Past Posting in Real Estate
Past posting is a term for a specific type of cheating in gambling. It has its roots in horse racing where gamers would attempt to get a bet in on a horse between the time that it passed the finish line (or post) and the time that the betting office gets word that the race is over.
In casios, past posting became known for the technique where a player would swap out a small bet for a large one when he was a winner. For example, a gamer might play roulette and bet $15 in three red chips. The dealer collects the $15 when the player loses, but if the player wins he deftly swaps out the three red chips for two reds and, say, a brown worth $100.
In short, it is a way to gamble where you get paid when you win and don't have to pay when you lose.
Enter real estate:
I know a real estate investor who only deals with unimproved properties. Let's call him "Joe" (I'm changing names a dollar amounts slightly). A while ago he sold two empty lots to another investor for $80k. Let's call that buyer "Sam". Joe not only sold Sam the property, but he also financed the purchase. Sam bought at the peak of the market and saw an expected loss within a few months. He ended up only making one payment before deciding to walk away.
Sam called Joe and told him that the land was worth less than he paid and he just wanted to walk away from the land and call it even. I believe this is what people have been referring to as jingle mail.
Joe said, "no". Joe sold him the property and was not interested in just taking back a piece of land worth less than the loan value on the land.
Sam told Joe that he wasn't going make any more payments on the land.
Joe told Sam that he would foreclose on the property, that it would be sold at auction, and that Joe would file a judgement against Sam for the remaining loan balance.
Sam was not happy hearing this news.
So months pass, the property goes into foreclosure, and Joe buys both lots back at public auction for around $40k. After interest, late fees, and billed expenses Same still owes Joe around $50k.
Joe hires a lawyer and files a judgement against Sam for this amount. Because this is an investment property and not a primary residence, the court awards him the judgement. This cost Joe aroud $1500.
It turns out that a few years back, Sam had purchased another piece of property for $100k and paid in cash. The deliquency judgement was filed just as this property was going into escrow to be sold for $130k. The judgement was attached to that property and suddenly the title was dirty and it could not be sold until the judgement was cleared.
Sam called Joe's lawyer and begged him to release the lien and promising to pay Joe if he did so. It was pointed out that Sam hadn't paid before and why should he be believed now. The lien stayed in place.
Next thing you know, Joe's lawyer receives a check in the mail made out to Joe for $50k.
The lesson here is that there are people past posting real estate investments. They were buying properties and selling them if they went up and walking away if they went down. Filing judgements is expensive and unlikely to produce a return against people who are in bad enough financial shape to allow foreclosure. So the past posters bet that by walking away they won't have to pay their losses.
And I bet that most of the time they are right.
In casios, past posting became known for the technique where a player would swap out a small bet for a large one when he was a winner. For example, a gamer might play roulette and bet $15 in three red chips. The dealer collects the $15 when the player loses, but if the player wins he deftly swaps out the three red chips for two reds and, say, a brown worth $100.
In short, it is a way to gamble where you get paid when you win and don't have to pay when you lose.
Enter real estate:
I know a real estate investor who only deals with unimproved properties. Let's call him "Joe" (I'm changing names a dollar amounts slightly). A while ago he sold two empty lots to another investor for $80k. Let's call that buyer "Sam". Joe not only sold Sam the property, but he also financed the purchase. Sam bought at the peak of the market and saw an expected loss within a few months. He ended up only making one payment before deciding to walk away.
Sam called Joe and told him that the land was worth less than he paid and he just wanted to walk away from the land and call it even. I believe this is what people have been referring to as jingle mail.
Joe said, "no". Joe sold him the property and was not interested in just taking back a piece of land worth less than the loan value on the land.
Sam told Joe that he wasn't going make any more payments on the land.
Joe told Sam that he would foreclose on the property, that it would be sold at auction, and that Joe would file a judgement against Sam for the remaining loan balance.
Sam was not happy hearing this news.
So months pass, the property goes into foreclosure, and Joe buys both lots back at public auction for around $40k. After interest, late fees, and billed expenses Same still owes Joe around $50k.
Joe hires a lawyer and files a judgement against Sam for this amount. Because this is an investment property and not a primary residence, the court awards him the judgement. This cost Joe aroud $1500.
It turns out that a few years back, Sam had purchased another piece of property for $100k and paid in cash. The deliquency judgement was filed just as this property was going into escrow to be sold for $130k. The judgement was attached to that property and suddenly the title was dirty and it could not be sold until the judgement was cleared.
Sam called Joe's lawyer and begged him to release the lien and promising to pay Joe if he did so. It was pointed out that Sam hadn't paid before and why should he be believed now. The lien stayed in place.
Next thing you know, Joe's lawyer receives a check in the mail made out to Joe for $50k.
The lesson here is that there are people past posting real estate investments. They were buying properties and selling them if they went up and walking away if they went down. Filing judgements is expensive and unlikely to produce a return against people who are in bad enough financial shape to allow foreclosure. So the past posters bet that by walking away they won't have to pay their losses.
And I bet that most of the time they are right.
Comments
Your analogy holds true for investment property but not necessarily owner-occupied homes.
People think about the consequences of walking away when they are in financial distress with no light at the end of the tunnel.
Walking away has some far-reaching consequences which is why homeowners are FAR BETTER OFF hiring their own attorney when faced with a decision like this, and listening to someone lay out all the possible consequences who is thinking in a clear-headed, rational way.
When homeowners are in financial distress and are thinking about just walking away, their minds are often flooded with emotion: Fear, anger, sadness, disgust (maybe at themselves,) and so forth. They need to have someone tell them that the chances of being able to become a homeowner again in the future are not all that good. Credit will become very expensive for foreclosed homeowners.
In your story, Alan, Sam had other assets, namely another piece of real property.
With a homeowner who is contemplating mailing in the keys, if that homeowner has other assets, then WHY WOULDN'T a lender go after that borrower for a deficiency judgement?
If I owned stock in that lender, I would want to know WTF the loss mitigation department is doing, just letting that person walk away.
All I can say is that this whole mess took years to run up, and now it's going to take at least that many years to unravel. I predicted 8 years last spring, so now I'm saying SEVEN YEARS before we're back to a normal credit market.
A loss department has to balance the cost to pursue a deficiency versus the expected reward. Joe got lucky in this situation -- even more so since he could have very easily missed the 2nd property being in escrow. In this particular case, Joe was betting $1.5 to win $50k. If there was at least a 3% chance he could collect the full amount then it made financial sense to do so.
There are other people who invested and made a bad investment and maybe they will actually pay off the loan.
There is another class of people who are working the system by doing what was described in the story above. They had the assets to pay the loan back. They just didn't want to do it and were hoping that the lender wouldn't come after them.
Joe sold the land to Sam and financed the mortgage, so how did Joe buy back the land at his own auction if he's the lender?
Had Joe been the only bidder he could have gotten the property back for free. Had someone else been the only bidder they, and Joe had not given instructions for a minimum bid, then someone else could have gotten the property for free. In that case, Sam would have owed closer to $80k.
Not everyone feels this way, apparently. Banks are reporting that they are starting to see an unprecedented trend of home-owners "walking away" from their properties when the value is worth less than the mortgag, EVEN WHEN THEY HAVE THE ABILITY TO KEEP MAKING PAYMENTS It would seem that a lot of people don't feel as if contractual obligations mean anything (in a moral sense) these days.
http://calculatedrisk.blogspot.com/2008/01/wachovia-homeowners-just-walking-away.html
I know, and that really, really concerns me and it should concern us all.
Not necessarily true.
Foreclosure laws vary state by state which is why an attorney's help is crucial.
A lender is under no obligation to accept a deed-in-lieu (also known as jingle mail) and can decide to pursue the borrower in court by forelosing on the deed of trust as a mortgage (switching over to a judicial foreclosure.)
This happens when the lender believes that the borrower has the assets to pay back the loan or losses, and especially if the lender believes the borrower has committed egregious acts of fraud.
Loss mitigation departments are not ready for the number of people coming through their system.
All of us will pay the price in the form of higher rates and fees in the future.
Where a lender has many borrowers jingle mailing, the risks and direct costs of going to court aren't especially attractive compared to letting the borrower walk and writing it off. Seems having recourse is not the same as choosing to exercise it.
But then I'm feeling awfully cynical these days.
Correct, it is not always possible to "walk away" from a mortgage and avoid a deficiency judgement. However, there is growing evidence that this is indeed the case in the majority of situations. As I pointed out in a seperate thread, lenders are rarely pursuing deficiency judgements these days, even when they have a legal right to do so. Apparently the cost involved in getting a judgement against the borrower, and enforcing it, is more than what they eventually recover.
http://seattlebubble.com/forum/viewtopic.php?t=959
Considering that up to this point, the amount owed and the value of the collateral have generally been similar, that's probably true. I wonder if lenders will become more aggressive (when legally able) as asset prices continue to slide. At some point, legal action must surely become worthwhile!?
I doubt it. The deeper we see real-estate prices fall (and a recession grip the country) the less the chance that a borrower will have any susbstantial assets (aside from the house) for lenders to pursue. Already there are numerous cases where lenders don't want to foreclose because the property isn't even worth the costs of foreclosure and re-sale. Cities are running into trouble even try to find out who really "owns" the places because the original borrower has vanished and the lenders of record refuse to foreclose.
Remember that pursuing, and enforcing, a deficiency judgement is no simple task. Borrowers can be damn slippery in hiding assets, etc. A lender faced with MASSES of defaulting borrowers just doesn't have the ability for due dilligence in assessing which borrowers are worth going after, or even doing so if they do.
Another hugely important factor is that many servicers of securitized loans view lengthy efforts of deficiency judgements as eating into their profit margins. The fees paid by most mortgages securities to servicers provide very little for handling foreclosures and defaults, which only eats up the already meagre margins these servicers have. It's not as if the servicer gets a percentage of any assets they manage to sieze when pursuing delinquent borrowers. The irony is that even a successful deficiency judgement effort that COMPLETELY pays off a delinquent mortgage will put the servicer in the hole (i.e. they'd be better off never having gotten the deficiency judgement).
That's a really good point actually. More profitable to become a slum lord than throw a lawyer at someone who is broke. The only way this breaks down is if we have a 'contained' recession. By which I mean, it's technically a recession, and housing falters enough to make lawsuits worth-while, but everything else holds up sort of ok.
Odds of that exact situation? Pretty low if you ask me.
He said in California, where there were once lots of mortgage brokerage shops lining the streets (where his main office is headquartered) now he sees law firms taking the place of those closed offices, and there are radio and TV commercials playing about how homeowners should contact an attorney if they believe they were harmed by their mortgage lender.
A threat of a lawsuit might make the bank back off from going after a jingle mail defaulting homeowner.
Especially if the bank can't honestly vouch for the way the homeowner was treated by the originating lender. Were all of the required government disclosures delivered to the homeowner in a timely manner? Were they completed properly?
If the loan was originated by a federal or state chartered bank, probably so because the compliance and auditing systems are already in place.
But what about loans originated by brokers? Hmmm. Maybe, maybe not.