mortgage odds: heads I win, tails the bank loses

Comments

• jillayne

  January 2008

  Hi Sniglet,
  
  How have you been?
  
  Yes, there was a recent WA Supreme Court opinion handed down a couple of months ago where WaMu wanted to go for a deficiency judgement AFTER foreclosure on their second mortgage, and the supreme court opinion favored WaMu.
  
  However, you are correct in that many institutional lenders weigh the costs of going after the homeowner, especially if a homeowner is financially insolvent, and they just pass on the opportunity.
  
  In the instances where the institutional lenders go for it, well those cases usually involve eggregious acts of mortgage fraud where the lender has evidence that the consumer was a party to the fraud. In these cases, the lender can decide to turn the non-judicial foreclosure into a judicial foreclosure and take the homeowner through the court system. Rare indeed, but it does happen. Again, the decision is financial.
• sniglet

  January 2008

  jillayne wrote:

  Hi Sniglet,
  
  How have you been?
  
  you are correct in that many institutional lenders weigh the costs of going after the homeowner, especially if a homeowner is financially insolvent, and they just pass on the opportunity.

  
  I am doing quite well, thank you. I've been busy with the family over the holidays, but have still been lurking.
  
  Judging from your comments it sounds as if lenders rarely go after defaulting borrowers unless there is outright fraud, or lots of assets. This seems to confirm my long-standing suspicion that for most (but not all) people who are under-water (i.e. have homes that are worth less than the mortgage) their best option is to just walk away and default.
• jillayne

  January 2008

  Glad to hear you're well. What you say is true, and if you go back to the comment section of the article you link to, those comments sure do paint an interesting picture.
  
  Let's say for example, instead of an institution that made the second mortgage, maybe it was a seller who carried back the second mortgage.
  
  If the first mortgage is in default, the second mortgage holder has the opportunity to show up at the trustee's sale and become high bidder thereby winning the property back.
  
  But if we look at the 80/20 mortgage loans that were made during the last few years, rarely were the second lien holders people, instead they were institutional lenders. Those lenders sold the servicing on the loans.
  
  Just like one of the commenters said, I'm not so sure that a servicing company would have the ability to go to court for a deficiency judgement. This means we're looking at another wave of bank write downs on these defaulting second mortgage loans.
• sniglet

  January 2008

  Lenders are noticing that that increasing numbers of borrowers are deciding to just "walk away" even though they have the ability to keep making payments. The old stigmas about defaulting and honouring a contract just don't seem to hold the same weight they used to.
  
  It looks like there is an increasing amount of evidence to back up my theory that most people are just going to send in the keys if they wind up in a home worth less than the value of the mortgage.
  
  http://calculatedrisk.blogspot.com/2008/01/wachovia-homeowners-just-walking-away.html
• sniglet

  January 2008

  Here is still more evidence that an increasing number of borrowers are deciding to "walk away" from their homes when they are worth less than the mortgage, even when they have the ability to pay.
  
  http://calculatedrisk.blogspot.com/2008/01/more-on-homeowners-walking-away.html
• jillayne

  January 2008

  Hi sniglet,
  
  I don't like what I read in that CR article. Yikes!
  
  The homeowner is obtaining the new loan with every intention of letting the first loan foreclose.
  
  ANYONE thinking about this idea better hire an attorney first.
  
  It is very difficult to prove intent. So therefore, the homeowner must carefully make decisions on how to present himself/herself to the new lender.
  
  Most reputable loan originators on the new loan would not want any part of this type of scheme.
  
  You would basically have to go out and perhaps obtain a fake rental agreement on house number 1.
  
  Obviously there never will be enough FBI agents or local state regulators to investigate and prosecute cases like this.
  
  This is like the new wave of mortgage fraud.
  
  We ALL pay for this kind of behavior in the form of higher rates and fees on our own mortgage loans, higher taxes in order to prosecute and incarcerate the players, and lower yields on our investments (if we invested in mortgage backed securities.)
• jillayne

  January 2008

  CR also posted quotes from the OFHEO board saying that the increase in limits is a BIG MISTAKE.
  
  http://calculatedrisk.blogspot.com/2008 ... -very.html
  

  Statement of OFHEO Director James B. Lockhart on Conforming Loan Limit Increase
  
  We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs' regulator has all the necessary safety and soundness tools.
  
  ... We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.
  
  OFHEO is the regulator charged with ensuring the safety and soundness of Fannie Mae and Freddie Mac.

  [/quote]
• sniglet

  January 2008

  It's breath-taking to see just how quickly the idea of "walking away" from homes just because they are worth less than the mortgage is spreading. A local TV station in Sacramento even ran a segment on how to do "intentional foreclosure".
  
  http://cbs13.com/local/foreclosures.real.estate.2.638417.html?ref=patrick.net
• jillayne

  January 2008

  Hi sniglet,
  
  I thought of you last night when I was watching that 60 Minutes episode. The one couple almost made it look logical and rational to just walk away, especially when they said "that's what we've been advised to do."
  
  What did you think of that map they showed with all the blue dots representing homes in default?
  
  That area looks like ground zero.
  
  I wonder if we could get a similar map of the Puget Sound area.
• Alan

  January 2008

  Businesses have been making cold, calculated financial decisions in a honor-vacuum for decades. Is it no surprise that individuals and consumers have learned to adapt to the new marketplace? This is economic survival of the fittest at its finest.
• sniglet

  January 2008

  This just gets better and better... Mish's blog pointed out that there is actually a company called "You Walk Away" who's whole purpose is to work out a personalized strategy for you to turn your house back to the lender. Business is booming apparently.
  
  http://globaleconomicanalysis.blogspot.com/2008/01/business-of-walking-away.html
• jillayne

  January 2008

  I know! Alan sent that link to me last week. I couldn't believe it.
• deejayoh

  January 2008

  you should read Tanta's post over at Calculated Risk
  
  Options Theory and Mortgage Pricing
• sniglet

  January 2008

  deejayoh wrote:

  you should read Tanta's post over at Calculated Risk
  
  Options Theory and Mortgage Pricing

  
  I really liked Tanta's comments (at the very end) about how it is only logical that people are treating their mortgages as PUTs seeing as how the mortgage industry was willing to write toxic loans such as 100% LTV, option ARM, etc. If the industry was willing to underwrite loans they really couldn't expect people to repay then why should anyone be surprised when borrowers decide not to pay?
  
  There is no point in getting indignant about the immorality of "walking away" when the mortgage finance industry has been made into such a mass of immorality to begin with.