When you’re this far under water, isn’t walking away the only sane choice?
Jones recently convinced her lender to modify her mortgage. But while that deal lowered her interest rate, it didn’t reduce what she owes and it added past-due payments to her total debt.
Jones now owes $227,000 for her home, which Merced County’s assessor says is worth about $70,000. She wonders why she shouldn’t just default and move on.
“It’s going to be 10 to 15 years before I have one cent in equity,” Jones lamented. “To me it doesn’t make sense to keep feeding and watering a dead horse.”
We can lament the ineffectiveness of HAMP and the lack of cram down, but what would cram down do for her? If a bankruptcy judge had cram down authority, presumably they’d cram this loan down to the very edge of what she could pay (which is probably a number pretty far north of $70K). Then, she’d be stuck in Merced County with a house she still can’t sell, and if she did try to sell it, she’d put it on the market for far more than its worth. If she walks away, she’s still going through bankruptcy, but she’s rid of the house and able to make new choices that include more mobility.
Xenos
While cramdown would not do much for her, it would sure help the rest of us by forcing some of the “hidden inventory” onto the market. This would cause some price discovery and make it safe for people to invest in housing again.
Now we just get serfs, underemployed people who owe their labor to the banks, trapped in inefficient, often inappropriate housing.
dmsilev
When you’re that far underwater, walking away certainly makes a lot of sense. There’ll be a black mark on her credit record for the next seven years, but if it’s going to take ten or more years to dig out of the hole…
That said, have real estate values in that area of California really imploded down to a third of peak values?
dms
PeakVT
She should walk away (unless she refinanced, which complicates things because such loans ARE recourse loans in California, unlike purchase mortgages). Unless the home is in some way exceptional, there’s no sense in throwing money away.
MikeJ
When the little guy is getting screwed you’ll often hear, “it’s nothing personal, just business.” Seems like “just business” works both ways.
There is no moral dimension to this. Add up the numbers. If this woman were a publicly traded company she’d be inviting a shareholder lawsuit if she didn’t walk away.
jon
Ms. Jones should walk away. Bankruptcy, the process, is so much better than bankruptcy, the lifestyle. One lasts some number of years, the other lasts a lifetime.
The lenders will suck it, those who took the loans will suck it, and everyone will suck it. But in the end, maybe homes will have realistic prices again.
And Charles Krauthammer will write a column about how a nuclear Iran isn’t such a big deal.
duck-billed placelot
Jesus. I wonder why, when she convinced her lender to modify her mortgage for…more money, apparently, she didn’t tell them to fuck off then. She certainly should now.
The past few months I’ve periodically looked at the mls for various US cities. You can find single-family homes in Detroit and Baltimore for $15k…looks like (the less desirable parts of) Cali might be headed in that direction.
mclaren
Actually, the judicial system appears to be implementing its own radical version of cramdown.
See “Could 62 million homes be foreclosure proof?”
Barbara
Cramdown almost certainly wouldn’t help someone this deep in debt, that’s for sure. It might help a lot of others, of course, which is to say, that there is simply no easy way forward when the economics of an investment have so totally imploded.
I am going to go out on a limb and say that when the property you own is closer to a commodity than a unique asset, you should ask yourself: what would happen if this were some other kind of asset? If she had bought stocks on the margin, she would have been through bankruptcy long before this — indeed, the lender would have forced the issue early. All she’s getting at this point is the value of imputed rent — she doesn’t have to pay rent to someone else. But since that rental payment is probably less than she is supposed to be paying on her mortgage, that doesn’t seem like a lot.
Moreover, she doesn’t have the “extra cash” at the end of the day to invest or do something useful with. All it’s really doing is propping up the balance sheet of the mortgage holder, who doesn’t have to write down the value of the asset on its books.
We would all be better off if we stopped attributing mystical qualities to an investment just because it is real property.
DecidedFenceSitter
@dmsilev:
Over here in “recession proof” Northern Virginia, townhouses in my area were going for close to 300K at the peak, insane. I purchased at 130K in ’03, figuring that yes while things would overheat, it wouldn’t drop below my purchase price (rent is insane, so I at least made money that way) – and it did drop, we had stuff going for 50-70K and it stayed there for a long time.
Thanks to a divorce, I had to sell, and luckily it was fairly amiably, as these things go, and I could afford the mortgage on my salary, but I sold the place the moment I could get close to breaking even with the equity put in (i.e., I sold it for less than I bought it for). I lost a bit on it, but I was free of the place and its memories.
I lived with friends for a bit, got remarried, and then bought as house prices were going up again – and doing a quick glance at Realtor.com (not reliable, but quick) it looks like prices are what they are at in ’03 again – 3ish years after the bust.
Jayackroyd
Two problems.
First, the total owed, with the added in past due amounts (with interest) may well be more than she paid for the property, especially if there is a refi in there.
Second, the county assessor probably doesn’t have the property on the rolls at its true market value. This is CA, where I have never worked on this stuff*, and where Prop 13 messes everything up. The property is nearly certain not to be overvalued, and may well be listed at much less than its market value.
That said, anyone considering HAMP should certainly walk away. It is clear that it will only cost them more money and delay their moving on with their lives.
(*Have worked on it in ME, NH, MA, PA, NY, OH, KS, NJ, HI and others I am not remembering.)
El Cid
I still have friends who are convinced by this whole nonsense about how your mortgage is basically a sacred bond based upon your word and you shouldn’t walk away or have it modified because ‘that’s wrong.’
burnspbesq
And yet …
Suppose this woman’s house were damaged or destroyed by some event that was covered up to full replacement cost by insurance, and the insurance company denied coverage because it was cheaper in the long run to litigate and settle for the value of the property rather than immediately pay the full amount of the claim. You’d be outraged.
Can’t have it both ways. You either believe in the theory of economic breach for all parties to all contracts, or you’re a hypocrite.
Linda Featheringill
The banks, mortgage companies, whatever holding the mortgage like to talk about how they are “generously trying to work out a deal with the homeowner.”
Bullshit. They slip stuff in here and stuff in there and they make sure they don’t lose anything and actually manage to make you further in debt, with payments that the homeowner probably can’t cover. They are very clever, compared to a simple homeowner. I guess that is why they pay lawyers, etc. to dream up this nonsense.
These institutions are looking out for themselves. When they talk about trying to “meet the homeowner part way” they are lying.
How do I know? Recently lost my home. In the courts now.
Bitter? Yes. Angry? Yes.
Off with their heads!!
[?and something about the horse they rode in on?]
Max Power
You’d think that the bank, facing a significant risk of foreclosure and loss, would be more open to reducing the principal. Are the banks still so weak that accounting for the real loss in collateral assets would finish them off?
zzyzx
Assuming she can afford the new payments and still likes the house, there’s a reason to not walk away. You have to live somewhere after all…
burnspbesq
@Jayackroyd:
Purchase-money mortgages on single-family residences are non-recourse by statute (Code of Civil Procedure section 580b, I think) in California. I haven’t looked at this stuff since law school, so I don’t know whether a refi loses the benefits of the statute.
zzyzx
@El Cid: modified yes, but there’s something to be said for not walking away from an agreement just because the on paper value of your house has (perhaps temporarily) decreased.
duck-billed placelot
@burnspbesq: You ever had a car accident, burns? Insurance doesn’t pay what you paid for the car when you bought it. It pays what it costs to fix it or, if you have super great insurance, replacement cost. Much like an aging vehicle, replacing lady’s house now would probably be quite a bit cheaper than her purchase price.
More importantly, economic breach is a non-sequitur. Her contract specifies very clearly what happens if she stops payment – the bank takes the property. She wouldn’t be breaching the contract.
roshan
You can guarantee that Burnsby will bring the stupid any which way possible.
duck-billed placelot
@zzyzx: You ever heard the one about spotting the sucker at the table?
Or, alternatively, what is the ‘something to be said’ for honoring usurious agreements between a regular person and a massive corporation complicit in both the building of the housing bubble and its complete destruction? (That’s a serious question; can you explain what you mean by that ‘something to be said’ bit?)
bjacques
Exactly. If I were in a similar situation and the bad mortgage were only an obstacle to future prosperity (a nice retirement, the kids’ college funds, etc.) instead of a catastrophe (ending up on the street), I’d be remiss in my fiduciary duties to my family if I didn’t walk away.
As mentioned above, all companies and even individuals such as Donald Trump, admired by some merely for being rich, have done this simply to improve the bottom line.
Yes, it’s dishonorable to welsh on a debt, but society dispensed with that kind of honor long ago, and all that’s left is moral blackmail of those who belatedly got wise to the above.
Moral blackmail isn’t a very good plan for financial recovery.
Frank
@duck-billed placelot:
Just wondering; if everyone who is under water walks away from their property, won’t that hurt the property values of everybody? In other words, anybody’s home which is not under water, would soon also be under water.
Wouldn’t this be a economic disaster at some point when literally everybody has an incentive to simply walk away from their property?
Keith G
@Max Power: Yeah. I wonder about that.
The bank holds a note for over $200,000 on a house valued at $70,000. If she walks, the bank might not even get the $70,000.
Why not renegotiate for a Solomon-esque $100,000 (+/-)?
Omnes Omnibus
@burnspbesq: Companies can, and often do, do that. I think the argument is that, since one of the parties to the contract (holder of the note) is treating the contract as a simply economic entity, the other party (debtor) would not be wrong in doing the same. It is hypocritical for the mortgage industry and various pundits to suggest that a home owner has some sacred obligation with respect to a home mortgage that does not exist with respect to any other contract.
homerhk
I would like more details other than simply saying she owes $270K on a house valued at $70K. How can she have almost 4 times as much debt as the propery is worth? Even if you assume a 100% mortgage, did house prices really fall to a quarter of what they originally were? maybe, but I don’t know.
Was there any re-financing/second mortgaging?
I’m all for helping people who simply can’t pay their mortgage because they’ve lost their jobs but she sounds like she can still “water and feed” the house – rather her complaint is that she won’t see any equity for 10-15 years.
If she can still afford the payments I really don’t have much sympathy for her walking away at all.
Barbara
Yes, indeed, when my car was “totalled” by my babysitter, it was still drivable and we really wanted to fix it, but my insurer refused because the salvage value was less than what it would cost to repair it. So we took the salvage value, plus another $500 or so and had someone repair it. This was six years ago and we are still driving it around, minus the airbag. I’m not sure what will happen if we “total” it again.
The letter of the contract is, if you stop payment, the bank gets the asset. In this case, the bank doesn’t really want it, but I don’t see why that should be the homeowner’s problem to worry about.
PaulW
And my parents kept insisting during the 90s that I needed to own a home instead of renting forever. Now I’m unemployed and coping with a condo that can’t be sold at value thanks to a depressed market in Florida. The good news are 1) I went with a fixed rate so the bank hasn’t bumped my monthly payments on me and 2) I put a huge down payment on the place so that the mortgage is actually lower than the current value of the condo: so if I had to undersell the condo I could still get something back (even if it’s $1,000 – $2,000). Still, I’m in a tight spot here… as our my parents, who can’t help with the mortgage payments anymore… at this point a Wal-Mart Greeter job is looking… terrible because it STILL won’t pay enough to cover all my damn bills! HEY CONGRESS! JOBS BILL! NOW!
Omnes Omnibus
@Keith G: Let a statistically significant number of people walk away, and it will start to happen. Right now, I think banks are not facing the losses because most people are staying.
danimal
The banking industry has done a great job in convincing everyone that they are reasonable and will accommodate people in a generous and equitable manner. Since they have been so flexible in working with people in underwater homes, it stands to reason that homeowners will continue to pay for their homes, even if it makes economic sense to walk away. Tit for tat.
Oh, wait….the banking industry opposed cramdown, has been reluctant to renegotiate terms and refuses to work with many homeowners until they foreclose… Uh oh.
PaulW
Hopefully it might wake up Congress and get them to FIX THE DAMN ECONOMY!
Xenos
@duck-billed placelot: CA is lien-theory, isn’t it? That means the failure to pay, failure to maintain, failure to insure is a breach, with foreclosure a remedy. Title theory does not have the same terminology, but this is way beyond technicalities at this point. It all amounts to the same thing – the bank does not get the right to claim the security until a condition of non-payment is met.
The news about MERS from McLaren is pretty interesting. Are they still writing MERS loans?
homerhk
@dbp and Barbara, the agreement will be that if the individual breaches the agreement by not paying, the bank can call the loan which is secured by the house. There is certainly a breach of the contract in that case and the remedy isn’t a simple exchange for the debt for the house but rather the remedy is the debt which is secured by the house. So in this example, if Ms Jones owes $270K on the house and walks away, that breach will entitl the bank to claim the entireamount of the outstanding loan, i.e. $270K from her. The agreement means that as a short circuit to suing her etc. they can just take back the house but if the house is really valued at only $70, the bank has the ability to sue Ms Jones for the remaining amount – and then once it gets a judgment debt can start repossessing various other personal assets, cars, furniture etc.
It is misleading to say that the only price of walking away is to lose a house that’s worth much much less.
duck-billed placelot
@Frank: I’m of the mind that our betters really screwed the pooch on TARP by not funneling the money through homeowners to the megacorporations. That would have, like, actually ameliorated the problem for middle-America, with the added benefit of not f-ing up everybody’s property values and the horrible spiral of awful that is our current economic situation.
As for where we’re at now? Part of me thinks that only massive default will make for any structural changes. If everybody who’s underwater threw up their hands and walked out, the banks might be forced to realize that it is also in their interests to not permanently bankrupt 2/5th of homeowners. Also it might be the only way that the government steps back in with something more helpful than the current plan.
Speaking of which, @ Linda – So sorry. Positive thoughts in your direction.
Barbara
Regarding the impact of mass walking away on the overall housing market — the first point is that the implosion is highly local in nature, as are real estate markets. There are parts of the country where almost none of this stuff happened at all. They will continue to be minimally affected. There may be some places that would be tipped in this direction by a significant increase in abandonment behavior, but in most cases this is happening in places like Merced, where a huge percentage of homes are affected and the impact on the entire market is already happening and there is just nothing to be done about it.
I just don’t see it as the duty of individual homeowners to court financial disaster and homelessness so that others can continue to reap gains from their real property investments. But then, I am someone who long ago decided that real estate “investment” is mostly an illusion — it’s a form of consumption, not an investment for most people. I lived through a downturn where I grew up — and where real estate is now basically worth no more thant it was 35 years ago, adjusted for inflation.
Punchy
IANAREA, but I think the fear is that once this precedent is set, everybody and their mistress is gunna demand this halving of their mortgage. And if they dont get it, maybe they’d sue for racial or sex or age discrimination, or whatever.
zzyzx
@duck-billed placelot: Yes I have heard that one and in the games I (infrequently) play, it’s crap… but that’s just because I play to have fun with friends, not get rich.
Same thing with my house. I bought it to give me a place to stay and so – in theory – at age 65 I would be able to live there for (effectively) free. I didn’t buy it to somehow become rich on a bubble. If you’re walking away because you lost your job and you can’t get your money back if you tried to sell, then I understand. However, if you can afford it, it’s morally questionable IMO to walk away from an agreement just because it looks bad for you in the moment. It’s just another side of the short term maximize all profits mentality that is destroying our economy.
Barbara
homerhk, it depends on what state you live in. In California, as someone said above, the debt is nonrecourse and the asset is what the mortgagee gets. In other states, the homeowner would be better of going through bankruptcy in order to get the debt discharged. I don’t think homeowners are courting your sympathy.
burnspbesq
@duck-billed placelot:
Wow, you’re really an idiot. The contract specifies the remedies the lender has in the event of a breach. She is legally obligated to make the payments.
duck-billed placelot
@Xenos:
@ homerhk:
Hmm. Haven’t owned in CA (and haven’t lived there in years), but IIRC it’s a huge pain in the ass for the lender to try to recover over&above the property, enough that in practice it’s almost never done. Not true in all states, I know. And there might be some tricky business with re-fis, which is dirty pool anyway.
Upshot, to me, is that people try to categorize ‘walking away’ from a mortgage as this horrible evil crime akin to stealing the off-brand cheerios from an orphan’s bowl, but it just ain’t. Mortgage holders are people with families; corporations, Citizens U notwithstanding, are not people. Oh, and they get massive influxes of cash from the feds. Also, too, see commercial real estate and the lack of hand-wringing over ethical breaches.
burnspbesq
@roshan:
Straight to ad hominem without even attempting to respond to the substance of my comment. Is that all you got?
henry
It appears that “cramdown” is not what I thought it would be. I thought it would reduce it to something near market value. The advantage of a low cramdown to the surrounding community (us) is that “market value” of 70K assumes a home sold in move-in conditions, not abandoned condition. Forclosure means the bank sees something closer to 50K after a year or more of lost payments, realtor fees and a sale in “fixer-upper” condition. Our property values do not recover as long as forclosures are being fed into the system.
Tone In DC
@Linda Featheringill:
Amen to that.
I used to think that sharks and big cats were the nastiest predators. The banks make these animals look positively tame.
WereBear
My mother, over retirement age, (we aren’t allowed to say how much) walked away from her Florida house.
She was working at WalMart, but since WalMart doesn’t do full time and won’t tell her what minimal hours she would be working, she couldn’t get another part time job. (She worked for 2 decades in Real Estate, but that’s toes up.) She came up with childcare at home, shared with my SIL, but it wasn’t enough to keep the mortgage and utility bills paid.
The house’s value just kept dropping like a rock, and the utility bills kept going up. If she got hit with something big breaking, like a roof or the AC, it would be over anyway.
So my brother moved her into a retirement apartment that let her keep her little dog, and there she is. A lifetime of working; savings & investments crashed, her real estate investments crashed, and she can’t afford a crappy house.
She never voted Republican in her life.
Xenos
@duck-billed placelot: I agree with you as to the larger point. It is ridiculous to have a financial contract where one side is held to moral reprehension for failing to perform while the other is held to no moral standard at all. Indeed, the bank is a creature of the government, through the consent of the governed, and so if anything the bank should be held to a higher standard than any consumer should be.
duck-billed placelot
@zzyzx: You pick the right kind of games.
I understand what you’re saying about short-sighted, profit maximization, etc, etc. And personally, I would probably have a tough time doing it if I could still afford the payments. But, and here’s where it gets interesting, isn’t that kind of … dumb of both of us? Banks, telecoms, pretty much any major corporate conglomerate you can think of have long been open about their complete lack of interest in any sort of moral/social contract. Overdraft charges in which the banks take out the largest amount first, regardless of time order of charges, so they can hit an account with six or seven overdraft fees instead of one. Creeping ATM rates. Charges for checking accounts under a certain limit.
Feeling morally obligated to organizations like that seems like a form of Stockholm Syndrome, doesn’t it?
Robert Arctor
Why is the woman in the story struggling to afford her home? This question isn’t answered but is important. It’s one thing if an unexpected/uncontrollable event is in play here (job loss, medical condition, etc.), but if this person is where they are because of their own poor financial decisions, then that’s an entirely different animal.
John S.
Here in Florida, this would be common and there’s nothing nefarious about it.
Once you claim your homestead exemption on your house here, your property value gets locked in and can only rise at a MAXIMUM of 3% per year on assessed value. So the assessed value will never be fair market value – ever.
This year, my property was assessed at $40k. Should I freak out and walk away from my home? No. My house would NEVER sell for that little – even in this market – and the only reason my assessment was so low was because there haven’t been any sales for 3 years here, so they linked my neighborhood to a “similar” neighborhood for valuation.
The only problem with that is the linked property is a 2/2 condo that sold for $50k (as a foreclosure) whereas I have a 3/2 villa which even on a bad day would be worth twice as much. They aren’t even remotely comparable properties, and a filed a petition to have my place revalued. Sure, it will raise my taxes, but my tax bill is 1/3 of what was last year ($1500 vs. $500) so I don’t really mind paying my fair share.
There is always more than meets the eye when it comes to comparing market value to assessed value.
duck-billed placelot
@burnspbesq: Ok, ok, now that Xenox, et al, have (much more coherently and reasonably) schooled me about the legal terms of the situation, what do you have to say to the substance of my (and others’) comments? Your insurance analogy didn’t hold up very long.
Jayackroyd
@burnspbesq:
My point was simpler. The “$227,000 she owes for her home” may be more than the purchase price, or even the valuation used for her last refi if the refi was recent, and the accumulated past due amounts are large.
She coulda paid 150, refied to 200, missed payments, and then HAMPed, ending up with a total obligation of 227 from penalties and interest, which overstates the market value of the house at any time in the process. If the 70K the assessor is carrying it at also understates it (which I strongly suspect), the decline in value is not nearly so dramatic.
John S.
@WereBear
My mom is pretty much in the same boat (even down to the particulars). Except that she was foreclosed on in a house that had $150k of equity because she couldn’t keep up with her ARM. She couldn’t qualify to withdraw the equity in any way, and so the bank went for the kill. They lied to her about the date of the auction (saying it was postponed) and then sent her a letter informing her after the fact that the auction was held as planned after all, and another bank purchased the home for $100.
The banks should have been allowed to fail. For them to turn around and fuck over the same people who bailed them out in the first place is absolutely criminal.
zzyzx
@duck-billed placelot: the flip of that is what moral power would we have to try to stop others if we play the same game ourselves? I’m not naive enough to believe that everything would just be perfect if we were just nice to each other, but at the same time, I refuse to go down the path of behaving in ways that I hate in others.
Larkspur
I doubt that this would make a difference in Ms. Jones’s case, not with that huge $227K v. $70K gap, but in general, we are really going to have to start looking at shared living space. I think that happened more in the olden days, whether by extended families living together, or in rooming house environments, before everything got golden in the 1950s.
I live alone in a small, shabby apartment. I’ve been living there for quite a while, so while neighboring apartments have turned over – and in the process, gotten much needed upgrades – mine is still pretty old-style. But the big plus: although the rent has gone up nearly every year, it’s still slightly below market rate, and the location is excellent.
When I first signed the lease a million years ago, I thought: “Ooh! A two-bedroom apartment! Yeah, everything is very small, one tiny bathroom, no dining room, but if times get hard, I could always get a roommate!”
To which I say (to my ancient self), who the hell are you kidding? I’m too old for this. I’ve expanded to fill the space, I don’t want to share a tiny bathroom, two people cannot cook in that tiny kitchen, and what if I rent to an axe-murderer?
But I’ve looked at studio apartments in the area, and the rent is not that much lower. And this is home. So even we low-stakes people feel like we have something to lose, and we really don’t want to lose it. But if I really really have to…. I’ve been clearing out stuff I don’t need, so the second
cubbyholebedroom could be ready. Ugh.PeakVT
@zzyzx: It’s just another side of the short term maximize all profits mentality that is destroying our economy.
A return to ethical business practices (if they ever existed) isn’t going to be brought about by individuals taking unnecessary punishment. If it happens, it will have to be forced on companies by the state. In the mean time, there is no good reason for individuals to remain in a financially damaging contract if they have the ability to cancel it.
Xenos
@duck-billed placelot: The insurance analogy is irrelevant because there are too many facts missing. If the insurance only covers the replacement cost, the bank is the one that will be out the money… unless the state allows them to sue the homeowner for the difference. Good luck recovering in state court, guys. If the bank did not make sure it was the payee on the fire insurance then they really screwed – this is, at least, not business as usual we are talking about here.
Now if there is no bank involved, and the insurance company pays replacement value, Ms. Victim can go out and buy another house as good as the old one, can’t she?
duck-billed placelot
@Robert Arctor: C’mon now, she was just being a good American and stimulating the local, unregulated free-market economy of blow and processed cheese-food snacks and super expensive rugs! OH WAIT that was one of the companies we ended up bailing out.
Bill H
@duck-billed placelot:
The contract is that the bank lends the money and that she repays it on certain terms. The “taking” of the house is spelled out in the contract as the consequence of breach on her part by not paying.
So without expressing any opinion as to the right or wrong of doing so, yes, she is breaching the contract.
WereBear
@John S.: Man, that totally sucks. I’m so sorry.
Now, was there something being discussed about homeowners having a moral obligation? To whom?
Anon
I think there is a misunderstanding in this thread about cram-down. As the term is used now, it refers to provisions in the Bankruptcy Code that allow you to set the new principal of the secured loan equal to the value of the collateral – if you could show the house is worth 70k in this example, you’d have a loan for 70k set at an interest rate of about prime plus one to three percent. The remaining debt would be unsecured, and would typically receive some pennies on the dollar before being discharged. The problem is while you can currently cram down loans on cars and investment property, you cannot cram down a loan on a principal residence.
I thought that the proposed bankruptcy legislation would have allowed this, but maybe there was a draft that had some other formula based on ability to pay.
I am practicing bankruptcy attorney in Oregon, do almost exclusively debtors work, and i know we were all sorely disappointed when the legislation failed.
duck-billed placelot
@Xenos: Well, my take on burns’s insurance analogy was more that the company would NOT in fact cover your everything – that the major corporations will do whatever they can to give you the least they can. As Barbara mentioned, often you don’t get replacement or repair cost for a car. (Never having lost a house to disaster, I don’t know as much about getting enough money to cover from insurance – although I think a whole lot of people in New Orleans didn’t get what they paid for.)
I guess my point (look, I found it!) is that contracts between a private citizen and a massive corporation are not contracts between equal actors. The big co’s know how to work the law and often get to help write the very laws that are meant to keep private citizens protected. So burns claiming that insurance slow-walking or going to court would be something we would decry, as if it doesn’t happen all the friggin’ time, is twisting the issue. It should be less ‘one-sided moral panic over contracts between unequal parties’ and more ‘why is it the little guy is so consistently squeezed?’
Omnes Omnibus
@Bill H: As people have noted above, businesses make business decisions about contracts all the time. If it makes business sense to breach the contract and pay damages, they do it. Business sense should include things like damage to reputation and effect on business relationships as well as the simple cost of the individual transaction. I do not see why an individual should not be able to make the same kinds of calculations regarding his/her economic interests.
Left Coast Tom
@dmsilev:
Google turned up a USA Today article from Feb. 2010 that says Merced County’s median price dropped from $337K to 94K. So, a third of peak values would be doing pretty good there.
I knew they dropped somewhat more (proportionately) than the Bay Area, but I didn’t realize it was that bad.
http://tinyurl.com/yhessyc
duck-billed placelot
@zzyzx: I think PeakVT has it right about societal change. But also, I think we’re looking at this issue a little differently because -and this is crucial for everything I’ve said in this thread – I don’t think major corporations are people. “Do unto others” is a great credo, but corporations aren’t people. It’s like demanding I be nice to a lamp. A radioactive lamp that would eat me without a thought.
Ok, corporations are made of people, etc, etc, but when the top people of those corporations get $185 million dollar golden parachutes….
NOTE: This absolutely does not apply to small companies. I totally agree you should pay your Mom & Pop stores.
El Cid
@zzyzx:
The point I was trying to make was that some people I knew did not see walking away from a mortgage as a financial decision — short or long term — but as a moral decision, willing to screw themselves over in order to honor their commitment to the lender.
I am on the side of people carefully evaluating their best options, rather than committing to banks who don’t give the slightest shit about them.
Scott de B.
In many jurisdictions, that’s illegal.
zzyzx
El Cid: I’m one of them. I made a deal. There are situations where I’d break it, but they’d have to be pretty huge for me to not hold up my end…
Stefan
Wow, you’re really an idiot. The contract specifies the remedies the lender has in the event of a breach. She is legally obligated to make the payments.
You don’t understand what the phrase “legally obligated” means, do you?
El Cid
@zzyzx: Of course. I would never walk away from a mortgage lightly.
But then I decided that the market wasn’t good for buying a home and that we were in over-inflated housing prices (without an economist, just thinking all these homes looked ridiculously overvalued) so I rented.
zzyzx
I also got VERY lucky with my mortgage, buying right before the bubble. I wouldn’t have purchased a bubble’d house.
duck-billed placelot
@zzyzx: Aren’t lot of people are in pretty huge situations these days? And while it’s totally admirable that you want to honor your agreements, it just doesn’t seem bad to me if people choose to turn over a physical structure to a major corporation if they think it will improve their/their children’s futures. Even if the improvement is because they were greedy or short-sighted (or just hoping for permanent housing price inflation) when they took out the loan in the first place.
Citizen Alan
My understanding was that “cramdown” as opposed to loan modification is a proposed option that a bankruptcy judge can impose on a creditor in Chapter 13 cases. Presently, you can cramdown any secured loan except a mortgage (or a vehicle purchased within 910 days of filing) to the actual value of the collateral plus a fixed interest rate, with the balance owed converting to an unsecured debt which will typically be wiped out completely or else paid back at pennies on the dollar. This makes sense because if the bank repossesses secured collateral and sells it for less than the loan is worth, the balance owed is an unsecured debt. Extending cramdown to mortgages would just allow this same procedure to apply to mortgages in Chapter 13.
Personally, I think cramdown should be applied to mortgages because the whole point of a mortgage loan is that the bank has loaned money and gains a right to collateral which is theoretically worth the amount of the loan or more. As far as I’m concerned, if a bank counts a secured mortgage for a $300,000 house as an asset on its books when it knows that said house is only worth $70,000, then the bank is committing fraud on its investors. Multiply that $300,000 times thousands of underwater homes, and you have fraud on a massive scale. Personally, I think every bank ought to be required to reassess the value of all the homes upon which each bank holds the mortgage every three years and note the true value of its secured collateral on its accounting sheets, but I suspect most bankers would pee in their pants if I suggested that too loudly.
duck-billed placelot
Oh! Oh! Is there a conflicting moral imperative for people with children? Is it more moral to honor your business agreements than to secure your child’s future?
Bah. I hate thinking of new topic angles when the thread is almost done.
Barbara
I don’t think most people are going to walk away if they can comfortably afford the mortgage — they have to live somewhere, the hit to the credit rating is expensive, and so on. But you have to think very carefully about what you are required to forego when you make that monthly payment: a nicer car versus sending your kids to college? In addition, you have to look long-term: if you are 55 and your income is going to be declining, can you afford to keep up these payments for a long enough time necessary to dig yourself out — and if you can’t, you must realize that by avoiding the reckoning now, the reckoning later will be that much worse, because you will have even less money, money that you might have saved by not making such high payments.
There is built into nearly every commercial contract the concept of fundamental changes in market conditions or legal requirements, such that the contract may no longer be advantageous to one or the other of the parties. I understand that a mortgage agreement might not explicitly contain those specific terms, but it’s important to remember commerce depends much more on notions of mutual economic advantage than moral commitment. When a deal becomes vastly burdensome it isn’t only the parties that are disadvantaged, but en masse, the economy as a whole, when so much money is so inappropriately allocated (i.e., spending so much more for an asset than it is worth).
hilzoy
I am not a bankruptcy lawyer, or for that matter any kind of lawyer, but back when I researched this for ObWi, my understanding was: under cramdown, the (first) mortgage can be written down to market value, but not below, and only if the homeowner has a good chance of being able to pay at that level. So if (big if) the 227k is a first mortgage, and 70k is the home’s present value (I think this is not tax assessments but comps etc.), then, yes, it could be written down that much.
The question “why wouldn’t the banks jump at that deal?” puzzled me too, back in the day. A couple of answers: first, if the mortgage has been securitized, it’s quite difficult to locate “the people who own it”. (One big advantage of cramdown: it’s one of the few instruments capable of cutting through the tangled web of ownership under securitization.) Second (probably more importantly): if loans start getting written down to their true value, then banks (or whoever owns this stuff) can use this as a data point to assess the real value of some of their other loans. For a bank interested in full and honest valuation of its various mortgages, this would be excellent news. For a bank interested in looking more financially healthy than it actually is by disguising the magnitude of its losses, not so much.
D-Chance.
Jones now owes $227,000 for her home, which Merced County’s assessor says is worth about $70,000. She wonders why she shouldn’t just default and move on.
TwoThree reasons:a) It’s your HOME, not an investment. You WERE planning on living there for the next 20-30 years and raising a family there? If not, you had no business buying it. The house still stands; it still serves the same purpose of providing shelter and a sense of permanence whether it is assessed at $70k or $227k or $1 million or $1. You LIVE there, you eat there, you sleep there, you have a husband and kids who also depend on that shelter and “home” life.
b) I’m assuming that, if the home had been assessed at $700k instead of $70k, you’d be more than happy to share your gains? Or is it “my gains, MINE; my losses, (Y)OURS!”
c) A man’s word, especially written, used to be his most indelible badge of honor, or lack thereof. Of course, honor means little to the Average American today…
Martin
She should walk away. The bank would have walked away from her for much less.
One of the things that kills the middle class is that citizens are expected to act morally, but corporations cannot. Their sole responsibility is to their shareholders, and if fucking you over is necessary to meet that responsibility, then they will fuck you over and not look back.
If consumers making maximum use of bankruptcy and other laws is an undesirable state of affairs for our country, perhaps we need to change the nature and relationship of corporations.
Martin
@D-Chance.: And what honor do corporations bring? I agree with you that in the interaction between people morals should count, but it needs to be a reciprocal relationship, and so long as corporations don’t play to our ground rules, I don’t see why we shouldn’t play to theirs instead.
Take them for their last penny. They’re happy to do it to you.
El Cid
@D-Chance.: Sure, okay. But people can raise families just fine and happily in rental properties. Many of, and I think I recently read that most, Europeans in cities rent than own, and their families seem to be pretty well adjusted and sheltered from the weather.
For point (b), yeah, I agree: the consumer should advantage themselves when possible over the bank, because the bank certainly will at any possibility to do the reverse.
And (c), that’s fine, but I don’t think that any extreme circumstances many people use this judgment, just like your employer who promised to employ you for life suddenly can’t afford to do so, and so you’re gone.
It’s a very, very serious decision, and for the first reason as well as perhaps bad economic logic, I wouldn’t personally recommend in any particular case to do so.
Corner Stone
@D-Chance.: WTF nonsense are you babbling about?
burnspbesq
@duck-billed placelot:
It only “doesn’t hold up” because you unilaterally chose to ignore the assumptions built into the hypothetical and go off on a bizarre tangent. The larger point stands. You’re either accept the theory of economic breach for all parties to all contracts, or you’re a hypocrite. Which is it?
Intellectually dishonest is no way to go through life. You should do something about that.
burnspbesq
@Stefan:
If you want to see the one who doesn’t get it, find a mirror.
John S.
@WereBear:
Moral obligation is for the little people. Especially when the NYT revealed that jumbo mortgages on mansions are defaulting at double the rate as average mortgages.
The wealthy seem to have no problem walking away from a bad investment without any qualms.
Corner Stone
@John S.:
And that’s all it is to rational people. Anyone who has been displaced knows the fact that they can make a “home” wherever they choose, or are forced to.
My house was near destroyed by Hurricane Ike. I lived somewhere else for 4 months while my investment was being made whole. If I had needed to take a check and move on it would have been stressful to accommodate new commutes and new specifics but I would’ve made it happen.
Anyone who thinks this is about honor is lost in the Old West.
Stefan
c) A man’s word, especially written, used to be his most indelible badge of honor, or lack thereof. Of course, honor means little to the Average American today…
Look, this is nonsense. If it’s “written” into a contract then honor is not at stake — it’s a business arrangement. You want to do the deal on honor? Fine, then let’s me and the bank do the deal on a handshake-only basis and they can give me the money for the mortgage based on my word alone. But the bank doesn’t want do it on a handshake basis — they want a contractual arrangement, spelled out in black and white, with explicit collateral and remedies for default.
El Cid
@John S.: It seems to be the case that for the rich it’s okay to see everything as ‘simply business’ but for the poor and middle class it’s strict lessons in morality.
Always has been. Back in the days of company shops mill hells when bosses could do anything in the name of ‘business’ and were seen as strengthening America but any worker organizing was immoral, evil, destroying our way of life.
Brachiator
@burnspbesq:
You got it exactly right. But a number of homeowners, especially in California, Arizona and Florida, were encouraged to refinance their homes and use the money for vacations, bills, other investments which since have gone sour. Then, when times get hard and a foreclosure hits, they now find that they have recourse debt and cancellation of debt income.
On the other hand, in states other than California where homeowners walk away from their homes, we taxpayers can end up absorbing part of the debt.
When the bank writes off the debt, the difference between the original loan balance outstanding and the reduced fair market value of the house becomes potential cancellation of debt income. In the old days, taxpayers had to include this in their income since they got the benefit of the money when they originally bought the home.
But the federal Mortgage Relief Act lets homeowners exclude the cancellation of debt income.
And by the way, because some lenders are still playing it loosey goosey, there are some people who are purchasing a new home even while preparing to walk away from the old one.
And, of course, professional are jumping in to buy flipped homes, which may influence people’s decisions to walk away from their homes.
Stefan
b) I’m assuming that, if the home had been assessed at $700k instead of $70k, you’d be more than happy to share your gains? Or is it “my gains, MINE; my losses, (Y)OURS!”
Um, that’s how business works. You try to maximize your gains and minimize your losses. That’s certainly what the banks do, so why shouldn’t the counterparty homeowner treat the bank the same way as the bank treats him?
Corner Stone
@Stefan: Banks also take advantage of their large pools of money to invest in insurance. As we’ve seen recently.
It’s cost prohibitive for an individual to enter into that kind of countermeasure.
And really, why would you?
bjacques
@77 El Cid:
At least until the 1990s, home ownership in continental Europe was uncommon. Starting salaries for young adults, even professionals, have been low compared to those in US or the UK, making buying even a “starter” home (usually a flat) unlikely. Historically, a person or family rented places in more or less fashionable areas as their fortunes dictated. If they bought anything, it was a house in the country–a dacha–or else they maintained the place their ancestors bought some time before.
I suspect, but can’t prove, that ownership took a stepwise jump as the EU knitted more closely together, globalization liberalized the housing market somewhat, and the 1990s flood of expats and the conversion to the Euro allowed local landlords to jack up rents to the point that buying a house seemed more attractive.
What little experience I have is strictly from being an expat in Amsterdam for the last 12 years. In addition to the above, banks relaxed their lending requirements a little. The mortgaged amount had to be related to the foreclosure value, which was 90% when I first got a mortgage and 75% on the eve of my rolling it over this Thursday (10 yrs @ 6.9% –> 10 yrs @ 5%; yay!). The home mortgage bubble hit here as elsewhere, and a few banks slurped up the high fructose corn syrup of CDOs, or their merger partners did. And the normally sober Dutch also got in on the investment property boom, a little.
The Dutch housing market is actually a bit warped. A huge chunk of housing stock is reserved for subsidized housing, which most locals sign up for as soon as they hit 18. It can take decades to get a flat somewhere nice. Over time, though, governments have loosened the requirements for social housing, and the semi-private housing corporations have gone completely private and been allowed to shift social housing units away from the fashionable inner city.
By the way, because of the aforementioned housing shortage, Amsterdam and probably other cities are now going after people who bought second places as pied-a-terres. They may be forced to rent the second place out, and if it’s small or amenity-poor enough to qualify as social housing, rent it out at social rates (currently, max is €548). If that doesn’t make the mortgage, then tough.
But the bubble implosion was not as severe as in the UK or the US. It ruined a lot of people here, but it didn’t ruin the economy (als elsewhere, you can thank bank jiggery-pokery for that). As far as I know, it was never possible to borrow against home equity; it’s considered fictitious until a mortgage is either paid or rolled over. Credit card penetration isn’t very high here, probably a holdover from Calvinist aversion to debt. German consumers are similarly conservative with their money.
And speaking of Calvinist horror of debt, the infamous Tulipmania of 1637 wasn’t really a financial disaster for the country–it was more like the collapse of the 1980s art market bubble. Its infamy came from the folly of a small circle of tulip aficionados speculating like idiots and then (shock horrors) welshing on their commitments when things went sour.
Keith G
@Corner Stone: I don’t think he fuckin knows.
Anniecat45
Can someone help me out here? I’m a lifelong renter (with rent control, thank God!); I resisted all the editorializing from relatives about how it was the best thing to do, so I never bought property and never wanted to.
So I am assuming that people who walk away from a mortgage have to find somewhere else to live, and pay for that somehow. And that is not cheap. I live in San Francisco, and in most of the Bay Area a new tenant must pay first and last month’s rent and a cleaning/security deposit. Also landlords ask for your employment status, and they call your employer to verify. Which makes it expensive to rent somewhere new, even if the monthly rent is less than your mortgage. If someone’s planning to walk away from a mortgage and move in with friends or relatives, that is probably a temporary fix; would walking away affect their ability to rent or buy a new place later on?
I am NOT arguing about the morality, or lack thereof, in walking away, just the practical aspects; it does not seem like the pure math of the mortgage payment includes all the costs involved.
Joey Maloney
@mclaren: Good article. I heard about this some time ago, I think in the NYT, there was an article about a judge in Brooklyn who was dismissing just about every foreclosure case that came before him because of MERS.
Barbara
Anniecat45, yes, people who are delinquent on a mortgage can find it difficult to rent. Landlords conduct credit checks too. The best case scenario for someone who is planning to walk away is to line up rental housing and then walk away. There are also people who just stop paying mortgage and wait for lenders to foreclose, which can take months if not years, because of the backlog. In that time frame, the hope is that they have saved enough money to cushion the blow. It’s really an astonishing, nothing like it within living memory kind of situation out there in a lot of places.
Stefan
c) A man’s word, especially written, used to be his most indelible badge of honor, or lack thereof. Of course, honor means little to the Average American today…
I suspect that if I asked the bank for a mortgage loan and, when presented with the contract, said “I don’t need to sign a contract, you have my word of honor that I’ll repay”, that the bank would say that’s lovely, but we don’t want your word, we want you to sign the damn contract.
If your honor isn’t good enough to get the loan then the bank can’t very well turn around and appeal to your sense of honor when it wants that loan to be repaid.
Ruckus
@Stefan:
If your honor isn’t good enough to get the loan then the bank can’t very well turn around and appeal to your sense of honor when it wants that loan to be repaid.
Sure it can. Didn’t you read the morals and honors clause in the Bill of Rights? I think it’s #2A and has ten sub sections. It was originally handed down on stone tablets to some guy with a talent for the timing of low tides. I don’t think it’s was widely distributed at the original bill signing due to the lack of ease of copying in it’s native form, so only people who practice the state religion are properly informed. Or something.
Anniecat45
@Barbara:
Thank you!
henry
You want to know why “Cramdown” didn’t get considered? Because Democratic leaders are tone deaf to the marketing of an idea. Idea was a home saving adjustment to real value. So what catchy word / slogan did they pick? A word similar to the way Republicans make things sound repulsive. You know, “Democrats are trying to ram this down our throats.” The one they use because subliminally it sounds like a forced oral sex act. And because the Republican politicians are men targeting their predominantly male voters, it means a gay sex act.
Bill H
@Omnes Omnibus:
mparker
They call it a “strategic default” when a corporation walks away. They can have billions on hand. But when they default on multiple properties as JP Morgan recently did in San Francisco, Honor is never mentioned.
drahcir61
Mortgage Electronic Registration Services (MERS) is the chink in the armor the big banks did not see. It is the place where all of the players came together to do business. It is the crucible in which the entire mortgage scandal brewed.
Who is MERS?
What do they do?
The banks, in their infinite pursuit of fractions of pennies of profit, changed the way they looked at the mortgage market from a large aggregation of individual homes to a cash flow pipeline. When you make this change, you realize you can slice and dice the cash flow pipeline into products and create ready markets for those products.
No one knows who owns a given barrel of oil in a pipeline. The oil companies pay to put their products into the pipeline and their customers pay to pull products out of the pipeline, but while it is in the pipeline, no one owns any single given barrel of oil. It just sort of … is. This is what happened when mortgages were securitized using the MERS system. No one owns your mortgage.
The banks pooled groups of mortgages into Structured Investment Vehicles (SIV’s) and cut the cash flow from those mortgages into tranches selling those tranches to qualified investors such as Mutual Funds, Pension Funds, Offshore Banks, Sovereign Wealth Funds and wealthy individuals. Each owned a “piece” of the SIV’s cash flow but not the underlying assets.
In order to facilitate the hoped for rapid changes in ownership, the banks had to streamline (circumvent) the well established registry of court house real property records. To do this, the former C.E.O.’s of Fannie Mae, Freddie Mac, Indy Mac, Countrywide, Stewart Title Insurance and the American Land Title Association created MERS Corp in the mid 1990’s.
MERS is a straw man who stands in place for an unknowable person from an investment trust in the title records at county courthouses all across the country. This closed the loop establishing the pipeline and enabled the ready market in securitized debt obligations. But in the process, by using MERS as a stand in at the courthouse, the banks separated the debt from the deed leaving an unenforceable piece of paper and because ownership is obliterated, a very muddied title.
Everything was fine until money from the mortgages stopped flowing. That was when disaster struck. Cash flow in the pipeline diminished because of the high rate of foreclosures and the banks who created this mess started looking for places to hang losses. Eventually, they turned to the taxpayer to unwind these complicated schemes of insurance payments, risk swaps and other forms of gambling with the bank bailouts of 2008 & 2009.
During all of this, a small group of informed homeowners took advantage of the structure of the pipeline to defend foreclosure on a group of houses in Ohio. The homeowners challenged the standing of Deutches Bank to foreclose on anything. They demanded the foreclosing party prove they had perfected interest in the title. Deutches Bank couldn’t, and the foreclosure stopped. This became known as the “Produce the Note” foreclosure defense.
What does this mean to those who are delinquent or are being foreclosed upon by groups including MERS?
It means there is a way to fight back. The only person who can foreclose on a mortgage is the person who holds the deed and the debt. Since the mortgage has been separated from the deed and the ownership has been obliterated, who can stand in front of the court and foreclose? The answer, ultimately, is no one and indeed, this strategy is being used all across the country to stop the foreclosure process dead in its track.
What does this mean to those who have been foreclosed upon by groups which includes MERS?
It means they can go back to the courts and demand the foreclosure be rescinded and ownership of the property returned. This will undo and threaten to undo all foreclosure sales that have taken place in the last three years.
If the bank or MERS files foreclosure and you DO NOT contest, then they win & they will take your house. If you don’t show up at the courthouse & DEMAND to see the note, then they take your house. The only way to stop this madness is to challenge every foreclosure … make them “produce the note” to a judge.
And lastly, local counties & city governments are struggling financially & are being forced to either cut services, layoff employees, or raise taxes. There are many reasons for the revenue shortfall but here’s one you don’t here very often.
By handling “assignments” of mortgages electronically, MERS never pays the county fee or tax. Multiply that lost fee times the hundreds of thousands of homes with new assignments each year and that’s a lot of lost revenue for every city & county in this country.
So before anyone preaches to you about personal responsibility & owning up to your obligations, tell them about MERS & the mortgage industry … & how they avoid paying local fees & taxes which contribute to revenue shortfalls & ultimately layoffs & higher local taxes.