patrick.net

What banks want is for you to pay for 5-10 years giving them their cut of the deal. then they want the house back. rinse,..repeat. They got their money and the house. Thanks for playing. 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 or you're their best chance at the better deal.

get it?

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?

I don't know how it's a better deal. I just know banks don't make a deal unless it's their best chance for profit in most cases. They would almost never agree to a bad deal. If they do someone is getting fired. you can bank on that.

Why would they write the loan down to market value when they can just foreclose and sell it for market value? I don't think your premise that they would have to sell it for "20-30% less" is true. Lots of buyers are perfectly willing to buy REOs; I've seen intense bidding wars on them. I don't think this "stain" that you speak of exists.

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 believe they do not want to give the impression that someone can get their principal reduced just for the asking to prevent everyone from doing the same thing. Let's say some underwater homeowner who just got laid off from work gets their principal reduced 30-40%. They tell their neighbor about their good fortune and although they are able to make the payments they appeal to the bank to get their principal reduced. They may even decide to take the maximum HELOC they can and after a few months ask for principal reduction. So (just my theory) the banks do not want to be seen as easy targets. They take the loss to prevent the masses from "working the system".

Plus it is not really money. They send an email stating it is $500,000 and the mortgage lender adds $500,000 to their balance sheet and gives someone a house.

"I bought a very modest ($200k) affordable house in 2007."

You should be legally bound to pay, more so than anyone. Forced labor camps should be an option. In '07 any half brain dead corpse with a pulse knew we were in a bubble, that was about to deflate. It was hard headed Blokes like you, that would have argued the loudest, that prices will never go down, and believed the Government was in any position to prevent it.

I remember arguing with people like you until I we were blue in the face, there was no telling them, that Real Estate is headed back down to 1999 prices.

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

twd000 says

They approved me for another loan roughly equal to my current loan, at 4.5%, FHA-backed, only 3.5% downpayment required.

Please go away FHA, can't you see you're being exploited like a needy ex girlfriend.

gameisrigged says

Why would they write the loan down to market value when they can just foreclose and sell it for market value? I don’t think your premise that they would have to sell it for “20-30% less” is true. Lots of buyers are perfectly willing to buy REOs; I’ve seen intense bidding wars on them. I don’t think this “stain” that you speak of exists.

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?

Norbecker says

I believe they do not want to give the impression that someone can get their principal reduced just for the asking to prevent everyone from doing the same thing. Let’s say some underwater homeowner who just got laid off from work gets their principal reduced 30-40%. They tell their neighbor about their good fortune and although they are able to make the payments they appeal to the bank to get their principal reduced. They may even decide to take the maximum HELOC they can and after a few months ask for principal reduction. So (just my theory) the banks do not want to be seen as easy targets. They take the loss to prevent the masses from “working the system”.
Plus it is not really money. They send an email stating it is $500,000 and the mortgage lender adds $500,000 to their balance sheet and gives someone a house.
Meet the new boss. Same as the old boss.

This I would believe. For the same reason banks are slow to list all REOs for sale and crash the market. It's just the perception that they are tough on delinquent borrowers, even if they take a larger-than-necessary loss by taking possession of properties they don't want.

I still haven't heard an answer about who "owns" my loan. If BofA securitized all or the majority of my loan in MBS, don't the holders of those MBS take the loss when I stop paying? Where is the bank's exposure if they haven't kept the loan on their books?

Nomograph says

I wouldn’t count on it. It’s still very easy to stroll down to the local branch and obtain a pre-approval letter, which is what you have. 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.

The agent informed me that FHA was comfortable backing loans up to the point where total debt payments were 50% of gross income (seems way to high to me but those are the govt's terms). I'm sure there is a possibility of them drastically changing the terms, but if they don't write the loan, they don't make any money. Why would they mislead people if they won't get a commission out of it? Where is the incentive? Banks still have to make loans to make money, and there aren't nearly enough cash buyers out there.

Also in reality I plan to put 20% down even if they would be satisfied with only 3.5% for FHA terms

Nomograph says

So, as far as “getting a getting a new loan for new house then jumping ship”, you’re WAY late to the party on that. They figured that out long ago and there is a 99.99% chance that it won’t be happening for you unless your have a very high income stream that clearly can support multiple properties.

The risk is 100% to Bank #1 - the terms of that loan can't be modified. Why would Banks # 2 care if I am likely to default on Bank #1 loan? If anything, Bank #2 would welcome it since it means I would not be extended in credit and more likely to pay them.

Zlxr says

I could be wrong - but I think that the Bank you pay your mortgage to is probably only servicing the loan.
The actual owner is probably Freddie Mac or Fannie Mae.
I do believe that the banks that service the mortgages make money whether you pay or go into foreclosure.
Furthermore - there must be some kind of insurance somehere that covers bad debts - I’m just not quite sure how it all works.

That is true in many cases, but my particular loan is not FHA-backed. Who would have insurance against default on my loan?

If the banks gets paid whether I foreclose or not, why would they be making the (meager) effort they are to prevent or delay foreclosures?

Who is taking it in the rear here?

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

Katy has it right. The bank lets you think you are buying a home, let you make payments while the equity builds, then they want it back. They'll fabricate a foreclosure out of thin air to skim the equity, claim a loss on their insurance, and charge you a bunch of bogus legal and processing fees.

As far as the bank is concerned, the equity is theirs because they provided the capital. Effectively, until you pay the last payment, you own nothing.

Because of they did then in all fairness, couldn't the bank ask you to pay more for your house if the value were rising?

Nope. Breach of contract. Baahahahahha. Like banks care what a contract 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?

Millions have done or will do a 'buy and bail' which is what the OP will end up doing.

The bank loses in a foreclosure, but the loan servicer does not. They make much more money in a foreclosure than they do in a principal adjustment and they have to agree to the short sale or adjustment before it can happen.

That's where the disconnect is located. The bank sold the loan to a company whose responsibility is to collect your payment and distribute it to the tranch holders. That company's incentives are completely and utterly backwards. This situation arose because the loan servicing contracts were all written when the foreclosure rate was low and the demand for principal adjustments was much, much lower than that.

We'll need to fix that issue before banks can get act in their best interest re: adjustment vs. foreclosure.

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.

A few things are clear, however. It is a mistake to think insurance payments to the lender relieve any borrower indebtedness. Also, the insurers are relatively small companies compared to their liability. They can't come anywhere close to paying their exposure to probable claims, let alone possible claims if principles are written down wholesale.

This is the real reason principle reduction is so difficult. It's the insurers call and they really would rather not have to pay. The primary insurer, say the PMI, may not care that much because it only covers part of the loss, that is the shortgage against principle up to the first 20% against the original appraised value. A portfolio insurer (or multiple insurers), however might be covering the rest and be subject to bigger and deeper losses.

These are secrets of the temple.

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.

PockyClipsNow says

Millions have done or will do a ‘buy and bail’ which is what the OP will end up doing.

Millions? Can you provide a cite to this almost certainly not true "fact"?

Stepheng.bishop says

Katy has it right. The bank lets you think you are buying a home, let you make payments while the equity builds, then they want it back. They’ll fabricate a foreclosure out of thin air to skim the equity, claim a loss on their insurance, and charge you a bunch of bogus legal and processing fees.
As far as the bank is concerned, the equity is theirs because they provided the capital. Effectively, until you pay the last payment, you own nothing.

Dont' like the deal? Pay cash.

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.