Premature 401k withdrawals require a 10% penalty and 20% withholding. There's the 70%.
Notice that the new guidlines do not address 403b's, 457's, IRA's or Annuities. I wonder if any brokers will violate the obvious spririt of the rule and value the other tax deferred accounts at 100%?
I was watching Bloomberg and the newscaster just noted that "financials were one of the worst beneficiaries" of the market drop. No metaphors, but certainly poetic. I thought you shold know.
I may be wrong, but I believe the 10% penalty on early withdrawls from qualified accounts, as well as the tax liability, has been waived for first time home buyers.
think first time buyers can use there 401k for a down payment up to 10,000 dollars without a penalty
True. But in that case, one is actually liquidating the money, so the underwriter verifies the actual dollars that you have in your checking account that you pulled out of your 401(k).
The issue here is that lenders use 401(k) balances as reserves after closing. The point of reserves is that you'd have something to make payments with if the worst happened. Sapient underwriters have always used 70% of vested balance in the reserve calculation, because there's no provision for you to keep pulling out $10,000 every time you can't make your mortgage payment.
Tanta, haven't you heard of the provision of forming your own LLC, moving the 401K over to it, then allowing real estate to be one of the investments? I'm sure the inhabitants of Ficoville know all about it.
Let me add, for you civilians, that the usual minimum reserve requirement for owner-occupied loans is a whoppin' 2 months' PITI (principal, interest, taxes and insurance on the subject property). You have people having to screw around with the calculations in order to get 2 months' mortgage payments out of these folks' 401(k) balance.
Think about that. If your 401(k) balance is $60,000 and your PITI is $3,000, you have 20 months' reserves. If you use 70%, it's 14 months reserves. Big deal. It does not matter how you calculate reserves for this loan, because you don't get a big boost in the underwriting models for 20 months rather than 14.
It matters when your PITI is $3,000 and your 401(k) balance is $6,000.
Yeah, being prudent certainly fell out of vogue. Those desiring to pay off their mortgages early were counseled not to by financial advisors who talked about using the $$ for more sensible returns, and what about the tax advantages to having a lot of mortgage debt?
Well, maybe now those radio guys who preach paying off your mortgage will get a little more respect...
More and more people are going to learn the hard way that cutting your losses is key to building wealth. Raiding your retirement fund to feed the mortgage alligator isn't exactly real bright. Better to take Cramer's advice, just walk away, leave the keys on the roof.
As an aside, I wonder how many boomers are nervously watching the markets, with fresh memories of 2000-2002 in their minds. Add in an upside-down McMansion, and you have all the ingredients for a nice panic.
"More and more people are going to learn the hard way that cutting your losses is key to building wealth. Raiding your retirement fund to feed the mortgage alligator isn't exactly real bright. Better to take Cramer's advice, just walk away, leave the keys on the roof."
Central, I just can't do that. I don't know. Is it just me? I can't build my wealth on a broken promise. It just doesn't feel right. If I lose my house, I lose my house, but I'll probably rack up my credit cards first in an attempt to salvage my integrity...
I don't get the Cramer advice to "just walk away."
Usually that mortgage loan is a personal promise to pay in addition to a promise to turn over your house if you don't pay. If you walk away from your "800k" house with a 799k mortgage and the servicer forecloses and sells at a distressed 500k . . . you still owe some hedge fund somewhere 299k -- plus interest and penalties and penalty interest. Plus your credit card rates may go up under a "universal defailt" provision.
Maybe in the old days the local bank would be satisfied with putting you out on the street and wouldn't get a deficiency judgment . . . but you can't count on the hedge fund trustee to be so nice if there are wages out there to be garnished for another five or ten years. The only way out is personal bankruptcy, and under the 2005 BRA, you will be put on an austerity budget and pay most your income to your creditors for 5 years. THere goes your Porche as well as your house.
And maybe if the servicer bids in the full amount of your mortgage and takes the property itself you are off the hook . . . but you can't count the hedge fund trustees going along with that for too long, either, unless the servicers start pumping real cash to the investors ... which they don't seem to have.
Help me out here, Tanta, what really happens these days -- are servicers getting deficiency judgments? Who pays off the investors if the servicer bids in the loan and takes ownership upon foreclosure?
(you can tell I am a lawyer by the way I spell "judgment" but I am not that kind of lawyers and really am not involved in the industry in any way." Anybody considering their options here ought to spend a few bucks to consult with a lawyer before proceeding to "walk away" from a mortgage! And no, I am not just looking for business for my sorry profession).
Help me out here, Tanta, what really happens these days -- are servicers getting deficiency judgments?
My sense of things right now is that a deficiency judg(e)ment is too expensive for most servicers' tastes if they can do a power-of-sale FC and skip the courts.
Back in the old days when I worked for a servicer, we never went after a deficiency judg(e)ment unless we thought the borrower had lied to us. No kidding. In those days we kind of expected everyone to tell the truth.
So I have to assume that the thing just goes into the "best execution" model, and if you can get out faster with a non-judicial FC, that's what you'll do.
k - As the old song goes, Some, they do and Some, they don't, and Some you just can't tell.
Servicers will go after deficiency balances if they think there is a chance to recover something.....like the Porsche that is free & clear. Garnishing a guy that is not making much anyway is a waste of time and expense. But what the defaulted H/O will get is a tax form at the end of the year and they get to pay taxes on the deficiency. That's always fun.........
If you want to walk away cleanly, get with the lender and agree to a deed in lieu of foreclosure. Once lender accepts that, they cannot go back for a deficiency.
"Outsider,
That's why the guys who run Bear Stearns are wealthier than you."
Correction: Were wealthier than me. The game's not over yet.
I still believe virtue triumphs over materialism. Call me an idealist. In 50 yrs. few of us will be here, and none of us will take all these greenbacks with us... And then, what will be the point?
k- It seems that most of the people who see me here in LA about giving up their homes qualify for Chapter 7 Bankruptcy- where there is no payment plan for the creditors.
(I don't know if this will still be true as the pain moves up from sub-prime to more affluent borrowers.)
Of course the difficulty Tanta, is that the median 401k balance is something like 17k, and of course young first-time home buyers are likely to be on the lower end of the scale.
Outsider, your personal ethics are admirable, but i doubt that they are shared by anything other than a small minority of the population.
Plus the financially smart thing to do if you are in an upside down situation with creditors hounding you is to shelter as much of your assets in "judgement proof" accounts like a 401k. Correct me if I'm wrong, but I don't believe a 401k can be touched by creditors even after a deficiency judgement.
Save us PPT!!! You're our only hope! Hehe. Just kiddin.
It is rather quaint when my quote streamer locks up when a big volume spike hits. Then when it reloads the numbers are hugely different downward. So special...
Ouch -- I momentarily forgot about the tax impact of "relief from debt." Seems like the IRS would be a big beneficiary of a foreclosure epidemic . . . except that they will also have to line up to squeeze the blood from the turnips . . . but this all still seems to point to a long drag on consumer spending even after foreclosures take place as people struggle with tax bills on top of everything else.
I have had extensive conversations with a bankruptcy attorney i like and respect about whether BK beats jingle mail.here in Sonoma county most folks who default here are seriously underwater on their homes,technically insolvent,and able to go ch7 which beats the shit out of a 1099 for $150k.
cathy, the comment in that piece that you linked mentioned Cramer's "telephone marathon" and suddenly I'm picturing Cramer holding a 24 hour telethon for "financial distrophy". Little sob pieces on brokers having their Yachts repossed interspaced with Cramer down on his knees sobbing, "please, cut the rates, just do it for the bids."
"Outsider, your personal ethics are admirable, but i doubt that they are shared by anything other than a small minority of the population."
They are, actually; but most of us put those ethic aside in the world of business and finance, because "the world doesn't work that way."
But if enough people feel like Outsider, or are eventually turned off/burned by the scuzzy road we have to travel to "succeed" under the current rules -- maybe it will, someday.
Some on Wall Street are looking for a save by the Fed tomorrow. I dont think the Fed has any options that will prevent further selling. (Of course, we should get an oversold bounce sometime soon). Here is what I come up with for Fed statements:
The credit crunch is no nearly as bad as most people thinkwe are keeping our bias toward fighting inflation. No change in rates.
Recent events show that a credit crunch is affecting the markets, especially real estate. We are moving to a neutral stance. No change in rates (but we might change later this fall).
The credit problems are troubling, we are moving toward a loosening bias and a cut is very likely next time. No change today.
We are really worried about the credit markets, so we are taking the almost unprecedented action of loosening by a quarter, an action that we have not signaled to the markets.
We fully agree with Cramer and are completely panicked by the credit crunch. In a last ditch effort to save the economy we are cutting by 0.5 (or maybe 1.0)and will likely cut next month. To hell with the value of the dollar.
I think that 2 or 3 are quite likely, that #1 above would not be believed, and that 4 and 5 would be very shocking and are very unlikely. I also think that any of the above could trigger further losses for the broad stock indexes.
By the way, SPF (Standard Pacific) seems to be collapsing today, down 25% this morning after a 14% loss on Friday. Its liquidity problems must be serious. Any rumors?
Like most legal issues the question of the status of 401(k) in a BK (liquidation or wage earner plan) "depends".
Surprisingly, it depends in part on which state you are in. Federal BK law respects the state exemptions laws (think jillion dollar home in TX or FL), and 401(k)s get better treatment in some states than others.
GENERALLY speaking, IIRC, the money you put in a 401(k) is exempt; the money your employer puts in is not exempt; nor is the money any of it earns.
Tanta, I'm still trying to fully parse your SFAS 140 missive from yesterday. I even resorted to going back and reading several UberNerd posts, which made my head hurt. Are the AAA's clamoring for strict application of the default rules because they are hoping to see the securities "step down" and therefore be more likely to get their money back out avant la deluge?
k - in California you can not get a deficiency judgment if it is a "purchase money" mortgage. So people who purchased the house and then just walk away, will only have to deal with IRS in regards to the 1099 debt relief. But all those people who refi'd themselves into an unsustainable situation, will be on the hook for their loans.
I spent the weekend trying to figure this very question. The effective demise of most stated Alt-A loans seems to hold a problem, in that these borrowers won't be able to refi out of the recast and/or reset. In some areas, such as SoCal, very significant overstatements of income were common on stateds. I very much suspect that most of these individuals will not be able to declare bankruptcy due to legal liability, and therefore will be subject to deficiency judgments.
Excuse me, not that it is an actual "purchase money" mortgage where the seller finances. What I meant was the original loan used to purchase the house, whether it is from a bank or seller, can not have a deficiency judgment filed to collect on it. But refi's and helocs are fair game.
If Bernanke wants to be a hero, he will say "We have plenty of liquidity ready to go if it is really needed, but we are not stepping in now just to save the 8-figure bonuses of a few investment bankers who made bad deals."
If he said that today, he could probably get away with a rate cut or even something more drastic in a week.
MOM - are you certain the piggyback's are exempt? I've seen a couple homes go into forclosure this year and last, with seconds that were used to purchase the home. What I heard was the seconds were told they could not get a deficiency judgment.
If he cuts, we're hosed: our pay and savings (yeah, some people still save, but we're those who refuse to Conform and Consume as instructed.) will be worth pesos, housing will take even longer to return to affordable, and we'll be looking at $4 to $5 a gallon gas. What fun - that'll save the economy! rolls eyes in disgust Oh, but it may let some more of the Big Boys get away with more loot before the curtain call...
In my opinion the FED should not lower rates here. Even going to neutral does not make sense. The economy is in much better shape now than in 1987 or 1998, so a bail out for hedge funds is not necessary. Those who miss-priced risk will get a nice and fresh lecture how markets work and correct this. With inflation still slightly elevated, the FED should just sit tight now.
As for the stock market, any bounce right now will still be short lived. There's more room to go down short-term.
They will say that markets should figure out on their on equilibrium points in the credit markets/mortgage etc.. and that they as Fed do not see a need to tight or loose as they keep watching inflation/economic activity and stability of the financial system.
Go look back at what B. said in Feb after the sub prime issue surfaced.
I predict that they will declare that the problem is now contained just to residental mortgages. Slightly bigger than a breadbox.
Did Option One change their guidelines for smoking crack while on the job? 'Cause even limiting 401(k) valuation to 70% still assumes that it will at least maintain its value. Something that isn't likely to be happening right now since most 401(k) investment options are going to be broad bullish type funds.
I even resorted to going back and reading several UberNerd posts, which made my head hurt.
Sorry, dear. But my shares of Johnson & Johnson are doing great.
Try it this way: if you assume that the choice is between modification and foreclosure, and you assume that modifications are 50-70% successful (enough so that you are better off, net, than if you had FC'd them all), then what modifications do is:
Reduce the percent of nonperforming loans in the deal, which can actually help the deal pass the step-down triggers. This isn't generally a good thing for the top tranches. Hence Fitch's announcement that they are going to start counting mods as delinquent loans (for 12 months after the mod, at least) for step-down purposes. That was supposed to make the top tranches calm down about accusations of "manipulation" without outright preventing mods.
Slow down the prepayment of principal. A foreclosed loan would result in a prepayment to any tranche that gets principal prepayments. A modified loan that performs just throws off its little bit of scheduled prinicpal every month. So the more loans you modify, the more you slow amortization of the bonds. This does not help the top tranches, who want out ahead of the flood. Generally, until step-down, the top tranches are getting all the principal prepayments.
It all gets complicated by the fact that nobody much trusts anybody's models anymore. A mod is "best execution" only if the model tells you you'd write off more principal in a foreclosure. But the model should also be using updated re-default statistics on the mods, because if a higher than historically-average number of them re-default, that means FCing later rather than sooner, and that means (in the current environment) higher loss severity when it's all over.
I am sympathetic to those who distrust the models in this regard. However, I do not trust the result that says you can FC that many loans at once and still get severities in the 30% range.
Some 14 percent of homeowners surveyed in July said they expected house prices to fall in the year ahead, down from 16 percent who said this in June. In July, only about 37 percent expected prices to rise in the coming year.
The limit on Florida condos does not surprise me a bit. I was in FL this weekend visiting family and read a story in the Palm Beach Post that claimed that Palm Beach, Broward and Dade counties (combined pop. ~5.5 million) currently has 100,000 condo units under construction. Wow.
because if a higher than historically-average number of them re-default, that means FCing later rather than sooner, and that means (in the current environment) higher loss severity when it's all over.
What makes you think it will ever be over? Seriously, we are seeing every single default metric bust every model that ever existed. The contagion upward to Alt-A and now Jumbo Prime wasn't modeled. The rate of increase in delinquencies is sigmas greater than worst case projections. The number of delinquencies going to NOD and then default are giving back ####! on the spreadsheet.
Deliquescence won't work. We need several stairstep (2x4s to the forehead) events just to avoid a cliff.
The last bear market of 2000-2002 (worst in 70 years) saw share depreciation of 40-50 percent. S&P went from 1500 down to 800. Was the FED dumber then or asleep? They cannot do anything. The market will move where it wants to.
Yeah. None of this has trickled into the public consciousness yet.
I went to a funeral in Solano County (CA) a couple of weeks ago; Solano's one of the foreclosure/subprime hotspots in California. We talked real estate; even so, most of the folks there accepted the idea that real estate was high and over time could only continue to go up. Of course they're not in the market, they're all quite settled: in their 50s or later and have owned their homes for 20+ years.
So, unless it's your business to know, or you hang out on a board like this, or you've been in the housing market lately, all this stuff about subprime and CDOs and such is just stuff on the business page that you don't pay much attention to. If you even read newspapers.
The last bear market of 2000-2002 (worst in 70 years) saw share depreciation of 40-50 percent. S&P went from 1500 down to 800. Was the FED dumber then or asleep? They cannot do anything. The market will move where it wants to.
justintime | 08.06.07 - 1:28 pm | #
They did do something. The FED doesn't cut to save "housing" or "stocks".
Some will argue that easy money caused the current problem- Sorry not so.
Cash automatically flows to good performing assets- nothing can be done to change that.
Breaking News -- Former Fed Pres Wm Ford Blames Fed Policy for the Mortgage Mess
William Ford, the former Atlanta Fed President, is on Bloomberg TV right now. He blames the 1% rate policy for the current woes. On Saturday, Former Fed Gov Gramlich, who voted for rate cuts to 1%, also indirectly admitted that the 1% rate was responsible for the sub-prime fiasco. He said" "We didn't know" that the policy would lead to the abuses.
Lots of local housing markets will do okay over the next few years. SoCal is not equal to the US.
Next year could be the time to buy a Florida beach condo if you ever wanted one. Sorry to be cliche, but they aren't making any more beaches and prices may be rock bottom.
I didn't think wages were stagnant? I thought the last number out for wages was up 3.9%, regardless of purchasing power, a few more years of that number and it takes the squeeze off some people, especially fixed mortgages.
I thought you could beat the 401k tax withholding (not penalty) by filing the correct form prior to a withdrawal? And the 70% number could still be too high if there are locked in employer accounts and the person is still emloyed at the same company.
I don't want to be the one to say I told you so, but I told you so:
Bear Stearns seeks Wall Street backing
By David Wighton in New York
Published: August 6 2007 19:53 | Last updated: August 6 2007 19:53
Jimmy Cayne, chief executive of Bear Stearns, has been calling round other Wall Street chiefs asking them not to pull business as he faces a growing crisis of confidence in the bank.
Funds available for asset verification (down payment/reserves) from a 401K will be limited to 70% of vested balance
Clearly targeted at older & middle aged borrowers since the young haven't accumulated 401Ks of any size yet... so what could they promise as collateral? THEIR FIRST BORN!!!
Absolute genius, man I should get a handle over at Brokers Universal Outpost & make some MO-NAY!!!
Call the company 'Swift Proposal Financial Services'... or something catchy like that. Is there still time?
M-F - if you look at real incomes over the last seven years, you'll see that many income brackets have been stagnant. The picture looks worse when you factor in a significant increase in overall debt levels. I was looking at G.20 earlier today and noticed, for example, the steadily increasing LTVs on used car loans. There is a short-term upward trend on new car loans as well.
The effect of that debt has been somewhat masked by the housing bubble and extraction of equity, but as CR has noted, the credit constriction will whittle away at that.
Regarding the question of whether a creditor can go after the borrower for any deficit after foreclosure, there are several factors.
1) A fraudulent transaction nullifies any statutory protections. So there is the legal ability to go after someone who had an $18,000 income and filed one of those cute stated-income apps reporting that they made $75,000 or got an undisclosed cash-back. My guess is that this will affect many more of the Alt-A borrowers than subprime.
2) State law. Many states have laws that limit deficiency judgments on purchase money mortgages. The theory is that both of the partners in the transaction should have done due diligence and that the lender should assume some of the risk.
3) Very few of those laws protect refinances and cash-out home equities. So if you go back and cash-out, the risk is then usually on the borrower, aka the FB.
4) In CA, in particular, I am quite sure that there is still a two-tier system. If a creditor does a quickie FC, they get the property to sell for value, but no deficiency judgment. OR the creditor can go through the courts, get the judgment, get the property, and get the right to seize other assets. But you have to pick one or the other, and it is way more expensive to choose the judicial route.
There is another thing about piggies. I don't know all the ins and outs of CA lending, but traditionally, most piggies have really been two rapid transactions. The first transaction is the first lienholder who finances acquisition of the property, and then the piggy pays the first lienholder down so that the first lienholder can sell the loan on the secondary market without MI having cut down the LTV in that way. The 80% is in first lien position, which was traditionally necessary to sell. I am not sure how exactly most of these piggies are being done in CA, but my guess is that it is done similarly.
I haven't checked up on CA law recently to know the exact wording, but I am sure most of the lenders there did, and structured these transactions to cover themselves as much as possible. Now from the borrower's POV this may be one transaction, but for the purpose of making sure that the first lienholder is indeed senior (the oinkholder only gets whatever is left over after the senior lien is paid down), these are generally two loan transactions. The piggyback payoff is generally a condition of purchase, but depending on the wording and interpretation of the statutes by the courts, that oink lien may not legally be purchase money. Purchase money finances initial acquisition of the home.
That still doesn't mean that the oinkholder will pursue a deficiency judgment. It will not be worth it to the oinkholder to go the judicial route unless The Bank Of Oink believes it can recover its legal costs and its principal after the senior lienholder is paid. So your normal FTHB is not likely to get slapped with an oink deficiency. However, speculators with other assets certai
MOM - I agree regarding real incomes, but I was talking about absolute incomes / actual dollars. (Which is why I said "regardless of purchasing power".)
For fixed mortgages, I think it's relevant to talk about actual dollar pay increasing at around 3% per year, regardless if real purchasing power is flat. I think the rising incomes have to at least help make some costs more manageable over 3,5,7 years.
And then people also progress in their careers. I am guessing that it's more likely that someone putting 0% down on an owner-occupied first home is more likely to be young.
So, my little half-baked theory is many people will hang on. If they can sweat out the first 5 years, their mortgage payment may seem 15% smaller even on the same salary.
Yes this assumes they don't het hit with a huge rate increase on an ARM and that they are able to convert fixed at some point. But to support my little theory there was some 4/28 posting here on CR which referenced a "broken system" and that perhaps 45% of subprime people could have qualified for fixed prime at thhe time but got cheated by the brokerage industry.
This is how Capitulation looks like:
Mortgage Grapevine: Should I even bother?
Tanta - I forgot you were in the meeting. Thanks for taking notes....
Don't mention it, Hoove. It was always my job to take the notes.
Premature 401k withdrawals require a 10% penalty and 20% withholding. There's the 70%.
Notice that the new guidlines do not address 403b's, 457's, IRA's or Annuities. I wonder if any brokers will violate the obvious spririt of the rule and value the other tax deferred accounts at 100%?
I missed the part of the article blaming the rating agencies....
Tanta,
I was watching Bloomberg and the newscaster just noted that "financials were one of the worst beneficiaries" of the market drop. No metaphors, but certainly poetic. I thought you shold know.
I may be wrong, but I believe the 10% penalty on early withdrawls from qualified accounts, as well as the tax liability, has been waived for first time home buyers.
If anyone ever wonder what is wrong in FicoVille:
Mortgage Grapevine: TRUE NO DOCS, WHO WHAT WHEN AND WHERE
I think first time buyers can use there 401k for a down payment up to 10,000 dollars without a penalty
someguy,
It depends upon the particular plan. They can be written different ways. Check with HR if you're intending to do so.
aaaaaah my 401k is in QIDs
Yal, that's the American Dream in action!
What a mess.
think first time buyers can use there 401k for a down payment up to 10,000 dollars without a penalty
True. But in that case, one is actually liquidating the money, so the underwriter verifies the actual dollars that you have in your checking account that you pulled out of your 401(k).
The issue here is that lenders use 401(k) balances as reserves after closing. The point of reserves is that you'd have something to make payments with if the worst happened. Sapient underwriters have always used 70% of vested balance in the reserve calculation, because there's no provision for you to keep pulling out $10,000 every time you can't make your mortgage payment.
Thank you, Bob. I'm sure that being one of the worst beneficiaries is better than being one of the best victims.
Ha! With housing prices dropping, prime mortgage loans are going to have to ask for 40% down payment to help alleviate the risk.
The no Florida Condos rule will probably become more widespread. Guess there goes the South Florida economy--good riddance!!!!!
Tanta, haven't you heard of the provision of forming your own LLC, moving the 401K over to it, then allowing real estate to be one of the investments? I'm sure the inhabitants of Ficoville know all about it.
I particularly enjoyed everyone's attempts to make up scenarios in which No-Doc loans "make sense."
Yeah, see, there was this one guy, see, and . . .
Uh oh. Better call out the black helicopters. Looks like we're running out of dip buyers.
"Ha! With housing prices dropping, prime mortgage loans are going to have to ask for 40% down payment to help alleviate the risk."
Boy, that'd be the feedback loop from Hell.
On the Cramer rant:
Clusterfuck Nation by Jim Kunstler
Let me add, for you civilians, that the usual minimum reserve requirement for owner-occupied loans is a whoppin' 2 months' PITI (principal, interest, taxes and insurance on the subject property). You have people having to screw around with the calculations in order to get 2 months' mortgage payments out of these folks' 401(k) balance.
Think about that. If your 401(k) balance is $60,000 and your PITI is $3,000, you have 20 months' reserves. If you use 70%, it's 14 months reserves. Big deal. It does not matter how you calculate reserves for this loan, because you don't get a big boost in the underwriting models for 20 months rather than 14.
It matters when your PITI is $3,000 and your 401(k) balance is $6,000.
Yeah, being prudent certainly fell out of vogue. Those desiring to pay off their mortgages early were counseled not to by financial advisors who talked about using the $$ for more sensible returns, and what about the tax advantages to having a lot of mortgage debt?
Well, maybe now those radio guys who preach paying off your mortgage will get a little more respect...
Oooh, I don't like those ads attacking my comments...
More and more people are going to learn the hard way that cutting your losses is key to building wealth. Raiding your retirement fund to feed the mortgage alligator isn't exactly real bright. Better to take Cramer's advice, just walk away, leave the keys on the roof.
As an aside, I wonder how many boomers are nervously watching the markets, with fresh memories of 2000-2002 in their minds. Add in an upside-down McMansion, and you have all the ingredients for a nice panic.
"More and more people are going to learn the hard way that cutting your losses is key to building wealth. Raiding your retirement fund to feed the mortgage alligator isn't exactly real bright. Better to take Cramer's advice, just walk away, leave the keys on the roof."
Central, I just can't do that. I don't know. Is it just me? I can't build my wealth on a broken promise. It just doesn't feel right. If I lose my house, I lose my house, but I'll probably rack up my credit cards first in an attempt to salvage my integrity...
Outsider -
If at first you dont succeed, try, try again. Then quit. Theres no point in being a damn fool about it. W. C. Fields
Outsider,
That's why the guys who run Bear Stearns are wealthier than you.
I don't get the Cramer advice to "just walk away."
Usually that mortgage loan is a personal promise to pay in addition to a promise to turn over your house if you don't pay. If you walk away from your "800k" house with a 799k mortgage and the servicer forecloses and sells at a distressed 500k . . . you still owe some hedge fund somewhere 299k -- plus interest and penalties and penalty interest. Plus your credit card rates may go up under a "universal defailt" provision.
Maybe in the old days the local bank would be satisfied with putting you out on the street and wouldn't get a deficiency judgment . . . but you can't count on the hedge fund trustee to be so nice if there are wages out there to be garnished for another five or ten years. The only way out is personal bankruptcy, and under the 2005 BRA, you will be put on an austerity budget and pay most your income to your creditors for 5 years. THere goes your Porche as well as your house.
And maybe if the servicer bids in the full amount of your mortgage and takes the property itself you are off the hook . . . but you can't count the hedge fund trustees going along with that for too long, either, unless the servicers start pumping real cash to the investors ... which they don't seem to have.
Help me out here, Tanta, what really happens these days -- are servicers getting deficiency judgments? Who pays off the investors if the servicer bids in the loan and takes ownership upon foreclosure?
(you can tell I am a lawyer by the way I spell "judgment" but I am not that kind of lawyers and really am not involved in the industry in any way." Anybody considering their options here ought to spend a few bucks to consult with a lawyer before proceeding to "walk away" from a mortgage! And no, I am not just looking for business for my sorry profession).
--k
Help me out here, Tanta, what really happens these days -- are servicers getting deficiency judgments?
My sense of things right now is that a deficiency judg(e)ment is too expensive for most servicers' tastes if they can do a power-of-sale FC and skip the courts.
Back in the old days when I worked for a servicer, we never went after a deficiency judg(e)ment unless we thought the borrower had lied to us. No kidding. In those days we kind of expected everyone to tell the truth.
So I have to assume that the thing just goes into the "best execution" model, and if you can get out faster with a non-judicial FC, that's what you'll do.
k - As the old song goes, Some, they do and Some, they don't, and Some you just can't tell.
Servicers will go after deficiency balances if they think there is a chance to recover something.....like the Porsche that is free & clear. Garnishing a guy that is not making much anyway is a waste of time and expense. But what the defaulted H/O will get is a tax form at the end of the year and they get to pay taxes on the deficiency. That's always fun.........
If you want to walk away cleanly, get with the lender and agree to a deed in lieu of foreclosure. Once lender accepts that, they cannot go back for a deficiency.
"Outsider,
That's why the guys who run Bear Stearns are wealthier than you."
Correction: Were wealthier than me.
The game's not over yet.
I still believe virtue triumphs over materialism. Call me an idealist. In 50 yrs. few of us will be here, and none of us will take all these greenbacks with us... And then, what will be the point?
Tanta,
dono if you meant it but the headline sound familiar until I have found it. It is not the name of the title but the album:
YouTube -
Best,
k- It seems that most of the people who see me here in LA about giving up their homes qualify for Chapter 7 Bankruptcy- where there is no payment plan for the creditors.
(I don't know if this will still be true as the pain moves up from sub-prime to more affluent borrowers.)
Of course the difficulty Tanta, is that the median 401k balance is something like 17k, and of course young first-time home buyers are likely to be on the lower end of the scale.
Outsider, your personal ethics are admirable, but i doubt that they are shared by anything other than a small minority of the population.
Plus the financially smart thing to do if you are in an upside down situation with creditors hounding you is to shelter as much of your assets in "judgement proof" accounts like a 401k. Correct me if I'm wrong, but I don't believe a 401k can be touched by creditors even after a deficiency judgement.
BTW, here comes today's market tank.
Save us PPT!!! You're our only hope!
Hehe. Just kiddin.
It is rather quaint when my quote streamer locks up when a big volume spike hits. Then when it reloads the numbers are hugely different downward. So special...
Define wealth- I agree with the Outsider.
JR in BG --
Ouch -- I momentarily forgot about the tax impact of "relief from debt." Seems like the IRS would be a big beneficiary of a foreclosure epidemic . . . except that they will also have to line up to squeeze the blood from the turnips . . . but this all still seems to point to a long drag on consumer spending even after foreclosures take place as people struggle with tax bills on top of everything else.
I have had extensive conversations with a bankruptcy attorney i like and respect about whether BK beats jingle mail.here in Sonoma county most folks who default here are seriously underwater on their homes,technically insolvent,and able to go ch7 which beats the shit out of a 1099 for $150k.
cathy, the comment in that piece that you linked mentioned Cramer's "telephone marathon" and suddenly I'm picturing Cramer holding a 24 hour telethon for "financial distrophy". Little sob pieces on brokers having their Yachts repossed interspaced with Cramer down on his knees sobbing, "please, cut the rates, just do it for the bids."
As I'm writing this the Dow is down 0.8 points. I'm heading for the bunker folks.
Good luck all.
"Outsider, your personal ethics are admirable, but i doubt that they are shared by anything other than a small minority of the population."
They are, actually; but most of us put those ethic aside in the world of business and finance, because "the world doesn't work that way."
But if enough people feel like Outsider, or are eventually turned off/burned by the scuzzy road we have to travel to "succeed" under the current rules -- maybe it will, someday.
Keep the faith, Outsider.
Some on Wall Street are looking for a save by the Fed tomorrow. I dont think the Fed has any options that will prevent further selling. (Of course, we should get an oversold bounce sometime soon). Here is what I come up with for Fed statements:
I think that 2 or 3 are quite likely, that #1 above would not be believed, and that 4 and 5 would be very shocking and are very unlikely. I also think that any of the above could trigger further losses for the broad stock indexes.
By the way, SPF (Standard Pacific) seems to be collapsing today, down 25% this morning after a 14% loss on Friday. Its liquidity problems must be serious. Any rumors?
OK, so any of you guys with a Bloomberg terminal heard whatever news it is that halted LUM an hour ago?
ac,
Naw, the crash is not scheduled until later this afternoon. There are still bulls that need to be drawn in for the fleecing.
central_scrutinizer
Like most legal issues the question of the status of 401(k) in a BK (liquidation or wage earner plan) "depends".
Surprisingly, it depends in part on which state you are in. Federal BK law respects the state exemptions laws (think jillion dollar home in TX or FL), and 401(k)s get better treatment in some states than others.
GENERALLY speaking, IIRC, the money you put in a 401(k) is exempt; the money your employer puts in is not exempt; nor is the money any of it earns.
Opinion,
Lehman will be the next shoe to drop.
Any idea why the pay day money lender and pawn broker stocks are taking such a beating? I am guessing that their cost of funding is going up.
OT
Tanta, I'm still trying to fully parse your SFAS 140 missive from yesterday. I even resorted to going back and reading several UberNerd posts, which made my head hurt. Are the AAA's clamoring for strict application of the default rules because they are hoping to see the securities "step down" and therefore be more likely to get their money back out avant la deluge?
Thanks for any insight.
k - in California you can not get a deficiency judgment if it is a "purchase money" mortgage. So people who purchased the house and then just walk away, will only have to deal with IRS in regards to the 1099 debt relief. But all those people who refi'd themselves into an unsustainable situation, will be on the hook for their loans.
Creative Destruction & Tom Stone:
I spent the weekend trying to figure this very question. The effective demise of most stated Alt-A loans seems to hold a problem, in that these borrowers won't be able to refi out of the recast and/or reset. In some areas, such as SoCal, very significant overstatements of income were common on stateds. I very much suspect that most of these individuals will not be able to declare bankruptcy due to legal liability, and therefore will be subject to deficiency judgments.
Napolean - don't forget piggybacks for purchases, which do not share the exemption.
Excuse me, not that it is an actual "purchase money" mortgage where the seller finances. What I meant was the original loan used to purchase the house, whether it is from a bank or seller, can not have a deficiency judgment filed to collect on it. But refi's and helocs are fair game.
If Bernanke wants to be a hero, he will say "We have plenty of liquidity ready to go if it is really needed, but we are not stepping in now just to save the 8-figure bonuses of a few investment bankers who made bad deals."
If he said that today, he could probably get away with a rate cut or even something more drastic in a week.
MOM - are you certain the piggyback's are exempt? I've seen a couple homes go into forclosure this year and last, with seconds that were used to purchase the home. What I heard was the seconds were told they could not get a deficiency judgment.
If he cuts, we're hosed: our pay and savings (yeah, some people still save, but we're those who refuse to Conform and Consume as instructed.) will be worth pesos, housing will take even longer to return to affordable, and we'll be looking at $4 to $5 a gallon gas. What fun - that'll save the economy! rolls eyes in disgust Oh, but it may let some more of the Big Boys get away with more loot before the curtain call...
--
No Money Down
They made no sense when the home prices were going up and they make no sense now. Are the lenders in speculation business?
Crooks by any other name...
Jas
On the Fed statement tomorrow, my bet is option number 2, or maybe muddled language that might be called option 2.5.
In my opinion the FED should not lower rates here. Even going to neutral does not make sense. The economy is in much better shape now than in 1987 or 1998, so a bail out for hedge funds is not necessary. Those who miss-priced risk will get a nice and fresh lecture how markets work and correct this. With inflation still slightly elevated, the FED should just sit tight now.
As for the stock market, any bounce right now will still be short lived. There's more room to go down short-term.
O-Joe
Bill,
You mis the FEd sentiment all together.
They will say that markets should figure out on their on equilibrium points in the credit markets/mortgage etc.. and that they as Fed do not see a need to tight or loose as they keep watching inflation/economic activity and stability of the financial system.
Go look back at what B. said in Feb after the sub prime issue surfaced.
I predict that they will declare that the problem is now contained just to residental mortgages. Slightly bigger than a breadbox.
Did Option One change their guidelines for smoking crack while on the job? 'Cause even limiting 401(k) valuation to 70% still assumes that it will at least maintain its value. Something that isn't likely to be happening right now since most 401(k) investment options are going to be broad bullish type funds.
Fed can't cut rates now.
Cramer's rant is everywhere and linked to Drudge.
The Fed doesn't want to look like it responds to guys like Cramer.
Also, it won't work anyway since Cramer's call for cuts is because he says it's Armeggedon out there now.
A rate cut would say the Fed agrees.
"The Fed doesn't want to look like it responds to guys like Cramer."
Absolutly. The moment I saw that I had the same thought.
central_scrutinizer, you might escape the deficiency judgment, but the IRS can take it for the taxes on your 1099 "income".
Besides, if the cut once (unless it's huge), they have to cut several times since everyone knows that one cut won't help
What happens to the dollar when everyone knows that several more cuts are coming?
Finally, on rate cuts:
If things go bad, any ACTION is easier to blame than INACTION.
It does not matter what happens to the dollar once they begin cutting because by then inflation will be the least of worries.
I even resorted to going back and reading several UberNerd posts, which made my head hurt.
Sorry, dear. But my shares of Johnson & Johnson are doing great.
Try it this way: if you assume that the choice is between modification and foreclosure, and you assume that modifications are 50-70% successful (enough so that you are better off, net, than if you had FC'd them all), then what modifications do is:
It all gets complicated by the fact that nobody much trusts anybody's models anymore. A mod is "best execution" only if the model tells you you'd write off more principal in a foreclosure. But the model should also be using updated re-default statistics on the mods, because if a higher than historically-average number of them re-default, that means FCing later rather than sooner, and that means (in the current environment) higher loss severity when it's all over.
I am sympathetic to those who distrust the models in this regard. However, I do not trust the result that says you can FC that many loans at once and still get severities in the 30% range.
Joe,
The fed does not care about the dollar.
Inaction is also problematic. Imgine we crash in September and Cramer blames the Fed in action.
What can they say: It was already too late to cut ?
SPF on the verge of going under!
Average joe wrote:
"Also, it won't work anyway since Cramer's call for cuts is because he says it's Armeggedon out there now.
A rate cut would say the Fed agrees."
That is exactly correct and why the Fed will not cut tomorrow. They will say something in line with option #2 written above by Bill.
This just in.... people still clueless!!
Few expect home prices to rise soon
| Reuters
Some 14 percent of homeowners surveyed in July said they expected house prices to fall in the year ahead, down from 16 percent who said this in June. In July, only about 37 percent expected prices to rise in the coming year.
37% say prices up, only 14% say down!
Apparently noone told them their incomes have been largely stagnant, and their ability to get financing just took shotgun blast to the kneecaps.
The limit on Florida condos does not surprise me a bit. I was in FL this weekend visiting family and read a story in the Palm Beach Post that claimed that Palm Beach, Broward and Dade counties (combined pop. ~5.5 million) currently has 100,000 condo units under construction. Wow.
"37% say prices up, only 14% say down!"
That sounds correct.
Where I live its different. We do not fit the mold of the panic stricken news writers. Besides, everyone wants to live here. Onward and upward I say.
because if a higher than historically-average number of them re-default, that means FCing later rather than sooner, and that means (in the current environment) higher loss severity when it's all over.
What makes you think it will ever be over?
Seriously, we are seeing every single default metric bust every model that ever existed. The contagion upward to Alt-A and now Jumbo Prime wasn't modeled. The rate of increase in delinquencies is sigmas greater than worst case projections. The number of delinquencies going to NOD and then default are giving back ####! on the spreadsheet.
Deliquescence won't work. We need several stairstep (2x4s to the forehead) events just to avoid a cliff.
crispy-any reference on SPF?
What makes you think it will ever be over?
Well, actually, I just meant "the loan" by "it." I didn't mean "the nightmare." That isn't going to end any time soon.
The last bear market of 2000-2002 (worst in 70 years) saw share depreciation of 40-50 percent. S&P went from 1500 down to 800. Was the FED dumber then or asleep? They cannot do anything. The market will move where it wants to.
"37% say prices up, only 14% say down!"
Yeah. None of this has trickled into the public consciousness yet.
I went to a funeral in Solano County (CA) a couple of weeks ago; Solano's one of the foreclosure/subprime hotspots in California. We talked real estate; even so, most of the folks there accepted the idea that real estate was high and over time could only continue to go up. Of course they're not in the market, they're all quite settled: in their 50s or later and have owned their homes for 20+ years.
So, unless it's your business to know, or you hang out on a board like this, or you've been in the housing market lately, all this stuff about subprime and CDOs and such is just stuff on the business page that you don't pay much attention to. If you even read newspapers.
The last bear market of 2000-2002 (worst in 70 years) saw share depreciation of 40-50 percent. S&P went from 1500 down to 800. Was the FED dumber then or asleep? They cannot do anything. The market will move where it wants to.
justintime | 08.06.07 - 1:28 pm | #
They did do something. The FED doesn't cut to save "housing" or "stocks".
Some will argue that easy money caused the current problem- Sorry not so.
Cash automatically flows to good performing assets- nothing can be done to change that.
SPF-
Potential for lines getting pulled - see bloomberg. Stock now below $10, of course the company denies it.
Standard Pacific Shares Tumble on Credit Concern (Update3) - Bloomberg.com
--
August 06, 2007; 11:05 PST
Breaking News -- Former Fed Pres Wm Ford Blames Fed Policy for the Mortgage Mess
William Ford, the former Atlanta Fed President, is on Bloomberg TV right now. He blames the 1% rate policy for the current woes. On Saturday, Former Fed Gov Gramlich, who voted for rate cuts to 1%, also indirectly admitted that the 1% rate was responsible for the sub-prime fiasco. He said" "We didn't know" that the policy would lead to the abuses.
Jas
Un autre.
2:12Aegis unable to fund mortgage loans already in pipeline
2:12Aegis Mortgage suspends all loan originations
cbsmarketwatch.
Multiple responses:
Lots of local housing markets will do okay over the next few years. SoCal is not equal to the US.
Next year could be the time to buy a Florida beach condo if you ever wanted one. Sorry to be cliche, but they aren't making any more beaches and prices may be rock bottom.
I didn't think wages were stagnant? I thought the last number out for wages was up 3.9%, regardless of purchasing power, a few more years of that number and it takes the squeeze off some people, especially fixed mortgages.
I thought you could beat the 401k tax withholding (not penalty) by filing the correct form prior to a withdrawal? And the 70% number could still be too high if there are locked in employer accounts and the person is still emloyed at the same company.
I don't want to be the one to say I told you so, but I told you so:
Bear Stearns seeks Wall Street backing
By David Wighton in New York
Published: August 6 2007 19:53 | Last updated: August 6 2007 19:53
Jimmy Cayne, chief executive of Bear Stearns, has been calling round other Wall Street chiefs asking them not to pull business as he faces a growing crisis of confidence in the bank.
That, by the way, is from Financial Times. BSC is now engaged in a fight for their existence as a firm.
From Tanta's main link...
Funds available for asset verification (down payment/reserves) from a 401K will be limited to 70% of vested balance
Clearly targeted at older & middle aged borrowers since the young haven't accumulated 401Ks of any size yet... so what could they promise as collateral? THEIR FIRST BORN!!!
Absolute genius, man I should get a handle over at Brokers Universal Outpost & make some MO-NAY!!!
Call the company 'Swift Proposal Financial Services'... or something catchy like that. Is there still time?
M-F - if you look at real incomes over the last seven years, you'll see that many income brackets have been stagnant. The picture looks worse when you factor in a significant increase in overall debt levels. I was looking at G.20 earlier today and noticed, for example, the steadily increasing LTVs on used car loans. There is a short-term upward trend on new car loans as well.
The effect of that debt has been somewhat masked by the housing bubble and extraction of equity, but as CR has noted, the credit constriction will whittle away at that.
judg(e)ment
LOL. Is that the new 'Rob Approved (RA)' version? Is there a link to an online 'Rob's Unabridged' somewhere?
For someone like me who can neither spell nor grammar (i.e. keep his verbs verbing and nouns nouning)... I find this very entertaining*.
*In keeping with the Punctuation Optional System (POS) I've employed for years.
Napolean:
Regarding the question of whether a creditor can go after the borrower for any deficit after foreclosure, there are several factors.
1) A fraudulent transaction nullifies any statutory protections. So there is the legal ability to go after someone who had an $18,000 income and filed one of those cute stated-income apps reporting that they made $75,000 or got an undisclosed cash-back. My guess is that this will affect many more of the Alt-A borrowers than subprime.
2) State law. Many states have laws that limit deficiency judgments on purchase money mortgages. The theory is that both of the partners in the transaction should have done due diligence and that the lender should assume some of the risk.
3) Very few of those laws protect refinances and cash-out home equities. So if you go back and cash-out, the risk is then usually on the borrower, aka the FB.
4) In CA, in particular, I am quite sure that there is still a two-tier system. If a creditor does a quickie FC, they get the property to sell for value, but no deficiency judgment. OR the creditor can go through the courts, get the judgment, get the property, and get the right to seize other assets. But you have to pick one or the other, and it is way more expensive to choose the judicial route.
There is another thing about piggies. I don't know all the ins and outs of CA lending, but traditionally, most piggies have really been two rapid transactions. The first transaction is the first lienholder who finances acquisition of the property, and then the piggy pays the first lienholder down so that the first lienholder can sell the loan on the secondary market without MI having cut down the LTV in that way. The 80% is in first lien position, which was traditionally necessary to sell. I am not sure how exactly most of these piggies are being done in CA, but my guess is that it is done similarly.
I haven't checked up on CA law recently to know the exact wording, but I am sure most of the lenders there did, and structured these transactions to cover themselves as much as possible. Now from the borrower's POV this may be one transaction, but for the purpose of making sure that the first lienholder is indeed senior (the oinkholder only gets whatever is left over after the senior lien is paid down), these are generally two loan transactions. The piggyback payoff is generally a condition of purchase, but depending on the wording and interpretation of the statutes by the courts, that oink lien may not legally be purchase money. Purchase money finances initial acquisition of the home.
That still doesn't mean that the oinkholder will pursue a deficiency judgment. It will not be worth it to the oinkholder to go the judicial route unless The Bank Of Oink believes it can recover its legal costs and its principal after the senior lienholder is paid. So your normal FTHB is not likely to get slapped with an oink deficiency. However, speculators with other assets certai
MOM is right- fraud can trump the anti-deficiency protections in CA (CCP 726f)
Creditors generally have only a narrow time window to assert fraud in a bankruptcy.
Piggybacks and CCP 580(b)- that sounds like a good title for an article...
MOM - I agree regarding real incomes, but I was talking about absolute incomes / actual dollars. (Which is why I said "regardless of purchasing power".)
For fixed mortgages, I think it's relevant to talk about actual dollar pay increasing at around 3% per year, regardless if real purchasing power is flat. I think the rising incomes have to at least help make some costs more manageable over 3,5,7 years.
And then people also progress in their careers. I am guessing that it's more likely that someone putting 0% down on an owner-occupied first home is more likely to be young.
So, my little half-baked theory is many people will hang on. If they can sweat out the first 5 years, their mortgage payment may seem 15% smaller even on the same salary.
Yes this assumes they don't het hit with a huge rate increase on an ARM and that they are able to convert fixed at some point. But to support my little theory there was some 4/28 posting here on CR which referenced a "broken system" and that perhaps 45% of subprime people could have qualified for fixed prime at thhe time but got cheated by the brokerage industry.