Walking away from a house part deux

I've got some friends who say they have a way to get out of their massive debt. Something to do with putting all the debt into a corporation and defaulting, then getting someone else to put a lien on their house so when the creditors come along their lien is 2nd (or 3rd) in line. Supposedly although it will hit your credit, they will give up on the debt and write it off. Then down the line you get your friend to release the lien and your free and clear. I have no idea how they think that can work, beyond the ethical issues, and it sounds like a recipe for disaster to me. Has anyone else heard of funny schemes like this?

Note. This is not me and I don't condone it.

The immediate issue I can see with that is that whoever holds the mortgage has the first lien on the house. Everybody else is subordinate...

Oh, and what happens if your "friend" doesn't release the lien?

Just try to secure debt in a corporation's name. At the very least they'll require a personal guarantee.

While that might work for major corporations it's not feasible for individuals.

Also subordinate lien holders have to get the permission from superior lien holders to be able to foreclose. All debt goes to pay superior lien holders in order of lien position. So basically it's somebody noodling, and not really doing.

You know, all the things you guys are talking about are all the things you've been blaming the banks and everyone else of doing and creating this mess. You're all crooks.

It's called

<Tony Soprano accent = on> "bizness" <Tony Soprano accent = off>

Let's say I sell you a car. Let's say you're short on money. Let's say you put 10% down, and I put you on a 'payment plan' for the rest. Let's say, six months after purchasing the car, it needs new brakes, your kid has spilled sodas in it, you've gotten parking lot dents, and you find another car you like better for less money than you paid for the car I sold you.

I'm still going to get my goddamned money.

The BANKS didn't sell houses to people for twice what they were 'worth'. People purchased houses for more than they could afford from private sellers (unless, of course, the house was bank-owned.) This is neither the seller's, nor the bank's fault.

A bud who sells motorcycles says people will come in, look at the latest and geatest and ask, 'what's the montlies?' They don't give a crap about what that thing actually sells for, just what the payment is. There are a lot of people who applied that same 'logic' (?) to big ticket items like houses and cars.

For a good long while, that's what drove the housing market along with the relaxing of underwriting standards. Just like the family which overextends themselves while living hand to mouth that suddenly has a loss of income, it's come back to haunt a lot of the mortgage companies and federal/state agencies.

carguy123 wrote: Just try to secure debt in a corporation's name. At the very least they'll require a personal guarantee.

I have never had to put up a personal guarantee to obtain credit for any corporation I created.

foxtrapper wrote:

carguy123 wrote: Just try to secure debt in a corporation's name. At the very least they'll require a personal guarantee.

I have never had to put up a personal guarantee to obtain credit for any corporation I created.

+1

What state are you guys in, my bankers tell me they simply won't do loans for "normal sized" corporations unless they have a long history. My corporation is almost 30 years old and my credit is impeccable and even the credit cards won't issue credit in the corps name unless I'm on the hook too.

I feel that if you walk away from a house because you want a bigger house for less money, someone should tear down your bigger house and leave you a Coleman tent in its place.

Walking away because you can't afford the house that you bought that was well within your means when you bought it, then ok, I can see that. I mean, if only one person in the family is working, and they kick off without adequate insurance, that family is gonna be boned. These things happen.

I have no sympathy for people who strategically default (aka walk away) from a house because they "deserve" a bigger house. They deserve the Coleman tent, preferably a leaky one.

I'm just surprised that a lot of people here assume that all the people who either default or have their houses repossessed are in a situation that they're 100% to blame for. Yes, the banks didn't sell them overpriced houses, but there is too much evidence of sales weasels, sorry, 'advisers' having sold mortgages based on commission (now there's a surprise) rather than suitability (why, for example, did supposedly middle-class families that weren't subprime end up with subprime mortgages?), said advisers participating in or encouraging fraud on mortgage applications etc. Not to mention that people were deliberately sold products that were/are dangerous to their financial well being (IMHO Option ARMs should not have been sold in the first place and most certainly not unsophisticated buyers, and especially not with the advice of "oh, don't worry, you can always refinance it before it resets").

Now, if a supposed financial advisor told me to not worry my pretty head[1] and just sign the dotted line and everything will be fine, they'll probably exit their own office via the window but seriously, how many people are out there who have enough of an idea what they had been sold to say "no thanks"?

There's also the little tidbit of a lot of banks being extremely unhelpful when it comes to mortgage mods that could keep a family in a house and that are actively encouraged by the government.

At the end of the day it takes two to tango and I don't think either side (banks or overstretched borrowers) are coming out of this smelling of roses. What does hack me off though is that the combination of the two, coupled with the chase of the short-term buck, has made it very hard for me to even consider purchasing a moderate house for the wife and myself. And that's simply as a place to live and not an "investment" that some people thought they made when they bought a house.

[1] My head ain't that pretty, so that tells me they're lying.

I don't pretend to be an expert here, but here's my $.02.
When my wife and I were shopping for our first house about a decade ago we were "pre-qualified". When we were told the amount I almost messed myself. My knee-jerk reaction was "sweet, I can get a sweet 3 car garage with 220V, running water and heat with a decent detached house". But, within seconds I though, "cummon, I can't afford that. What the heck are they talking about." My wife and I had already done things "backwards". We sat down, made a current budget, deleted rent and renters insurance and figured out what we had left for a house payment. Honestly, I thought that's what everybody did. I was wrong.
Then when we found our house, our mortgage company didn't seem to be able to understand that we only wanted to spend X dollars and not XX dollars. They also tried to sell us an ARM. I said, "ok, so the rate can adjust, right? What's the chances of it adjusting down (not waiting for an answer),oh it won't? Keep your ARM. I'll pay what I can afford." My sister-in-law said I was making a big mistake. I should mortgage more because I'll "grow into the payment."
Well, here it is, 18 months after being laid-off and we still have a house over our heads. Things are tight as heck but we are still making the payments from the side jobs I can scare up.
In the end, I do blame the buyers. Sure, banks may have pushed ARMs and bigger payments but, if you can't afford it, don't sign on the dotted lines.

As an attorney, I have never understood the "walk away" theory. First, you will end up paying for the deficiency at some point in your life and second, unless you were grossly overextended, it is hard to find a place to rent/live for less. However I have seen and heard about the move on up scenario. I just never wanted a house that owned me. I like having my toys and lifestyle(I am sitting on the bed in Nashville waiting on the SEC semifinal today between Ky and UT as I type this). I do have an ARM on my house but with caps on interest and low purchase price, I am within 2 years of paying off the place. I knew what the maximum monthly payment could be and it was always within our budget. Things arent rosy right now for small town lawyers but I can afford a $453 monthly payment under most any circumstance.
Greed is not good. Unless Congress passes some law that gives all of these folk amnesty, it will catch up with them. If that happens, our tax dollars will be providing the funding(sort of like extending unemployment benefits). Keep an eye on your local politicians.

As far as ARMS go people took them because they got a great interest rate in the beginning and they weren't worried about tomorrow (there's that greed thing again) They have always had it explained to them that it could change and how much. They even have to sign forms that spells it all out. So don't tell me about the poor people who took ARMS. They took it with eyes wide open and they simply wanted to spend less, or felt the market could never go wrong. But things going wrong with housing is the exception rather than the rule so most of them were right and most of the people came out ahead.

And the people that got B loans deserved them. B loans are BAD loans and they were for people with BAD credit or BAD situations like they didn't make enough money to qualify for the house they just HAD TO HAVE! If people had lived up to their promises on their other debt they wouldn't have been taking a B loan. The personal greed or keepin' up with the Jones where you wanted much more home than you could qualify for so you had to take a B loan because a regular loan wouldn't let you buy that much home, well that's a personal issue. As Dr. Boost has pointed out regular loans qualify you for a heck of a lot of house. But even then most of the people made out like a bandit because housing values were shooting up.

And why do regular loans qualify you for the amount they do? It's based upon historical performance records, not banker's greed. Fannie Mae & Freddie Mac have the performance records on billions of loans and have seen that once if you stay within certain guidelines of income, outgo, savings, etc. well over 97% of the people don't have trouble with monthly house payments nor defaults.

The housing market is kinda like playing the stock market you only loose if you sell when prices are down. Right now your house is still your castle. It's every bit as good as it was when you bought it. Nothing has changed about your house, it's only your attitude that's changed. A house should first and foremost be a place you want to live, not an investment. The investment side is simply a plus.

On a coincidental note do a little research and you'll see that for the past 2 centuries America has had economic issues at just about this same time of the century. The problems in 1907 lead to the Federal Banking system which Ron Paul says is the root of our issues today, he conveniently forgets that the Fed is also the mastermind behind the longest period of stable interest rates the country's ever known.

DrBoost wrote: I don't pretend to be an expert here, but here's my $.02. When my wife and I were shopping for our first house about a decade ago we were "pre-qualified". When we were told the amount I almost messed myself. My knee-jerk reaction was "sweet, I can get a sweet 3 car garage with 220V, running water and heat with a decent detached house". But, within seconds I though, "cummon, I can't afford that. What the heck are they talking about." My wife and I had already done things "backwards". We sat down, made a current budget, deleted rent and renters insurance and figured out what we had left for a house payment. Honestly, I thought that's what everybody did. I was wrong. Then when we found our house, our mortgage company didn't seem to be able to understand that we only wanted to spend X dollars and not XX dollars. They also tried to sell us an ARM. I said, "ok, so the rate can adjust, right? What's the chances of it adjusting down (not waiting for an answer),oh it won't? Keep your ARM. I'll pay what I can afford." My sister-in-law said I was making a big mistake. I should mortgage more because I'll "grow into the payment." Well, here it is, 18 months after being laid-off and we still have a house over our heads. Things are tight as heck but we are still making the payments from the side jobs I can scare up. In the end, I do blame the buyers. Sure, banks may have pushed ARMs and bigger payments but, if you can't afford it, don't sign on the dotted lines.

Same thing happened to me in 1994. The girl doing the mortgage said 'you qualify for $XXX,XXX.00, why not go ahead and buy a house in that range?' Uh, because I'd like to eat something other than peanut butter and jelly, thankyaverramuch. I was offered an ARM as well, I took the stuff and read through it, the future ex Ms. saw me looking at it and freaked. (That started the first really big fight we ever had, mostly because she didn't realize, even after I told her numerous times, that it was definitely NOT the way to go.) The thing that really jumped out at me re: ARMs: when you looked at the amortization charts your equity percentage started off and stayed low. At roughly the 10 year mark, a conventional mortgage beat an ARM in equity by, IIRC, 15%.

When we went back to see Miz Mortgage Girl she was obviously disappointed; no big ol' commission for her.

THe only way I've seen an ARM used effectivly is when you know you will be leaving at a certain time.

Example.

I know I'm moving in 5 years from a place. soooo

Get a low rate arm, enjoy low interest rates while you are there for 5 years, then sell in 5 years. (hopefully with corp moving benny's)

So you think that the mortgage gal just saw you as a commission? If so then she'd have also been interested in the commission off the next home you bought and also any commissions you might have sent her way from friends or relatives. Commission is a good thing, the people being paid commissions don't make a dime unless they perform to your satisfaction.

Even scum bag car salesmen can only go so far before you walk and go elsewhere.

Having made my living as a commissioned salesperson since 1985, I know someone who is interested only in the short term when I see them.

xd wrote:

foxtrapper wrote:

carguy123 wrote: Just try to secure debt in a corporation's name. At the very least they'll require a personal guarantee.

I have never had to put up a personal guarantee to obtain credit for any corporation I created.

+1

Can you provide any details on how to do it?? EVERYTHING I've ever heard about starting a small business says that you just can't get credit without a personal guarantee...

jeffmx5 wrote: Can you provide any details on how to do it?? EVERYTHING I've ever heard about starting a small business says that you just can't get credit without a personal guarantee...

You'll also hear how you need an attorney to file articles of incorporation. Don't believe everything you hear about how difficult it all is.

File the articles of incorporation and shortly you'll experience a wave of offers for credit cards and lines of credit with various banks, credit unions, S&L's and other entities. Pick and chose wisely, not all offers are wonderful.

BoxheadTim wrote: Yes, the banks didn't sell them overpriced houses, but there is too much evidence of sales weasels, sorry, 'advisers' having sold mortgages based on commission (now there's a surprise) rather than suitability

Umm... Duh? They are salesmen. Of course they are going to try to sell as much as possible. It's what salesmen do. Do you go to a used car salesman for advice on the most suitable car for your needs? Of course not. Going to a house / mortgage salesman for advice on the most suitable house / mortgage makes no more sense.

Datsun1500 wrote: The only successful way I have seen this done (if there is a successful way...) was with one of my Brother (I know....) His house payment is $2000 a month. He did not pay it for 3 months, put that $6K towards credit card bills. Paid month 4 starting over the repo clock. Took the next 6K paid of the rest of the bills and part of the car, pay 1 payment. Took the next $6K and paid off the car. He has a 2 year plan where he figures he will not have any debt except the house and will have put enough in the bank to buy the next car. At that point everything he has will go towards paying off the house in under 8 years. Don't say I agree with it, just thought it was an interesting take on it....

So they'll let him continue to fall further behind, as long as he just gives them a trickle every few months? Jeez, why does anyone bother to pay every month?

In reply to Datsun1500:

then wouldn't he be also shorting his escrow account? when his escrow comes up short next year does the escrow company let him go negative, or do they not pay his tax bill? doesn't this then have further costs and implications?

I got a feeling that Datsun1500's bro is gonna get a surprise when the bank finally gets around to him. As in, AMF, we're selling yo pad on the courthouse steps next Thursday unless you come up with 25 large to get current. The "clock" isn't resetting. He just isn't an extra month behind each month he pays. And, eventually when this depression is over in a few years, the houses will recover in value for several reasons (one of which will be the coming inflation). Picking easy illustrative numbers: Bro owes 100K on house, house is worth 50K now. Bro sends in one of every 4 payments, falling further behind. We get a new President and a new Congress temporarily not corrupt (takes a few months anyway) who actually rebuild our economy. Inflation raises Bro's house, now worth 150K. Bro owes 100K + interest + penalties=120K. Bank kicks bro out, sells house for $140K, PROFIT.

I had one ARM, and that was a re-fi. When I got it, I knew that I would almost certainly be moving in ~4 years. (HEY IGGY, WE AGREE ON SOMETHING.) As it turned out, I managed to re-fi it at a better rate at 4 years and it all worked out OK, but I fully anticipated the maximum they could go up in interest/payment.

I don't have any corps, but my friend formed one by himself with minimal research/homework. I do have some L.P.s and I have always formed them myself. The total paperwork to form either is easily downloadable from your state's SoS. Fill it in, send off the fee, that's it. I have not seen any offers for credit in my LPs' name that was not backed up by me personally. But, perhaps that's more the nature of a LP versus a Corp. I dunno, I ain't an esquire. I haven't formed a new LP in 10 years anyway. Maybe they only troll for fresh filings.

Datsun1500 wrote: In reply to Strizzo: Some people don't escrow the accounts. You don't have to in MD, don't know about other places.

I know it isn't required in MI. I opted out of that, figuring it is less trouble to just pay my tax bills directly rather than berkeleying around with a third party.