Using Foreclosure to save $30,000 in cash

[Seeker]

Some are missing the point.

When you take out a home loan, you agree to make an agreed upon payment each month, If you don't, the lender gets your collateral ala, the house. That's the contract. That is what you agreed to, and that is what the bank agreed to. Morals have nothing to do with it! It is a business. You certainly don't see Morgan Stanley care about defaulting on an entire office building in San Francisco. They made a business decision.

What no one has brought up is why are the banks allowing so many people to not pay their mortgage without foreclosing? Due to our great accounting system, when they foreclose and take possession of the property they have to realize the loss of the loan. They don't want to do that. The fact remains that the financial stability of the US is still unstable. The losses have not been realized. The system will continue to limp along or decline until those loans that are bad are realized. Hello Fannie and Freddie!!
Loans don't become bad over time. Bad loans are made at origination.

I see what DS is saying, and tripod, and even jpg.... and while understanding what everyone is writing, i think that ultimately "banditfist" wrote it specifically

1) The banks have not accepted the loss in value as permanent.

2) Nobody is owning up to the fact that deals have been made at unrealistic terms.

Who is at fault? Absolutely everyone who made that "deal."

Who pays for these errors? Absolutely everyone who has a job and pays taxes.

Is it right for people to take advantage of the situation and continue to live in a house that they refuse to honor their previous agreements? No, of course not. Tripod68 "understands" why people do it, as do I, but it is not "right" and nobody is saying that this is morally correct.

The economy will continue to suffer as the individuals and entities reject their own future realities.

The economy will continue to struggle as people choose to ignore the future potential and/or the future ramification of what they do, either as an individual or as an entity.

[Seeker]

In recent years, that situation got way out of control with lenders approving ridiculous loans to people who couldn't possibly come close to affording them. Was that the government's fault? Perhaps they had a hand in it, but the lender had to know the loan was bad and the borrower absolutely should have known that he was taking out a loan that there was no way he could repay. When people were borrowing 5 or 6 or 7 times income, where did they expect the money to come from to make the payments?

And DS, lenders didn't care because the majority of these loans have been sold and double-sold to other financial instutions such that nobody knows who really holds the note on the property in question. In some cases, banks are having a very difficult time proving that they are the owners/holders of the notes. Why do you think lawyers are getting away with these delay tactics of "having banks prove that they own the note"?

[disneysteve]

And DS, lenders didn't care because the majority of these loans have been sold and double-sold to other financial instutions

True. I left out that piece of the puzzle. The bank would make a ridiculous loan, like approving a $300,000, 100% interest-only mortgage for a borrower who earned $50,000/year and then turn around and sell the loan so they didn't have to deal with the repercussions when that loan crashed. The bank had no business making that loan. The loan buyer had no business buying bad debt like that. And, ultimately, the borrower had no business taking out that loan. Like I said, plenty of fault to go around.

[rennigade]

people that do things like this should face prison time no questions asked and they should be forced to pay off whatever debt they acquired no matter how long it takes.

[wincrasher]

There is plenty of blame to go around.

Regulators, banks, underwriters, appraisers, real estate agents, wall street, investors, insurers and borrowers. Everyone is greedy, everyone expects to make money. Well guess what? For every winner there is a looser. That's the system. Everyone's irrational exuberance made the house of cards fall to the ground.

So get over it. It is what it is.

I'm paying on a mortgage for a house in Florida that has a value so far below what it cost to build it, it's not even slightly humourous. But I plan on paying it - in full. Why? Because I am a man of my word and actually care about my reputation. Even if I'm the only one who gives a damn about it.

If I made a bet on a football game, and I lost, wouldn't I be expected to pay? It's the same thing.

The foreclosure process, just like bankruptcy, is a process to handle defaults. That's the system. There is no immorality in it. It's just unfortunate. "Strategic" default? That's a moral dilemna as I see it. Without your very survival at stake, it's just welching on a bet.

[disneysteve]

If I made a bet on a football game, and I lost, wouldn't I be expected to pay? It's the same thing.

Exactly. A lot of people gambled on their houses. They bought houses that they couldn't afford with nothing down with ARMs or interest-only loans and gambled that the value of the home would rise fast enough to cover their bet. When it didn't, people started walking away with the mindset that because things didn't work out, they shouldn't have to pay. Sorry folks, it just doesn't work that way.

[am_vanquish]

A lot of people gambled on their houses.

The couple in the article did that in the most literal way possible - taking their mortgage payment down to the local Hard Rock casino instead of paying their debt. I wonder what they would have done if they'd hit a nice jackpot with the money that belonged to the bank ... I'm guessing they'd buy ANOTHER home they couldn't afford - and be back in the same position 3 years from now.

[Seeker]

"Strategic" default? That's a moral dilemna as I see it. Without your very survival at stake, it's just welching on a bet.

Agreed. Ultimately I wonder if there yet another part to this that maybe we don't know.

Are the Banks potentially biding their time for a "recovery" that starts to grow? When the interest rates do go up, when (coincidentally) the Banks can finally document ownership and take legal possession of these defaulted homes, is that when they oust these people? Or will they still wait?

When a house is empty, banks lose money every day. When banks have a huge glut of empty houses, do they really want to add to that inventory? When they cannot sell except at a lower cost than they originally paid for that house/property... why wouldn't they want to bide some time to see if the economy does pick up?

When a house has people, even people who may not be paying, do the banks stand to gain anything in exchange for that time that the people have been living there without paying? I think that banks may get some intangibles from "waiting."

[maat55]

I think there is plenty of blame to go around but I still believe the bottom line lies with the borrower. It is your responsibility to determine how much you can afford to borrow. When my wife and I were ready to buy our home years ago, I sat down and reviewed our income and expenses and calculated how much we could afford to pay each month. Then we sat down with the mortgage broker who pre-approved us for a loan of about $20,000 more than I had figured out we could comfortably afford. Had we just depended on her calculations, we would have been overextended and struggling to support that loan.

In recent years, that situation got way out of control with lenders approving ridiculous loans to people who couldn't possibly come close to affording them. Was that the government's fault? Perhaps they had a hand in it, but the lender had to know the loan was bad and the borrower absolutely should have known that he was taking out a loan that there was no way he could repay. When people were borrowing 5 or 6 or 7 times income, where did they expect the money to come from to make the payments?

While I would agree under normal circumstances, it is by no coincidence that the housing bubble was created. Large numbers of people did not just become brain dead, they were led by an perpetrated mindset.

[disneysteve]

Large numbers of people did not just become brain dead, they were led by an perpetrated mindset.

For sure. Lots and lots of unsophisticated consumers were outright lied to by lenders. They were told not to worry about principal payments, not to worry about a down payment. They were given all kinds of "creative" loans to get people into houses "before prices rise even more." They were told that before the rate adjusted or the interest-only period ended, they would just refinance with the equity gained from further increases in the value of the properties. It was a scam from every angle. And the American public bought into it full force.

Maybe they weren't all brain dead, but they sure didn't put on their thinking caps and run the numbers before signing on the bottom line.

[wincrasher]

Well it's hard to fault people for wanting their "own" home. Our whole society and economy is geared to achieving the "good life", which for most is a nice home in the suburbs.

The problem is that that desire can blind people to the point that they become poor consumers. And there are lots of companies (banks, mortgage companies) that were ready and willing to take advantage of that.

People want "the dream", companies want the profits, bond investors want the returns.

[disneysteve]

Well it's hard to fault people for wanting their "own" home. Our whole society and economy is geared to achieving the "good life", which for most is a nice home in the suburbs.

The problem is that that desire can blind people to the point that they become poor consumers. And there are lots of companies (banks, mortgage companies) that were ready and willing to take advantage of that.

People want "the dream", companies want the profits, bond investors want the returns.

This is true, and the government DOES have fault here. They perpetuate the myth that you aren't a success until you own your own home. They provide all kinds of incentives to get people to purchase homes like the interest-rate tax deduction or the new home buyer's credit. Where are the credits and deductions to help those who do the responsible thing and rent because they can't afford to buy?

[wincrasher]

Well, there are all kinds of benefits to society and to families that have home ownership. I can certainly see the government wanting increases in home ownership and having policies to encourage/facilitate that.

FWIW the credits and benefits for rentals go to the landlords - which may in turn, lower rents.