New penalty for homeowners who walk away

jkom51July 1, 2010

Sorry - thought I posted this FYI previously but apparently did not:

New penalty for homeowners who walk away

Losing your home to foreclosure is one thing. But walking away just because it's financially convenient could hurt down the road.

MSN Money, June 24, 2010

With millions of Americans owing more on their mortgages than their houses are worth, many are opting for a "strategic default" -- allowing a house to go back to the bank, even though the borrower may be capable of making the payments.

In some states, those who choose a strategic default face lawsuits from lenders anxious to collect what they're owed. Now, the quasi-governmental agency Fannie Mae has announced it's upping the stakes by barring those who walk away from getting an FHA-insured loan for seven years.

"Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting," said Terence Edwards, executive vice president for credit portfolio management at Fannie Mae.

Fannie Mae also said that in states where such lawsuits are allowed, it plans to join lenders in suing borrowers who default. That won't apply to all borrowers -- just those who, in the company's opinion, are able to pay their mortgage but aren't willing. The company said homeowners who make a good-faith effort to repay their loan or have extenuating circumstances won't be affected.

The other big mortgage guarantor, Freddie Mac, already requires a five-year wait for those who strategically default. In the latest quarter, Fannie Mae and Freddie Mac insured about 96% of all mortgages issued, but insure only about half of all mortgage debt currently outstanding in the U.S.

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Honestly I don't think that's such a big deterrence for people who walk. They'll rent for 7 years.
Now if they really started to SUCCESSFULLY sue large enough amounts of people that word of mouth etc. started to get around it might make people rethink, but that won't happen fast enough, hell its already water under the bridge for many.

    Bookmark   July 1, 2010 at 8:54PM
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Those who make an agreement and then default voluntarily should not ever again be able to get a mortgage.

    Bookmark   July 2, 2010 at 8:11AM
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I know three classmates of my daughters who have done this. In most cases, bought another home and walked away from the first (this was a few years ago). Hopefully, it is not so easy to do now. It sickens me.

    Bookmark   July 2, 2010 at 11:53AM
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There is another side to this. The lenders (who are in a much better position to understand the mortgage contracts) also signed the contract. It was the lenders (including Fannie Mae and Freddie Mac) who reduced the standards for obtaining a mortgage. This reduction of standards caused more people to obtain mortgages than should have been allowed. These additional people brought more demand to the market. This demand artificially drove the price of Real Estate up. Now the lenders got burned.

I believe this mess is a joint responsibility but much more of the blame belongs with the lenders.

(I don't even own a house but that's how I see it. I'm just frustrated that it is Tax Payers who are really bailing everyone out.)

    Bookmark   July 7, 2010 at 3:50AM
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Chrisdoc Wrote:
"It was the lenders (including Fannie Mae and Freddie Mac) who reduced the standards for obtaining a mortgage. This reduction of standards caused more people to obtain mortgages than should have been allowed."

Chrisdoc, the new rules are speaking of the people that were given loans that can STILL make payments. The borrowers were qualified financially when they applied, just as they were when they walked away. They just did not qualify morally. Therefore your point is moot.

    Bookmark   July 7, 2010 at 7:05AM
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The entire mortgage/real estate industry participated in a shell game of inflated/fraudulent appraisals and high risk lending which drove real estate prices artificially through the roof, leaving taxpayers and many homeowners holding the bag.

Some of those same homeowners have elected to dump the rotten mess right back in the lap of the lenders. Too bad they can't also dump it back onto the REAs, appraisers, mortgage brokers, and investment banks that profited at the expense of buyers and taxpayers.

Chrisdoc's point is hardly moot. It is right on.

    Bookmark   July 7, 2010 at 8:22AM
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"I believe this mess is a joint responsibility but much more of the blame belongs with the lenders. ":

And the Congress-critters who pushed them to service markets that did not or could not pay.

The government has been leaning on Fannie and Freddie for years to push up home ownership rates.

Even the bank regulators got into the game by threatening to audit banks who did not make enough loans to the 'right' people (bad credit, no credit, unstable income, etc.).

They used some of the same tools that have been used for years by good credit risks (interest only, 'no doc' loans, etc.) to purchase more than they could even hope to actually afford.

The 'Alt-A' market took off to the profit of the loan originators, leaving Fannie, Freddie, and the bond holders to pick up the pieces.

Country Wide made a fortune, and shoved huge amounts of high risk loans onto the GSEs.

Now we are all paying for this though the GSEs.

    Bookmark   July 7, 2010 at 9:19AM
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IMO, these people have learned from Wall Street, as they too walked away from their TRILLIONS in debt. Their outrageous leveraging decimated the economy...yet THEY were bailed out by the taxpayers...courtesy of the same politicians who won't extend unemployment benefits.
The finance community is now rolling merrily along, laughing all the way to the proverbial bank, and planning on hiring.

That being the case, is there any wonder that so many home buyers have just said "screw it"?

Here is a recent, very on point NYT article. Interestingly enough, when the rich walk away...or a corporation walks away, it is considered an "investment strategy" in terms of cutting losses.

When the average person does the same, they are considered to be greedy deadbeats, who bit off more than they can chew, and are getting what they deserve.

We live in a society that penalizes anyone who has a moral compass, and rewards those who have destroyed our economic viability simply to feed their own unbridled greed.

Gives a whole new meaning to "double standard" and reinforces the old adage, "nice guys finish last".

July 8, 2010
NY Times

Biggest Defaulters on Mortgages Are the Rich

LOS ALTOS, Calif. No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.

The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

"The rich are different: they are more ruthless," said Sam Khater, CoreLogicÂs senior economist.
Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.

Not so long ago, said Chris Redden, the paperÂs advertising services director, "it was a surprise if we had one foreclosure a month."

The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago  like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.
In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.

"IÂve never seen the wealthy hit like this before," Mr. Lowman said. "They made their plans based on the best of all possible scenarios  that their incomes would continue to grow, that real estate would never drop. Not many had a plan B."

The defaulting owners, he said, often remain as long as they can. "TheyÂre in denial," he said.
Here in Los Altos, where the median home price of $1.5 million makes it one of the most exclusive towns in the country, several houses scheduled for auction were still occupied this week. The people who answered the door were reluctant to explain their circumstances in any detail.
At one house, where the lender was owed $1.3 million, there was a couch out front wrapped in plastic. A woman said she and her husband had lost their jobs and were moving in with relatives. At another house, the family said they were renters. A third family, whose mortgage is $1.6 million, said they would be moving this weekend.

At a vacant house with a pool, where the lender was seeking $1.27 million, a raft and a water gun lay abandoned on the entryway floor.

Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.
Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.

In a recent column on Freddie MacÂs Web site, the companyÂs executive vice president, Don Bisenius, acknowledged that walking away "might well be a good decision for certain borrowers" but argues that those who do it are trashing their communities.

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.
With second homes, the delinquency rate for both types of owners was rising in concert until the stock market crashed in September 2008. That sent the percentage of troubled million-dollar loans spiraling up much faster than the smaller loans.

"Those with high net worth have other resources to lean on if they get in trouble," said Mr. Khater, the analyst. "If theyÂre going delinquent faster than anyone else, that tells me they are doing so willingly."
Willingly, but not necessarily publicly. The rapper Chamillionaire is a plain-talking exception. He recently walked away from a $2 million house he bought in Houston in 2006.

"I just decided to let it go, give it back to the bank," he told the celebrity gossip TV show "TMZ." "I just didnÂt feel like it was a good investment."

The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.
"They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest," Mr. White said.
The CoreLogic data measures serious delinquencies, which means the borrower has missed at least three payments in a row. At that point, lenders traditionally file a notice of default and the house enters the official foreclosure process.

In the current environment, however, notices of default are down for all types of loans as lenders work with owners in various modification programs. Even so, owners in some of the more expensive neighborhoods in and around San Francisco are beginning to head for the exit, according to data compiled by MDA DataQuick.

In Los Altos, Los Altos Hills and the most expensive neighborhood in adjoining Mountain View, defaults in the first five months of this year edged up to 16, from 15 in the same period in 2009 and four in 2008.
The East Bay suburb of Orinda had eight notices of default for million-dollar properties, up from five in the same period last year. On Nob Hill in San Francisco, there were four, up from one. The Marina neighborhood had four, up from two.

The vast majority of owners in these upscale communities are still paying the mortgage, of course. But they appear to be cutting back in other ways. The once-thriving Los Altos downtown is pocked with more than a dozen empty storefronts in a six-block stretch.
But this is still Silicon Valley, where failure can always be considered a prelude to success.

In the middle of a workday, one troubled homeowner here leaned over his laptop at the kitchen table, trying to maneuver his way out from under his debt and figure out the next big thing.

His five-bedroom house, drained of hundreds of thousands of dollars of equity over the last 13 years, is scheduled for auction July 20. Nine months ago, after his latest business (he has had several) failed in what he called "the global meltdown," the man, a technology entrepreneur, said he quit making his $9,000 monthly payments.

"IÂm going to be downsizing," he said.
The man spoke on the condition of anonymity because, he said, he did not want his current problems to interfere with his coming reinvention. "IÂm a businessman," he explained. "I have to be upbeat."

Carol Pogash contributed reporting.

    Bookmark   July 13, 2010 at 5:44PM
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