Ken777
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Walking Away From Your Mortgage

Thu Jan 07, 2010 8:39 pm

A rather concerning article in the NYT today. About people who are underwater on their mortgage walking away even if they are able to pay the monthly payments. The article also notes that companies (including banks) do the same thing.

The extent of the problem is demonstrated in the stat that 65% of all residential properties with a mortgage in Nevada are underwater.

http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html?hp
 
cytz_pilot
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RE: Walking Away From Your Mortgage

Thu Jan 07, 2010 9:08 pm



Quoting Ken777 (Thread starter):
About people who are underwater on their mortgage walking away even if they are able to pay the monthly payments.

I heard about this quite a lot in Central California when I was working for a real estate magazine there. Homes in the cities of Merced & Stockton dropped to less than half their value from a few years ago, by averages. They're becoming ghost towns from people just leaving. Imagine being in debt $500,000 for a home that was now worth about $250,000. For anyone who thinks that the housing market isn't going back to where it was, they make a choice...what is 10 years of bad credit worth to them...if it's less than they still owe, why would they stay. A house is an investment, all investments carry risks, and sometimes when the risk doesn't pay off, it's better to cut the losses and jump than ride it to the bottom.

Very sad, indeed...but a sign of the times.
 
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jetjack74
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 12:47 am

Bad thing to do. I do not know why people would do that, there's always a way out with a shred of you credit in tact
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lowrider
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 2:25 am

Never mind keeping your credit intact, what about the contract you signed pledging to pay the money back? Boo hoo, the housing market tanked, I will take my ball and go home? A disturbing comentary on our society. If this becomes common, mortgage rates are going to start to look like credit card rates.
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BMI727
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 2:43 am



Quoting Jetjack74 (Reply 2):
Bad thing to do.

I don't think so, at least not in the strict moral sense. If that is the best thing for someone to do financially, then do it. The article talks about being responsible and setting an example. Screw that, the only responsibility they have is to build the best financial future they can within the law, and if someone feels that trashing their credit is a fair price to pay in order to get out of an investment gone bad, I don't have a problem with that.

If an investment goes underwater, sometimes it is best to just walk away and do something else.
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Ken777
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 3:00 am



Quoting Lowrider (Reply 3):
Never mind keeping your credit intact, what about the contract you signed pledging to pay the money back?



Quoting BMI727 (Reply 4):
If that is the best thing for someone to do financially, then do it.

Note that the article pointed out:

Quote:
Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.”

The concerning part for me is that the housing industry these days is dependent on mortgage payers maintaining payments. If the majority of people underwater walk away then it could take the 60 years noted in the article for a recovery to happen.

Housing values are based on what someone will pay and I don't know how strong this country is IF the growth of walk-aways continue to grows.
 
gatorfan
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 3:10 am

it's the only rational decision. Any discussion of morality has to be made in light or what the financial institutions have done. The banks have been bailed out on the back of current and future taxpayers and are now profiting from their irresponsibility. Anyone who imposes on themselves a sense of moral responsibility here is just screwing themselves.

I say this from the position of someone who paid off their home mortgage in 9 years and who could still sell his house at a profit.
 
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jetjack74
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 4:04 am



Quoting BMI727 (Reply 4):
I don't think so, at least not in the strict moral sense.

It's never morally responsible to just walk away from something just becuase you can't afford the mortgage

Quoting BMI727 (Reply 4):
If an investment goes underwater, sometimes it is best to just walk away and do something else.

There's always a short sale option, and plus many lenders becuase of the financial crisis are most likely more than willing to renegotiate a lower mortgage rate in order to help the borrower. The banks and lenders don't want a foreclosed or abandoned home, especially with the bottomed-out market. But many people just panic and never attempt to do anything, thinking they'll be cleaned out by the banks. Hardly the case

Quoting Lowrider (Reply 3):
Never mind keeping your credit intact, what about the contract you signed pledging to pay the money back?

I agree, but doing nothing is 10 times worse than just running away from it.

Quoting Lowrider (Reply 3):
Boo hoo, the housing market tanked, I will take my ball and go home? A disturbing comentary on our society. If this becomes common, mortgage rates are going to start to look like credit card rates.

This is a lesson many Americans will learn
Made from jets!
 
ltbewr
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 4:21 am

The situation many find themselves in today with 'upside down' mortgages isn't the same for everyone. Some were blind to the risks, lied about income, got false compatable values, played the banks with false info to get a mortgage. For some, banks, their employees or mortgage brokers were greedy for the fees for placing a mortgage, usually to sold into a pool so had no risk, so let they lies go by, made irresponsible decisions. Then for others, they lost their jobs, had health problems or other pesonal setbacks that meant they couldn't afford to pay.
What needs to happen is several things. One is to allow 'cram-downs' in Bankruptcy proceedings to reduce the amount due on a mortgage to the lender to more moderate market levels. Two, is to mandate that all banks redo mortgages that are upsidedown, taking the hit for thier bad decisions. Three is to tax higher as well criminaly and civily sue those banks and bankers who abused the system to get back some of the losses and to get some justice. Fourth, is to return sound regulation and business policies as to banking and financial services. Fifth is to put in a much higher capital gains tax rate for short term 'flipping' of real property (as well as stock, bonds, commodities and other investments) to recover some of the losses and discouage the next 'bubble'.
 
Mir
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 4:23 am



Quoting Lowrider (Reply 3):
Never mind keeping your credit intact, what about the contract you signed pledging to pay the money back? Boo hoo, the housing market tanked, I will take my ball and go home? A disturbing comentary on our society.

Disturbing indeed, but it becomes very hard to blame people for not playing by the rules when the lenders don't follow them themselves.

-Mir
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rfields5421
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 4:34 am



Quoting Jetjack74 (Reply 7):
There's always a short sale option, and plus many lenders becuase of the financial crisis are most likely more than willing to renegotiate a lower mortgage rate in order to help the borrower.

No there is not always a short sale option.

If the home is too far under, or the holder of the mortage is a bit upside down themselves - the lender will do anything they can to avoid a short sale.

That is what happened to my daughter's home. Job loss put them without an income to support the home or payments - a 1,300 sq ft 3 br / 1 bath for 100K in Dallas.

We floated them for a few months - but it became very obvious that the mortage servicer - Chase - was not going to allow a short sale, or renegotiate a lower rate.

So the home is gone. The family of six is living in with my son's family and they are starting over. Even now, the bank is opposing the bankruptcy.
 
Pyrex
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 5:20 am



Quoting Cytz_pilot (Reply 1):
A house is an investment,

Well, there is your problem right there. House = place to live = bare necessity = something you do with your essential income. Investment = not necessary = something you do with your disposable income. If you could afford a $200,000 but wnated that extra room for your air guitar collection than it is your problem - rent it out.

Quoting LTBEWR (Reply 8):
Two, is to mandate that all banks redo mortgages that are upsidedown, taking the hit for thier bad decisions.

Thanks for increasing the interest rate for all responsible borrowers. A bank, when giving out a loan, makes an investment in the person and their creditworthiness - it is the borrower that makes the "investment" on the real estate. Why the hell should a bank take the hit just because YOUR investment turned sour?

The solution for this problem is very simple. Make all mortgage loans recourse, as they are everywhere else around the world (a practice stupidly banned in some U.S. states). Or of course, we can go the way of the Democratic Party - use Fannie and Freddie to crowd out and essentially kill off the private mortgage market and then once the U.S. government holds every single mortgage in the U.S. pass laws giving people incentives to default, thus putting the burden of these deadbeats onto all taxpayers. Zimbabwe here we come.
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Flighty
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 5:37 am

The funny thing is, people consider it an investment when it goes up. When it goes down, they just walk away like they got amnesia about the signature they signed, like it never happened.

If that's how it goes, then houses can no longer can be an investment. Banks will not give loans that enjoy an investment upside if they have no recourse on the downside. Why would a bank do that? It's too risky.

Otherwise, there needs to be some recourse. Or, we could just have a giant Federal giveaway program where everybody gets a house, on money borrowed from China and basically our kids will be slaves to their masters in China. The immaturity involved would be nothing new for Americans, including the Baby Boom generation.
 
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casinterest
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:01 am

The folks that walk away do not get off scott free.
Thier credit rating is junked and they lose the house.

These are serious ramifications.

People should walk away. The banks should get left holding the bag for their lack of reiling in the wilde markets. They wrote mortgages for houses that were above and beyond the standard 28% rules means and averages in many markets. Did they assume everyone was suddenly getting paid more?


People walking away would help balance the system and make the banks more watchful for what they did. Houses would never be speculative if the Mortgage industry had strict standards and followed them for mortgages.

The bubble went up hard and if I found myself with a mortgage payment of 2500 a month on a 500,000 dollar loan for a house that was now worht 250,0000 and my neighbor was renting the same size house for 1250 a month. You better believe I would walk away from the house. That would be 15000 cash in hand that I could use to pay for rent and go cashless.


Not everyone will walk, but there are many that will, becase why go broke on an investment that will not regain it's value in the next 10 years?
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BMI727
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:05 am



Quoting Jetjack74 (Reply 7):
There's always a short sale option, and plus many lenders becuase of the financial crisis are most likely more than willing to renegotiate a lower mortgage rate in order to help the borrower.

Those are definitely better options that people should look into, but if those options are exhausted and the best financial decision is to walk away, I can't argue with that.

Quoting LTBEWR (Reply 8):

Both buyers and banks made a lot of bad decisions during the bubble period, and both sides are paying the price now.

Quoting Pyrex (Reply 11):
Why the hell should a bank take the hit just because YOUR investment turned sour?

Because that is the way the system works, whether you are investing in a house, a business, or something else. If the bank thinks the investment will turn sour they won't give you the loan. When a bank loans money for an investment, they are essentially investing in whatever the borrower is, which is why they don't just give out money for whatever with no questions.
Why do Aerospace Engineering students have to turn things in on time?
 
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ManuCH
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:29 am

How can you just walk away from a contract you sign? Can't the bank come after you and get their money somehow? In this country, besides losing the house, you would be forced by a judge to do monthly payments to the bank ("forced" as in "we take the money from your account, period") until you settle your debt. Does something like this exist in the US?
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FX772LRF
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:37 am



Quoting ManuCH (Reply 15):
How can you just walk away from a contract you sign? Can't the bank come after you and get their money somehow? In this country, besides losing the house, you would be forced by a judge to do monthly payments to the bank ("forced" as in "we take the money from your account, period") until you settle your debt. Does something like this exist in the US?

That's called foreclosure. They essentially kick you out of your home, and damage your credit score for a good amount of time.

I also think that they can take you to court over it, and make you set up payments to them.

I'll have more information after I talk to my father about it tomorrow. We nearly had to go through all of this.

-Noah  wave 
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nws2002
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:46 am

Some states allow banks to come after your other assets, most do not. Usually the property is the collateral on the loan, and that's what the bank gets when you default. You have the right under the contract you signed to stop making payments, the consequences of that are simple, the bank gets the property.

Several states also allow the bank to file a civil suit to attempt to collect whatever money they may be owed after they sell the property. Usually this is not worth it. If the person cannot afford a mortgage payment, how can they afford a lump sum payment of tens of thousands of dollars? So the banks write it off.

This is not morally wrong. It's the nature of business. The banks took a risk on loaning money to someone. That person ended up unwilling or unable to repay the loan, due to economic reasons. The banks face the consequences of loaning large sums of money in a rapidly rising market without adequate collateral to cover themselves if they whole thing comes tumbling down.
 
MD11Engineer
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 9:22 am



Quoting FX772LRF (Reply 16):
Quoting ManuCH (Reply 15):
How can you just walk away from a contract you sign? Can't the bank come after you and get their money somehow? In this country, besides losing the house, you would be forced by a judge to do monthly payments to the bank ("forced" as in "we take the money from your account, period") until you settle your debt. Does something like this exist in the US?

That's called foreclosure. They essentially kick you out of your home, and damage your credit score for a good amount of time.

I also think that they can take you to court over it, and make you set up payments to them.

I'll have more information after I talk to my father about it tomorrow. We nearly had to go through all of this.

-Noah wave

No, I know what MauCH means. We have essentially the same system over here. The creditor goes to the local court of justice wirh all the paperwork he has about the debtor and gets a legal writ about the unpaied debts, which is valid for thirty years. Then, with this paper, he goes to the bailiff and first the bailiff will take stock of the debtor´s property. Everything not on a very limited list of essential items (basic furniture, tools and shop equipment required for a job to earn money) will be marked with a seal. Then the debtor has two weeks to raise the money, if not his property (including house) will be auctioned off. If the debts are bigger than his property, he´ll have to swear an oath that he has no other assets, if he lies he wil be tried for perjury, a serious offense with jailtime on it.
The bailiff can also go to the debtor´s boss and order him to transfer all of the debtor´s salary above social welfare level to the creditor in monthly installlments.
We have one rule though that if the debtor is bankrupt, but makes a serious effort for seven years to pay back his debts, he can be, in agreement with the creditors, cleared of the remaining debts, but the hurdles are quite high. This at least gives a person a chance to make a new start and won´t ruin him for the rest of his life.

Jan
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vc10
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 10:15 am

Here in the UK you cannot walk away from your mortgage, even if you hand in the keys and move out the debt is still yours . The mortgage company will sell the house and if it does not raise sufficient to clear the mortgage then they will chase you for the unpaid debt.

littlevc10
 
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fca767
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 10:35 am

I always thought! why not just Live in them...why the need to worry about resale value...unless it's to do with other things like not having a job because of the recession and interest rates going up.
 
ltbewr
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 11:39 am

What I think should happen, further to the points I made earlier, is to criminally charge those that commited fraud in their application for a mortgage and as possible, go after other assets of value if a mortgage is upside down. Problem of course is that there isn't enough jail space for such debtors and only a few have sufficient assets to go after beyond the primary home they are in a bad mortgage with.
 
Pyrex
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 1:17 pm



Quoting BMI727 (Reply 14):
If the bank thinks the investment will turn sour they won't give you the loan.

A bank invests in YOU when they give you the mortgage loan, what part of that don´t you get? Otherwise why would they even care how much your monthly income is? Then again, you might be right, maybe they thought they were investing in someone with character and it turns out you were nothing but a common crook, so they should lose their "investment".

Quoting BMI727 (Reply 14):
which is why they don't just give out money for whatever with no questions.

Hmmm, yes they do. It's called unsecured debt. Just like credit cards. That is why the way things are going mortgage rates will go the way of credit card rates (either that, or Fannie/Freddie will keep being the bottomless pit of money they are now).
Read this very carefully, I shall write this only once!
 
rfields5421
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 2:00 pm



Quoting LTBEWR (Reply 8):
Two, is to mandate that all banks redo mortgages that are upsidedown, taking the hit for thier bad decisions.

Who says what is a bad decision? A home, car or other asset has no real 'value' until the owner tries to sell it. Yes the tax authorities and appraisers can estimate a current sale value, but that is only an educated guess.

We do not think homes will climb back to the price levels at which many of these people purchased, but we don't know.

Quoting VC10 (Reply 19):
The mortgage company will sell the house and if it does not raise sufficient to clear the mortgage then they will chase you for the unpaid debt.

That occurs in the US also. But seldom is there much to recover. There is about seven years to collect the unpaid portion. And the mortage holder has to write off the unpaid portion from their books immediately.

That is one reason many people are extended month to month - so the mortage holder can avoid listing the home as a loss.

Recently many people who lost homes with second mortages from GMAC have been surprised to find the requirements set on GMAC for their bailout funding by the government require GMAC to go after those 'bad debts'.

I know people who lost jobs and homes two or three or four or five years ago who are facing court dates and potential asset seizures from GMAC. A great many people who lost homes did not declare bankruptcy, so the outstanding debt is still on the books.

Quoting ManuCH (Reply 15):
you would be forced by a judge to do monthly payments to the bank ("forced" as in "we take the money from your account, period") until you settle your debt.

It is difficult to get that kind of court order in the US. Child support or IRS debt/penalties are among the few things which can be 'taken' from your wages.

Lenders can get court orders requiring you to pay a set amount, but they cannot force you by taking the money from your accounts. They can seize accounts, cars, furnishings, watches and jewelry, etc. physical property.

However, our 'states rights' friendly constitution allows each state to set different thresholds and catagories for such seizures. There is no one standard across the US.

In some states a bankruptcy can take your home. In some it cannot.
 
D L X
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 2:03 pm



Quoting Jetjack74 (Reply 7):
It's never morally responsible to just walk away from something just becuase you can't afford the mortgage

Taking on or releasing a mortgage is not a *moral* event.

Do you think it is moral to foreclose on family when the breadwinner loses his job?

If you become a bad investment for a bank, don't think they won't drop you in a New York Minute. This has to be reflexive.
 
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falstaff
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 2:05 pm



Quoting Jetjack74 (Reply 2):
Bad thing to do. I do not know why people would do that, there's always a way out

Well, people do it for a variety of reasons. I will have to do it if my job goes away. I owe $82,000 on my house. It is worth around $20,000-$25,000. I don't have the money to pay the difference if I have to sell. Several houses on my street sold for less than $10,000. Michigan has a 15% unemployment rate I would probably have to leave the area to get another job in my field. So I would have to leave my house. Another example. My buddy, Wade, lived in Detroit and his neighborhood was becoming very unsafe. He was robbed several times in one year. He had a nice home that he owed $77,000 on. Houses on his block were selling as low as $480. He needed to move and nobody is going to buy his house for what he owed. Wade walked away. His house (nicest on the block) eventually sold for $8000. He bought a new home that sold in $2004 for $280,000 for $40,000.

Quoting Lowrider (Reply 3):
Never mind keeping your credit intact, what about the contract you signed pledging to pay the money back? Boo hoo, the housing market tanked,

So what... When you buy stock or make any kind of investment there is no guarantee that that you will make money or get your money back. Anyone who ever invested in companies like K-Mart know that. Banks made an investment in the homeowner sometimes their investment pays off sometimes it doesn't.

Quoting BMI727 (Reply 4):
I don't think so, at least not in the strict moral sense

I agree.... Especially since many loan terms were not explained to the borrower. What did these companies think was going to happen when you make a loan at 6% and it would raise to 15% or higher? What did they think would happen when they gave loans to people with no verifiable income? The company I got my mortgage through lost their license in Michigan for various illegal practices, including paying off appraisers for favorable appraisals. They were sued by the state and the state won. I don't even think Ameriquest is even around anymore. They were not honest with the people of Michigan and they screwed us, so why do we have a moral obligation to them? My loan has been sold several times and I can't believe anyone would want to buy it.

Quoting ManuCH (Reply 15):
How can you just walk away from a contract you sign?

Businesses do that all the time. I have documents that say that Ameriquest will not sell my loan. Well they sold it... We can't put all the blame on the borrower.

Quoting Flighty (Reply 12):
The funny thing is, people consider it an investment when it goes up. When it goes down, they just walk away like they got amnesia about the signature they signed, like it never happened.

Do you own a home? Many times people walk away because they can't sell it for what they owe and they have to move on. A guy I went to school with used to live in metro Detroit. He lost his job. He owned around $100,000. He couldn't find a job here, but found a great job in Kansas City. He left his house. His house was worth around $30,000. He just wasn't going to stick around and not support his family because he owed money to some bank. When property values drop a lot and you have to leave the area many times there is nothing else to do but walk away.

Most of you probably have no idea how much property values have dropped in some parts of the USA. My house was once appraised for $105,000. Now it is worth $20,000-$25,000. There are houses on my street that are in move in condition that have sold for $15,000. There are fixer uppers on my block that have sold for $6000. There are houses in my neighborhood that need a lot of work that will go for less than $3000. I know of houses in the city of Detroit that have sold for less than $500 and those homes were occupied fairly recently. When your house is "under water" that much you cannot refinance no matter how good your credit is. I have good credit and I tried to rifi my loan. I owe $82,000 It is worth $25,000. I would need to come up with $57,000 to refi. That is a bad investment. This Mortgage mess is a lot more than just a lot of people buying huge houses they couldn't afford. In my part of town most of the houses are 50 plus years old and less than 1500 square feet. It is a working class part of town and a lot of working people in Michigan are not working right now.


Here is my house. It is small, but not a turd by any means. This is what you can buy cheap. If you want cheap property come to Wayne County Michigan.
Big version: Width: 1024 Height: 768 File size: 207kb
My House

The house on the right of me sold for $21,000 in 2008. It sold for $136,000 in 2002. The guy that owned it before lost his job and couldn't keep up the payments.

Quoting LTBEWR (Reply 8):
got false compatable values

Huge problem in metro Detroit. A lot of brokers were paying off appraisers to say property was worth more than it was. He is how the scam worked

broker: We can give you a variable rate loan for 110,000 at 6% for three years, then it will go to 15%.

barrower: Wow! I can't afford that when it goes to %15 so no thanks.

Broker: No problem. I see you are buying this home for $120,000 and you are putting $10,000 down. But these appraisals say the home is worth $165,000. You already have a lot of equity so in two years you can refi into a 30 year fixed.

barrower: oh, I am getting a good deal on this property so why not save some money the first couple of years and get that varible rate loan then switch to that higher 30 year fixed later.

The scam worked for a while, until the bottom fell out of the market or people found out that the appraisers were paid off and the values were false.
My mug slaketh over on Falstaff N503
 
D L X
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 3:17 pm

Falstaff, thank you for your post. I hope your unfortunate experiences serves to actually educate some people around here beyond the talking points they get from biased pundits.

Best of luck to you.
 
gatorfan
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 3:47 pm



Quoting ManuCH (Reply 15):
How can you just walk away from a contract you sign? Can't the bank come after you and get their money somehow? In this country, besides losing the house, you would be forced by a judge to do monthly payments to the bank ("forced" as in "we take the money from your account, period") until you settle your debt. Does something like this exist in the US?

After the bank obtains legal title from you under the foreclosure process, they then evict you. The house is then usually sold at auction to the highest bidder. In some, but not all states, the law allows the lender to seek a deficiency judgment against the borrow for the difference between the proceeds received in the auction and the sum of the unpaid loan + legal fees. However some states, like California for example, do not permit lenders to seek deficiency judgments against individual homeowners. Therefore, while their credit report gets hit, the face no additional financial repercussion for defaulting on the loan.

But even in those states that allow deficiency judgments the debtor can file for bankruptcy and have that deficiency judgment discharged in whole or in part. Given the poor financial condition of many of these defaulting debtors, many lenders are considering that the legal expense of seeking a deficiency judgment is just more money wasted.

US bankruptcy laws are very debtor friendly in most instances.

My younger brother bought a house in South Florida that has now fallen more than 50% in value. While he made a substantial (20%) downpayment, the house is still worth at least $200,000 less than his mortgage, and the value is falling. He has 30 year fixed mortgage, a stable job and can afford the payments.

I started researching the law related to bankruptcy for him after I saw the schemes the big institutions were using to discharge their debt. I eventually felt comfortable enough to recommend to him that it would be in his best interest to speak with a bankruptcy attorney. He was very hesitant to because we've always been raised to live up to our obligations. However, when Bank of American raised his credit card interest rate from 9% to 28% when he was 100% current on all his obligations, he realized that the rules are stacked and everyone else is just looking out for themselves. If BoA was going to take $45B from taxpayers like him, and then turn around and f*ck the honest law abiding citizens, then screw them.

He scheduled a meeting with a bankruptcy attorney who told him to immediately stop paying his mortgage. The courts in SoFla are so backed up, it would be at least 18 to 24 months before his case would even be scheduled. He now put the $2,500/month he was paying into Roth IRA for himself, one for his wife, maxes out his kid's 529 (college savings plan) and fully funds his 401k. The remainder goes into a high interest savings account in his wife's name (he bought the house before they were married so she's not on the mortgage note). He's now saving $30,000 a year in principal and interest, plus another couple grand by switching his homeowner's insurance from full coverage to just contents.

The bank called him a couple of times and he simply told them he wasn't going to pay. They've now asked him to PLEASE stay in the house (even if he doesn't pay the mortgage) because the value of the property drops faster if it's unoccupied.

Is this morally right? In absolute terms probably not. However, in relative terms, is he anything more wrong than what the banks have and are doing to huge numbers of people? IMO, nope.

Net net, he'll probably live in the house for three years without paying a penny. In that time he'll have saved over $100,000 that can be used as cash for a down payment. Yes his credit report will be ruined for 7 years but that's only 4 years from when he's out of the house. His wife keeps her perfect credit score and they eliminate $200,000+ of unrealized losses. It will literally change his financial life for the better. His bankruptcy attorney told him that he doesn't believe the bank will ever seek a deficiency judgment because all of his assets will be exempt from seizure in bankruptcy.

Big picture wise, I think we're at the tipping point where individuals rationally following their own best interest (a key assumption in economic theory) naturally leads us to this type of behavior.
 
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falstaff
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 3:47 pm



Quoting D L X (Reply 26):
I hope your unfortunate experiences serves to actually educate some people around here beyond the talking points they get from biased pundits.

Thanks. You are right about biased pundits. They come from all sides too. There mortgage "crisis" was caused by a lot of factors. A lot of people just look at either the preditory lending (especialy to minorities) or the people who bought giant houses with loan they didn't have the ability to pay. Those are only two of the causes, but usually the only I usually here about.

My loan expierence is ok now. With interest rates so low my variable rate loan has been lower than it would have been if I had a 30 year fixed. The way the loan is written it isn't as bad as lot of them, becuase I had good credit. When the loan begins to adjust upward again the interest will be on what I have left to pay, not the original amount so the payment will never be as high as it was several years ago. The loan is 5.25% now; two years ago it was at its max, which was 12%. Some people's loans adjusted to 19%. Those are people that I know so there may be some that even went higher.
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falstaff
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 5:00 pm



Quoting GatorFan (Reply 27):
However, when Bank of American raised his credit card interest rate from 9% to 28% when he was 100% current on all his obligations

My credit card company (1st national of Omaha) raised my rate from 9% to 16.9% and I had a zero balance and have never made a late payment. What a bunch of crooks.
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Ken777
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 5:09 pm



Quoting RFields5421 (Reply 10):
That is what happened to my daughter's home. Job loss put them without an income to support the home or payments - a 1,300 sq ft 3 br / 1 bath for 100K in Dallas.

Unfortunately your daughter's situation is happening all too often. It's pretty obvious from the house stats that your daughter didn't go out and splurge beyond a house that was probably very reasonable when they bought it. Like a lot of decent young people they probably felt they were doing a pretty good job at work and felt that they were making a responsible purchase. My bet is that at the time they were. Depending on how long they had the house they may have been more responsible than the bank - if the bank knew the house was over-priced in the bubble and was at risk of not surviving the bubble popping.

Quoting Falstaff (Reply 25):
Here is my house.

Your house looks like my parents first house - they built it in Lake Charles when I was in diapers. And not that different from my first house - which I moved into with the GI Bill.

The challenges you're facing up in Michigan are huge and I wish you well.

Quoting GatorFan (Reply 27):
Big picture wise, I think we're at the tipping point where individuals rationally following their own best interest (a key assumption in economic theory) naturally leads us to this type of behavior.

I think you're right. One reason is because I believe we were far closer to a true depression last year than we are willing to admit. We have been able to patch up the financial sector a bit, and provided a stop gap for the auto industry. That doesn't mean that we are close to being out of the woods when it comes to risks of an even greater recession or true depression.
 
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falstaff
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 5:39 pm



Quoting Ken777 (Reply 30):
which I moved into with the GI Bill.

A lot of the houses on my block were bought by GIs that had fought in Korea. The last original guy on the street is a Korean vet, he moved in when he got out of the Army in 1954. My street was built between 1953-56.
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Ken777
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 5:51 pm



Quoting Falstaff (Reply 31):
A lot of the houses on my block were bought by GIs that had fought in Korea. The last original guy on the street is a Korean vet, he moved in when he got out of the Army in 1954. My street was built between 1953-56.

I believe that was one of the "Golden Ages" for this country in terms of the average family. Serve in uniform and you would generally be able to buy a house when you got out. I paid out $127 in "closing costs" to move into mine in 1970 - and the 50s would have been a better deal.

But it seems that people today want a far larger house for their first house - as close to a McMansion as possible. Add that to the lenders rushing to finance anything that breathes (because it resulted in large personal bonuses) and here comes the crisis.

And, looking at autos, I think the same thing is happening - look at the number of Chevys & Fords that are $30,000+ and need 5 or 6 years of financing. Bloody McMansions on wheels.
 
StarAC17
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 5:58 pm



Quoting Pyrex (Reply 22):
Hmmm, yes they do. It's called unsecured debt. Just like credit cards. That is why the way things are going mortgage rates will go the way of credit card rates (either that, or Fannie/Freddie will keep being the bottomless pit of money they are now).

They won't barring a huge amount of inflation like what was seen in the early 1980's because people simply won't have an incentive to buy and everyone will rent and even with that it will be beneficial to the saver because they would love getting 20% annualy on a savings account.

Quoting GatorFan (Reply 27):

He scheduled a meeting with a bankruptcy attorney who told him to immediately stop paying his mortgage. The courts in SoFla are so backed up, it would be at least 18 to 24 months before his case would even be scheduled. He now put the $2,500/month he was paying into Roth IRA for himself, one for his wife, maxes out his kid's 529 (college savings plan) and fully funds his 401k.

Smart move on his behalf because as far as I know if he has to declare bankruptcy that money is protected as far as I recall. The big mistake people make that ruins them big time is tapping into a Roth IRA or 401k to pay bad debts.
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mt99
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:08 pm



Quoting Pyrex (Reply 22):
A bank invests in YOU when they give you the mortgage loan,

So shouldn't the banks protect its own investment making sure only qualified people get the loan?
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D L X
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:39 pm



Quoting Pyrex (Reply 22):
A bank invests in YOU when they give you the mortgage loan

And all investments carry risk - the risk that it will be in your financial advantage to stop paying the loan.

I am really bothered by this idea of it being moral to only use one side of your contract for mortgage. A mortgage has two sides - an if/then and an else. The if/then side is "if you pay us X a month for the next Y years at Z interest, THEN we will give you the house." The else is "or you will return the house to us and vacate." It is completely the buyer's choice to pay or not to pay.

It is not in that sense "breaking the contract" to foreclose. In fact, it is adhering to the contract to foreclose, as that is the recourse according to the contract when the buyer makes the choice not to pay. It would be breaking the contract if the buyer both chose not to pay, AND didn't vacate the house.
 
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falstaff
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 6:41 pm



Quoting Ken777 (Reply 32):
And, looking at autos, I think the same thing is happening - look at the number of Chevys & Fords that are $30,000+ and need 5 or 6 years of financing. Bloody McMansions on wheels

GMAC was financing for up to 8 years at one time for higher end cars. That is why there were people around here that were broke driving $50,000 cars. My buddy, Zac, works for GMAC and he said they lost their shirts on a lot of those deals. Either way car loans were never as bad. Car loans had a fixed interest rate. The saleman would figure a price based on your trade in, down payment, credit, etc. and tell you how much each payment would be until it was paid for. With the Variable home loan people had no idea what the payment would be, because interests rates changed all the time. With the car you could look at the payments and say I can or cannot afford this. With that mortage you may not be able to figure that out.

Quoting Mt99 (Reply 34):

So shouldn't the banks protect its own investment making sure only qualified people get the loan?

That would make sense. But individuals who make the decisions get bigger pay checks when they sell more mortgages. Also a lot of lenders were basing the barrowers ability to pay off of the indroductory interest rate, not the rate it would likely adjust to. A lot of people who had "bad" mortages were paying their bills no problem at 6-8%, but when they went to 12-19% the could no longer pay. A lot of these people had low credit scores but would have been able to continue to pay without issue if the rates were lowered.


Also at one time local banks did most of the mortgage work. Those local banks knew people and knew local markets. Then along came huge mortage companies with brokers that knew nothing of local conditions and probably never even saw the house. They didn't care about anything, but making money on the commision and closing costs.

I always figuered that it would have been easier and cheaper to just go ahead and make every ARM a fixed rate at 8%. That would have stopped a lot of foreclosures because people could pay that. It wouldn't have fixed everything, but it would have helped a lot. I talked to a Citi Bank Official about this once and he told me that they couldn't do that because they sold securities in the loan and would be sued by the investors who bought the loans for X% interest. If the loans actualy been owned by the banks they could have frozen the interest rate. They might not have made as much money, but they would have helped stop the forclosure problem.

In my neighborhood the problem is so bad that many of the houses have been bank owned for 3-4 years. There are more empty houses than the banks can take care of and now they are falling apart and becoming eyesores. Many have broken/missing windows, holes in the roof, missing A/C units, furnaces, land scaping items, etc. They drop the value of other homes. Many of the families in my neighborhood could have stayed in their homes if the interest rates had not been raised so high. A lot of these people were not well educated and a fast talking broker easily conned many.
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rfields5421
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 7:03 pm



Quoting Mt99 (Reply 34):
So shouldn't the banks protect its own investment making sure only qualified people get the loan?

Yes the bank should. But bank officers are under pressure from their owners, investors, to make more loans and to 'grow'. Being a conservative bank which does not grow is a sure formula to end up without investors or depositors in today's world.

The two primary causes of foreclosure in the US are Job Loss and Medical.

Can the bank guarantee that I will have a job for 30 years when they made my loan? If that was a criteria, they would never make any home loans.

Can the bank guarantee that I will not have a medical crisis. In 2001, I spent 39 days in the hospital with a major illness. Never worried about my job, and we had a Cadillac health insurance plan. Cost me $30,000 out of pocket by the time is was completely cleared approx 8 months later. (I went back to work with restructions after 72 days on disability). My disability pay was $13.75 over my deductions each month. We fell behind on a lot of bills.

Had I owned my present home at that time, I would not have been able to stay current. As it was we were renting and the landlord agreed to defer the rent until we were back on full salary.

The negative impact of that medical crisis kept us from being able to purchase a home for five years.

Now - those two scenarios are the VAST MAJORITY of home foreclosures. Not the relatively small number of walk-aways which is the focus of this thread.

But if the bank views the financing of the home as a business decision with risks (default) and rewards (interest) - why should the buyer not have the same view?

Both made a bad decision - accepting the value of the house.

Both shared the risk, and both will pay a penalty for their bad judgement, or more correctly - their failure to see future changes in the market.

Rose colored glasses all the way around.
 
mt99
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 7:15 pm



Quoting RFields5421 (Reply 37):
But bank officers are under pressure from their owners, investors, to make more loans and to 'grow'.

The banks shot themselves in the foot!
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cytz_pilot
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 8:14 pm



Quoting Ken777 (Reply 32):
But it seems that people today want a far larger house for their first house - as close to a McMansion as possible. Add that to the lenders rushing to finance anything that breathes (because it resulted in large personal bonuses) and here comes the crisis.

I don't know that people necessarily want a larger house, but people fall into a trap when they've been told that they can get a larger house by bad marketing practices. "We can get you the home you want!" By no means do I think this absolves a buyer of responsibility, just that both sides take blame, both sides have taken risks on signing the contracts. Lessons are being learned now that will last for decades. I'm sure many people who have bought homes in the last 10 years have never lived through a recession as an adult, and didn't see it as potentially being a terrible decision to sign that paper. "Even if I lose my job, I'll get another one." Common thought when there were lots of jobs to go around.

Quoting Mir (Reply 9):
Disturbing indeed, but it becomes very hard to blame people for not playing by the rules when the lenders don't follow them themselves.

As easy as it is to absolve one's conscience by justifying their actions this way, if they were to remove themselves from the situation, and look in as someone who does play by the rules, they would find it offensive and wrong. I think it's gotten too easy for one to point fingers to justify immoral/unethical actions, rather than to own up and say "I was wrong, I apologize and now I have to make it right." Blame the public level of politics for that one, politicians have a certain knack for doing that.
 
StarAC17
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RE: Walking Away From Your Mortgage

Fri Jan 08, 2010 8:55 pm



Quoting RFields5421 (Reply 37):

Yes the bank should. But bank officers are under pressure from their owners, investors, to make more loans and to 'grow'. Being a conservative bank which does not grow is a sure formula to end up without investors or depositors in today's world.

We're doing fine with that business model.

Signed,

Canadian Banks (the soundest in the world)
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gatorfan
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RE: Walking Away From Your Mortgage

Sat Jan 09, 2010 1:56 am



Quoting Ken777 (Reply 30):

I think you're right. One reason is because I believe we were far closer to a true depression last year than we are willing to admit. We have been able to patch up the financial sector a bit, and provided a stop gap for the auto industry. That doesn't mean that we are close to being out of the woods when it comes to risks of an even greater recession or true depression.

I think it's actually going to get much worse. Consumer spending is going to be depressed for a very long time. Home prices are going to continue to fall in most markets because of the accelerating rate of defaults and walk-aways. The more housing prices fall, the more people will have incentive to walk away, the more people walk away or default, the more housing prices fall and the cycle repeats itself.
 
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falstaff
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RE: Walking Away From Your Mortgage

Sat Jan 09, 2010 3:51 pm



Quoting GatorFan (Reply 41):
The more housing prices fall, the more people will have incentive to walk away, the more people walk away or default, the more housing prices fall and the cycle repeats itself.

This kind of thing has happened before and has been going on in Detroit for years. There are thousands of vacant homes and businesses in cities like Detroit. Detroit once had 2,000,000 people now there is less than 800,000. More people left than came in so there have been buildings that have gone unsold and just abandoned, like the boom towns of the old west. Some people my try to sell their homes and businesses, but if not enough new people come to the area you just have to walk away. There are blocks in Detroit where there is only one house, but 50 years ago every lot had a home. In some cases people had to walk away from homes they owned because nobody was there to buy them.

As the property values fall and people become desperate to sell or to rent we get undesirables move into the neighborhood. Many of them don't stay long so they have no ties to the neighborhood. With them comes crime, drugs, poverty etc. Property crime is up in my area and so are the number of new faces that don't stick around. Ten years ago my neighborhood was a multiracial working class neighborhood of well kept small homes. Today it is still multiracial and working class, but there are lot more low income (non workers, who are always non workers) people who rent houses for three months, don't pay, get evicted, and then some new bums move in. On my block the homeowners out number the vacant homes and low income renters, but on some blocks it looks pretty bad.
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Ken777
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RE: Walking Away From Your Mortgage

Sat Jan 09, 2010 5:55 pm



Quoting Falstaff (Reply 42):
This kind of thing has happened before and has been going on in Detroit for years. There are thousands of vacant homes and businesses in cities like Detroit.

Detroit may be the classic example of a need for a new "Marshall Plan" - this time focusing inward to work on rebuilding this country.

That may seem a bit odd, but I can remember the 50s and 60s where a kid could graduate from high school and get a job that offered a decent living without the costs of university. With a bit of experience he's be able to get married, eventually buy a modest house (and generally a nice used car) and raise his family with strong values towards family and country. And by the time his kids were ready for college they were financially able to go if they wanted - and graduate without a mountain of debt that would last their lifetime.

I believe that we need to invest in moving back to that quality of life - and make the investments to do the job properly. We've shifted far too many "jobs" to minimum wage, which is a perfect way to ensure increased welfare costs. We've focused on cheap as possible, forgoing solid values - in products and in country. Too often it is simply Cash Over Country and all of us are paying the costs these days.
 
baroque
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RE: Walking Away From Your Mortgage

Sun Jan 10, 2010 7:28 am

A question. I can see that the walk away stunt could have produced the results it did in the US. And I can see why Aus with no ability to walkaway has such a different recent history in the property market. But what I cannot figure out is how the UK with similar rules to Aus is in such a mess. Does that mean that walkaway is not a primary cause for the US woes. What difference would it make if all US mortgages attached a liability to repay?

G(enuinely) Puzzled.
 
Flighty
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RE: Walking Away From Your Mortgage

Sun Jan 10, 2010 8:00 am



Quoting Falstaff (Reply 25):
When property values drop a lot and you have to leave the area many times there is nothing else to do but walk away.

Well your post is very good, I guess, for the unusual situation of Detroit, MI. It's interesting.

I hope I am not overly sanctimonious about mortage holders paying their bill. But housing appreciation is not guaranteed. It _is_ conceivable that a housing buy will lose value. Each day is not a new record high. Buying houses is a gamble, on the upside or the down.

For many people the only option is to walk away. Or, the best option. That's okay. They get punished. Not perhaps as much as they could be. They "spent" money on a house and then seek to erase that expenditure. I still don't see how on a societal level, that is okay. When we write a check, we should not bounce it, and then laugh about it.

Good luck in Detroit. I am definitely pulling for your city. And I mean no disrespect, but it's an interesting experiment, what is happening there.
 
Alias1024
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RE: Walking Away From Your Mortgage

Sun Jan 10, 2010 8:03 am



Quoting Baroque (Reply 44):
What difference would it make if all US mortgages attached a liability to repay?

It would certainly reduce speculation on real estate, which was a contributing factor in the bubble that the housing market experienced.

Quoting Baroque (Reply 44):
Does that mean that walkaway is not a primary cause for the US woes.

I think that the foreclosures are a symptom, and not a cause. The causes are numerous, but bad lending practices, dishonest lenders and borrowers, and poor government regulation and policy all certainly played a part.
It is a mistake to think you can solve any major problems with just potatoes.
 
Flighty
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RE: Walking Away From Your Mortgage

Sun Jan 10, 2010 10:10 am



Quoting Alias1024 (Reply 46):
dishonest lenders and borrowers,

Everybody will do what they can, within the law, to earn a million dollars. If it wasn't illegal, then it wasn't the companies' fault. They were doing legal business to make money.

Basically these were dirt assets that were bought by incompetent people in the financial industry. They did not understand their own industry. And they got burned. Sure, the government could have helped. But really, the government "intervened" in quite harmful ways. Just look at Fannie and Freddie. Government intervention actually caused a lot of this speculation. In effect, the government itself wildly speculated on real estate.
 
baroque
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RE: Walking Away From Your Mortgage

Sun Jan 10, 2010 12:23 pm



Quoting Alias1024 (Reply 46):
Quoting Baroque (Reply 44):
Does that mean that walkaway is not a primary cause for the US woes.

I think that the foreclosures are a symptom, and not a cause. The causes are numerous, but bad lending practices, dishonest lenders and borrowers, and poor government regulation and policy all certainly played a part.

Would not a "no walkaway" setting automatically have improved lending practices? Perhaps not to the extent of making them honest - that story from Florida about the mortgage agents with criminal records still has me totally staggered. Presumably one of the simpler govt regs would relate to lending practices? I mean if they cannot lend more than 90% of an agreed value - with a method of verifying that - and the borrower could not walk away it might be bad for the volume of business but a great deal better for the quality of that business.

The other issue is why ever is it legal to be able to on sell mortgages. I mean I can see why some would want to do it, but the immediate flow ons - more costly to the end user - are so obvious I cannot see why it was permitted. No I don't want to hear about the depth of the market, one tends to drown more easily in deeps!  Wink
 
comorin
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RE: Walking Away From Your Mortgage

Sun Jan 10, 2010 2:50 pm



Quoting Baroque (Reply 48):

Banks enter the business of lending by charging a premium for risk. On mortgages, this includes default and prepayment risk. This risk is also based on assumptions about future interest rates and housing prices. Default risk goes up when the asset you have drops significantly in value.

Once a bank has used up its balance sheet in making loans, it will sell its portfolio to investors in the secondary market for a fee, and use the proceeds to make new loans, since it has the infrastructure to do so. This happens all over the world, Germany, Canada and Australia included.

In the US, bankruptcy laws allow the consumer the protections that businesses have - the ability to get a fresh start without going to debtors prison. Bank lending is a commercial transaction, and consumers will default much in the same way that banks can fail on each other. Once again, remember that default probabilities are already built-in into the lending decision.

There really is no moral issue here, it's just a cold, commercial transaction. If a credit card company is charging you 30% APR, feel free to beat them up. If everyone acted the same way, then on a relative basis, your credit score percentile should stay the same.

If you are still feeling really bad, remember that bank bonuses will be at record levels this year, and they thank you for giving up your first-born for them.

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