patrick.net

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.