Market Conditions: Homeowners Turn to Bankruptcy When Short Sales Won’t Save Them
The Chicago Tribune had an interesting article over the weekend describing one 32-year old Lakeview condo owner’s decision to file Chapter 7 bankruptcy when a short sale wouldn’t have saved him from still owing money on his $212,500 1-bedroom condo.
Here’s the story in a nutshell:
- Del Phillips buys a 1-bedroom $212,500 condo in a Lakeview courtyard building in May 2007.
- He takes out two loans: first mortgage of $159,375 and a second of $53,125– both from Chase.
- In January 2009, he lost his public affairs job.
- In April 2009, he applied for a modification under the federal HAMP program.
- He continued paying the $1400 a month mortgage while he waited to hear on the modification.
- In September 2009, he was turned down because his hardship was “not of a permanent nature.”
- He tried to short sell the condo.
- But Chase told him that they had the right to persue him for the second mortgage (not to mention the fact that, under the law as I’ve heard it described, the second loan would be considered “income” by the IRS if it was forgiven by the bank so he would have to pay taxes on it.)
So- he filed bankruptcy.
Phillips sought help from Neighborhood Housing Services of Chicago Inc., a federal government-approved counseling agency, which broached the idea of filing personal bankruptcy.
“(Phillips) did everything right. He had good credit, and then he lost his job,” said Michael van Zalingen, director of homeownership services for Neighborhood Housing Services. “If your lender isn’t interested in helping you, or the only thing you qualify for hurts your household, I don’t think you have any moral obligation to stay bound in that mortgage or paying to that company when it no longer makes economic sense for you.”
Phillips bristled at the bankruptcy suggestion, but after consulting with an attorney, in late February he filed for Chapter 7 bankruptcy, not the Chapter 13 that would have negotiated his debts, including those with Chase.
“My other option was to say I’ll roll the dice with the bank,” Phillips said. “Will they really come after me? I wouldn’t put it past the bank industry to do that. It’s going to kill me to pay a bank for a house I no longer owned. I was, like, there’s no way I’m going to pay the bank another dime.”
Lawyers say they are hearing about more instances of mortgage lenders selling the delinquent second loans used to buy homes during the industry’s heyday to third parties that are then pursuing debtors.
“He’s not outside the norm,” said Stephen Cleary, a Chicago attorney and board member of the Northwest Side Housing Center. “He can now sleep at night. The mental anguish has been relieved.”
He is still unemployed and believes he can live in his condo about another 7 months before it is foreclosed (all the while, not paying the mortgage.)
He IS however, paying the monthly assessments.
“I’m not a deadbeat,” Phillips said. “I’ve had to be very shrewd, like most business people. … I’m looking out for my best interests, and this is my best interests.”
Moral bankruptcy? [Chicago Tribune, Mary Ellen Podmolik, June 27, 2010]
1) It is my understanding that under the The Mortgage Forgiveness Debt Relief Act he would not have a tax liability on any portion of this: http://www.irs.gov/individuals/article/0,,id=179414,00.html But I’m not a tax expert.
2) If he could qualify for the HAFA program his bank could not go after him
3) Yes, the bank has the right to try to get the deficiency from him but I bet if they had an offer on the table they would back off of this. If not, he just refuses to accept the offer.
My condolences to this hapless borrower. I sympathize with a borrower who cannot pay because of job loss, and of course this is the very class of borrower who is least likely to be helped by any of the housing help programs for troubled borrowers.
It’s too bad he was even given a second mortgage when he bought the place in 2007. The 80/20 piggyback financing that became common in the last decade has been a disaster for most borrowers. If the house is too expensive relative to your income to be financed with a single mortgage, than you just need to buy something cheaper.
IL is not a non-recourse state and your lender can go after you for any deficiency. Worse, the second mortgage is always recourse. When you are in the pass where you can’t even pay the first mortgage, chapter 7 is your only option. This young guy has no choice.
I tell my bankruptcy clients to stop paying their second mortgage even if they plan on staying in the house. They no longer have the obligation to pay the note and there’s not enough equity for the second to foreclosure. And given that the loan mod on the first they have is usually a 40 or 50 year time bomb with a balloon at the end, its all but inevitable they walk away at some point in the future.
Chapter 7 for this guy is easy. Nothing to be shameful over. He’s obviously got no assets and he’s probably discharging a lot of credit card debt too.
Our economic doldrums will continue for many years.
This guy had nothing to begin with so a chapter 7 just hurts his credit a little bit. This is what makes me uncomfortable over 3.5% down FHA purchases.
One thing I will point out, that the article also mentions, is that this individual is still paying his association fees. As HD or others can explain, condo associations have a lot of power/latitude and can move very quickly to evict (notice to terminate) and can easily file liens (supposing there was any equity to lien against). I believe they can also petition in another court than chancery court, which speeds this process. In any event, this guy’s lawyer obviously told him to keep paying the association. So, in a sense, he really is not a deadbeat.
But, this guy should never, ever have been allowed to buy. Especially in the city where rental stock is reasonably well maintained and plentiful. If this were Dubuque, IA, that might be a different story.
Gary: It is my understanding that the mortgage relief act only applies to the first mortgage, not the second. So the second is counted as “income” for the purposes of the IRS.
Someone I know was short selling out in the burbs recently in order to move to Texas. $138k on the first loan, $50k on the second. The banks were willing to waive both of the loans in the short sale, but the bank on the second told them they’d have to issue a 1099 for the $50k. So my friends declared bankruptcy. They had no choice as they were broke and didn’t have the money to pay the taxes on the $50k.
Perhaps Homedelete can verify what homeowners might owe on.
“If this were Dubuque, IA, that might be a different story.”
shoot if this were iowa that 212k would have 3br house or a decked out town home. after we visited des moines Wife wanted like to move there, and was pushing it like crazy. (we even had a realtor there). all i can say is your dollar goes LONG way there.
“I’m not a deadbeat, but one day I just decided that two mortgages were a financially prudent idea”
I am going to be renting my condo forever with this kind of stuff going on! All of these government programs drive me crazy because I do everything I am supposed to do. When I could not sell, I rented my unit (rent covers all but the property taxes). I am so tired of paying income and property taxes so that the government can give it away to someone else. Bought a new car over the weekend and not I get greated with excise taxes and sales taxes. 2009 was a miserable year to be employed and unemployed. If you did not get an eye twitch, neck bob or some other type of stress related nervous movement, count yourself lucky.
If the government wants to know why people are obese, drunks and addicts, it is because they are not happy. Man I am jaded.
Let’s not glorify Bankruptcy the problem was he took on too much debt. It is dumb to do so and even dumber to declare bankruptcy.
“Let’s not glorify Bankruptcy the problem was he took on too much debt. It is dumb to do so and even dumber to declare bankruptcy.”
I thought the problem was the guy lost his job. If he doesn’t declare bankruptcy, then what are his options?
The scary thing is that the vast majority of home sales between 2000 and 2007 were exactly like this guy. Yes, the vast majority. Most will go bankrupt.
The larger issue is the guy lost his job. Unless he was able to find equitable employment, he was going to end up in foreclosure at some point. Combine that with the fact he can’t sell, it is a disaster waiting to happen.
Of course, one has to wonder what his employment situation is now though and if this is really a strategic default.
The problem though is that many people are taking a non-emotional business approach now in deciding to go into foreclosure. While this may make sense contractually, the problem is that once banks feel that borrowers will no longer make every effort to pay, it will raise prices for all of us. Mortgage rates are low due to pooled risk and a large part of that is the assumed moral obligation to satisfy your debts.
Of course, the flip side of this is that if Fannie/Freddie weren’t interfering with the free market, banks would have more prudent and efficient underwriting based on their individual risk tolerance much like commercial lending. There would be a lot less lending, but the quality of the loans would probably be a lot better across the board.
“shoot if this were iowa that 212k would have 3br house or a decked out town home. after we visited des moines Wife wanted like to move there, and was pushing it like crazy. (we even had a realtor there). all i can say is your dollar goes LONG way there.”
Would you make as much money there?
Very prudent. But still deadbeat.
I don’t feel sorry for this guy at all!!! He basically bought a condo with no money down. Although the lenders should have been more careful, he cannot be that naiive to think that it would be risk-free to buy a place with no money down.
He, like all other homeowners shouldn’t be allowed to get out of his obligations through bankruptcy, etc. He WILL get another job and should be held responsible for his payments. Otherwise, this moron will never learn and, mark my words, in 10 years he will be out buying another place (probably with no or little money down)!!
hard to condemn this guy when Chase got bailed out due to far more egregious overextending.
why should only businesses get to exploit the system?
“I thought the problem was the guy lost his job. If he doesn’t declare bankruptcy, then what are his options?”
Get another job and pay his debts.
This article bothers me. On the one hand I want to be sympathetic to people who find themselves in unfortunate situations. But by vision of that is someone with a family that has an unexpected health emergency. Someone without a college degree that gets laid off and has no options Something along those lines. Not a 20-something living in Lakeview that one day decides it would be in his best interests to not pay his debts.
I know a lot of people who have lost their jobs. The ones who are willing to work — and by that I mean take a job to make some money even if it’s not their dream job — are landing on their feet. They may not be exactly where they want to be or making as much money as they want to make / used to make, but they’re not filing for Chapter 7 either. They are changing fields, they are taking on 2 hour commutes, whatever. But they are paying their bills.
“Most will go bankrupt.”
This part of my big fear of buying right now. Not to attention-hog, but after nearly 2 years of looking, I finally found a great condo in the green zone that is a good deal. I am not worried about holding up my end of the bargain, but what scares me is everyone else.
If enough of this goes on in the real estate market and the US economy continues to sputter, prices will have to go down, and that’s my big fear. If I knew I could sell the place and breakeven after 5 years, I would do it. But I’m not sure that will happen. Heck, the current sellers are listing at a $32,000 loss after owning the place for 5 years. I don’t want to end up like that.
So, what say you CCers? Is now a good time to buy or should I just stuff my money back in the mattress and wait until this is all sorted out?
If your time frame is 7+ years I’d say go for it, probably a much lower risk at this point buying than 2+ years ago
Rates on mortgages probably won’t be any lower, supply probably won’t be any higher so if you qualify I’d say go for it as owning is great!
Have y’all seen the new Fannie/Freddie penalties?
From this article: http://minnesotaindependent.com/60775/strategic-default-penalties-threaten-struggling-homeowners
“Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure,” the company announced, adding that the policy goes into effect this Thursday, July 1. “Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.”
There is nothing immoral about not paying your mortgage. In fact, I believe that not paying your mortgage is glorious. Its the most important step our nation can take to restoring afforability to all parts of the housing market.
Filing BK isn’t that big of a deal. 90% of the population has a net worth no greater than their next paycheck and their $20,000 car insurance policy.
File your bk on the seconf before they issue the 1099 and you have no tax liability.
“Would you make as much money there?”
Anon,
I would, some wouldnt, and some would need to take a different career.
“If the government wants to know why people are obese, drunks and addicts, it is because they are not happy. Man I am jaded”
ThinkSmall,
i am going to quote that from now on!!!!! Awesome
“hard to condemn this guy when Chase got bailed out due to far more egregious overextending”
-if you see a man in a suit KICK him and ask for your money back!………Suburban kids dont need to dress like gangsta rappers they should dress like their Dads. their dads have done far worse things than selling drugs and drive by shootings.
Glenn Wool
“Anon,
I would”
Then you’re standard of living would be about 50% better there. NO wonder your wive wants to move–more money for overpriced fashion accessories, shorter Groove commute, etc, etc.
But then you’re an Iowan, which is it’s own issue.
“But then you’re an Iowan, which is it’s own issue”
and thats why i am still there. Doode the downtown night life/restaurants is one strip of places, its sad.
*there=here (chicago)
Alanon, the unemployment rate is over 12pc in IL and the U-6 rate is nearing 20pc. There are no jobs. Your talk of hustling and working two jobs to make ends meet is a bit naïve. You better knock on wood and hope you don’t end up under or unemployed for any significant period of time.
“Sonies on June 28th, 2010 at 8:59 am
If your time frame is 7+ years I’d say go for it”
The problem is I am fairly young and expect my housing needs to change in the next 7 years. 5 years was my horizon as that is when I would expect we would start spitting out little ones.
What about the thought that if real estate does go down in value any loss you take when you sell should be offset by a similar savings on a new place? Any truth to that or is it just rationalizing.
Des Moines seems like a nice town. Only been there in the summer, might be kind of bleak in Jan. not that chi is the cat’s meow that time of year.
One thing about cities that size is there’s little anonymity.
The final sentence is one of the most interesting. IL law is amongst the most generous to owners in the country and has been the cause of much of the economic obsolescence that results from poorly capitalized owners who are allowed to remain in possession of dwellings in which they no longer have any economic interest. Equally it has created a nice little sideline for some developers who can continue renting out units for 12+ months without paying any of their capital costs.
In the same way that bailouts prevent true market clearing prices, excessively owner friendly possession laws, like 7 months of statutory redemption after a lis pendens, create a deadweight loss for the economy. Whilst I would not advocate Texas style eviction process (I am not into kicking families out into the street in the night) the current process positively encourages the destruction of economic value and leads to blight in many areas where the necessary and significant renovation of foreclosed properties is no longer economically viable.
Des Moines is a great town if you’re boring, don’t enjoy any sort of decent restaurants or night life and enjoy the sounds of Harleys and jacked up Pickup trucks being driven by drunk high school kids/dropouts
It is, without a doubt the lamest town I have ever been to in my life.
“Your talk of hustling and working two jobs to make ends meet is a bit naïve.”
Or it’s based on recent experience of several of my very good friends.
You’re right, I hope I don’t lose my job. That would suck. But I don’t have any doubt that I would find another job. Making less than I make now, sure, but something. Like I said, the only people I know that haven’t found work are those that are being naive – to use your term – about this economy and setting their standards too high.
Hopefully Dubuque’s cultural insalubrities are better now than 20 years ago.
http://www.nytimes.com/1991/11/03/us/seeking-a-racial-mix-dubuque-finds-tension.html
Back to the thread, I wonder if this type of activity, walking away, will form a black mark for the participants for years to come. If I were a lender, and if it were legal, I would prohibit lending to anyone who walked away (credit score, 7 or 10 years notwithstanding). I’d make it black and white.
As an employer, I’d also consider it as a condition to employment, but its hard to find good people even in this job market, so I think that will just have to sit on the shelf.
Is a lender better off (all in, including recouping principle, plus all costs [legal] and timing [time value of money], etc.) if a homeowner seeks Chapter 7 protection vs. Chapter 13 vs. agrees to a short sale? What are the deciding factors? Is the consideration of a short sale just a big game of chicken between the lender and homeowner?
“Is a lender better off (all in, including recouping principle, plus all costs [legal] and timing [time value of money], etc.) if a homeowner seeks Chapter 7 protection vs. Chapter 13 vs. agrees to a short sale?”
I don’t think it’s realistic to generalize. Too many variables in each situation. And, if you’re assuming that the HO is underwater, they *can* keep the house in both a 7 and a 13 w/o much difference in the total cost–not that I know why they would.
RE_novice – the first question you need to ask yourself is why do yo want to buy? Is the place you found far superior to anything you can rent? Will your taxes + mortgage + insurance + assessments make sense financially compared to renting? What is your tolerence for risk? What happens in 5 years if you want to sell but you cannot without taking a large lose? What kind of down payment do you have saved?
For me it made sense to buy. I have a 7yr ARM at 3.5% and I was able to put 20% down. I also budgetted to pay an extra 25% a month of the mortgage towards principle to help further reduce my risk when I plan to sell 7-10 years down the line. It is something we can live in past 7-10 years if we our unable to sell. It is a very nice house and I cannot rent anything similiar. Combine that with the $8,000 cash and the 1.25% I got back from Redfin it felt like the right decision. I posted the exact same question you did awhile back in CC. Only time will tell but us it made sense financially, we can easily afford it, and we are very happy in our new home.
Chap 13 allows you to catch up on the missed payments aka arrearages, and if you’re lucky, you can strip the 2nd mortgage (aka pay back as an unsecured creditor at 10 cents on the dollars). However the downside is that you can only strip the second if you are also underwater on your first mortgage. And the Chap 13 plans are a pain in the butt because as I tell my clients, the chap 13 plan isn’t for your benefit, it’s for the bank’s benefit to squeeze as much money as possible from the plan. only 1 in 5 chap 13 plans actually completes the term of the plan. Most people drop out because the terms are so onerous and the chapter 13 trustees are a pain in the butt. You try living with a family of four on $550 a month for food. In many cases, no cable television and you get pre-paid cell phone plans. It’s a policy decision from the US trustee’s office to make the chapter 13s unpalatable. However chapter 7’s are easy and slide right through. Rarely do any of these mortgage debtors have any assets worth liquidating so they just slide right through.
HD-
can you provide some more detail as to strategic default if you have only a 1st mortgage. If IL is a no-recourse state, can you just go through foreclosure without declaring bankruptcy? I have a bro-inlaw in similar situation and thinking about it.
He’s stuck in tiny condos with Jr on the way. Wanted to rent it out and buy a bigger place (yeah I know, a bigger disaster). Suprisingly the banks actually required them to have 6 months reserve for each place, the new and the rental, so they can’t proceed.
I suggested renting a place themselves and renting out his current condo.
B, thanks for making those points.
When it all boils down, I just think it’s too risky right now. Nothing in the “green zone” is anything close to rental parity, so that’s where I will stay, a renter.
oh HD, you’re such a chapter 7 shill
Sonies, I gotta earn a living somehow.
Tom(tfo), IL is a recourse state, but, judges are loathe to give deficiency judgments. Rarely happens on 1st mortgages for owner occupied properties. My firm doesn’t even bother trying to get deficiency judgments because the judges, especially in cook county, don’t really give them. Chancery is a court of equity and I guess the reasoning is that it is inequitable to make a homeowner pay for a 1st mortgage on a home he no longer owns.
So for all practical purposes you can default and walk away from a 1st in IL without any real trouble. However, if you have a second mortgage, you can be sued, its happening more regularly now. I see second mortgage lawsuits all the time – my firm sometimes files them too.
This BS from Fannie pursuing deficiency judgments is just a bunch of BS designed to scare. Fannie/Freddie defaults have formed a ‘hockey stick’ graph http://2.bp.blogspot.com/_pMscxxELHEg/SutdPiLiIMI/AAAAAAAAGsI/G-9WT0uqiHM/s1600-h/FannieMaeDelinquencyAug.jpg) and they see losses continuing especially since people like me are out there encouraging people to default and go BK.
Long term it’s the healthiest thing for this country. SO much of our productive income is siphoned off by bankers in the form of mortgages that could be used for other purposes. We need to get foreclosures down to levels below 1% where it has been historically. And the only way to achieve that is to have lower, much lower home prices for everyone.
It’s amazing to think that home prices can be affordable, in all areas, not just areas outside the green zone.
I don’t know about other states so I won’t try to give advice.
“anything close to rental parity”
maybe not true with interest rates as low as they are – but probably. I would do the math on it to be sure.
But with your 5-year timeline it is probably safer to rent. Also it will be interesting to see what things look like a year from now. The government is out of bullets so the true state of the enconomy will start showing over the next few years … If I were in your shoes I would keep renting.
looked in this area 4 years ago—problem is the non-stop hum of the expressway…it never goes away & travels for about 4 blocks in very direction
“Nothing in the “green zone” is anything close to rental parity, so that’s where I will stay, a renter.”
For SFH, maybe because there is a supply / demand imbalance for that product.
For condos, that is not correct for Lincoln Park. Our three flats rent for 2200-2400 for each 2/2 unit. Highly upgraded, nice neighborhoods, but still that implies between $400k and $425k at sale. A new constuction condo nearby just traded for 415. Ergo, below rental parity.
Sonies,
I see higher interest rates as pushing buyers into less expensive housing, thus creating downward pressure on pricing.
I see lower interest rates. Hell we just reached a record low the other day. It still has lower to go. AS long as we have the ZIRP then we’ll continue to have low mortgage interest rates.
Most of the bad borrowers have been shut out of the mortgage market (excep FHA). So there are only good borrowers out there and they get the best interest rates.
The defaults are all on past loans and do not affect mortgage interest rates going forward.
And a lot of those were high interest subprime loans anyway.
Another scenario taken from this story…HD?
What if the man decided to let all other bills slide…CC, Car payment, etc but instead of letting his house go, he decides to keep making the mortgage and assessments on time.
Would a chap 7 or 13 allow him to do so? He would not be responsible for CC payments, etc but wouldn’t having his house, an asset, encourage CC companies to put a lien on the equity, which I am sure he does not have yet so soon after its purchase?
I feel bad for those in his situation as no matter how hard you might be looking for A job, there just are none out there to be had. To me there is no shame in doing what he is doing as our government has given big business the freedom to do exactly what he is doing.
I currently have a similar situation going on in one of my rentals in Chicago. Great couple who BOTH lost their jobs within a month of each other 9 months after signing a two year lease. So far they are 3 months behind on the rent, but I am not going to evict them as they are trying hard to remain strong with their heads above water. I receive weekly calls from them updating me on their lack of progress on the job front and can only sympathize, while not asking for or expecting the rent. The one partial rent check they did send I have returned to them. Who knows how long it will be before they are able to have their life restored. I am just lucky to have only one household in this mess!
I am losing $$$, but I can’t imagine being in their situation. I just know I can’t evict them…and to tell them this is the only good news they receive.
WL:
yes, you can stop paying every unsecured creditor and pay only the mortgage/assessments and keep your house. However, the issue with BK in NY is that if you make more than the median income you must file a Chap 13. The median in NY is something like $45k a year. All those dirt poor upstate folks dragging down the median.
Remember, the banks and creditors wrote the bankruptcy law in the Bankruptcy Reform Act or whatever of 2005. The bankruptcy laws favor secured creditors and toss unsecured creditors to the garbage. you can pay for your $700 per month Acura and your $2,500 per month condo and yet let $80,000 in CC bills be discharged. In fact, the more secured debt you have, the higher your income limits for the means test. So the renter with a used vehicle making $45k a year has to file a chapter 13 – but the owner with a fancy car can make $55k, or sometimes $60k and still file a chap 7 because of the secured debt.
I handle a lot of complex cases, i don’t work at a mill, i get a lot crazy referrals
Note that because the lender refused to relinquish their right to repayment of the second lien, the borrower filed Chapter 7 instead of 13.
Months ago Mike Konzcal wrote a smart analysis of the Big Four banks’ valuation of second liens.
http://www.newdeal20.org/2010/03/09/principal-writedowns-and-the-fake-stress-test-8835/
From publicly available data Konzcal learned that nearly half of all second liens are held by the Big Four banks, who value the loans at 86% of original value.
But what’s the value of second liens?
Konzcal argues the seconds ought to be written down to 40% or 60%, which would saddle the Big Four with losses of $190 billion to $285 billion. Konzcal says “[I]f the stress tests were done with terrible 2nd lien performance in mind, there would have been an extra $150 billion dollar hole in the balance sheet of the four largest banks.”
Since the banks cannot afford that large a writedown on their seconds without raising additional capital, we ought to expect to see more persons following Del Phillips’ decision to file 7 instead 13.
About such borrowers Michael Panzer writes:
“These ‘buyers’ don’t ‘own’ anything; all they’re doing is renting the money in the hopes that rising home prices will create equity for them out of thin air. What they ‘own’ is essentially an option on a property which they ‘rent’ monthly. If the government manages to reinflate the housing bubble (it won’t, but hope and greed spring eternal), then the option will pay off handsomely. The ‘owner’ put no money into the speculative bet, but they can then sell their option for a huge profit.”
http://www.financialarmageddon.com/2010/05/who-benefits.html
I own a business and one of my customers declared bankruptcy and stiffed me for a $2000 bill. He works in my building and when I see him coming back in everyday from his Starbucks and smoke breaks, I want to punch his M—F— face. Declaring bankruptcy is not an “okay” thing to do. When you f— other people over for your bills, you’re an asshole.
Just to clarify from the original post, he wouldn’t have had 1099 liability had he short sold his house, it was his principal residence, and therefore would have been exempt.
“Declaring bankruptcy is not an “okay” thing to do. When you f— other people over for your bills, you’re an asshole.”
Hahaha. Its a business decision. And you are the idiot who misjudged his risk.
“As an employer, I’d also consider it as a condition to employment, but its hard to find good people even in this job market, so I think that will just have to sit on the shelf.”
This is mostly an empty threat. I hear a lot of people talking about using someone’s credit score or report as part of pre-employment background screening but I’ve never seen it actually done for employment. It would seem almost non-sensical for the vast majority of jobs and is it really even your business the personal financial situation of a job applicant? (Presumably you’re going to care if its a regular or strategic default, right?)
“The problem though is that many people are taking a non-emotional business approach now in deciding to go into foreclosure. While this may make sense contractually, the problem is that once banks feel that borrowers will no longer make every effort to pay, it will raise prices for all of us. Mortgage rates are low due to pooled risk and a large part of that is the assumed moral obligation to satisfy your debts. ”
I don’t see this as a problem. A debt is not and never should be considered a moral obligation (unless its alimony or a lawsuit you owe legit damages on), even palimony I’d be very reluctant to grant as a juror as if the gal as never married to the guy she shouldn’t have any expectation of financial support.
Somehow the banking sector got it into the American psyche that repaying a debt is not solely a business decision. When the big banks started walking away from some of their condo developments there wasn’t any morality mentioned in any of the memos, e-mails or analysis I’d be willing to bet. Yet somehow individuals are held to a higher standard?
Also I am of the belief that inexpensive mortgage financing contributed to the bubble in asset prices. I think the removal of subsidized mortgage financing is a GOOD THING as the market will be functioning better and more accurately PRICE IN RISK. It will also translate to LOWER PRICES.
Second mortgage holders in instances like this deserve to lose every last penny. Chances are Chase didn’t hold that second though they probably sold it off to guillable investors who bought it at face value because Moody’s gave it a AAA. Caveat emptor folks.
As for the first mortgage Chase probably sold that too. But the guillable investors sold it to the Federal Reserve Bank of the United States at a hundred cents on the dollar because our government decided that it was more important to protect the mortgage backed securities bond investors over taxpayers.
Bob, the interest rates are still super low, but no bubble exists any more. your hypothesis is flawed, as it always has been.
FLIPPERS are what is wrong with the picture here – people driving upwards pressure on any given measurement of livable space (ie, zoning restrictions as well as simply “land”) – but outside of suspending civil rights and forcing someone to live in a unit of housing for 5+ years I don’t know what can be done.
I can say that all the knuckleheads that thought they deserved to make thousands of dollars a year for gracing a “fringe” neighborhood with their presence deserve the stocks – just in time for independence day!
“but no bubble exists any more”
That is subjective. In terms of affordability I think indeed there is still a bubble. Prices are still ~20% above 2000 levels yet wages are essentially flat. And there are fewer of those jobs at those wages. Real estate is sticky, especially on the way down, so give it some time.
If Detroitland can goto 73 on the Case-Shiller, I don’t see a compelling reason for Chicago to still be at 120 and I think 90 is in the cards. We are going to overshoot on the downside anyway.
Why do I think there is a bubble mentality? Just walking home from errands overheard someone talking about how low mortgage rates were and how you could get a 4.625% mortgage with no points. Presumably because they thought “Now has never been a better time to buy”. Except do you think that low mortgage rate matters in comparison to the tax credit that just expired?
There are still people out there, most people in fact, who think real estate can’t go down over a period of 10 or so years. It can go down and stay down for decades.
“Just to clarify from the original post, he wouldn’t have had 1099 liability had he short sold his house, it was his principal residence, and therefore would have been exempt.”
From what I understand- not on the 2nd mortgage. He is only exempt on the first but every person needs to check with an attorney and get good legal advice.
Like I said- when my friends were short selling their house in the Chicago suburbs just a few weeks ago- they had a second of $50k. The bank told them they would waive it but they would issue the 1099. It was their principal residence. No 1099 on the first mortgage, however.
People think they can just walk away if they have the two mortgages. It’s not that easy. My friends had to go bk to avoid liability on the second.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
“Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only canceled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.”
I’m sure everyone’s HELOC was used to improve their home, right?
Thanks Homedelete. HELOCs seemed so innocent back in the day, didn’t they?
Keep in mind that if you have no assets (like most people out there who did a 80/20 or 80/10 loan between 2005-2007), second mortgages will settle for pennies on the dollar. They rather get something, usually a couple of thousand like a large tax refund, rather than nothing.
dedalus: those quotes are spot on. To follow up on that, people don’t know that for all practical purposes they can go BK and stop paying the second mortgage while living in the house, usually with some sort of loan modification (trial or permanent) on the first. Yet the terms of the first are so ridiculous they really are just renting from the bank. i’ve routinely seen 3 or 4 year seasoned notes be extended to 40, and often 50 years, usually with a balloon payment at the end. That’s encouraging defaults, foreclosures and walk-away and short sales for years and years to come. There will never be enough equity for these owners to refinance as long as their neighbors keep walking away.
Neo you said, “In the same way that bailouts prevent true market clearing prices, excessively owner friendly possession laws, like 7 months of statutory redemption after a lis pendens, create a deadweight loss for the economy”
Actually, it’s 7 months from service of the complaint, not 7 months from the lis pendens. That can be a difference of months. Additionally, you get 3 months from the date the judgment is entered to redeem. And you get to choose the longer of the two. So if you can drag out the time period between service and entry of judgment…..
Keep in mind that under HAMP the bank’s are not providing the borrower a loan modification for the borrower’s benefit – it’s provided to the borrower for the bank’s benefit.
The banks are required to perform a secret NPV (net present value) test – the specification of which are totally secret – to determine if the bank can squeeze more money out of the borrower with a loan mod or with a foreclosure. If the bank thinks it’s more profitable to foreclosure the case worker presses the F4 button and prints out an arbitrary letter to send to the borrow that says something similar to “your hardship was “not of a permanent nature.””
From what I’ve seen the borrowers with steady jobs (which just so happens to be 99.9% of my clients) and the greatest loss in home value get the loan mods lowering the payments to usually what rent in the area is. For example I had a client in Bellwood with a loan mod that lowered his payment over 60% and of course tacked on a balloon payment of $120k at the end of the 50 year term. The other great loan mods I’ve seen have all been in places like Berwyn, Cicero, the south and west sides, etc. They know that if they resell the house as a foreclosure they’ll get $30,000 or $40,000 dollars, it might be easier to get $40k in mortgage payments over the next three years and then sell for $40k. Whereas I’ve seen numerous people on the northwest, north and gold coast get denied loan mods for stupid reasons like “you have not been delinquent for 60 days” when they’re been delinquent for more like 300 days and ridiculous stuff like that.
I’m just an observing in this. People come to me every so often with their paperwork and I get to review it. I don’t work at a NACA booth or anything like that.
Dedalus, that second link you posted was great. Thanks.
It contained this little piece of information:
“the default rate on low-down-payment FHA loans is a staggering 20% on loans written in 2008–after the housing bust had already unfolded and the risk was undeniable”
Yikes, that’s frightening.
“There are still people out there, most people in fact, who think real estate can’t go down over a period of 10 or so years. It can go down and stay down for decades.”
Most people on this chat board think real estate is a very safe bet over a 10 year tenor, rightly or wrongly. Still, I don’t think many smart buyers care if housing appreciates much in the future. Smart buyers seem to just be concerned about continued drastic depreciation, which I think is behind us.
One item to point out about the low mortgage rates we see today is that the REAL (nominal less inflation) interest rates for short duration ARMs is actually higher than at many times in the past. And since people tend to gravitate towards the lowest nominal interest rate (5/1 ARMs, for example), they are actually paying fairly high real interest rates as compared to the yield curve. But, they think they are getting a deal and its a “good time to buy” because of it. I think the WSJ ran a good piece on this recently.
That said, 30 year conforming mortgages seem pretty darn good right now. Jumbos aren’t too bad as well because the spread has come in so much and can serve as a pretty effective inflation hedge for a high net worth homeowner. And yes, those people still do exist.
“Most people on this chat board think real estate is a very safe bet over a 10 year tenor, rightly or wrongly……….they think they are getting a deal and its a “good time to buy” because of it”
I will always say 10 years is a good benchmark for the main reason, even if there is slight or moderate depreciation in that time, is because if most are smart and did a vanilla 15 yr or 30yr fixed by that time you have built some good equity. (if you didnt tap it) so if the market is bad by then you can take a hit and still be in good shape.
I also believe its a great time to buy a place. the feds cant really lower the rate any lower and some lenders will give you a 4.5% on a 30 yr fixed. If you can find a good priced place, not the deals HD and Bob want, just a good priced place and get a 5% 30yr fixed that you are planning to hunker down for a good stretch of time, then why not? *
*this excludes buying 1br place
I dont feel sorry for this guy one bit. He CAN always go out and find another job, it might not be perfect or ideal, but it will pay some of the bills. He CHOOSES not too.
thanks for the clarification hd. is the 3 month redemption after judgment rule only if the plaintiff (mortgagee) buys the property at auctions? as i understand it if a 3rd party purchases this goes away, although i’ve been in court to hear a judge ‘forget’ this part.
speaking of foreclosure details, I’ve been watching a foreclosure over on the county clerk’s site, and after watching it for awhile, the last thing entered in the docket is “DISMISS ENTIRE CAUSE – PLAINTIFF -”
What does that mean? That the bank will take the house, but won’t look for any money from the owner?
Here’s a chain of events:
DEFAULT – ALLOWED –
SUMMARY JUDGMENT – ALLOWED –
JUDGMENT OF FORECLOSURE ENTERED (CASE IS PENDING)
MOTION TO DISMISS FILED
DISMISS ENTIRE CAUSE – PLAINTIFF –
I don’t get what’s happened here…
Go to the Daley Center, pull the record in person and you can read all about it.
If I had the time to go downtown and pull the records, I would. But it’s funner to pick y’alls brains over here!
😉
loagansquarean —
Could be a few reasons. Defendant could have reached a modification with the bank. Defendant could have refinanced. The law firm handling the case could have done something incorrect to the point that the judge wants them to start over (when you are in front of these judges every day, with 30 cases on his/her docket each day, sometimes you just have to concede, get your ducks in a row and start over). Defendant could have settled the mortgage debt. It’s not over until the Sheriff Sale is confirmed (usually 30 days after the Sheriff sale). The judgment is really irrelevant in terms of finality of the case, it’s a step along the way, but confirmation of the sale is usually the end of the end.
Logansqqueen: 96% chance there was a loan modification or a chapter 13 bk. Probably a loan mod.
Thanks, gang. In this case, given the owner is unemployed, I’m thinking Ch. 13…
I was responding to his post where he called me an “idiot” for actually expecting payment from one of my customers:
Me: I own a business and one of my customers declared bankruptcy and stiffed me for a $2000 bill. He works in my building and when I see him coming back in everyday from his Starbucks and smoke breaks, I want to punch his M—F— face. Declaring bankruptcy is not an “okay” thing to do. When you f— other people over for your bills, you’re an asshole..
Bob’s clever retort: Hahaha. Its a business decision. And you are the idiot who misjudged his risk.
My reply back: So Bob, if someone smashes your mother in the face and takes her purse and gets away with it scot-free, have they in fact made a good decision, you know, from an economic standpoint? They are certainly richer for it. There is something called moral behavior which is useful for little things, like keeping civilization from falling apart. It’s the reason I don’t shove people down when getting on the bus even though it might serve my short term interests. Because I’m not an asshole, unlike the guy you are defending, and by association, yourself.
Marko,
Morality, ethics, and just plain good actions are lost in the world today.
to keep the topic on real estate. remember the days when builders were craftsmen? took pride in what the built? and built quality stuff they know there name would be associated with for decades to come?
also remember when architects would design great house and buildings with wonderful details the would showcase the buliders/craftsmen work?
now what do we see, unimaginative boxes with no details built to maximize profit and each and every square inch to the point the only outdoor are you get is a deck above the garage facing the alley so you can smell warm garbage on a hot summer day.
all the crap you see now is “in the name of money” pride in work and self is lost. dollar dollar yall
Ok…speaking about keeping places for a decent period of time and nominal interest rates
For background: I keep my places a while (sold the last one after having it for 10 years).
I’m getting an offer to refinance. Conforming loan.
4.5 30 yr from US Bank
3.75 7 yr ARM from BoA
Whatcha all think? It comes out to be about 2000 dollars difference a year between the two so 14k over 7 years. Then again…interest rates going to stay low as HD says? or will they go up? I’m inclined to go with BoA.
The annual US Inflation Rate for the 12 months ended in April, 2010 was 2.24%.
Thoughts?
Chapter 7 and 13 will become more and more common amongst the middle class. I feel bad for this gnetlemen.