

This is correct. 9 times out of 10 it's not the bank being stubborn, it's the realtor being shady and giving the bank a haircut on the short sale (in addition to charging commission twice, on the SS and then the flip, instead of just on the SS) Many, MANY offers are never forwarded on to the owner and/or lender by the agent, because that person already knows who is going to buy the home (their 'investor' buddy) and will pretend their super lowball offer is the only one out there. (and again, as long as it nets the lender 88% of the appraised value, the bank will approve it) So the realtors are in a position to say "Ok, I know the bank will approve this at $180k, I have an offer for $205k, so I'm going to tell that 205 guy, "sorry, home was sold already", tell the bank the only offer out there is for $180k, short sell it to my investor friend for $180k, then resell it to the 205k guy once my buddy owns it, and we'll split the $25k."

It really is fish in a barrel for the realtor. They hold all the cards. They know the lender rules for approval, they know how many and what offers are out there as well as being able to hide offers from the owner/lender while at the same time telling prospective buyers that their offers were rejected, when in fact they were never shared with the owner or lender in the first place.

Short Sale should be between the owner and lender and nobody else. Agents shouldn't even be eligible for commission on short sales. But to leave this much latitude for them is just abhorent.