The Draconian Credit Card Bill passed by the prior congress has given consumers a choice. Your house or your credit; you can't have both. Most choose the latter and mail the keys in.
61% (I think this is correct; it is from memory) of Americans think the country is in a recession. They probably know more about it than the professional economists.
I'm a great deal less worried about individuals deciding to walk away from their mortgages based on something they read in the paper that suggests that their neighbors do it too, than I am politicians deciding to base regulatory or legal proposals on the "conventional wisdom" as represented in media stories.
If you do remember the news coverage of the bankruptcy reform bill, you might remember that a lot of people got away with throwing out anecdotes of BK "abuse" without having to even verify that they were more than urban legends, let alone anything more than a small minority of filers.
I also observe that this anecdote from one of Mish's readers itself starts out by observing that the reader's observation of his own neighborhood dynamics was influenced by what he read on Mish's blog.
Now, we all want to influence our readers, but there's always the danger in anecdotal evidence that what we notice or remember or choose to interpret about the world is driven by arguments made or presented on the blog, not really by truly objective observation. In other words, if the blogs or papers have convinced you that "walk-aways" are becoming common, there's the problem that you will begin to "see it" in your neighborhood by interpreting things (like the neighbor leaving before dawn) to fit the theory. It is incredibly difficult to change people's minds once they have convinced themselves that they have "seen" this phenomenon in their own block.
So again, I'm not really worrying at the moment that this behavior will "catch on" because of the media; I'm worried that it doesn't exist yet except in some pockets of the borrower pool who have other problems (like unfinished developments). That is, people might be walking away, but I'm not yet convinced that they are not also in financial distress. It may be that they are just giving up on the house a lot faster than past generations of distressed borrowers did.
To the mortgage or newspaper professional who's made it this far:
If you want to claim you have statistics about any of these conclusions Tanta's just shot down, please post everything. 100% of your data, how you analyzed it, what your assumptions were -- front to back.
Because, you see, people who are trained in statistics (me, for instance) will most likely eat your numbers for lunch and still be hungry.
I don't agree with any so-called conclusion from Lawrence Yun. He's a fool. A rich fool, yes, but as a professional? Bunk.
I really wish newspaper professionals hadn't sacrificed their integrity just for another nickel of ad money from lenders.
CalculatedRiskOmnibusPig, I really am trying to be constructive for a minute.
It does occur to me that reporters just don't know how much (or how little) actual hard data mortgage servicers would have in a given foreclosure case. So it doesn't necessarily occur to them to ask, "How do you know this to be true"?
I am trying to help out, by letting people know that (as far as I've seen) these claims about walk-aways are being based on inferences and proxied data, not direct evidence. I won't assume that reporters are unwilling to ask follow-up questions, just that they don't realize that they should.
It's hard to imagine that at this point borrowers are walking away for any reason but financial distress. The one exception is flippers, who are certainly aware of how much house prices have dropped. So perhaps the walkaways that the industry refers to are speculators, although it would be embarrassing for the industry to admit it, as that would emphasize the stupidity of the lending practices that got the industry in this mess.
I'm sure consumers will take banks' admonishments to heart - and start modifying their behavior in ways that will economically cripple them, even though they are not legally required to.
Just as the banks have always been known to act against their own economic self-interest, taking into account their moral obligations to say home- and farmowners being repossesed, credit cardholders who get hit with fees and rate hikes, bank employees who get laid off after mergers.
Of course people are going to respond to incentives, and take full advantage of their legal rights to protect their families' financial future. Just as the bank is supposed to act in shareholders' interests.
The mystery is not that the borrowers are acting in their own interest, but that the bankers didn't. They made a bunch of loans to dodgy borrowers at 100% LTV that let the customer make money if the value went up, and walk away if it went south. Now they're acting surprised and blaming the borrower.
So perhaps the walkaways that the industry refers to are speculators, although it would be embarrassing for the industry to admit it
I think that's very plausible.
I also think that we possibly need to expand the definition of "speculator" a little.
There were those--flippers--who were planning on a quick resale of a property they didn't occupy.
There are those who do occupy the property, but really just bought it (and screwed their household budget in the process) because they believed that it would function as their retirement savings or they could cash-out in the future periodically to supplement household income or whatever. There is certainly something speculative about this behavior, but it isn't the classic flipper.
You can, I think, rest assured that lenders don't want to talk about the assumptions of housing as a retirement nest egg, for instance, to be a kind of speculation.
It's dishonest to have it both ways: (1) federal tax money backstops investor and bank losses when homeowners walk away from homes, and (2) California law allows homeowners to walk away without liability - even if they have money to pay.
Yeah OK so why can't the Feds just get rid of #1, which is within their jurisdiction, rather than #2, which isn't.
If lenders have a problem with #2 they can demand a substantial down payment or just not lend in California. Nobody's forcing them to.
Lending with 20% down a good idea. Not lending in Cali a terrible idea. Remember its the third biggest economy in the world. It would crush the US, the dollar, etc....
For those serious reporters reading CR on a Sunday afternoon - one possible source for these type of data - contact the owners of youwalkaway.com and ask them for some numbers....
Um, as a person who seems to be living at ground zero of the real estate debacle. (pardon to those in San Diego just a year ahead of us), I am beginning to wonder how long the banks are going to stay in the business of housing lending.
The profit margins for holding even 50 cents of loans looks to be very very bad in this type of environment.
Now if consumer credit rolls over next, we are going to see serious impairment in the functioning of our consumer economy.
All of you would be Franklins out there- where does your paycheck come from? Remember, a collapse in consumer spending will be felt throughout the economic terra firma.
I for one am beginning to become very concerned with the lack of good alternatives being offered by our politicians to this crisis.
No, Whocoodanode, is not an acceptable response. First wall street killed the S&Ls that used to fulfill the role of mortgage providers, and now the banks are failing at filling Wall Street's gap.
The immense deleveraging that is beginning to occur on Wall Street is a further symptom of the disease, lack of confidence.
Bernanke's research focused on the liquidity questions, and ignored the solvency and lack of confidence that the early 30s was mired in. I think he still does not understand the failure of the markets due to insolvency, and the bank run disasters, combined with massive layoffs.
Ah well, ruthless borrower was enabled by ruthless mortgage industry. Who is at fault? Our regulatory system (or lack thereof), and Congress will close the door after the barn has burned down.
"Lending with 20% down a good idea. Not lending in Cali a terrible idea. Remember its the third biggest economy in the world. It would crush the US, the dollar, etc...."
This place would shut down pretty quickly if that happened. For that reason, I doubt that it would. Even going back to a 20 percent down would be a hard fall; though personally, in a time of decreasing housing valuations, that would be prudence on the behalf of the lenders.
Getting back on topic, I believe yes, that for journalists places like Calculated Risks should be like tipsters; that's where you get the idea that something's going on, then you go and dig up the facts that make it an actual story.
Journalism has devolved into a "he said, she said" exercise over the last 30 years. The race to get a story out first -- and thus, raise ratings and ad revenues -- has trumped the thought of actually doing research. Thus journalism has too often become merely the practice of finding someone who says something shocking or outrageous, and then dutifully transcribing it.
I'd flunked out of j-school 30 years ago if I'd reported the way some of these guys do now. And no, not a practicing journalist.
Given the fact that most people think their house is worth more or the same as one year ago, I really don't think this is a $ value issue. Nearly everyone falls into the trap as it's ego driven.
Reading some of the anecdotes, it seems that resets are setting the FC into action. People just realize that life can be better with a $2k rental payment than a $5k mortgage payment. The boom was driven off immediate monthly payments and I think the bust will snap back just as hard for the same reason.
As far as a stigma, with $3 ATM charges and credit card rates interest rates adjusting for no reason, few are going to have a hard time justifying sticking it to the bank. As I've said before, I believe it will soon be a badge of courage to some.
In 1946, when the American post war housing boom started, the average house was 1,100 square feet and housed 5 people. Fifty years latter, in 1996 the average house would grow to 2,200 square feet and house 2.6 people and by 2007, fueled by easy credit, the average American home would would become the equivalent of a Hummer, weighing in at super-sized 2,400 square feet.
Americans have become too fat, too complacent, too much in debt, way to much house for their needs and way too many Americans living beyond their means.
Tanta,I suspect that the people claiming that "walk-aways" can pay their mortgage are looking at the claimed "income" on the apps as well as fico scores.Our local paper has an article about a poor victim who claimed $10k a month more than he actually made,and had to sell his $1MM dream home in a short sale.looking at his app and credit report only,he could afford the place...half the loans here in sonoma county were sisa,nina,or stated in '04-'06,without re underwriting these loans how can you tell if the borrowers are ruthless,or simply fools who committed fraud ?
The problem with analysis-by-anecdote-and-media is that it doesn't mean much. I'm sure you could have a frontpage article every day in the NYT about particular ruthless debtors even if it was trivial statistically. Unfortunately it's hard to get at. You could look at defaults by DTI on recent loans. Some low DTI defaults will occur as a result of life changes, but if there's a big jump that would tip us off to a real shift.
There's also a philosophical issue with people under onerous, but at least theoretically manageable debt loads, particular loads that 10-15 years ago would be considered unacceptable for a loan. If they default, is it ruthless? Or are they just coming to their senses? Most likely some combination, and the point is that even with detailed financial info drawing the "ruthless" line can be hard.
Tanta,I suspect that the people claiming that "walk-aways" can pay their mortgage are looking at the claimed "income" on the apps
I hope they're not that stupid. I wouldn't even do that on a full-doc loan.
Since the most likely possibility in any situation of default is loss of job/loss of breadwinner/inability to work, the last thing you would do is assume that employment income that was available at time of origination is necessarily still available.
The trouble is that if the borrower doesn't talk to you, you can't verify whether there is an income deficiency. But you can always order a new credit report without borrower authorization (under the "account monitoring" rules).
In fact, the GSEs (at least) require servicers to report cause of delinquency codes, and I suspect lenders collect this info for anyone they do talk to. So in the group of reponsive borrowers, you can distinguish between those with income shortfalls and those with unexpected expenses (not necessarily more consumer debt). However, if you never talk to the borrower, you just report "no contact" or "skipped." So then you have to make educated guesses about what's going on with that group.
Historically, looking at the credit report wasn't that bad a proxy. I just question whether it's a good one today.
The survey of 1,619 homeowners found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value. . . .
Is this from the peak price? Original purchase price?
Yeah OK so why can't the Feds just get rid of #1, which is within their jurisdiction, rather than #2, which isn't.
If lenders have a problem with #2 they can demand a substantial down payment or just not lend in California. Nobody's forcing them to.
Because that would involve shrinking government, rather than expanding it, and we can't have that, now can we?
I know, I know. This crisis is all private enterprises fault, and has nothing to do with the GSE's backstopping the RE industry with tax dollars, the chummy relationship between the big banks and washington, or govt. pension funds blindly buying AAA paper.
You could look at defaults by DTI on recent loans.
CR and I were just talking about this the other day.
What complicates it for me is that given a certain set of assumptions about the world, a certain set of homeowners will put up with making life sacrifices to carry a very high mortgage payment. If you think that your house will provide for your retirement, or send your kids to college, or just mean your kids can stay in a great school system, you can go a surprisingly long time on ramen and mended underwear and begging for a loan from the parents to make up a missed payment or two.
If you get the sense that those assumptions were false, it begins to be harder to never take the kids to a movie just to keep up with the house payment.
This is rather different than what a lot of people think of as "debt reprioritizing." I would certainly like to see any data servicers have for DTI at origination linked to walk away rates, with the caveat of course that given stated income plus teaser-rate qualification games, I don't trust reported DTIs much.
"It suggests that editors are getting over their preference for misleading information from named sources with institutional affiliations and a book to talk up (Hi, NAR!) over solid information from anonymous bloggers who are accumulating credibility the hard way (by, you know, being credible)."
Interesting, I have a huge BS meter and I routinely dismiss or challenge the credibility of many with supposedly good credentials for easily recognizable shill/immoral behaviour. Sometimes I continue to follow these people simply because it is important to know what the self-interest-regardless-of-cost-to-society or ounce of ethics or morality group is up to.
I may have looked for your references before, because I often do look for references on web sites I visit, however, I had completely forgot that you were "anonymous."
"The survey of 1,619 homeowners found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value. . . .
Is this from the peak price? Original purchase price?"
They don't say, do they? I followed the link to the story, and they don't say there either, nor is there a link to any survey site.
If you bought more than five years ago, your house is still worth more than you paid for it (for now). And I would be willing to believe that the majority of homeowners have been in place five years or more.
how dumb were some of the policies you encountered?
Sometimes they were so dumb they'd make your teeth hurt, but I still don't think anyone goes back to a 2-year-old loan application to see what the borrower's current income is. They're no more likely to do that than to go back to a 2-year-old appraisal to see what the house is worth today.
From the first paragraph, I assume they asked about declines/increases "in the past year."
So someone who bought in 2003 may still be ahead compared to original purchase price, but might accurately have responded that the value is down in the last year from the peak.
Excellent point about how to define the ability to pay. Since I've been following this stuff I've been shock to see 40 year mortgage and 50% of income to qualify. I worked in banks from 1980 to 1984 and I think banks had good standards then.
I looked up my local credit union:
"This calculation determines your proposed monthly housing costs. Along with your mortgage payment, it includes other expenses like property taxes, electricity and heating costs, condo or strata fees. These total monthly housing costs divided by your gross monthly income shouldn't exceed 32%, or your housing costs may be too high to sustain."
This should be the definition of being able to "afford to pay." Anything else is debt slavery.
It also said total debts should not be more than 40%, with utilities included.
Thanks for your post -- brings to mind those armies of welfare queens and bankruptcy scammers we just knew were mocking us.
One presumption that weighs heavily on your post, though, is that journalists need to just be enlightened and asked nicely to dig deeper and they'll be motivated beyond their salaries and skill sets, and wishes of their corporate bosses, to do so.
Lately, I've started to think that some writers who adeptly point out the media's shortfalls may actually be able to shame them into a more nuanced reporting style. Of course I don't have a shred of evidence why they might be motivated to take your advice. Please don't stop giving it, though.
Actual news in a Sunday paper would only fill 5 broadsheets. Advertising requires far more. It is only natural to add filler to th point of revenue maximization.
I used to get so mad at the media for being sloppy, uninformative and biased in the direction I don't like. I was a terrible hypocrite.
In California it's not surprising that people decide to walk away from the mortgage, whether or not that is, in fact, happening to any appreciable degree. The income/house prince disparity was so great after 2003 that no one making 120% of the median income could possibly afford to purchase a house without a stated income option ARM unless it was a move-up buyer who had sold to someone who used one of those loans.
Very few first-time buyers in California make a 20% down payment, unless they have really rich relatives. Almost everyone I know who bought a house either had borrowed from one or more relatives, or was assisted by one of the government down-payment assistance programs. The difference is that the lender and/or government agency required proof of income, employment history and so on sufficient to determine that the borrower could make the payments over time. That's actually much more important than "skin the game."
I do wonder how many of the alleged walkaways are speculators who realized that the rents weren't going to catch up to the mortgage payments for, say, 15 years or so. (That was the disparity that led Dean Baker to declare a likely bubble several years ago.) It's much easier to walk away from a house that is someone else's home.
Of course I don't have a shred of evidence why they might be motivated to take your advice.
Alo, I have actually gotten a few very thoughtful emails lately from reporters who are grappling with the fact that they'd like to call me so that they can get quotations on record for the paper, but they know I won't do that. At least a few of them really do understand why I don't want to become just another quote-bot.
I really think this select group of reporters just does need to know 1) what questions to ask and 2) what counts as a worthless response to that question. Once they know that they can find people to talk to; surely everyone has figured out how to get a mortgage lender's servicing department SVP on the phone (right?). I have no problems with the idea that some reporters are using the content of this blog in an argument with their editors about how deeply they should be rooting into stories. Or perhaps editors might use the insights from this blog to beat on reporters. Who knows?
There isn't anything I or anyone else can do for or about the simple stenographers except devoutly hope that they'll fall off a curb while they're chasing some press secretary who is about to fill them full of spin.
I would guess that that the executives and Bank of America and Wachovia are in a position to know something about the defaulting customers they are talking about. These borrowers may have checking accounts and credit cards with the very same bank as their mortgages. The bankers would have a good perspective into the monthly cash flow and credit worthiness of the account. If they saw people in otherwise healthy financial circumstances walk away, this would be cause for alarm as I am pretty sure it is unprecedented.
These borrowers may have checking accounts and credit cards with the very same bank as their mortgages.
Well, if that's the case, then that's the evidence. I'd still like to see it.
As it happens, both those outfits are claiming that their retail mortgage book (the one most likely to be made up of customers who also have deposit accounts with them) are performing much better than their wholesale/brokered book (which is much more likely to be made up of non-bank customers).
Also, how much exposure to the hottest CA markets does Wachovia have at the retail deposit level? I mean, if it were Wells Fargo, maybe. But aren't BoA and Wachovia deposits still concentrated in the east/southeast? (That's a real question--I don't pay as much attention to retail banking patterns as I used to.)
Finally, if these institutions were able and willing to analyze deposit account activity of mortgage borrowers, you think they might have done that before they wrote the loan. I know BoA didn't do as much of that "stated asset" crap as Wachovia did, but they did all take loans without, so far as I know, bothering to look up the borrower's deposit activity first.
In a previous thread, somebody claimed that California (for example) could not now pass legislation that would stop people from walking away from mortgages that were no-recourse at the time they were written. Can anyone confirm this?
I have predicting passage of a lot of "homeowner distress relief" legislation that has, tucked away in some inconspicuous place, a switch from non-recourse to recourse. I hope I'm mistaken.
There's a reason everyone single commenter here who works in the mortgage biz posts using a pseudonym.
True. But on the other hand, if you put a hundred monkeys in a room with a phone and a phone book, eventually one of them will call you, Shnaps.
I'm guessing they'd let you go in the paper as a "source who doesn't want to be named" as long as the reporter knew who you were and where you worked.
And may I say I live for the day I pick up the WSJ and read some quote from a "mortgage servicing expert" and think, Jeebus, that's our Shnaps! No one else has that exact combination of knowledge, experience, snarkiness, and bad attitude!
Billy - I'm not sure what your getting at. I can't imagine any legislation that would prevent people from walking away, whether the lender has recourse or not.
Would this involve locking collars and a buried perimeter wire like I the ones they use for Labradors?
Wachovia bought Oakland-based World Savings two years ago. World was a big player in payment option ARMs. BofA was a huge west coast regional bank until in was bought by Nations Bank of Charolotte NC and kept the BofA name. Both of these banks have significant California deposit bases and very large exposures to California real estate. BofA is big in Nevada and Arizona as well.
I would not defend their underwriting standards regardless of how much data they have on their customers.
Why, thanks. I'm sure that quote will be stipped of my soul and therefore unrecognizable.
I think that's why I come here - you provide a healthy outlet to purge the snark and 'tude from my system, either that, or I'd have to start drinking on the job.
Yeah, sorry about the tea. In that regard, we're still not quite even. I think I got Billy's drift, honesty - I just couldn't resist sharing that mental image.
Wachovia bought Oakland-based World Savings two years ago. . . .
I was going to say something snarky about being surprised that World Savings borrowers still had deposit accounts, but let's not go there.
I guess I'm surprised that anyone who has an active checking account with the lender can "disappear" or hide from the servicing department. Unless you don't get mailed statements, the bank generally has your current address . . .
So long as the subject of "flippers" has come up, we should recognize that this is also a nuanced group.
The pejorative flipper typically bought a home from a desperate or uninformed homeowner at a low-ball price, did some cosmetic work and put it back on the market at a competitive price. The principle was to turn over as many properties as fast as possible, often several concurrently, with little attention to a real increase in value.
At the other end of the spectrum, the value-added flipper bought a home that was in physically bad condition, at least relative to the neighborhood, at essentially a fair price. He then made substantial improvements to bring the home up to (and often beyond) the neighborhood standard. Profit depended on increasing the market value of the home in excess of the cost of the improvements. This flipper did in fact add value to the neighborhood.
But even in an age when access to data is light-years ahead of a generation ago, I doubt that it will be possible to collect sufficiently detailed information such that behavior across the spectrum of so-called flippers is instructive.
BTW I just noticed that I wrote this in the past tense; probably a mistake since flippers of all shades are a result of market conditions, not the cause. They will be back whenever, or wherever, the situation appears lucrative. And besides, scavengers serve an essential role in all of nature, including the financial world.
Tanta, it was a stumbly way to say it in the last post, but I'm pretty sure your columns have made for more careful journalism.
What would be really cool is to imagine both the editor and reporter storming into the publisher's office with copies of your column and...oh well, I can dream.
I have no doubt there are some responsible reporters still out there, but man, this bubble needed a whole lot more of them to counteract that sea of stenographers. Stenographers come cheap, as every publisher knows.
So, is the time right to start calling the mortgage company and offering 40% of the second for forgiveness? I suspect if the second is on investment property, the answer may be yes.
One of the things folks forget is that a trip through technical insolvency doesn't touch retirement assets for the most part. In other words, if you have most of your savings in 401k, and you bought a speculator home, you could have an almost free walk away option.
The funny part is we trained investors to think like this, and then when they perform like rational economist type homo economicus, the lenders complain.
I have to laugh, you want a nice stodgy borrower, they look for folks who want to buy now- most of them understand the risks and can run a calculator.
Now BB had best get that inflation machine going, or we will be in real poop. Wage inflation is the only measure that will grow us out of this mess without handing investors a huge loss, and impairing mortgage markets for decades.
I know the feeling. We did a caption contest a while ago involving some picture of some home on a flatbed parked along the side of some freeway that immediately came to my mind. A bunch of people suggested that basically it looked like owners were trying to walk away and the house was trying to track them down again . . .
At the other end of the spectrum, the value-added flipper bought a home that was in physically bad condition, at least relative to the neighborhood, at essentially a fair price. He then made substantial improvements to bring the home up to (and often beyond) the neighborhood standard. Profit depended on increasing the market value of the home in excess of the cost of the improvements. This flipper did in fact add value to the neighborhood.
I personally call those folks "rehabbers." I know the term "flipper" is used there, but I agree that there's a difference between the two groups.
You can further distinguish between rehabbers who put their own money (or sweat equity) into increasing the market value, at least in part, and those who funded all the improvements with cash-out. The latter group is in as much trouble as the simple flipper.
but the non-recourse protections would be null and void if you committed fraud in obtaining the loan, would they not?
Maybe we'll get lucky and one of our attorney friends will pipe up here, but my understanding is that it's not that the non-recourse law is voided in a fraud case, it's that there's a different cause of action. That is, in the case of fraud you aren't just doing a simple foreclosure, you're suing the borrower for having defrauded you, and the judge can order restitution or damages out of any assets you have.
Tanta Saith: Unless you don't get mailed statements, the bank generally has your current address . . .
With the rise of electronic banking, banks have been in a rush to eliminate their paper statements (every fourth time I log on to my bank's website they give me an ad that I must click through trying to encourage me to stop getting paper statements). It's pretty possible for your bank to not know where you live these days.
Here it seems like there were a lot of wannabe flippers that just finished too late. Empty House gets remodeled. For Sale sign goes up. After a few months without a sale, the orange sticker shows up on the door, the sign vanishes and then it sits and sits. Granted I'm not in one of the Bubble areas. We have had a few folks prosecuted for fraud buying multiple properties as owner occupied primary residences.
OT: The "hope now" rate freeze seems to me to result in higher payments for the most subprime-y loans. Guy I know has a 2/28, resetting sometime this fall. Initial rate of 11.7, variable rate is LIBOR plus 7.65 . Seems to me whatever LIBOR index they're using it would have to be lower than his current rate (granted when rates go back up then it would go the other way).
By the way, I now know exactly how much my house is worth. I added it to my Ameritrade Streamer and it flashes a very attractive red and green. It was up $ 4 at mid-day friday, but finished down $ 2. I can't wait for it to open in Tokyo!
I think stories of borrowers going out and buying a second cheaper home (that they can afford) before they walk away from their first home are bogus.
Can you imagine the loan officer for the second home's mortgage? He pulls up the borrower's credit report and there's the first mortgage listed. That has to be a red flag. The credit score is good, so he asks for documented income... and then denies them because their real income can't afford the first mortgage, much less the first plus another one for the cheaper (second) home.
We are back in the traditional "documented-income-plus-down-payment" times, right?
Many of the 2003-2006 rehabbers were amatuers who paid retail for the wiring and plumbing (and roofing and siding and). They were able to do the painting themselves. Sometimes the renovations would take over 6 months. During the boom, most of the money they made was the increase in market value plus low paying sweat equity, not the added value of a new kitchen puchased and installed at retail prices.
I found the 41% of folks surveyed who replied, "no change" in their home's value to be pretty revealing. No matter how you intepreted the question (change over the past year or when you bought), we've recently gone through a historic run-up in prices and now a historic deflation of values. The one thing your home's price hasn't done lately is stay the same.
Foreclosure and HPI declines are now "front page" news in the MSM. It's like global warming stories: you simply cannot have failed to have noticed. Your neighbors don't talk about this stuff at parties?!
Thus this 41% isn't in denial-- they are simply clueless. I hasten to add that your most important asset / liability needs monitoring.
If I could draw a Venn diagram of mortgagor stupidity, the union of "I didn't know what kind of loan I was getting into" and "I don't think my house's value has changed" must cover a lot of territory.
There are an awful lot of folks who should be renting rather than owning. And for people like that, life is chock full of surprises.
This is another wonderful and informative post. The financial community of movers and shakers as well as journalists could use a major dose of literature and the ability to craft narrative and the plot line of this, not to mention the imagination necessary to conceptualize it, as it is playing out.
Just a guess, but you must be a graduate of one of the best liberal arts programs in the US.
You did a brilliant job of pointing out something that I have believed....that those that can truly afford their home are not likely "walking away" just because they are upside down. At least not in any great numbers.
Several things would have to happen first...
1) The owners would have to have another place in mind immediately that they could go to for less money a month.
2) It would likely have to be nearby and in the same school district (if they have kids).
3) The new payment (whether purchase or rent) would have to be much less than the mortgage to make up for the difference after taxes...and more importantly the walk-aways would have to have calcualated it exactly.
4) The walk-awayers would have to have a very real understanding of the value of their own house relative to those that are valued well below theirs. Most people view their own house as "special" anyway so just because a similar model is say $350,000 and they owe $500,000 on theirs...they are likely to see theirs as worth more anyway.
5) The cost to their credit, reputation, the inconvienience to move and any other unforseen or unkowable legal consequence would have to be well worth the monthly difference in living expenses. Given the arguing of those on this blog of the legal ramifications of walking away...I doubt many people really could forsee what legal or civil cost that would or would not incur by up and leaving.
6) Those walking away would have to be very confident that the drop in value in their house relative to what they owe will be a long term drop and not bounce right back a few months after settling in somewhere else (especially if they plan to rent and re-purchase later). Given the varying opinions of how long this housing bust will last..I doubt many people will gample to save $ each month when they can afford what they are currently paying.
All this combined leads me to believe that those walking are doing so because they can't afford to stay.
Again, I am not saying that people won't walk away. I am saying that most who can comfortably afford their current mortgage won't walk simply because their house is worth even several tens or hundreds of thousands less than they owe.
"That is, in the case of fraud you aren't just doing a simple foreclosure, you're suing the borrower for having defrauded you, and the judge can order restitution or damages out of any assets you have."
It seems to me the result is the same either way; that is you can go after other assets. Banks may not have the resources to do this, but I could see a whole industry arising to take this on for a % age of the recovery. I sold at a loss in 1991 and brought a check to closing (only a couple of thousand, but still) and I don't like the idea of those who are walking (as opposed to those who have met with misfortune) to skate free and clear.
To begin with I would be shocked if every single person in CA with a mortgage isn't accutely aware of what thier properties are worth on any given day. RE is like GOOG stock to californians, a get-rich-quick scheme. Many (OR MOST) that are upside down will walk away.
There's a website dedicated to helping them with the details! justwalkaway.com
I think it's the most logical thing to do, given the circumstances and future prospects for housing prices. I'd do it if I were deep underwater and saddled with a painful payment. Of course I would never put myself in that kind of position (painful payment) so perhaps I'm not a good judge of how they'll behave (doubtful).
Get used to u-hauls emptying homes and owners abandoning, near you.
Perhaps not completely off-topic: has anything been heard recently about Senator Dodd's proposal to allow bankruptcy judges to change mortgage payment terms? (sorry if I've completely misstated what Dodd was proposing)
But I'm not willing to take it as a matter of faith, and I'm impatient with pronouncements from banks and rating agencies that aren't backed up with better data.
You want data? You can't handle data. Well, okay, you can, but you aren't going to get it from most newspapers.
Mark Twain and the Russians had the right idea about newspapers, I am afraid.
Nothing against ya but have fun with that !!! On the news last night they had a blurb about Lee county Florida needing judges for foreclosures. They actually said if you were a lawyer with some arbitration(didn't hear it all) background to get ahold of so and so at the county courthouse. The courts can't even process foreclosures at the current rate...Do you think they or the lenders want to even go down the lawsuit route ??? It would be years before you got anything...
I have friends in the journalism business. Some are now teaching while others are still working in newsrooms. Many until recently were unaware of gathering storm. They'd never heard of the shadow banking system and do not understand derivatives (who does?). I directed them to this blog, especially the ubernerd posts.
Newspapers everywhere are undergoing the same transformation that earlier hit your industry -- the corporatization of news organizations. The result of which is turning into a failure to serve the public good.
Whenever oldtime journalists gather, we talk of these changes. Most of us believe democracy can't exist without informed citizens.
I guess I'm surprised that anyone who has an active checking account with the lender can "disappear" or hide from the servicing department. Unless you don't get mailed statements, the bank generally has your current address . . .
Tanta -- I work for a major bank, and I have two words for you: legacy systems. You may or may not be surprised how often one hand doesn't know what the other hand is doing.
"I found the 41% of folks surveyed who replied, "no change" in their home's value to be pretty revealing. No matter how you intepreted the question (change over the past year or when you bought), we've recently gone through a historic run-up in prices and now a historic deflation of values. The one thing your home's price hasn't done lately is stay the same."
According to our local paper, prices in my area (Albany, NY) were down 1% last year. So, I could reasonably be in that 41 %. I suspect in many mid-sized metro areas outside of FL, CA, AZ or NV prices in the last year may indeed not have changed much.
Newspapers are getting crushed. Ebay/craigslist vs classifieds. Why pay for the cow when the milk is free. NYT abandon its pay model for online content.
This has been going on for a while. Any fans of the HBO series The Wire can see what was going on at the Baltimore Sun circa 1995. We are in about round 5 of this.
Google news has the same story 500 times.
Print journalism is a little like steel in 1965 -- a lot of high fixed costs, still profitable, but steadily declining. Maybe more like wire line phone service.
I think the newspapers do a pretty good job. I frequently read the paper editions of both the NYT and the WSJ. It's not a bad way of knowing what everybody knows. I suppose if you turn back the clock 30 years, national newspapers weren't readily available locally, so we may be in about the same place.
Blogs are going to have to pick up some of the slack as general newspapers turn out the lights. I'm happy we have some that are more serious than gawker. Good work, cr and tanta.
Perhaps I should make my point a little more clear. I don't think the newsroom reporters are lackeys for their corporate bosses. They are constantly asked to do more with less. They rely on press releases. Corporations have communications departments to get their story out.
As far as a monolithic business 'line' -- there is nothing the WSJ likes better then a 'gotcha' piece. Reporters and editors live for these rare moments.
Tanta -- I work for a major bank, and I have two words for you: legacy systems. You may or may not be surprised how often one hand doesn't know what the other hand is doing.
There isn't much about legacy system horrors that would shock me.
But a seriously delinquent loan goes to someone in the default servicing department for some kind of review. Even if the default servicing people don't have access to the deposit system, there's picking up the phone to call Irene in Research to see if deposit ops processed a change of address. I mean, people in default servicing can do some pretty sophisticated kinds of skip-tracing; you'd think they could also just yell over the top of the cubicles to the the checking account people to see if anyone's heard from this borrower lately over there . . . .
I know. I know. The cubicles are in different hemispheres and Irene got forced to retire a long time ago. Sigh.
Concerning the BK abuse being whide spread before the BK laws were changed.
I am Canadian and my wife's uncle did declare BK even thought his wife a nurse in LA was making 90k+ and he had a decent house, nice SUV and seem to be living pretty comfortabley. And he seem to think to declare BK was quite a normal thing to do. I assume some of his friends have done the same thing.
So the odds would say that
BK abuse must have been pretty wide spread because I know less than 5 people in the states.
I take exception with the term "wealth was vaporized" in the context of home values. These buyers likely knew they were buying near the top, but refused to listen to reason and stubbornly believed that values would continue to rise.
Americans need to get educated on how a market works. As someone who has dabbled in option trading, I can attest to the fact that something is worth whatever you can sell it for, right now.
If I had the mentality that I was "owed" a price on an equity or option, I would get my butt handed to me.
Your house is worth whatever you can sell it for on the open market, period. If you don't like the current market, you can choose to hold on and wait it out. But don't go crying because your neighbor had the good fortune to sell right near the top, while you missed out. That is called a free market; deal with it.
Tanta:
Thank you for such a thoughtful post.
I see the question as going deep into the American Psyche.
Lama touches on it when he calls most housing as "ego-enhancing". It is our need to define ourselves and demonstrate our social position by the proxy of our overt material possessions.
And those ersatz communities in CA FL NV immediately filled with the rootless have no history to help in social delineation. So the proxy is the only clue available.
How much then should we as a society be forced to support a residence that is not for shelter but for status-definition?
Myself I would favor a non-recourse limit. A shelter safety-net. Beyond that it is Vanity. Which as we know is a Mortal Sin
It may sound appropriately populist to be in favor of making the rich pay up, but . . . [m]y own sense is that such a proposal would be more likely to garnish wages of already-struggling families than it would to force the fat cats to liquidate the jewelry collection to pay off Countrywide..
You sure can turn a phrase, girl.
I am also very willing to believe that servicers and servicing platforms are broken: that we aren't collecting the right kind of data, that contact efforts (rather than just responses) are inadequate, and that it's just plain easier for understaffed outfits to credit "borrower attitudes" for rising defaults than to send those defaulting files through a rigorous analysis process, one that looks carefully at the original loan underwiting and reverifies more than just a current FICO.
Since they didn't look very closely at the files before making the loan, it's safe to assume there's no way they're going to spend the time and energy to do that now.
The purpose [of non-recourse laws] is supposed to be to prevent bad lending practices in the first place: if lenders know they are secured only by the real estate in a purchase transaction--not by any additional recourse to other assets--then, in theory, they will institute sane LTV limits and pay attention to decent appraisals.
I believe those law are also expressly designed to put the financial burden of an overpriced asset on the seller, not the buyer, since the seller presumably knows more about the true value of the asset. The institutional lender is just a bad substitute for seller financing, but, as a third party, has every incentive to protect itself in the ways you mentioned.
I cannot speak for anyone but myself, here is how I came the realization that, ruthless or not, I was making the best decision for my family and I by walking.
Since I bought this 970 sq. ft RivCo home, I have never been below 50% total housing expenditures. With 10k down, i was still given an 80/20. Now, 5 years later, its almost worth what i originally mortgaged. Too bad I refid 3 times to keep the place from falling down. My income is up 60% since the day we moved in, and we dont seem to be making any headway. Yes, I have a car payment, and a student loan, and a credit card. Decent credit too, 720 fico. Enough is enough- Ill keep paying the car note, since that is what gets me to work. Ill keep paying the credit card, cos thats what will pay emergency med bills.
I am 29 years old, and it took me this long to realize the extent to which many in this country are in debt slavery. Media didn't tell me, the for sale signs and empty houses in my neighborhood didnt tell me. Waking up and realizing that no person making 65k a year, with a comparatively modest life style ( i dont have a boat, rv, hummer, etc) should be this broke.
Tanta, congratulations. I'm sure that if anyone ever finds out your real name you will have a very hard time working in banking again for this and similar efforts. In this respect, the fat cats have long memories.
No matter how politely you phrase it, the suggestion that bankers who believed they could sell all risk might now not be correctly assessing risk, and indeed have a huge incentive not to assess risk, carries a cruel inevitability. The truth hurts.
"...force the fat cats to liquidate the jewelry collection to pay off Countrywide..."
Oh Tanta! Ipodius (I love it when I refer to myself in the third person) longs for the good old days when hefty sterling was given as wedding gifts so that the bride and groom would have something of value to sell if times became difficult. I suppose that went out with being presented with an immaculately gloved hand from a lady, but I can still dream.....
I suspect most upside-down homeowners hadn't considered walking away until the "60 Minutes" program and resulting news stories. Well, they know now.
Those heavily involved in the RE biz & carrying several investment homes know the present value of their houses and that they are in trouble. It happened in 1979-80 in Arizona. Most of the flippers I knew were California & AZ Realtors, AZ mortgage bankers & title company folks who bought multiple investment homes. They went bankrupt & lost everything when the bubble popped.
. . . it's not that the non-recourse law is voided in a fraud case, it's that there's a different cause of action.
In California the non-recourse laws are statutory and cannot be waived by the buyer. Since they are not part of the contract, they cannot be vitiated by fraud on the part of the party being benefited.
The benefit accrues to society as a whole, not to any individual buyer (borrower). The legislation came right out of the 1930s for a reason.
The preponderance of walkaways almost certainly belong to two groups:
(1) Those first-time specuvestors buying NOO properties using toxic mortgages, and
(2) Those buying for themselves using toxic mortgages before being "priced out forever".
Neither could actually afford the properties, but neither ever expected anything other than future appreciation. Once the promise of appreciation stopped, their days were numbered.
Only for UberNerds on non-recourse law, sections of the California Code of Civil Procedure:
relating to 1 to 4 unit residential:
C.C.P. 580b.
"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
"Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein."
relating to non-judicial foreclosure:
C.C.P. 580d.
"No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.
"This section does not apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or which is made by a public utility subject to the Public Utilities Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code)."
Many my friends and colleagues bought within the last 5 years and are addicted to Zillow and Trulia. I know this because I was subjected to incessant bragging about the "value" of their homes. Now, not so much.
One divorce is already directly attributable to a short sale caused by financial irresponsibility. Another colleague is foreclosing on a condo because her home is not selling. Both cases are upper middle class families with two well-payed earners.
A broad slice of well off mortgage holders have their savings sequestered in protected accounts. My colleagues at work have 12% of their income in a traditional pension (all employer contrib), up $15,000 in a 403b, up to $15,000 in a 457, and $5,000 in an IRA. For many middle class left-coast home debtors, default would seem to be the EASY choice.
The USA has become more polarized, alienated, and angry. IMO, this will have huge impact on the currenct economic crunch. In my social circle, debt and tax default is cool. Its viewed as form of political protest.
I'd really like to see some quantitative analyis on what is determined to be a "walk away".
FWIW my own review of a decent sized sample of EPDs and Servicer Evaluation Forms pointed to a flip problem not a "walk away" problem. This wasn't a huge sample of EPDs (about 30 loans) but was pretty time consuming as it required the credit to be re-pulled and a re-underwrite of each file. This was in early 2007 and was concentrated in the SE US. As for the Servicer Evaluation Forms they didn't really help at all. The information that the servicer provided was inconclusive. I wouldn't be suprised to see a growing # of "walk aways" but I don't have any hard empirical evidence as of yet.
Squeezed - It's cool to have bastard kids too. After all - don't all the Hollywood stars do it? Remind me never to enter into any form of contract or investment in California. Sounds about as sound to me as investing in some third world country. Roby
"In my social circle, debt and tax default is cool. Its viewed as form of political protest."
I'm not sure that's true in mine, but I do think there is an attitude change. It's the "deep pockets" theory applied to mortgages. You know, you stick your hand in a snowblower and sue because it didn't have a warning label. The company is found liable because, to a jury, it has deep pockets.
You got a mortgage you can't afford. Stick it to the bank. After all, they have deep pockets and should have known better. It's no longer a contract between two parties, it's a harm situation. Same psychology.
No borrower is ever going to say "I lied on my loan application and that's why I lost the house". No, the bank/appraiser/mortgage broker screwed me!
But, then again, I would agree with Tanta that most of these are fringe events and that, in most cases, people haven't just "walked away", they've called a lawyer and negotiating some sort of out, or even BK in the end. Just like what happened in the last bust.
Zig, I can see why you don't think reporters are lackeys for their corporate bosses (even as they assume the "doing more with less" position)
If you have a vision of the sincere, curious independent sort of scribe, you can see that made manifest at times in the national and local sections of the newspaper. To get an idea of what really runs the economic show for the press, take a look at the happy chat, i mean, er, reporting, in the travel, auto, features, gadgets, holiday special issue, special fashion section, back-to-school, health and diet tips, and oh yeah...real estate sections. Even the biz and sports sections have been known to get disquietingly gushy with their hometown teams, and ad-dollar rich companies.
Now here's a fun exercise: try counting the pages of local/national/world news vs. happy chat.
I just met my first ruthless borrower! He's an acquaintance that I've known for about five years. He bought for somewhere under a million (old home in a nice neighborhood), and told me Friday night he was in the process of buying a place closer to my area. He said he offered to pay down one hundred thousand for a better deal from the mortgage holder, but was refused, so he's planning on walking away. I think he's pretty straight forward,...any questions you want answered? I'm going to see him in about an hour, I'll ask him any details you want to know.
I really wish newspaper professionals hadn't sacrificed their integrity just for another nickel of ad money from lenders.
If you think that's why we write the things we write, you're badly misinformed. We do quote the opinions of the realtors, bankers and so forth in our communities, and hopefully on our better days we get more objective sources of info...but in many cases, people who aren't working in the industry either don't know any more about what's going on than I do, or else they don't want to be quoted in the paper. That includes some real estate industry professionals. One local mortgage broker whom I believe to be honest was very outspoken a few months ago about lax lending standards, and I quoted her. Since then, she has not returned my phone calls. Perhaps she got some blowback on her printed comments and has decided to keep a lower profile in the future. But you get my point. It's not so easy to find well-informed sources who want their names in the paper.
A few years ago, I reported extensively on questionable lending practices at Household Finance. I didn't know if they were advertisers, and I didn't care.
Also what happens when the "overstated income" turns out to because the mortgage broker was fiddling with the numbers?
Given the amount of time you're given to flip through that stack to paper to sign at the closing, it's pretty hard cheese for the borrower to be held to everything he signed. In my case, my lawyer and I ended up going through everything sheet by sheet, caught and corrected a few things, and STILL didn't pick up that the official deed had the wrong address on it. Sheesh.
I also enjoyed the packet of material I received from the bank: 3 pages explaining fixed loans, another 30 explaining the ARM/balloon/interest-only/20-80 and all the rest of the zoo. (I had gone for a 15-year fixed because I didn't want to have to deal with the hassle of anything else. )
[What we have, so far, is a series of industry insiders making a general claim that "ruthless default" is on the rise.]
I'll preface my comments by stating that I deal exclusively with mid-western folks. Since we're in the flyover zone, you may feel you have to disregard everything that follows.
We're not seeing this kind of thing without being coupled with severe financial distress.
[These borrowers may have checking accounts and credit cards with the very same bank as their mortgages. ]
I almost never see this. The rare exceptions were those who had accounts at Lasalle, which was linked to ABN. Now that their stuff was shipped to CITI, we almost never see a borrower with all of their business "in house."
[Even if the default servicing people don't have access to the deposit system, there's picking up the phone to call Irene in Research to see if deposit ops processed a change of address.]
Are you kidding me? Have you called a loss mit or collections department lately? Maybe they were doing this kind of due diligence in the 70's, but they're not doing it now. If you call in to nearly ANY servicer these days and ask five BASIC questions about a particular loan, you will find that they have to wade through 5 of 6 screens just to find it. During that time, you will experience extended periods of silence, usually accompanied by, "I'm sorry, my system is running a little slow today."
To think that a financial institution would be coordinated and dextrous enough to make use of the information assumes that they can easily access it. They can't.
Finally, you've assumed that anyone has the time to do this sort of research. As you know, the servicers were woefully understaffed in the first place. And, as the giants have added portfolios, they have not added sufficient staff to accommodate the growth.
[We do have some data indicating that borrowers in general are not, on the whole, likely to be highly-informed about the current value of their homes unless they are actively trying to sell or refinance.]
Nearly all of the homeowners I encounter are completely unrealistic about the value of their homes. Add the hyper-inflated appraisal number they saw at the time of their refi to their inability to divorce their ego from their [phantom] equity, even those who think they're being "realistic" are over-estimating their home's value.
The ones who really know how screwed they are have had their homes for sale for a year (or more), have reduced the price, and still can't sell it. Reality has smacked the delusion out of these folks. In these cases, coupled with hardship, we're getting questions about whether they should stay or leave.
[we have at least a few borrowers who are not even very clear on how much they currently owe until they try to refinance]
Often the lenders can't figure out what's owed, either.
[My guess is that servicers do not have the kind of information that would let us answer these questions directly.]
Listen, they can't even keep up with their fax machines. In the last week, a major servicer had "lost a few days' worth of data," so all faxes sent in a 72 hour period had ro be re-sent. So I seriously doubt they're able to track the kind of data you'd expect them to know cold. And, the servicers are doing such a SHOCKINGLY bad job of servicing defaults that I'm sure they wouldn't honestly share what info they do have. As it was, there was that BS report about 25% of defaulted borrowers being unreachable. The number has always been 50% according to insiders, and it hasn't changed.
[In fact, it seems possible that the borrowers being labelled "walk-aways" are those who 1) do not respond to servicer attempts to contact them at the first or subsequent delinquencies]
What constitutes an attempt? For most of the majors, they use a robot to dial the borrowers. If the borrower even picks up the phone, they usually have to wait a few minutes before a human picks up the line. Would you respond to that?
[significant percentages of those borrowers did not return lender phone calls out of embarrassment or a lack of faith that anything can be done to help them.]
Lack of faith or lack of evidence? If you look at any of the recent reports, whether it's the MBA or the self-congratulatory folks at HOPE/Neighborworks, you see that hardly any of the applicants are getting mods. In cases of legitimate hardship, a repayment plan is hardly ever a long-term success. Furthermore, take a look at what is, and more importantly, what is NOT included in the financial worksheets submitted to loss mit. There are so many normal expenditures that are not included on those forms, that it's easy to see how a lender's perspective of a borrowers ability to pay is pure fantasy.
[the customary assumption in mortgage servicing was that borrowers in distress would prioritize payments such that they would skip the credit cards, personal loans, and auto loans (in that order) before failing to make the mortgage payment. ]
Completely out of touch. Contrary to popular belief [Chuck Grassley], most people WANT to pay their bills. If there's not enough to pay everything, they'll at least try to pay SOMETHING. This is why you often see people who've caught up their credit cards, utilities, etc., while failing to save for up-front funds to their lenders. Quite frequently, we'll see borrowers who are current on their second, which is lower than the payment on their first. While this is a mistake, they feel like, "Hey- I want to pay my bills, and I'm paying those that I can."
The "prioritization of debt payment" assumption is based on the expectation that borrowers in default [under extreme duress] will act rationally. It's appalling just how out of touch mortgage folks are with the market they allegedly serve.
[Of the loss mitigation efforts closed in October, 73% of all resolutions were due to the borrower bringing the account current.]
This explains the still-widespread practice of using old-school collection techniques with borrowers. Squeeze them hard enough, and they will tap that IRA/401(k), beg for that "loan" from Ma and Pa. It's amazing how often servicers lie to borrowers about what their options truly are, and it's clear that these techniques work... the first time around.
[But it is also not clear to me that a borrower's failure to file for bankruptcy necessarily means that the borrower's income is sufficient to carry the mortgage, given how stringent means-tests in BK have become. ]
The perception in the marketplace is that it's tougher to qualify for Chapter 7. However, if you ask most experts who practice in this area, you'll find that nothing much has changed. The commonly-held, mythical image of the scofflaw who borrows all the way to the courthouse steps was an invention of the credit card lobbyists.
The walk-away is essentially the same myth, carefully constructed on anecdote, repeated often enough, the "ruthless borrower" will eventually become a proxy for all defaulting borrowers. Bad legislation will HAVE to be passed to "stop these evil people."
[But I'm not willing to take it as a matter of faith, and I'm impatient with pronouncements from banks and rating agencies that aren't backed up with better data.]
And you shouldn't be. They're going to say ANYTHING to try and make themselves look good in spite of their piss-poor performance. The fact is that they're not collecting enough servicing income to properly handle the volume of defaults. And nobody seems to be willing to pay what it would cost to properly handle this problem. No... they'd rather pretend that upping GSE loan limits and shifting the loans to FHA will fix this. This approach is already NOT working, and won't work. Unless the investors are willing to PAY THE PRICE of getting these loans handled properly, and until they are willing to start offering REAL solutions to borrowers, the pain will continue.
There's an article in the new Atlantic titled: "The next Slum? The subprime crisis is just the tip of the iceberg, Fundamental changes in the American way of life may turn today's Mcmansions into tomorrow's tenements." by Christopher Leinberger. Not only is it timely, it incorporates a quote from E.B. White.
PS This is the March 08 issue so it's not online yet.
My call - 80%+ non-recourse homeowners $100K+ upside down are going to walk. The key variables are negative equity, negative equity/wealth, future valuation prospects, and own/rent economics. At $100K+ negative equity, the stigma variable impact drops considerably.
Think this video might be the rock blog clip most appropriate from the Hooters of 80s fame: Google Videos Error
I find these lyrics particularly appropriate:
"When you sleep all night on a pillow of stone
Brother, don't you walk away
Do you dream of finding your way back home
Brother, don't you walk away
Well some might say these are better days
Brother, don't you walk away
But a cardboard box is your home these days..."
No one is walking away in the NYC suburb that I live in, but no one is all too optimistic about the real estate market either. NYC is starting to soften....
I think small local papers do a much better job than the big huge operations. The local paper has been published by the same family since 1931. Current editor is 2nd generation, and the 3rd generation daughter is fresh from journalism school. They are a small weekly, but they know the territory and (usually) know about most everything that is happening (even the stuff that isn't printable).
I can't say that I disagree.
squeezed | 02.10.08 - 7:15 pm | #
funny you should mention that. A few guys I work with, young blue collar types with crushing mortgages in OC california all say the same thing: "f-'em"
Remember--advertisers don't advertise because they approve of what the reporters are writing. They are advertising because the newspaper reaches some significant number of households with disposable income. Sometimes advertisers get pissed off by a reporter and pull their ads, but they generally come back, if the advertising was doing their sales any good to begin with.
..."In the newsroom we no longer talk about journalism," said Max King, then editor of the Philadelphia Inquirer. "We are consumed with business pressure and the bottom line," agreed another editor. News was becoming entertainment and entertainment news. Journalists' bonuses were increasingly tied to the company's profit margins, not the quality of their work. Finally, Columbia University professor James Carey offered what many recalled as a summation: "The problem is that you see journalism disappearing inside the larger world of communications. What you yearn to do is recover journalism from that larger world."
How do we explain the mystery of this consistency? The answer, historians and sociologists have concluded, is that news satisfies a basic human impulse. People have an intrinsic need -- an instinct -- to know what is occurring beyond their direct experience.2 Being aware of events we cannot see for ourselves engenders a sense of security, control, and confidence. One writer has called it "a hunger for human awareness."
There are always some borrowers who request a deed-in-lieu when they are in distress, but that's not really what we mean by "jingle mail" or "walking away," which implies that the borrowers are letting the banks foreclose, not voluntarily surrendering the deed.
Some borrowers may not be correct. After requesting deed-in-lieu myself, I was informed by my loan servicer that they are behind, by an indeterminate amount of time, on such requests now, as they are getting "thousands" of requests every week for the past few months.
There is also a local backload of foreclosure sales, moving from a three month turn from foreclosure to sale to 6 months + currently.
Mike--the buying the other house thing is not an urban myth. And it can happen without any fraud whatsoever. I closed one about 10 months ago. The only variation was that the borrower was having the other house built, and it wasn't finished yet. The loan was current because the interest the bank was paying itself was part of the loan.
No lies were told on the application.
Banks are just incredibly stupid.
The people moved back from west coast Florida to east Coast Florida because of the tragic death of the young son in law.
I personally called both the developer and the lender and offerred to deed the half finished house back to them and they both refused.
The Cliff Notes banker Fisher was the lone dissenter...prolly for the PR his entertaining self needs so badly...not totally uncommon around here either, if I do say so my self...show me your funny bone and I'll do what I can to tickle it, you know?
Well, my little note comes on the heels of "f'em", noted above representing an "attitude" change...somewhat connected to CR's first observation/warning months ago that "walking away" might become "socially acceptable"...not exactly a moral condemnation (You B so BAD, you and your Mother gonna B burned at the stake...so people unnerstan The Good.)...but an indication that moral standards...are in...transition (like this)...why B good and pounded poor (you illegal aliens, know who you are?) [Our profit centers], when you can be filthy rich?
'Tso horrifically expensive bein good nowadays, you know?
Mortgage rates creep up, worrying buyers -- Refinance market collapses as 30-year loans top 6 percent
Kelly Zito, Chronicle Staff Writer
Friday, August 1, 2003
and I think for decades in the past,
the average homeowner sold and moved in seven years. Is that still true?
I recall reading years ago that's how the "thirty year" mortgage was decided on, the lenders figured that since they were lending to people who moved every seven years on average, the way to maximize profit on the loan was to pick a length of amortization so the borrower paid almost entirely interest, on their average stay, and very little on principal. And that worked out to 30 year loans, for the average actual 7-year real period before the payoff and move.
That article is dated August 1, 2003; another quote from it: "This week, the average rate on a 30-year fixed mortgage increased to 6.14 percent from 5.94 last week...."
Next question -- I only recollect this from reading it on paper in the 1970s when I had a clerical job and saw the American Banker daily newspaper every day, and lo, on the front page was an article celebrating the first big change in banking laws since the New Deal, and saying that one of the big successes of the bank lobby in the change was getting rid of a New Deal rule that said when a bank foreclosed on a home it had to promptly put it up for sale -- until the New Deal bank laws, banks were able to put people into unsustainable loans, foreclose, then capture them as renters forever.
And I recall the article saying the banks had been working for 40 years to get rid of that provision and finally succeeded.
American Banker, daily edition, front page, below the fold, but I can't recall the date and have no way of digging it out now. Just memory.
But I wasn't in the habit of dreaming about bank laws or the New Deal back then. Anyone recognize this as part of history?
Third bit -- in California, for sure, the home mortgage pushers (the people who sent you multiple mail offers and phoned you several times a day every day) did know about the One Form of Action Rule -- and knew it has a major loophole. It applies only to first purchase mortgages, not to refinances.
One of the really big purposes of the huge grinding mortgage sales mill was to get people into a first purchase and then into refinances, quickly.
I heard repeatedly of people who believed they'd gotten the best available deal on a mortgage and then within days or weeks were getting calls from the very same broker or lender saying that rates had gone down or there was a better deal available and they could -- at no cost to them -- refinance and take money out or reduce their payments.
And lo many did. And the big thing this accomplished was to take that borrower and that home off of eligibility for the One Form of Action Rule, and put them on the list of people whose assets can be taken if they walk away from the house.
$Profit$
That's what I recall. It's just anecdotal, can't prove it.
Well, I just say no family I personally know would flippantly be foreclosed on their family home. I believe it's a disaster all the way around for the average family.
But you say it much more eloquently, Tanta. Which is why you're a blogger and I'm a too-often commenter.
..."In the newsroom we no longer talk about journalism," said Max King, then editor of the Philadelphia Inquirer. "We are consumed with business pressure and the bottom line," agreed another editor. News was becoming entertainment and entertainment news. Journalists' bonuses were increasingly tied to the company's profit margins, not the quality of their work. Finally, Columbia University professor James Carey offered what many recalled as a summation: "The problem is that you see journalism disappearing inside the larger world of communications. What you yearn to do is recover journalism from that larger world."
Nobody in the news biz could disagree with any of this--except the notion that we have somehow slipped out of a past golden age of journalistic excellence. It has always been a very dubious enterprise, with some bright moments, to be sure, but a lot of space filler and a lot of things that were just plain embarrassing. Aging editors and j-school profs look back with nostalgia on their imagined youthful triumphs and think that those were the good old days--but they were just different old days; nothing particularly good about them. Newspapers are in economic decline, still trying to find out what their role (if any) will be or should be in the Internet age. Meanwhile, we're all supplementing our knowledge of the world by reading blogs and other online info sources that make us the best-informed people in the history of mankind. This won't necessarily make the world a better place, since the Internet lets everyone compile "facts" to suit their point of view. Of course, people always did that, so again, there's no lost golden age to get nostalgic about.
Journalists' bonuses were increasingly tied to the company's profit margins, not the quality of their work.
I forgot to add--What in the hell is a bonus? Is that, like, extra money they give you besides your paycheck? I have heard rumors of such things, but not in journalism.
IN any event, it's nice to know that in businesses other than journalism, bonuses have nothing to do with crass considerations like profit margins.
Oh wait, I do remember a bonus. It was 1973, and at Christmas, the owner of the independent El Paso Times gave everybody a five-pound round of fine cheddar cheese, encased in black wax.
But by the following Christmas, Gannett had taken over the paper. Those greedy corporate profit-seekers NEVER gave us cheese. They did make the newspaper a lot better. Still, some cheese would have been a nice gesture.
I'm afraid journalism's much like every other field -- there's good & bad, but the bad tends to overshadow the good. That said, it is quite amazing to me how far behind the press has been on economic issues.
I canceled my LA Times subscription a few years back because I simply couldn't take the BS (business section) anymore. Petruno, Flanagan, etc. -- clueless cheerleaders. They didn't just miss the housing bubble, they repeatedly denied it. The rest of the paper isn't much better. Perhaps the editorials are the worst; but at least there they admit to their biases.
Before I end my rant, the one thing that truly irritates me to no end is the subtle bias inherent in the stories that the Times "chooses" to cover. Conciously or not, they engage in their own "confirmation bias"; unfortunately, in doing so they impose it upon their readers, too.
First, I do not practice in California, so nothing herein is legal advice or necessarily even correct (but I wouldn't bet heavily against it).
Lying on a mortgage application can create significant civil and criminal liability. Depending on the lender, federal criminal statutes may be implicated; I presume, but do not know, that there are California state criminal provisions that are similar.
As to civil liability, common law fraud usually requires proof by a high (clear and convincing) evidentiary standard that the misstatement was (i) material; (ii) reasonably relied upon; (iii) foreseeably relied upon; and (iv) made with knowledge (or intentionally to induce the reliance) of its falsity.
Assume a plain vanilla balance sheet lender (otherwise it just gets really messy).
First, in passing, I mention that as anecdotally, most of the SISA applicants seem to have relied on a broker (mortgage or real) telling them what income they needed to state, that implicates those third parties in aiding and abetting civil (and criminal) liability (I think in California this is referred to as civil conspiracy, but it's much the same thing).
In any event, one problem with this is the issue of proximate causation of damages.
Suppose I lied about my income and got a rate of LIBOR+250 and had I told the truth I would have got a rate of LIBOR+500. Likely the damage would be limited to the interest rate differential.
But suppose the bank can show that it's a real "but for" and had they known the truth they would not have made the loan.
I'm wondering to what degree the diminution in value of the house would necessarily be deemed the proximate cause of the fraud.
For example, suppose I lie about my income and as a result buy a house for $1,000,000 that I otherwise would not have got.
Suppose a month after I move in a meteor falls out of the sky and destroys the house, and suppose the meteor is full of radioactive material so the whole lot is toxic and let's say it's cesium or something with a 500 year half life so there can be no use put to the lot. Please ignore insurance considerations because this is a didactic hypothetical.
I have a very hard time imagining that a court would consider the loss in value (presumably a total write off of $1,000,000) to have been proximately caused by the fraud; it was caused in fact, because without the mortgage there was no loss to the bank, but morally, or as a matter of policy, or ethically, however you want to look at it, the loss by meteor impact is not what we're trying to prevent by requiring honest applications.
I say this because if I were representing the borrower in a liar loan case, and had to come up with a defense, I would argue that sure, if there was a fraud, damages for collection and similar expenses and commissions to resell it and the like lie, but that damages due to extrinsic, cyclical, secular forces such as the credit market seizeup were more like the meteor.
I didn't say I'd expect to win, but it would be a defense and if in some way it can survive summary judgment and embody one or more triable issues of fact, I just made a lot of grief for the lender in the litigation.
All of this is why it may not happen except on big loans that private litigation will be brought by banks; perhaps a few cases for show, but any in terrorem effect may be unlikely right away given the slow pace of litigation.
But yes, fraud of course is a separate cause of action (in tort) from a deficiency judgment (in contract).
Finally, casual perusal of the non-recourse statutes indicate that the proscription applies only where the loan was used to pay at least some of the acquisition expense and where the obligor occupied the house. I should imagine it would be a far more likely outcome that a bank would litigate against the liars who never occupied it, if I read the statute correctly.
My two cents (well no, I bill more than that, but...).
I enjoy your blog very much. One point is that you seem too concerned about the "MSM" too much. Most intelligent people interested in a topic have found blogs, evaluated them, and are ignoring the MSM. When I want FACTS and informed analysis, I go to CALCULATED RISK. When I want blondes, I go FOX, brunetts BLOOMBERG, and CNBC for Burnett and Bartiromo.
To add to the "anecdotal" comments: (with the aggegation of anecdotal comments being one reason why this blog is so valuable) I can offer the following datapoint with regards to Tanta's post.
I know an owner of a mortgage company (broker) that noted and commented on this trend late last year, of the subprime borrower letting their mortgages lapse while preserving all other payments to keep their credit report "good" by showing only one late payment stream. He further noted that a lot of these people were being allowed by the lenders to stay in their homes, even after the homes went up for sale by the bank, since the lender seemed to prefer to have an occupied dwelling rather than a vacant dwelling. This seems to align with the (very) desperate lender theory.
This is in the Detroit area, where there is obviously a glut of underwater homes on the market, so maybe this is a local "solution", but it may also be a leading indicator to other regions. Keep in mind that Detroit also has the history / precedence of the "midnight move-outs" during the social upheaval in the 60's, but now folks seem to be staying put - at least for now. The people that are leaving are those that get jobs out of state, then they just walk away from a home that they don't own and have already "written off".
Tanta, my continued compliments on a great resource.
What's so interesting -- and tragic --to me about the decline of journalism is how self-inflicted it is. First problem is when you ask these naturally curious and insightful reporters to examine the flaws in their own house, they instantly become unable to see beyond the noses on their faces.
None of them seem to ever have had a personal experience getting a story pulled, or an advertiser mad, or sat in the publisher's office and been told that coverage of a certain source or subject isn't good for the bottom line. They might not have come for you personally (or in a way that you'd realize it), but they have come for your bretheren on many other pages in your newspaper. It's as plain as the fluff that fills the pages.
It is tragic that reporters and editors and publishers can't see that you can't sell out one part of your newspaper (then two, then ten) and expect people to trust you everywhere else.
If you can't see the disease that's killing you, you can't begin to have a conversation among yourselves and with your readers about how to save yourselves before it's too late.
I have never been witness to an event, read about it in the paper, and found the event to have been reported accurately. This includes various 1960s events. A friend of mine was at some sort of student protest thing in the 60s, very peaceful, and the reporters tried to churn things up and make it non-peaceful, to get a better story. I see it in relatively non controverial reportage, too. I see it in the real estate section where they buy advice columnists and then don't vet the columns by Fla attys to make sure the advice works in Fla. Just recently in the local rag, they gave bad advice on Agreements for Deed. There is no desire for excellence, just money. Funny thing is, if there is no excellence to buy, your money isn't worth anything.
So no, there is no golden age. And I don't read the papers much anymore. Why fill my mind with stuff I know is inaccurate, when I don't know where the inaccuracies lie. It's worse than nothing.
The crusading altruistic reporter has always been a myth, it's just part of the collective professional ego.
Shill is a more apt description of the typical "The Daily Plan-it" staff reporter. Manipulator also fits the bill during election times.
An irony is that today's bloggers are much closer to the original colonists with private printing presses who published anonymously and risked life and property for the sake of principal than the MSM carnival hustlers( sorry for the run on but it's early). Our First Amendment protections were written for those private publishers not for today's commercial promoters and purveyors of human corruption.
monday 2/11 it is great to see and read you tanta in real time . i should send you some tuition money , ihave learned more here than 4 years at school.again, thanks.
Shill is a more apt description of the typical "The Daily Plan-it" staff reporter. Manipulator also fits the bill during election times.
An irony is that today's bloggers are much closer to the original colonists with private printing presses who published anonymously and risked life and property for the sake of principal than the MSM carnival hustlers( sorry for the run on but it's early). Our First Amendment protections were written for those private publishers not for today's commercial promoters and purveyors of human corruption.
Right--that good old 18th Century press! Go back and read about it sometime. You're an idiot.
Thank you, Tanta, for the original post. I also have been been disturbed by the lack of any serious data-based estimates about how many are doing what. In particular, an estimate of the number of homes bought as investments with the expectation of being able to resell at profit and subsequently abandoned at little or no cost to the investor: 5%, 12%, 25%, 1% ?, in 2004, 2005, ... ? Another analysis could focus on the distribution of MEW as a percentage of the original mortgage, over the same set of years. I am thinking of a WSJ article two or three months ago ( sorry, no reference) which detailed the actions of a family which started out with a 500,000 mortgage, refinanced several times, taking out an additional 300,000 in SUVs and other toys and then decamped to another state. A third area of concern follows from my belief that at least one of the goals of the FED is to keep the Libor rate as low as possible in order to minimize the magnitude of the ARM resets and thereby make it easier for owners to avoid foreclosure: is there any data which might let us understand the effectiveness of this strategy?
How is it even possible to distinguish between 'walking away' and 'foreclosure due to inability to service the debt'?
Couldn't it be an element of 'walking away' in every foreclosure?
After all, people have different capacity for living under economical stress. What feels like 'walking away' to one, may feel as personal bankruptcy to another.
The press has always had credibility issues, but they were not as well known because the press owned the communications channels. So there was a golden age, in the sense that they could print puff pieces or innacurate info and no one could call them on it. If they screwed up, they might print a correction, they might not, and few would be the wiser. And there was not much competition, so the profit margins soared.
There was also a brief enlightened time, in the Watergate era, that investigative and consumer oriented journalism became popular. You could kind of call that a golden age, but still with plenty of tarnish. Again, though, with the high profit margins.
Things aren't so golden now, and the press seems to be at a loss for what to do now that its facts are being checked and second-guessed from all sides. The only thing not on their list of remedies is the very thing that would save them: A huge investment in high-quality journalists and a robust fact-checking apparatus.
I was with you until you called the elimination of taxes on debt forgiveness "proconsumer". This is obviously the most pro-ruthless defaulter scheme going, and it really pisses me off.
What good does it do to eliminate taxes on debt forgiveness to honest borrowers in financial distress? Just because the taxes get assessed doesn't mean the IRS will be able to collect them before the 10 year collections statute expiration date. The IRS has very lenient collections policies and "CNC" (currently not collectible) provisions. If someone is honest about paying what they can, they will not be devasted by unpaid federal taxes (unless they think they deserve to live like Paris Hilton). This was a redundant "fix" that will do more harm than good.
I don't know the particulars, but I think it's safe to assume that the new law has some meaningless, unworkable provision for instances where the default was fraudulent. Which means that instead of having one low paid GS-7 telephone clerk evaluating the tax debtor's ability to pay the tax on their COD income, you have to have a team of high paid GS-13 agents trying to make a fraud assessment that will stick - this is a very expensive and time consuming process - and that's just to get the tax assessed. We're not even talking about collecting it yet.
And I can tell you that with the short staffed IRS, the process of identifying and then developing fraud cases is just not going to happen in any meaningful way.
But what really makes this stupid has nothing to do with tax administration. The really stupid part is you have just been granted a tax break for defaulting on your mortgage. Is the Wall St word for this "incentiv-ize"? DC was allegedly trying to find a way to help marginal people stay in their homes longer (more like forestalling the inevitable while help struggling people throw good money after bad. who does that help besides the lender?).
Instead, they have introduced the final, crowning, piece de resistance of "moral hazard" by giving the worst borrowers a big fat tax break for all the money they have recklessly wasted and all the equity they withdrew to live beyond their means. The circle is now compleat!
This wasn't a solution in search of a problem afterall. This was a problem disguised as a solution. The part I haven't figured out is what constituency this was designed to help out, because I just know this wasn't as plain out and out stupid as it seems. I'll betcha in the next year or two we hear how millionaire CEOs or somesuch trash found a loophole in here to bail them out of some crap we don't even know about yet. And whoever finds that loophole is probably the one who lobbied congress to put the loophole there to begin with.
I'm a little late to this thread but I hope someone reads it anyway. I am attorney and I work both sides of the game. I represent banks and I represent foreclosed mortgagors. There are a million and one reasons why someone falls behind on payments. However, there are a couple of overarching anecdotal reasons why people are just 'walking away' as you claim. I've seen hundreds of foreclosure defendants in court explain their reasons to the judge why they defaulted and I tell you, there as many reasons as there are debtors:
1) An investor buys a rental property and a) gets taken advantage of by a tenant and b) has insufficient capital reserves to evict the tenant and cover the mortgage payments;
2) The homeowner falls behind on a payment or two and can't catch back up. Kind of like the apartment renter who falls behind two months has about a 1% chance of ever catching up. The homeowners who do catch up, in my experience (including my own father a couple of times) receive a gift from a family member. These people aren't tapping their 401(k) or reducing their lifestyles because they don't have much, if any, savings and their lifestyles are already paycheck to paycheck.
3) The homeowner overextended himself on too many properties for whatever reason and they just don't care. Some people out there believe that can buy a house for someone else. One person can sign the mortgage paperwork but someone else will live there. Typical straw buyer without the fraudulent intent. The real party in interest isn't on the hook so when things go bad they just leave. The straw buyer doesn't really care because it wasn't their house anyway.
4) Fraud, fraud and more fraud. So many deals are fraudulent, with weird tenancy issues, where someone, anyone, pays the mortgage for a while before default, I won't even bother because it's too extensive.
5) The homeowner overextended himself through HELOC's and when he tries to refinance because he's about to fall behind, he can't refinance because the bank tells him that he's underwater. So they figure, what the hell, I've got the plasma, and the truck, and Hawaii was pretty nice too...let them have the house - there is no recourse.
In conclusion, I think there are just so many reasons why homeowners default that the walking away theory is just an over-generalization of the variety of reasons listed above.
Media never influences popular behavior.
The Draconian Credit Card Bill passed by the prior congress has given consumers a choice. Your house or your credit; you can't have both. Most choose the latter and mail the keys in.
61% (I think this is correct; it is from memory) of Americans think the country is in a recession. They probably know more about it than the professional economists.
Media never influences popular behavior.
I'm a great deal less worried about individuals deciding to walk away from their mortgages based on something they read in the paper that suggests that their neighbors do it too, than I am politicians deciding to base regulatory or legal proposals on the "conventional wisdom" as represented in media stories.
If you do remember the news coverage of the bankruptcy reform bill, you might remember that a lot of people got away with throwing out anecdotes of BK "abuse" without having to even verify that they were more than urban legends, let alone anything more than a small minority of filers.
I also observe that this anecdote from one of Mish's readers itself starts out by observing that the reader's observation of his own neighborhood dynamics was influenced by what he read on Mish's blog.
Now, we all want to influence our readers, but there's always the danger in anecdotal evidence that what we notice or remember or choose to interpret about the world is driven by arguments made or presented on the blog, not really by truly objective observation. In other words, if the blogs or papers have convinced you that "walk-aways" are becoming common, there's the problem that you will begin to "see it" in your neighborhood by interpreting things (like the neighbor leaving before dawn) to fit the theory. It is incredibly difficult to change people's minds once they have convinced themselves that they have "seen" this phenomenon in their own block.
So again, I'm not really worrying at the moment that this behavior will "catch on" because of the media; I'm worried that it doesn't exist yet except in some pockets of the borrower pool who have other problems (like unfinished developments). That is, people might be walking away, but I'm not yet convinced that they are not also in financial distress. It may be that they are just giving up on the house a lot faster than past generations of distressed borrowers did.
To the mortgage or newspaper professional who's made it this far:
If you want to claim you have statistics about any of these conclusions Tanta's just shot down, please post everything. 100% of your data, how you analyzed it, what your assumptions were -- front to back.
Because, you see, people who are trained in statistics (me, for instance) will most likely eat your numbers for lunch and still be hungry.
I don't agree with any so-called conclusion from Lawrence Yun. He's a fool. A rich fool, yes, but as a professional? Bunk.
I really wish newspaper professionals hadn't sacrificed their integrity just for another nickel of ad money from lenders.
Most choose the latter and mail the keys in.
In the context of the current post, I take that as begging the question.
CalculatedRiskOmnibusPig, I really am trying to be constructive for a minute.
It does occur to me that reporters just don't know how much (or how little) actual hard data mortgage servicers would have in a given foreclosure case. So it doesn't necessarily occur to them to ask, "How do you know this to be true"?
I am trying to help out, by letting people know that (as far as I've seen) these claims about walk-aways are being based on inferences and proxied data, not direct evidence. I won't assume that reporters are unwilling to ask follow-up questions, just that they don't realize that they should.
It's hard to imagine that at this point borrowers are walking away for any reason but financial distress. The one exception is flippers, who are certainly aware of how much house prices have dropped. So perhaps the walkaways that the industry refers to are speculators, although it would be embarrassing for the industry to admit it, as that would emphasize the stupidity of the lending practices that got the industry in this mess.
Most choose the latter and mail the keys in.
In the context of the current post, I take that as begging the question.
--Tanta
Ohmigod! Someone using the phrase "begging the question" in the correct way!
Read and learn, fools!
I'm sure consumers will take banks' admonishments to heart - and start modifying their behavior in ways that will economically cripple them, even though they are not legally required to.
Just as the banks have always been known to act against their own economic self-interest, taking into account their moral obligations to say home- and farmowners being repossesed, credit cardholders who get hit with fees and rate hikes, bank employees who get laid off after mergers.
Of course people are going to respond to incentives, and take full advantage of their legal rights to protect their families' financial future. Just as the bank is supposed to act in shareholders' interests.
The mystery is not that the borrowers are acting in their own interest, but that the bankers didn't. They made a bunch of loans to dodgy borrowers at 100% LTV that let the customer make money if the value went up, and walk away if it went south. Now they're acting surprised and blaming the borrower.
So perhaps the walkaways that the industry refers to are speculators, although it would be embarrassing for the industry to admit it
I think that's very plausible.
I also think that we possibly need to expand the definition of "speculator" a little.
There were those--flippers--who were planning on a quick resale of a property they didn't occupy.
There are those who do occupy the property, but really just bought it (and screwed their household budget in the process) because they believed that it would function as their retirement savings or they could cash-out in the future periodically to supplement household income or whatever. There is certainly something speculative about this behavior, but it isn't the classic flipper.
You can, I think, rest assured that lenders don't want to talk about the assumptions of housing as a retirement nest egg, for instance, to be a kind of speculation.
It's dishonest to have it both ways: (1) federal tax money backstops investor and bank losses when homeowners walk away from homes, and (2) California law allows homeowners to walk away without liability - even if they have money to pay.
Yeah OK so why can't the Feds just get rid of #1, which is within their jurisdiction, rather than #2, which isn't.
If lenders have a problem with #2 they can demand a substantial down payment or just not lend in California. Nobody's forcing them to.
"Another house went on the market one day and the owner loaded up a U-haul the next and drove away at 4am"
In the UK this used be know as a "moon light flit"!
Mostly carried out by council house tennants on the verge of eviction for rental arrears.
Lending with 20% down a good idea. Not lending in Cali a terrible idea. Remember its the third biggest economy in the world. It would crush the US, the dollar, etc....
For those serious reporters reading CR on a Sunday afternoon - one possible source for these type of data - contact the owners of youwalkaway.com and ask them for some numbers....
Stunning post. A tour de force.
Um, as a person who seems to be living at ground zero of the real estate debacle. (pardon to those in San Diego just a year ahead of us), I am beginning to wonder how long the banks are going to stay in the business of housing lending.
The profit margins for holding even 50 cents of loans looks to be very very bad in this type of environment.
Now if consumer credit rolls over next, we are going to see serious impairment in the functioning of our consumer economy.
All of you would be Franklins out there- where does your paycheck come from? Remember, a collapse in consumer spending will be felt throughout the economic terra firma.
I for one am beginning to become very concerned with the lack of good alternatives being offered by our politicians to this crisis.
No, Whocoodanode, is not an acceptable response. First wall street killed the S&Ls that used to fulfill the role of mortgage providers, and now the banks are failing at filling Wall Street's gap.
The immense deleveraging that is beginning to occur on Wall Street is a further symptom of the disease, lack of confidence.
Bernanke's research focused on the liquidity questions, and ignored the solvency and lack of confidence that the early 30s was mired in. I think he still does not understand the failure of the markets due to insolvency, and the bank run disasters, combined with massive layoffs.
Ah well, ruthless borrower was enabled by ruthless mortgage industry. Who is at fault? Our regulatory system (or lack thereof), and Congress will close the door after the barn has burned down.
Someday this war's gonna end...
"Lending with 20% down a good idea. Not lending in Cali a terrible idea. Remember its the third biggest economy in the world. It would crush the US, the dollar, etc...."
This place would shut down pretty quickly if that happened. For that reason, I doubt that it would. Even going back to a 20 percent down would be a hard fall; though personally, in a time of decreasing housing valuations, that would be prudence on the behalf of the lenders.
Getting back on topic, I believe yes, that for journalists places like Calculated Risks should be like tipsters; that's where you get the idea that something's going on, then you go and dig up the facts that make it an actual story.
Journalism has devolved into a "he said, she said" exercise over the last 30 years. The race to get a story out first -- and thus, raise ratings and ad revenues -- has trumped the thought of actually doing research. Thus journalism has too often become merely the practice of finding someone who says something shocking or outrageous, and then dutifully transcribing it.
I'd flunked out of j-school 30 years ago if I'd reported the way some of these guys do now. And no, not a practicing journalist.
Given the fact that most people think their house is worth more or the same as one year ago, I really don't think this is a $ value issue. Nearly everyone falls into the trap as it's ego driven.
Reading some of the anecdotes, it seems that resets are setting the FC into action. People just realize that life can be better with a $2k rental payment than a $5k mortgage payment. The boom was driven off immediate monthly payments and I think the bust will snap back just as hard for the same reason.
As far as a stigma, with $3 ATM charges and credit card rates interest rates adjusting for no reason, few are going to have a hard time justifying sticking it to the bank. As I've said before, I believe it will soon be a badge of courage to some.
How our Homes became the Equivalent of a Hummer..
In 1946, when the American post war housing boom started, the average house was 1,100 square feet and housed 5 people. Fifty years latter, in 1996 the average house would grow to 2,200 square feet and house 2.6 people and by 2007, fueled by easy credit, the average American home would would become the equivalent of a Hummer, weighing in at super-sized 2,400 square feet.
Americans have become too fat, too complacent, too much in debt, way to much house for their needs and way too many Americans living beyond their means.
The Sustainable Home Blog
Sustainable Dwelling
Tanta,I suspect that the people claiming that "walk-aways" can pay their mortgage are looking at the claimed "income" on the apps as well as fico scores.Our local paper has an article about a poor victim who claimed $10k a month more than he actually made,and had to sell his $1MM dream home in a short sale.looking at his app and credit report only,he could afford the place...half the loans here in sonoma county were sisa,nina,or stated in '04-'06,without re underwriting these loans how can you tell if the borrowers are ruthless,or simply fools who committed fraud ?
The problem with analysis-by-anecdote-and-media is that it doesn't mean much. I'm sure you could have a frontpage article every day in the NYT about particular ruthless debtors even if it was trivial statistically. Unfortunately it's hard to get at. You could look at defaults by DTI on recent loans. Some low DTI defaults will occur as a result of life changes, but if there's a big jump that would tip us off to a real shift.
There's also a philosophical issue with people under onerous, but at least theoretically manageable debt loads, particular loads that 10-15 years ago would be considered unacceptable for a loan. If they default, is it ruthless? Or are they just coming to their senses? Most likely some combination, and the point is that even with detailed financial info drawing the "ruthless" line can be hard.
Anyway, very good article and points (as usual).
Tanta,I suspect that the people claiming that "walk-aways" can pay their mortgage are looking at the claimed "income" on the apps
I hope they're not that stupid. I wouldn't even do that on a full-doc loan.
Since the most likely possibility in any situation of default is loss of job/loss of breadwinner/inability to work, the last thing you would do is assume that employment income that was available at time of origination is necessarily still available.
The trouble is that if the borrower doesn't talk to you, you can't verify whether there is an income deficiency. But you can always order a new credit report without borrower authorization (under the "account monitoring" rules).
In fact, the GSEs (at least) require servicers to report cause of delinquency codes, and I suspect lenders collect this info for anyone they do talk to. So in the group of reponsive borrowers, you can distinguish between those with income shortfalls and those with unexpected expenses (not necessarily more consumer debt). However, if you never talk to the borrower, you just report "no contact" or "skipped." So then you have to make educated guesses about what's going on with that group.
Historically, looking at the credit report wasn't that bad a proxy. I just question whether it's a good one today.
The survey of 1,619 homeowners found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value. . . .
Is this from the peak price? Original purchase price?
Tanta,we have both worked for Banks...how dumb were some of the policies you encountered?
Yeah OK so why can't the Feds just get rid of #1, which is within their jurisdiction, rather than #2, which isn't.
If lenders have a problem with #2 they can demand a substantial down payment or just not lend in California. Nobody's forcing them to.
Because that would involve shrinking government, rather than expanding it, and we can't have that, now can we?
I know, I know. This crisis is all private enterprises fault, and has nothing to do with the GSE's backstopping the RE industry with tax dollars, the chummy relationship between the big banks and washington, or govt. pension funds blindly buying AAA paper.
Cheers,
prat
You could look at defaults by DTI on recent loans.
CR and I were just talking about this the other day.
What complicates it for me is that given a certain set of assumptions about the world, a certain set of homeowners will put up with making life sacrifices to carry a very high mortgage payment. If you think that your house will provide for your retirement, or send your kids to college, or just mean your kids can stay in a great school system, you can go a surprisingly long time on ramen and mended underwear and begging for a loan from the parents to make up a missed payment or two.
If you get the sense that those assumptions were false, it begins to be harder to never take the kids to a movie just to keep up with the house payment.
This is rather different than what a lot of people think of as "debt reprioritizing." I would certainly like to see any data servicers have for DTI at origination linked to walk away rates, with the caveat of course that given stated income plus teaser-rate qualification games, I don't trust reported DTIs much.
Priceless...
"It suggests that editors are getting over their preference for misleading information from named sources with institutional affiliations and a book to talk up (Hi, NAR!) over solid information from anonymous bloggers who are accumulating credibility the hard way (by, you know, being credible)."
Interesting, I have a huge BS meter and I routinely dismiss or challenge the credibility of many with supposedly good credentials for easily recognizable shill/immoral behaviour. Sometimes I continue to follow these people simply because it is important to know what the self-interest-regardless-of-cost-to-society or ounce of ethics or morality group is up to.
I may have looked for your references before, because I often do look for references on web sites I visit, however, I had completely forgot that you were "anonymous."
To me you've grown to favourite columnist status.
"The survey of 1,619 homeowners found 36% believe their home has increased in value, and another 41% believe their value has stayed the same. Only 23% believe their home has lost value. . . .
Is this from the peak price? Original purchase price?"
They don't say, do they? I followed the link to the story, and they don't say there either, nor is there a link to any survey site.
If you bought more than five years ago, your house is still worth more than you paid for it (for now). And I would be willing to believe that the majority of homeowners have been in place five years or more.
how dumb were some of the policies you encountered?
Sometimes they were so dumb they'd make your teeth hurt, but I still don't think anyone goes back to a 2-year-old loan application to see what the borrower's current income is. They're no more likely to do that than to go back to a 2-year-old appraisal to see what the house is worth today.
Maybe we just got a bunch of Joe Walsh fans out there....
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They don't say, do they?
From the first paragraph, I assume they asked about declines/increases "in the past year."
So someone who bought in 2003 may still be ahead compared to original purchase price, but might accurately have responded that the value is down in the last year from the peak.
Excellent point about how to define the ability to pay. Since I've been following this stuff I've been shock to see 40 year mortgage and 50% of income to qualify. I worked in banks from 1980 to 1984 and I think banks had good standards then.
I looked up my local credit union:
"This calculation determines your proposed monthly housing costs. Along with your mortgage payment, it includes other expenses like property taxes, electricity and heating costs, condo or strata fees. These total monthly housing costs divided by your gross monthly income shouldn't exceed 32%, or your housing costs may be too high to sustain."
This should be the definition of being able to "afford to pay." Anything else is debt slavery.
It also said total debts should not be more than 40%, with utilities included.
Thanks for your post -- brings to mind those armies of welfare queens and bankruptcy scammers we just knew were mocking us.
One presumption that weighs heavily on your post, though, is that journalists need to just be enlightened and asked nicely to dig deeper and they'll be motivated beyond their salaries and skill sets, and wishes of their corporate bosses, to do so.
Lately, I've started to think that some writers who adeptly point out the media's shortfalls may actually be able to shame them into a more nuanced reporting style. Of course I don't have a shred of evidence why they might be motivated to take your advice. Please don't stop giving it, though.
Actual news in a Sunday paper would only fill 5 broadsheets. Advertising requires far more. It is only natural to add filler to th point of revenue maximization.
I used to get so mad at the media for being sloppy, uninformative and biased in the direction I don't like. I was a terrible hypocrite.
In California it's not surprising that people decide to walk away from the mortgage, whether or not that is, in fact, happening to any appreciable degree. The income/house prince disparity was so great after 2003 that no one making 120% of the median income could possibly afford to purchase a house without a stated income option ARM unless it was a move-up buyer who had sold to someone who used one of those loans.
Very few first-time buyers in California make a 20% down payment, unless they have really rich relatives. Almost everyone I know who bought a house either had borrowed from one or more relatives, or was assisted by one of the government down-payment assistance programs. The difference is that the lender and/or government agency required proof of income, employment history and so on sufficient to determine that the borrower could make the payments over time. That's actually much more important than "skin the game."
I do wonder how many of the alleged walkaways are speculators who realized that the rents weren't going to catch up to the mortgage payments for, say, 15 years or so. (That was the disparity that led Dean Baker to declare a likely bubble several years ago.) It's much easier to walk away from a house that is someone else's home.
Tanta,
I am like an old school reporter always check your source. If someone says your mother loves you call and make sure.
Of course I don't have a shred of evidence why they might be motivated to take your advice.
Alo, I have actually gotten a few very thoughtful emails lately from reporters who are grappling with the fact that they'd like to call me so that they can get quotations on record for the paper, but they know I won't do that. At least a few of them really do understand why I don't want to become just another quote-bot.
I really think this select group of reporters just does need to know 1) what questions to ask and 2) what counts as a worthless response to that question. Once they know that they can find people to talk to; surely everyone has figured out how to get a mortgage lender's servicing department SVP on the phone (right?). I have no problems with the idea that some reporters are using the content of this blog in an argument with their editors about how deeply they should be rooting into stories. Or perhaps editors might use the insights from this blog to beat on reporters. Who knows?
There isn't anything I or anyone else can do for or about the simple stenographers except devoutly hope that they'll fall off a curb while they're chasing some press secretary who is about to fill them full of spin.
Tanta,
I would guess that that the executives and Bank of America and Wachovia are in a position to know something about the defaulting customers they are talking about. These borrowers may have checking accounts and credit cards with the very same bank as their mortgages. The bankers would have a good perspective into the monthly cash flow and credit worthiness of the account. If they saw people in otherwise healthy financial circumstances walk away, this would be cause for alarm as I am pretty sure it is unprecedented.
you've got a formatting problem in the first paragraph...
These borrowers may have checking accounts and credit cards with the very same bank as their mortgages.
Well, if that's the case, then that's the evidence. I'd still like to see it.
As it happens, both those outfits are claiming that their retail mortgage book (the one most likely to be made up of customers who also have deposit accounts with them) are performing much better than their wholesale/brokered book (which is much more likely to be made up of non-bank customers).
Also, how much exposure to the hottest CA markets does Wachovia have at the retail deposit level? I mean, if it were Wells Fargo, maybe. But aren't BoA and Wachovia deposits still concentrated in the east/southeast? (That's a real question--I don't pay as much attention to retail banking patterns as I used to.)
Finally, if these institutions were able and willing to analyze deposit account activity of mortgage borrowers, you think they might have done that before they wrote the loan. I know BoA didn't do as much of that "stated asset" crap as Wachovia did, but they did all take loans without, so far as I know, bothering to look up the borrower's deposit activity first.
you've got a formatting problem in the first paragraph...
That isn't a problem, it's an opportunity.
mortgage lender's servicing department SVP on the phone (right?).
Uh, huh. Like that individual would be willing and able to say anything half as insightful as you? Not a chance.
There's a reason everyone single commenter here who works in the mortgage biz posts using a pseudonym.
Great post, btw. Can you consider adding some podcasts? I'm serious about that.
In a previous thread, somebody claimed that California (for example) could not now pass legislation that would stop people from walking away from mortgages that were no-recourse at the time they were written. Can anyone confirm this?
I have predicting passage of a lot of "homeowner distress relief" legislation that has, tucked away in some inconspicuous place, a switch from non-recourse to recourse. I hope I'm mistaken.
That isn't a problem, it's an opportunity.
yes, an opportunity for bd to score a point! haha!
bd: 4
There's a reason everyone single commenter here who works in the mortgage biz posts using a pseudonym.
True. But on the other hand, if you put a hundred monkeys in a room with a phone and a phone book, eventually one of them will call you, Shnaps.
I'm guessing they'd let you go in the paper as a "source who doesn't want to be named" as long as the reporter knew who you were and where you worked.
And may I say I live for the day I pick up the WSJ and read some quote from a "mortgage servicing expert" and think, Jeebus, that's our Shnaps! No one else has that exact combination of knowledge, experience, snarkiness, and bad attitude!
Billy - I'm not sure what your getting at. I can't imagine any legislation that would prevent people from walking away, whether the lender has recourse or not.
Would this involve locking collars and a buried perimeter wire like I the ones they use for Labradors?
Tanta,
Wachovia bought Oakland-based World Savings two years ago. World was a big player in payment option ARMs. BofA was a huge west coast regional bank until in was bought by Nations Bank of Charolotte NC and kept the BofA name. Both of these banks have significant California deposit bases and very large exposures to California real estate. BofA is big in Nevada and Arizona as well.
I would not defend their underwriting standards regardless of how much data they have on their customers.
Would this involve locking collars and a buried perimeter wire like I the ones they use for Labradors?
You owe me four ounces of pricy tea, buddy, that are being wasted all over my computer monitor.
I think Billy's talking about how any change to recourse laws wouldn't be retroactive to existing mortgage contracts.
Why, thanks. I'm sure that quote will be stipped of my soul and therefore unrecognizable.
I think that's why I come here - you provide a healthy outlet to purge the snark and 'tude from my system, either that, or I'd have to start drinking on the job.
Yeah, sorry about the tea. In that regard, we're still not quite even. I think I got Billy's drift, honesty - I just couldn't resist sharing that mental image.
Wachovia bought Oakland-based World Savings two years ago. . . .
I was going to say something snarky about being surprised that World Savings borrowers still had deposit accounts, but let's not go there.
I guess I'm surprised that anyone who has an active checking account with the lender can "disappear" or hide from the servicing department. Unless you don't get mailed statements, the bank generally has your current address . . .
So long as the subject of "flippers" has come up, we should recognize that this is also a nuanced group.
The pejorative flipper typically bought a home from a desperate or uninformed homeowner at a low-ball price, did some cosmetic work and put it back on the market at a competitive price. The principle was to turn over as many properties as fast as possible, often several concurrently, with little attention to a real increase in value.
At the other end of the spectrum, the value-added flipper bought a home that was in physically bad condition, at least relative to the neighborhood, at essentially a fair price. He then made substantial improvements to bring the home up to (and often beyond) the neighborhood standard. Profit depended on increasing the market value of the home in excess of the cost of the improvements. This flipper did in fact add value to the neighborhood.
But even in an age when access to data is light-years ahead of a generation ago, I doubt that it will be possible to collect sufficiently detailed information such that behavior across the spectrum of so-called flippers is instructive.
BTW I just noticed that I wrote this in the past tense; probably a mistake since flippers of all shades are a result of market conditions, not the cause. They will be back whenever, or wherever, the situation appears lucrative. And besides, scavengers serve an essential role in all of nature, including the financial world.
Tanta, it was a stumbly way to say it in the last post, but I'm pretty sure your columns have made for more careful journalism.
What would be really cool is to imagine both the editor and reporter storming into the publisher's office with copies of your column and...oh well, I can dream.
I have no doubt there are some responsible reporters still out there, but man, this bubble needed a whole lot more of them to counteract that sea of stenographers. Stenographers come cheap, as every publisher knows.
So, is the time right to start calling the mortgage company and offering 40% of the second for forgiveness? I suspect if the second is on investment property, the answer may be yes.
One of the things folks forget is that a trip through technical insolvency doesn't touch retirement assets for the most part. In other words, if you have most of your savings in 401k, and you bought a speculator home, you could have an almost free walk away option.
The funny part is we trained investors to think like this, and then when they perform like rational economist type homo economicus, the lenders complain.
I have to laugh, you want a nice stodgy borrower, they look for folks who want to buy now- most of them understand the risks and can run a calculator.
Now BB had best get that inflation machine going, or we will be in real poop. Wage inflation is the only measure that will grow us out of this mess without handing investors a huge loss, and impairing mortgage markets for decades.
Someday this war's gonna end...
I just couldn't resist sharing that mental image.
I know the feeling. We did a caption contest a while ago involving some picture of some home on a flatbed parked along the side of some freeway that immediately came to my mind. A bunch of people suggested that basically it looked like owners were trying to walk away and the house was trying to track them down again . . .
Correct me if I am wrong, but the non-recourse protections would be null and void if you committed fraud in obtaining the loan, would they not?
At the other end of the spectrum, the value-added flipper bought a home that was in physically bad condition, at least relative to the neighborhood, at essentially a fair price. He then made substantial improvements to bring the home up to (and often beyond) the neighborhood standard. Profit depended on increasing the market value of the home in excess of the cost of the improvements. This flipper did in fact add value to the neighborhood.
I personally call those folks "rehabbers." I know the term "flipper" is used there, but I agree that there's a difference between the two groups.
You can further distinguish between rehabbers who put their own money (or sweat equity) into increasing the market value, at least in part, and those who funded all the improvements with cash-out. The latter group is in as much trouble as the simple flipper.
but the non-recourse protections would be null and void if you committed fraud in obtaining the loan, would they not?
Maybe we'll get lucky and one of our attorney friends will pipe up here, but my understanding is that it's not that the non-recourse law is voided in a fraud case, it's that there's a different cause of action. That is, in the case of fraud you aren't just doing a simple foreclosure, you're suing the borrower for having defrauded you, and the judge can order restitution or damages out of any assets you have.
Tanta Saith: Unless you don't get mailed statements, the bank generally has your current address . . .
With the rise of electronic banking, banks have been in a rush to eliminate their paper statements (every fourth time I log on to my bank's website they give me an ad that I must click through trying to encourage me to stop getting paper statements). It's pretty possible for your bank to not know where you live these days.
Here it seems like there were a lot of wannabe flippers that just finished too late. Empty House gets remodeled. For Sale sign goes up. After a few months without a sale, the orange sticker shows up on the door, the sign vanishes and then it sits and sits. Granted I'm not in one of the Bubble areas. We have had a few folks prosecuted for fraud buying multiple properties as owner occupied primary residences.
OT: The "hope now" rate freeze seems to me to result in higher payments for the most subprime-y loans. Guy I know has a 2/28, resetting sometime this fall. Initial rate of 11.7, variable rate is LIBOR plus 7.65 . Seems to me whatever LIBOR index they're using it would have to be lower than his current rate (granted when rates go back up then it would go the other way).
By the way, I now know exactly how much my house is worth. I added it to my Ameritrade Streamer and it flashes a very attractive red and green. It was up $ 4 at mid-day friday, but finished down $ 2. I can't wait for it to open in Tokyo!
I think stories of borrowers going out and buying a second cheaper home (that they can afford) before they walk away from their first home are bogus.
Can you imagine the loan officer for the second home's mortgage? He pulls up the borrower's credit report and there's the first mortgage listed. That has to be a red flag. The credit score is good, so he asks for documented income... and then denies them because their real income can't afford the first mortgage, much less the first plus another one for the cheaper (second) home.
We are back in the traditional "documented-income-plus-down-payment" times, right?
Many of the 2003-2006 rehabbers were amatuers who paid retail for the wiring and plumbing (and roofing and siding and). They were able to do the painting themselves. Sometimes the renovations would take over 6 months. During the boom, most of the money they made was the increase in market value plus low paying sweat equity, not the added value of a new kitchen puchased and installed at retail prices.
I found the 41% of folks surveyed who replied, "no change" in their home's value to be pretty revealing. No matter how you intepreted the question (change over the past year or when you bought), we've recently gone through a historic run-up in prices and now a historic deflation of values. The one thing your home's price hasn't done lately is stay the same.
Foreclosure and HPI declines are now "front page" news in the MSM. It's like global warming stories: you simply cannot have failed to have noticed. Your neighbors don't talk about this stuff at parties?!
Thus this 41% isn't in denial-- they are simply clueless. I hasten to add that your most important asset / liability needs monitoring.
If I could draw a Venn diagram of mortgagor stupidity, the union of "I didn't know what kind of loan I was getting into" and "I don't think my house's value has changed" must cover a lot of territory.
There are an awful lot of folks who should be renting rather than owning. And for people like that, life is chock full of surprises.
Dear Tanta,
This is another wonderful and informative post. The financial community of movers and shakers as well as journalists could use a major dose of literature and the ability to craft narrative and the plot line of this, not to mention the imagination necessary to conceptualize it, as it is playing out.
Just a guess, but you must be a graduate of one of the best liberal arts programs in the US.
Tanta,
You did a brilliant job of pointing out something that I have believed....that those that can truly afford their home are not likely "walking away" just because they are upside down. At least not in any great numbers.
Several things would have to happen first...
1) The owners would have to have another place in mind immediately that they could go to for less money a month.
2) It would likely have to be nearby and in the same school district (if they have kids).
3) The new payment (whether purchase or rent) would have to be much less than the mortgage to make up for the difference after taxes...and more importantly the walk-aways would have to have calcualated it exactly.
4) The walk-awayers would have to have a very real understanding of the value of their own house relative to those that are valued well below theirs. Most people view their own house as "special" anyway so just because a similar model is say $350,000 and they owe $500,000 on theirs...they are likely to see theirs as worth more anyway.
5) The cost to their credit, reputation, the inconvienience to move and any other unforseen or unkowable legal consequence would have to be well worth the monthly difference in living expenses. Given the arguing of those on this blog of the legal ramifications of walking away...I doubt many people really could forsee what legal or civil cost that would or would not incur by up and leaving.
6) Those walking away would have to be very confident that the drop in value in their house relative to what they owe will be a long term drop and not bounce right back a few months after settling in somewhere else (especially if they plan to rent and re-purchase later). Given the varying opinions of how long this housing bust will last..I doubt many people will gample to save $ each month when they can afford what they are currently paying.
All this combined leads me to believe that those walking are doing so because they can't afford to stay.
Again, I am not saying that people won't walk away. I am saying that most who can comfortably afford their current mortgage won't walk simply because their house is worth even several tens or hundreds of thousands less than they owe.
Nuff said.
"That is, in the case of fraud you aren't just doing a simple foreclosure, you're suing the borrower for having defrauded you, and the judge can order restitution or damages out of any assets you have."
It seems to me the result is the same either way; that is you can go after other assets. Banks may not have the resources to do this, but I could see a whole industry arising to take this on for a % age of the recovery. I sold at a loss in 1991 and brought a check to closing (only a couple of thousand, but still) and I don't like the idea of those who are walking (as opposed to those who have met with misfortune) to skate free and clear.
To begin with I would be shocked if every single person in CA with a mortgage isn't accutely aware of what thier properties are worth on any given day. RE is like GOOG stock to californians, a get-rich-quick scheme. Many (OR MOST) that are upside down will walk away.
There's a website dedicated to helping them with the details! justwalkaway.com
I think it's the most logical thing to do, given the circumstances and future prospects for housing prices. I'd do it if I were deep underwater and saddled with a painful payment. Of course I would never put myself in that kind of position (painful payment) so perhaps I'm not a good judge of how they'll behave (doubtful).
Get used to u-hauls emptying homes and owners abandoning, near you.
Perhaps not completely off-topic: has anything been heard recently about Senator Dodd's proposal to allow bankruptcy judges to change mortgage payment terms? (sorry if I've completely misstated what Dodd was proposing)
But I'm not willing to take it as a matter of faith, and I'm impatient with pronouncements from banks and rating agencies that aren't backed up with better data.
You want data? You can't handle data. Well, okay, you can, but you aren't going to get it from most newspapers.
Mark Twain and the Russians had the right idea about newspapers, I am afraid.
Aheadofthecurve | 02.10.08 - 4:17 pm |
Nothing against ya but have fun with that !!! On the news last night they had a blurb about Lee county Florida needing judges for foreclosures. They actually said if you were a lawyer with some arbitration(didn't hear it all) background to get ahold of so and so at the county courthouse. The courts can't even process foreclosures at the current rate...Do you think they or the lenders want to even go down the lawsuit route ??? It would be years before you got anything...
Chris
Tanta:
I have friends in the journalism business. Some are now teaching while others are still working in newsrooms. Many until recently were unaware of gathering storm. They'd never heard of the shadow banking system and do not understand derivatives (who does?). I directed them to this blog, especially the ubernerd posts.
Newspapers everywhere are undergoing the same transformation that earlier hit your industry -- the corporatization of news organizations. The result of which is turning into a failure to serve the public good.
Whenever oldtime journalists gather, we talk of these changes. Most of us believe democracy can't exist without informed citizens.
Tanta writes:
I guess I'm surprised that anyone who has an active checking account with the lender can "disappear" or hide from the servicing department. Unless you don't get mailed statements, the bank generally has your current address . . .
Tanta -- I work for a major bank, and I have two words for you: legacy systems. You may or may not be surprised how often one hand doesn't know what the other hand is doing.
"I found the 41% of folks surveyed who replied, "no change" in their home's value to be pretty revealing. No matter how you intepreted the question (change over the past year or when you bought), we've recently gone through a historic run-up in prices and now a historic deflation of values. The one thing your home's price hasn't done lately is stay the same."
According to our local paper, prices in my area (Albany, NY) were down 1% last year. So, I could reasonably be in that 41 %. I suspect in many mid-sized metro areas outside of FL, CA, AZ or NV prices in the last year may indeed not have changed much.
Newspapers are getting crushed. Ebay/craigslist vs classifieds. Why pay for the cow when the milk is free. NYT abandon its pay model for online content.
This has been going on for a while. Any fans of the HBO series The Wire can see what was going on at the Baltimore Sun circa 1995. We are in about round 5 of this.
Google news has the same story 500 times.
Print journalism is a little like steel in 1965 -- a lot of high fixed costs, still profitable, but steadily declining. Maybe more like wire line phone service.
I think the newspapers do a pretty good job. I frequently read the paper editions of both the NYT and the WSJ. It's not a bad way of knowing what everybody knows. I suppose if you turn back the clock 30 years, national newspapers weren't readily available locally, so we may be in about the same place.
Blogs are going to have to pick up some of the slack as general newspapers turn out the lights. I'm happy we have some that are more serious than gawker. Good work, cr and tanta.
Perhaps I should make my point a little more clear. I don't think the newsroom reporters are lackeys for their corporate bosses. They are constantly asked to do more with less. They rely on press releases. Corporations have communications departments to get their story out.
As far as a monolithic business 'line' -- there is nothing the WSJ likes better then a 'gotcha' piece. Reporters and editors live for these rare moments.
Tanta -- I work for a major bank, and I have two words for you: legacy systems. You may or may not be surprised how often one hand doesn't know what the other hand is doing.
There isn't much about legacy system horrors that would shock me.
But a seriously delinquent loan goes to someone in the default servicing department for some kind of review. Even if the default servicing people don't have access to the deposit system, there's picking up the phone to call Irene in Research to see if deposit ops processed a change of address. I mean, people in default servicing can do some pretty sophisticated kinds of skip-tracing; you'd think they could also just yell over the top of the cubicles to the the checking account people to see if anyone's heard from this borrower lately over there . . . .
I know. I know. The cubicles are in different hemispheres and Irene got forced to retire a long time ago. Sigh.
Concerning the BK abuse being whide spread before the BK laws were changed.
I am Canadian and my wife's uncle did declare BK even thought his wife a nurse in LA was making 90k+ and he had a decent house, nice SUV and seem to be living pretty comfortabley. And he seem to think to declare BK was quite a normal thing to do. I assume some of his friends have done the same thing.
So the odds would say that
BK abuse must have been pretty wide spread because I know less than 5 people in the states.
I take exception with the term "wealth was vaporized" in the context of home values. These buyers likely knew they were buying near the top, but refused to listen to reason and stubbornly believed that values would continue to rise.
Americans need to get educated on how a market works. As someone who has dabbled in option trading, I can attest to the fact that something is worth whatever you can sell it for, right now.
If I had the mentality that I was "owed" a price on an equity or option, I would get my butt handed to me.
Your house is worth whatever you can sell it for on the open market, period. If you don't like the current market, you can choose to hold on and wait it out. But don't go crying because your neighbor had the good fortune to sell right near the top, while you missed out. That is called a free market; deal with it.
Tanta:
Thank you for such a thoughtful post.
I see the question as going deep into the American Psyche.
Lama touches on it when he calls most housing as "ego-enhancing". It is our need to define ourselves and demonstrate our social position by the proxy of our overt material possessions.
And those ersatz communities in CA FL NV immediately filled with the rootless have no history to help in social delineation. So the proxy is the only clue available.
How much then should we as a society be forced to support a residence that is not for shelter but for status-definition?
Myself I would favor a non-recourse limit. A shelter safety-net. Beyond that it is Vanity. Which as we know is a Mortal Sin
It may sound appropriately populist to be in favor of making the rich pay up, but . . . [m]y own sense is that such a proposal would be more likely to garnish wages of already-struggling families than it would to force the fat cats to liquidate the jewelry collection to pay off Countrywide..
You sure can turn a phrase, girl.
I am also very willing to believe that servicers and servicing platforms are broken: that we aren't collecting the right kind of data, that contact efforts (rather than just responses) are inadequate, and that it's just plain easier for understaffed outfits to credit "borrower attitudes" for rising defaults than to send those defaulting files through a rigorous analysis process, one that looks carefully at the original loan underwiting and reverifies more than just a current FICO.
Since they didn't look very closely at the files before making the loan, it's safe to assume there's no way they're going to spend the time and energy to do that now.
The purpose [of non-recourse laws] is supposed to be to prevent bad lending practices in the first place: if lenders know they are secured only by the real estate in a purchase transaction--not by any additional recourse to other assets--then, in theory, they will institute sane LTV limits and pay attention to decent appraisals.
I believe those law are also expressly designed to put the financial burden of an overpriced asset on the seller, not the buyer, since the seller presumably knows more about the true value of the asset. The institutional lender is just a bad substitute for seller financing, but, as a third party, has every incentive to protect itself in the ways you mentioned.
I cannot speak for anyone but myself, here is how I came the realization that, ruthless or not, I was making the best decision for my family and I by walking.
Since I bought this 970 sq. ft RivCo home, I have never been below 50% total housing expenditures. With 10k down, i was still given an 80/20. Now, 5 years later, its almost worth what i originally mortgaged. Too bad I refid 3 times to keep the place from falling down. My income is up 60% since the day we moved in, and we dont seem to be making any headway. Yes, I have a car payment, and a student loan, and a credit card. Decent credit too, 720 fico. Enough is enough- Ill keep paying the car note, since that is what gets me to work. Ill keep paying the credit card, cos thats what will pay emergency med bills.
I am 29 years old, and it took me this long to realize the extent to which many in this country are in debt slavery. Media didn't tell me, the for sale signs and empty houses in my neighborhood didnt tell me. Waking up and realizing that no person making 65k a year, with a comparatively modest life style ( i dont have a boat, rv, hummer, etc) should be this broke.
Tanta, congratulations. I'm sure that if anyone ever finds out your real name you will have a very hard time working in banking again for this and similar efforts. In this respect, the fat cats have long memories.
No matter how politely you phrase it, the suggestion that bankers who believed they could sell all risk might now not be correctly assessing risk, and indeed have a huge incentive not to assess risk, carries a cruel inevitability. The truth hurts.
"...force the fat cats to liquidate the jewelry collection to pay off Countrywide..."
Oh Tanta! Ipodius (I love it when I refer to myself in the third person) longs for the good old days when hefty sterling was given as wedding gifts so that the bride and groom would have something of value to sell if times became difficult. I suppose that went out with being presented with an immaculately gloved hand from a lady, but I can still dream.....
I suspect most upside-down homeowners hadn't considered walking away until the "60 Minutes" program and resulting news stories. Well, they know now.
Those heavily involved in the RE biz & carrying several investment homes know the present value of their houses and that they are in trouble. It happened in 1979-80 in Arizona. Most of the flippers I knew were California & AZ Realtors, AZ mortgage bankers & title company folks who bought multiple investment homes. They went bankrupt & lost everything when the bubble popped.
. . . it's not that the non-recourse law is voided in a fraud case, it's that there's a different cause of action.
In California the non-recourse laws are statutory and cannot be waived by the buyer. Since they are not part of the contract, they cannot be vitiated by fraud on the part of the party being benefited.
The benefit accrues to society as a whole, not to any individual buyer (borrower). The legislation came right out of the 1930s for a reason.
No, I just play one on blogs.
Tanta,
I couldn't get thru all the posts. Company coming. Forgive me if this is a repeat.
Thanks for making an murky subject even more difficult.
Here is one proposal. Assign losses as follows
Note: the extra 20% is for admin costs.
Amen!
Hearsay is generally inadmissible in court and it should be likewise inadmissible as evidence elsewhere.
I agree that the industry needs to show cold hard data before making pronouncements and the press parroting those pronouncements.
Thanks again for your insight.
The James Gang was da bomb... for something completely different here's the Left Banke -
YouTube - Left Banke
And when I see the sign that points one way
The lot we used to pass by ev'ryday
Just walk away Renee
You won't see me follow you back home
The empty sidewalks on my block are not the same
You're not to blame
The preponderance of walkaways almost certainly belong to two groups:
(1) Those first-time specuvestors buying NOO properties using toxic mortgages, and
(2) Those buying for themselves using toxic mortgages before being "priced out forever".
Neither could actually afford the properties, but neither ever expected anything other than future appreciation. Once the promise of appreciation stopped, their days were numbered.
Only for UberNerds on non-recourse law, sections of the California Code of Civil Procedure:
C.C.P. 580b.
"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
"Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein."
C.C.P. 580d.
"No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.
"This section does not apply to any deed of trust, mortgage or other lien given to secure the payment of bonds or other evidences of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or which is made by a public utility subject to the Public Utilities Act (Part 1 (commencing with Section 201) of Division 1 of the Public Utilities Code)."
I'd like to reinforce what barely said.
Many my friends and colleagues bought within the last 5 years and are addicted to Zillow and Trulia. I know this because I was subjected to incessant bragging about the "value" of their homes. Now, not so much.
One divorce is already directly attributable to a short sale caused by financial irresponsibility. Another colleague is foreclosing on a condo because her home is not selling. Both cases are upper middle class families with two well-payed earners.
A broad slice of well off mortgage holders have their savings sequestered in protected accounts. My colleagues at work have 12% of their income in a traditional pension (all employer contrib), up $15,000 in a 403b, up to $15,000 in a 457, and $5,000 in an IRA. For many middle class left-coast home debtors, default would seem to be the EASY choice.
The USA has become more polarized, alienated, and angry. IMO, this will have huge impact on the currenct economic crunch. In my social circle, debt and tax default is cool. Its viewed as form of political protest.
I can't say that I disagree.
I'd really like to see some quantitative analyis on what is determined to be a "walk away".
FWIW my own review of a decent sized sample of EPDs and Servicer Evaluation Forms pointed to a flip problem not a "walk away" problem. This wasn't a huge sample of EPDs (about 30 loans) but was pretty time consuming as it required the credit to be re-pulled and a re-underwrite of each file. This was in early 2007 and was concentrated in the SE US. As for the Servicer Evaluation Forms they didn't really help at all. The information that the servicer provided was inconclusive. I wouldn't be suprised to see a growing # of "walk aways" but I don't have any hard empirical evidence as of yet.
Squeezed - It's cool to have bastard kids too. After all - don't all the Hollywood stars do it? Remind me never to enter into any form of contract or investment in California. Sounds about as sound to me as investing in some third world country. Roby
"In my social circle, debt and tax default is cool. Its viewed as form of political protest."
I'm not sure that's true in mine, but I do think there is an attitude change. It's the "deep pockets" theory applied to mortgages. You know, you stick your hand in a snowblower and sue because it didn't have a warning label. The company is found liable because, to a jury, it has deep pockets.
You got a mortgage you can't afford. Stick it to the bank. After all, they have deep pockets and should have known better. It's no longer a contract between two parties, it's a harm situation. Same psychology.
No borrower is ever going to say "I lied on my loan application and that's why I lost the house". No, the bank/appraiser/mortgage broker screwed me!
But, then again, I would agree with Tanta that most of these are fringe events and that, in most cases, people haven't just "walked away", they've called a lawyer and negotiating some sort of out, or even BK in the end. Just like what happened in the last bust.
Zig, I can see why you don't think reporters are lackeys for their corporate bosses (even as they assume the "doing more with less" position)
If you have a vision of the sincere, curious independent sort of scribe, you can see that made manifest at times in the national and local sections of the newspaper. To get an idea of what really runs the economic show for the press, take a look at the happy chat, i mean, er, reporting, in the travel, auto, features, gadgets, holiday special issue, special fashion section, back-to-school, health and diet tips, and oh yeah...real estate sections. Even the biz and sports sections have been known to get disquietingly gushy with their hometown teams, and ad-dollar rich companies.
Now here's a fun exercise: try counting the pages of local/national/world news vs. happy chat.
Hey Tanta!
I just met my first ruthless borrower! He's an acquaintance that I've known for about five years. He bought for somewhere under a million (old home in a nice neighborhood), and told me Friday night he was in the process of buying a place closer to my area. He said he offered to pay down one hundred thousand for a better deal from the mortgage holder, but was refused, so he's planning on walking away. I think he's pretty straight forward,...any questions you want answered? I'm going to see him in about an hour, I'll ask him any details you want to know.
I really wish newspaper professionals hadn't sacrificed their integrity just for another nickel of ad money from lenders.
If you think that's why we write the things we write, you're badly misinformed. We do quote the opinions of the realtors, bankers and so forth in our communities, and hopefully on our better days we get more objective sources of info...but in many cases, people who aren't working in the industry either don't know any more about what's going on than I do, or else they don't want to be quoted in the paper. That includes some real estate industry professionals. One local mortgage broker whom I believe to be honest was very outspoken a few months ago about lax lending standards, and I quoted her. Since then, she has not returned my phone calls. Perhaps she got some blowback on her printed comments and has decided to keep a lower profile in the future. But you get my point. It's not so easy to find well-informed sources who want their names in the paper.
A few years ago, I reported extensively on questionable lending practices at Household Finance. I didn't know if they were advertisers, and I didn't care.
Also what happens when the "overstated income" turns out to because the mortgage broker was fiddling with the numbers?
Given the amount of time you're given to flip through that stack to paper to sign at the closing, it's pretty hard cheese for the borrower to be held to everything he signed. In my case, my lawyer and I ended up going through everything sheet by sheet, caught and corrected a few things, and STILL didn't pick up that the official deed had the wrong address on it. Sheesh.
I also enjoyed the packet of material I received from the bank: 3 pages explaining fixed loans, another 30 explaining the ARM/balloon/interest-only/20-80 and all the rest of the zoo. (I had gone for a 15-year fixed because I didn't want to have to deal with the hassle of anything else. )
[What we have, so far, is a series of industry insiders making a general claim that "ruthless default" is on the rise.]
I'll preface my comments by stating that I deal exclusively with mid-western folks. Since we're in the flyover zone, you may feel you have to disregard everything that follows.
We're not seeing this kind of thing without being coupled with severe financial distress.
[These borrowers may have checking accounts and credit cards with the very same bank as their mortgages. ]
I almost never see this. The rare exceptions were those who had accounts at Lasalle, which was linked to ABN. Now that their stuff was shipped to CITI, we almost never see a borrower with all of their business "in house."
[Even if the default servicing people don't have access to the deposit system, there's picking up the phone to call Irene in Research to see if deposit ops processed a change of address.]
Are you kidding me? Have you called a loss mit or collections department lately? Maybe they were doing this kind of due diligence in the 70's, but they're not doing it now. If you call in to nearly ANY servicer these days and ask five BASIC questions about a particular loan, you will find that they have to wade through 5 of 6 screens just to find it. During that time, you will experience extended periods of silence, usually accompanied by, "I'm sorry, my system is running a little slow today."
To think that a financial institution would be coordinated and dextrous enough to make use of the information assumes that they can easily access it. They can't.
Finally, you've assumed that anyone has the time to do this sort of research. As you know, the servicers were woefully understaffed in the first place. And, as the giants have added portfolios, they have not added sufficient staff to accommodate the growth.
[We do have some data indicating that borrowers in general are not, on the whole, likely to be highly-informed about the current value of their homes unless they are actively trying to sell or refinance.]
Nearly all of the homeowners I encounter are completely unrealistic about the value of their homes. Add the hyper-inflated appraisal number they saw at the time of their refi to their inability to divorce their ego from their [phantom] equity, even those who think they're being "realistic" are over-estimating their home's value.
The ones who really know how screwed they are have had their homes for sale for a year (or more), have reduced the price, and still can't sell it. Reality has smacked the delusion out of these folks. In these cases, coupled with hardship, we're getting questions about whether they should stay or leave.
[we have at least a few borrowers who are not even very clear on how much they currently owe until they try to refinance]
Often the lenders can't figure out what's owed, either.
[My guess is that servicers do not have the kind of information that would let us answer these questions directly.]
Listen, they can't even keep up with their fax machines. In the last week, a major servicer had "lost a few days' worth of data," so all faxes sent in a 72 hour period had ro be re-sent. So I seriously doubt they're able to track the kind of data you'd expect them to know cold. And, the servicers are doing such a SHOCKINGLY bad job of servicing defaults that I'm sure they wouldn't honestly share what info they do have. As it was, there was that BS report about 25% of defaulted borrowers being unreachable. The number has always been 50% according to insiders, and it hasn't changed.
[In fact, it seems possible that the borrowers being labelled "walk-aways" are those who 1) do not respond to servicer attempts to contact them at the first or subsequent delinquencies]
What constitutes an attempt? For most of the majors, they use a robot to dial the borrowers. If the borrower even picks up the phone, they usually have to wait a few minutes before a human picks up the line. Would you respond to that?
[significant percentages of those borrowers did not return lender phone calls out of embarrassment or a lack of faith that anything can be done to help them.]
Lack of faith or lack of evidence? If you look at any of the recent reports, whether it's the MBA or the self-congratulatory folks at HOPE/Neighborworks, you see that hardly any of the applicants are getting mods. In cases of legitimate hardship, a repayment plan is hardly ever a long-term success. Furthermore, take a look at what is, and more importantly, what is NOT included in the financial worksheets submitted to loss mit. There are so many normal expenditures that are not included on those forms, that it's easy to see how a lender's perspective of a borrowers ability to pay is pure fantasy.
[the customary assumption in mortgage servicing was that borrowers in distress would prioritize payments such that they would skip the credit cards, personal loans, and auto loans (in that order) before failing to make the mortgage payment. ]
Completely out of touch. Contrary to popular belief [Chuck Grassley], most people WANT to pay their bills. If there's not enough to pay everything, they'll at least try to pay SOMETHING. This is why you often see people who've caught up their credit cards, utilities, etc., while failing to save for up-front funds to their lenders. Quite frequently, we'll see borrowers who are current on their second, which is lower than the payment on their first. While this is a mistake, they feel like, "Hey- I want to pay my bills, and I'm paying those that I can."
The "prioritization of debt payment" assumption is based on the expectation that borrowers in default [under extreme duress] will act rationally. It's appalling just how out of touch mortgage folks are with the market they allegedly serve.
[Of the loss mitigation efforts closed in October, 73% of all resolutions were due to the borrower bringing the account current.]
This explains the still-widespread practice of using old-school collection techniques with borrowers. Squeeze them hard enough, and they will tap that IRA/401(k), beg for that "loan" from Ma and Pa. It's amazing how often servicers lie to borrowers about what their options truly are, and it's clear that these techniques work... the first time around.
[But it is also not clear to me that a borrower's failure to file for bankruptcy necessarily means that the borrower's income is sufficient to carry the mortgage, given how stringent means-tests in BK have become. ]
The perception in the marketplace is that it's tougher to qualify for Chapter 7. However, if you ask most experts who practice in this area, you'll find that nothing much has changed. The commonly-held, mythical image of the scofflaw who borrows all the way to the courthouse steps was an invention of the credit card lobbyists.
The walk-away is essentially the same myth, carefully constructed on anecdote, repeated often enough, the "ruthless borrower" will eventually become a proxy for all defaulting borrowers. Bad legislation will HAVE to be passed to "stop these evil people."
[But I'm not willing to take it as a matter of faith, and I'm impatient with pronouncements from banks and rating agencies that aren't backed up with better data.]
And you shouldn't be. They're going to say ANYTHING to try and make themselves look good in spite of their piss-poor performance. The fact is that they're not collecting enough servicing income to properly handle the volume of defaults. And nobody seems to be willing to pay what it would cost to properly handle this problem. No... they'd rather pretend that upping GSE loan limits and shifting the loans to FHA will fix this. This approach is already NOT working, and won't work. Unless the investors are willing to PAY THE PRICE of getting these loans handled properly, and until they are willing to start offering REAL solutions to borrowers, the pain will continue.
There's an article in the new Atlantic titled: "The next Slum? The subprime crisis is just the tip of the iceberg, Fundamental changes in the American way of life may turn today's Mcmansions into tomorrow's tenements." by Christopher Leinberger. Not only is it timely, it incorporates a quote from E.B. White.
PS This is the March 08 issue so it's not online yet.
My call - 80%+ non-recourse homeowners $100K+ upside down are going to walk. The key variables are negative equity, negative equity/wealth, future valuation prospects, and own/rent economics. At $100K+ negative equity, the stigma variable impact drops considerably.
Think this video might be the rock blog clip most appropriate from the Hooters of 80s fame:
Google Videos Error
I find these lyrics particularly appropriate:
"When you sleep all night on a pillow of stone
Brother, don't you walk away
Do you dream of finding your way back home
Brother, don't you walk away
Well some might say these are better days
Brother, don't you walk away
But a cardboard box is your home these days..."
No one is walking away in the NYC suburb that I live in, but no one is all too optimistic about the real estate market either. NYC is starting to soften....
I think the newspapers do a pretty good job.
I think small local papers do a much better job than the big huge operations. The local paper has been published by the same family since 1931. Current editor is 2nd generation, and the 3rd generation daughter is fresh from journalism school. They are a small weekly, but they know the territory and (usually) know about most everything that is happening (even the stuff that isn't printable).
Its viewed as form of political protest.
I can't say that I disagree.
squeezed | 02.10.08 - 7:15 pm | #
funny you should mention that. A few guys I work with, young blue collar types with crushing mortgages in OC california all say the same thing: "f-'em"
Remember--advertisers don't advertise because they approve of what the reporters are writing. They are advertising because the newspaper reaches some significant number of households with disposable income. Sometimes advertisers get pissed off by a reporter and pull their ads, but they generally come back, if the advertising was doing their sales any good to begin with.
Sigh, journalist, investigate thyself:
..."In the newsroom we no longer talk about journalism," said Max King, then editor of the Philadelphia Inquirer. "We are consumed with business pressure and the bottom line," agreed another editor. News was becoming entertainment and entertainment news. Journalists' bonuses were increasingly tied to the company's profit margins, not the quality of their work. Finally, Columbia University professor James Carey offered what many recalled as a summation: "The problem is that you see journalism disappearing inside the larger world of communications. What you yearn to do is recover journalism from that larger world."
The Elements of Journalism: What Newspeople Should Know and the Public Should Expect - Introduction | Project for Excellence in Journalism (PEJ)
Also John, my point above is that entire sections of the daily newspaper have been created in to make advertisers happy.
Is there a cliff notes version of CR?
True enough. I generally skip those sections. It's obvious that some of the specialty sections (real estate, automobiles) are frequently infomercials.
You also get an occasional puff piece on a business with an ad somewhere close by.
Look at some of the stock prices of newspapers. Their glory days are behind them.
[Is there a cliff notes version of CR?
75 bp, baby! | 02.10.08 - 8:18 pm]
I think one of the points of this blog is that there is no cliff notes version of life.
How do we explain the mystery of this consistency? The answer, historians and sociologists have concluded, is that news satisfies a basic human impulse. People have an intrinsic need -- an instinct -- to know what is occurring beyond their direct experience.2 Being aware of events we cannot see for ourselves engenders a sense of security, control, and confidence. One writer has called it "a hunger for human awareness."
thx cr&t
Just a comment here:
There are always some borrowers who request a deed-in-lieu when they are in distress, but that's not really what we mean by "jingle mail" or "walking away," which implies that the borrowers are letting the banks foreclose, not voluntarily surrendering the deed.
Some borrowers may not be correct. After requesting deed-in-lieu myself, I was informed by my loan servicer that they are behind, by an indeterminate amount of time, on such requests now, as they are getting "thousands" of requests every week for the past few months.
There is also a local backload of foreclosure sales, moving from a three month turn from foreclosure to sale to 6 months + currently.
All anecdotal, but interestingly depressing.
Wonderful posts Tanta.
Wonderful comments, Robert.
Mike--the buying the other house thing is not an urban myth. And it can happen without any fraud whatsoever. I closed one about 10 months ago. The only variation was that the borrower was having the other house built, and it wasn't finished yet. The loan was current because the interest the bank was paying itself was part of the loan.
No lies were told on the application.
Banks are just incredibly stupid.
The people moved back from west coast Florida to east Coast Florida because of the tragic death of the young son in law.
I personally called both the developer and the lender and offerred to deed the half finished house back to them and they both refused.
The Cliff Notes banker Fisher was the lone dissenter...prolly for the PR his entertaining self needs so badly...not totally uncommon around here either, if I do say so my self...show me your funny bone and I'll do what I can to tickle it, you know?
Well, my little note comes on the heels of "f'em", noted above representing an "attitude" change...somewhat connected to CR's first observation/warning months ago that "walking away" might become "socially acceptable"...not exactly a moral condemnation (You B so BAD, you and your Mother gonna B burned at the stake...so people unnerstan The Good.)...but an indication that moral standards...are in...transition (like this)...why B good and pounded poor (you illegal aliens, know who you are?) [Our profit centers], when you can be filthy rich?
'Tso horrifically expensive bein good nowadays, you know?
Several things.
As of this article, at least,
Mortgage rates creep up, worrying buyers -- Refinance market collapses as 30-year loans top 6 percent
Kelly Zito, Chronicle Staff Writer
Friday, August 1, 2003
and I think for decades in the past,
the average homeowner sold and moved in seven years. Is that still true?
I recall reading years ago that's how the "thirty year" mortgage was decided on, the lenders figured that since they were lending to people who moved every seven years on average, the way to maximize profit on the loan was to pick a length of amortization so the borrower paid almost entirely interest, on their average stay, and very little on principal. And that worked out to 30 year loans, for the average actual 7-year real period before the payoff and move.
Still true?
Last mention I find of it is here:
Mortgage rates creep up, worrying buyers / Refinance market collapses as 30-year loans top 6 percent
"Most consumers move within seven years," said Avram Goldman, president of Coldwell Banker Northern California. "You can still get a seven-year adjustable for less than 6 percent."
That article is dated August 1, 2003; another quote from it: "This week, the average rate on a 30-year fixed mortgage increased to 6.14 percent from 5.94 last week...."
Next question -- I only recollect this from reading it on paper in the 1970s when I had a clerical job and saw the American Banker daily newspaper every day, and lo, on the front page was an article celebrating the first big change in banking laws since the New Deal, and saying that one of the big successes of the bank lobby in the change was getting rid of a New Deal rule that said when a bank foreclosed on a home it had to promptly put it up for sale -- until the New Deal bank laws, banks were able to put people into unsustainable loans, foreclose, then capture them as renters forever.
And I recall the article saying the banks had been working for 40 years to get rid of that provision and finally succeeded.
American Banker, daily edition, front page, below the fold, but I can't recall the date and have no way of digging it out now. Just memory.
But I wasn't in the habit of dreaming about bank laws or the New Deal back then. Anyone recognize this as part of history?
Third bit -- in California, for sure, the home mortgage pushers (the people who sent you multiple mail offers and phoned you several times a day every day) did know about the One Form of Action Rule -- and knew it has a major loophole. It applies only to first purchase mortgages, not to refinances.
One of the really big purposes of the huge grinding mortgage sales mill was to get people into a first purchase and then into refinances, quickly.
I heard repeatedly of people who believed they'd gotten the best available deal on a mortgage and then within days or weeks were getting calls from the very same broker or lender saying that rates had gone down or there was a better deal available and they could -- at no cost to them -- refinance and take money out or reduce their payments.
And lo many did. And the big thing this accomplished was to take that borrower and that home off of eligibility for the One Form of Action Rule, and put them on the list of people whose assets can be taken if they walk away from the house.
$Profit$
That's what I recall. It's just anecdotal, can't prove it.
Newspaper people, dig!
Well, I just say no family I personally know would flippantly be foreclosed on their family home. I believe it's a disaster all the way around for the average family.
But you say it much more eloquently, Tanta. Which is why you're a blogger and I'm a too-often commenter.
..."In the newsroom we no longer talk about journalism," said Max King, then editor of the Philadelphia Inquirer. "We are consumed with business pressure and the bottom line," agreed another editor. News was becoming entertainment and entertainment news. Journalists' bonuses were increasingly tied to the company's profit margins, not the quality of their work. Finally, Columbia University professor James Carey offered what many recalled as a summation: "The problem is that you see journalism disappearing inside the larger world of communications. What you yearn to do is recover journalism from that larger world."
Nobody in the news biz could disagree with any of this--except the notion that we have somehow slipped out of a past golden age of journalistic excellence. It has always been a very dubious enterprise, with some bright moments, to be sure, but a lot of space filler and a lot of things that were just plain embarrassing. Aging editors and j-school profs look back with nostalgia on their imagined youthful triumphs and think that those were the good old days--but they were just different old days; nothing particularly good about them. Newspapers are in economic decline, still trying to find out what their role (if any) will be or should be in the Internet age. Meanwhile, we're all supplementing our knowledge of the world by reading blogs and other online info sources that make us the best-informed people in the history of mankind. This won't necessarily make the world a better place, since the Internet lets everyone compile "facts" to suit their point of view. Of course, people always did that, so again, there's no lost golden age to get nostalgic about.
Journalists' bonuses were increasingly tied to the company's profit margins, not the quality of their work.
I forgot to add--What in the hell is a bonus? Is that, like, extra money they give you besides your paycheck? I have heard rumors of such things, but not in journalism.
IN any event, it's nice to know that in businesses other than journalism, bonuses have nothing to do with crass considerations like profit margins.
Oh wait, I do remember a bonus. It was 1973, and at Christmas, the owner of the independent El Paso Times gave everybody a five-pound round of fine cheddar cheese, encased in black wax.
But by the following Christmas, Gannett had taken over the paper. Those greedy corporate profit-seekers NEVER gave us cheese. They did make the newspaper a lot better. Still, some cheese would have been a nice gesture.
I know I'm just talking to myself at this point.
John Stark,
Nah, someone's still reading (at least here).
I'm afraid journalism's much like every other field -- there's good & bad, but the bad tends to overshadow the good. That said, it is quite amazing to me how far behind the press has been on economic issues.
I canceled my LA Times subscription a few years back because I simply couldn't take the BS (business section) anymore. Petruno, Flanagan, etc. -- clueless cheerleaders. They didn't just miss the housing bubble, they repeatedly denied it. The rest of the paper isn't much better. Perhaps the editorials are the worst; but at least there they admit to their biases.
Before I end my rant, the one thing that truly irritates me to no end is the subtle bias inherent in the stories that the Times "chooses" to cover. Conciously or not, they engage in their own "confirmation bias"; unfortunately, in doing so they impose it upon their readers, too.
Attorney comment re fraud and nonrecourse:
First, I do not practice in California, so nothing herein is legal advice or necessarily even correct (but I wouldn't bet heavily against it).
Lying on a mortgage application can create significant civil and criminal liability. Depending on the lender, federal criminal statutes may be implicated; I presume, but do not know, that there are California state criminal provisions that are similar.
As to civil liability, common law fraud usually requires proof by a high (clear and convincing) evidentiary standard that the misstatement was (i) material; (ii) reasonably relied upon; (iii) foreseeably relied upon; and (iv) made with knowledge (or intentionally to induce the reliance) of its falsity.
Assume a plain vanilla balance sheet lender (otherwise it just gets really messy).
First, in passing, I mention that as anecdotally, most of the SISA applicants seem to have relied on a broker (mortgage or real) telling them what income they needed to state, that implicates those third parties in aiding and abetting civil (and criminal) liability (I think in California this is referred to as civil conspiracy, but it's much the same thing).
In any event, one problem with this is the issue of proximate causation of damages.
Suppose I lied about my income and got a rate of LIBOR+250 and had I told the truth I would have got a rate of LIBOR+500. Likely the damage would be limited to the interest rate differential.
But suppose the bank can show that it's a real "but for" and had they known the truth they would not have made the loan.
I'm wondering to what degree the diminution in value of the house would necessarily be deemed the proximate cause of the fraud.
For example, suppose I lie about my income and as a result buy a house for $1,000,000 that I otherwise would not have got.
Suppose a month after I move in a meteor falls out of the sky and destroys the house, and suppose the meteor is full of radioactive material so the whole lot is toxic and let's say it's cesium or something with a 500 year half life so there can be no use put to the lot. Please ignore insurance considerations because this is a didactic hypothetical.
I have a very hard time imagining that a court would consider the loss in value (presumably a total write off of $1,000,000) to have been proximately caused by the fraud; it was caused in fact, because without the mortgage there was no loss to the bank, but morally, or as a matter of policy, or ethically, however you want to look at it, the loss by meteor impact is not what we're trying to prevent by requiring honest applications.
I say this because if I were representing the borrower in a liar loan case, and had to come up with a defense, I would argue that sure, if there was a fraud, damages for collection and similar expenses and commissions to resell it and the like lie, but that damages due to extrinsic, cyclical, secular forces such as the credit market seizeup were more like the meteor.
I didn't say I'd expect to win, but it would be a defense and if in some way it can survive summary judgment and embody one or more triable issues of fact, I just made a lot of grief for the lender in the litigation.
All of this is why it may not happen except on big loans that private litigation will be brought by banks; perhaps a few cases for show, but any in terrorem effect may be unlikely right away given the slow pace of litigation.
But yes, fraud of course is a separate cause of action (in tort) from a deficiency judgment (in contract).
Finally, casual perusal of the non-recourse statutes indicate that the proscription applies only where the loan was used to pay at least some of the acquisition expense and where the obligor occupied the house. I should imagine it would be a far more likely outcome that a bank would litigate against the liars who never occupied it, if I read the statute correctly.
My two cents (well no, I bill more than that, but...).
I enjoy your blog very much. One point is that you seem too concerned about the "MSM" too much. Most intelligent people interested in a topic have found blogs, evaluated them, and are ignoring the MSM. When I want FACTS and informed analysis, I go to CALCULATED RISK. When I want blondes, I go FOX, brunetts BLOOMBERG, and CNBC for Burnett and Bartiromo.
To add to the "anecdotal" comments: (with the aggegation of anecdotal comments being one reason why this blog is so valuable) I can offer the following datapoint with regards to Tanta's post.
I know an owner of a mortgage company (broker) that noted and commented on this trend late last year, of the subprime borrower letting their mortgages lapse while preserving all other payments to keep their credit report "good" by showing only one late payment stream. He further noted that a lot of these people were being allowed by the lenders to stay in their homes, even after the homes went up for sale by the bank, since the lender seemed to prefer to have an occupied dwelling rather than a vacant dwelling. This seems to align with the (very) desperate lender theory.
This is in the Detroit area, where there is obviously a glut of underwater homes on the market, so maybe this is a local "solution", but it may also be a leading indicator to other regions. Keep in mind that Detroit also has the history / precedence of the "midnight move-outs" during the social upheaval in the 60's, but now folks seem to be staying put - at least for now. The people that are leaving are those that get jobs out of state, then they just walk away from a home that they don't own and have already "written off".
Tanta, my continued compliments on a great resource.
What's so interesting -- and tragic --to me about the decline of journalism is how self-inflicted it is. First problem is when you ask these naturally curious and insightful reporters to examine the flaws in their own house, they instantly become unable to see beyond the noses on their faces.
None of them seem to ever have had a personal experience getting a story pulled, or an advertiser mad, or sat in the publisher's office and been told that coverage of a certain source or subject isn't good for the bottom line. They might not have come for you personally (or in a way that you'd realize it), but they have come for your bretheren on many other pages in your newspaper. It's as plain as the fluff that fills the pages.
It is tragic that reporters and editors and publishers can't see that you can't sell out one part of your newspaper (then two, then ten) and expect people to trust you everywhere else.
If you can't see the disease that's killing you, you can't begin to have a conversation among yourselves and with your readers about how to save yourselves before it's too late.
I have never been witness to an event, read about it in the paper, and found the event to have been reported accurately. This includes various 1960s events. A friend of mine was at some sort of student protest thing in the 60s, very peaceful, and the reporters tried to churn things up and make it non-peaceful, to get a better story. I see it in relatively non controverial reportage, too. I see it in the real estate section where they buy advice columnists and then don't vet the columns by Fla attys to make sure the advice works in Fla. Just recently in the local rag, they gave bad advice on Agreements for Deed. There is no desire for excellence, just money. Funny thing is, if there is no excellence to buy, your money isn't worth anything.
So no, there is no golden age. And I don't read the papers much anymore. Why fill my mind with stuff I know is inaccurate, when I don't know where the inaccuracies lie. It's worse than nothing.
The crusading altruistic reporter has always been a myth, it's just part of the collective professional ego.
Shill is a more apt description of the typical "The Daily Plan-it" staff reporter. Manipulator also fits the bill during election times.
An irony is that today's bloggers are much closer to the original colonists with private printing presses who published anonymously and risked life and property for the sake of principal than the MSM carnival hustlers( sorry for the run on but it's early). Our First Amendment protections were written for those private publishers not for today's commercial promoters and purveyors of human corruption.
monday 2/11 it is great to see and read you tanta in real time . i should send you some tuition money , ihave learned more here than 4 years at school.again, thanks.
Shill is a more apt description of the typical "The Daily Plan-it" staff reporter. Manipulator also fits the bill during election times.
An irony is that today's bloggers are much closer to the original colonists with private printing presses who published anonymously and risked life and property for the sake of principal than the MSM carnival hustlers( sorry for the run on but it's early). Our First Amendment protections were written for those private publishers not for today's commercial promoters and purveyors of human corruption.
Right--that good old 18th Century press! Go back and read about it sometime. You're an idiot.
Thank you, Tanta, for the original post. I also have been been disturbed by the lack of any serious data-based estimates about how many are doing what. In particular, an estimate of the number of homes bought as investments with the expectation of being able to resell at profit and subsequently abandoned at little or no cost to the investor: 5%, 12%, 25%, 1% ?, in 2004, 2005, ... ? Another analysis could focus on the distribution of MEW as a percentage of the original mortgage, over the same set of years. I am thinking of a WSJ article two or three months ago ( sorry, no reference) which detailed the actions of a family which started out with a 500,000 mortgage, refinanced several times, taking out an additional 300,000 in SUVs and other toys and then decamped to another state. A third area of concern follows from my belief that at least one of the goals of the FED is to keep the Libor rate as low as possible in order to minimize the magnitude of the ARM resets and thereby make it easier for owners to avoid foreclosure: is there any data which might let us understand the effectiveness of this strategy?
How is it even possible to distinguish between 'walking away' and 'foreclosure due to inability to service the debt'?
Couldn't it be an element of 'walking away' in every foreclosure?
After all, people have different capacity for living under economical stress. What feels like 'walking away' to one, may feel as personal bankruptcy to another.
The press has always had credibility issues, but they were not as well known because the press owned the communications channels. So there was a golden age, in the sense that they could print puff pieces or innacurate info and no one could call them on it. If they screwed up, they might print a correction, they might not, and few would be the wiser. And there was not much competition, so the profit margins soared.
There was also a brief enlightened time, in the Watergate era, that investigative and consumer oriented journalism became popular. You could kind of call that a golden age, but still with plenty of tarnish. Again, though, with the high profit margins.
Things aren't so golden now, and the press seems to be at a loss for what to do now that its facts are being checked and second-guessed from all sides. The only thing not on their list of remedies is the very thing that would save them: A huge investment in high-quality journalists and a robust fact-checking apparatus.
I was with you until you called the elimination of taxes on debt forgiveness "proconsumer". This is obviously the most pro-ruthless defaulter scheme going, and it really pisses me off.
What good does it do to eliminate taxes on debt forgiveness to honest borrowers in financial distress? Just because the taxes get assessed doesn't mean the IRS will be able to collect them before the 10 year collections statute expiration date. The IRS has very lenient collections policies and "CNC" (currently not collectible) provisions. If someone is honest about paying what they can, they will not be devasted by unpaid federal taxes (unless they think they deserve to live like Paris Hilton). This was a redundant "fix" that will do more harm than good.
I don't know the particulars, but I think it's safe to assume that the new law has some meaningless, unworkable provision for instances where the default was fraudulent. Which means that instead of having one low paid GS-7 telephone clerk evaluating the tax debtor's ability to pay the tax on their COD income, you have to have a team of high paid GS-13 agents trying to make a fraud assessment that will stick - this is a very expensive and time consuming process - and that's just to get the tax assessed. We're not even talking about collecting it yet.
And I can tell you that with the short staffed IRS, the process of identifying and then developing fraud cases is just not going to happen in any meaningful way.
But what really makes this stupid has nothing to do with tax administration. The really stupid part is you have just been granted a tax break for defaulting on your mortgage. Is the Wall St word for this "incentiv-ize"? DC was allegedly trying to find a way to help marginal people stay in their homes longer (more like forestalling the inevitable while help struggling people throw good money after bad. who does that help besides the lender?).
Instead, they have introduced the final, crowning, piece de resistance of "moral hazard" by giving the worst borrowers a big fat tax break for all the money they have recklessly wasted and all the equity they withdrew to live beyond their means. The circle is now compleat!
This wasn't a solution in search of a problem afterall. This was a problem disguised as a solution. The part I haven't figured out is what constituency this was designed to help out, because I just know this wasn't as plain out and out stupid as it seems. I'll betcha in the next year or two we hear how millionaire CEOs or somesuch trash found a loophole in here to bail them out of some crap we don't even know about yet. And whoever finds that loophole is probably the one who lobbied congress to put the loophole there to begin with.
I'm a little late to this thread but I hope someone reads it anyway. I am attorney and I work both sides of the game. I represent banks and I represent foreclosed mortgagors. There are a million and one reasons why someone falls behind on payments. However, there are a couple of overarching anecdotal reasons why people are just 'walking away' as you claim. I've seen hundreds of foreclosure defendants in court explain their reasons to the judge why they defaulted and I tell you, there as many reasons as there are debtors:
1) An investor buys a rental property and a) gets taken advantage of by a tenant and b) has insufficient capital reserves to evict the tenant and cover the mortgage payments;
2) The homeowner falls behind on a payment or two and can't catch back up. Kind of like the apartment renter who falls behind two months has about a 1% chance of ever catching up. The homeowners who do catch up, in my experience (including my own father a couple of times) receive a gift from a family member. These people aren't tapping their 401(k) or reducing their lifestyles because they don't have much, if any, savings and their lifestyles are already paycheck to paycheck.
3) The homeowner overextended himself on too many properties for whatever reason and they just don't care. Some people out there believe that can buy a house for someone else. One person can sign the mortgage paperwork but someone else will live there. Typical straw buyer without the fraudulent intent. The real party in interest isn't on the hook so when things go bad they just leave. The straw buyer doesn't really care because it wasn't their house anyway.
4) Fraud, fraud and more fraud. So many deals are fraudulent, with weird tenancy issues, where someone, anyone, pays the mortgage for a while before default, I won't even bother because it's too extensive.
5) The homeowner overextended himself through HELOC's and when he tries to refinance because he's about to fall behind, he can't refinance because the bank tells him that he's underwater. So they figure, what the hell, I've got the plasma, and the truck, and Hawaii was pretty nice too...let them have the house - there is no recourse.
In conclusion, I think there are just so many reasons why homeowners default that the walking away theory is just an over-generalization of the variety of reasons listed above.