Walking away from a house part deux

Strizzo wrote: 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?

He may not have necessarily have an escrow account if he put lots of equity in the home, though you make a good point. The lender will pay the taxes no matter what, however, since it affects their lien. Him not paying the taxes may be a default that will end the circus altogether. Frankly, I don't know what state is being referenced, but it would have to be the People's Republic of California or similar place for him to get away with it.

Some consequences: 1) Horrible credit score/history. Not paying your mortgage impacts your credit score more than most other things. 2) Late fees and default interest rates may apply and will accrue, which means it will actually take him longer to pay off the house and he will pay more interest, assuming the lender can't force a foreclosure based on his late payment history. If the lender incurs legal fees they can be thrown on top of the pile, as well.

As for short sales, some lenders will negotiate away (forgive) or reduce the deficiency depending on the circumstances. Usually if they need the seller's cooperation for something and they feel it is uncollectable anyway. It is usually an advantage to the lender to short sale rather than foreclose, so they are willing to be more flexible.

A timely article on the topic: LA Times story on strategic defaults

carguy123 wrote: 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.

Of course, their definition of not having trouble with monthly house payments may not match the buyer's definition of not having trouble with their monthly house payments. The bank's definition is usually, "They'll be able to find enough money to pay us, one way or another." Many customers would prefer not to live under the bank's definition of not having enough trouble. Though, like Dave said, asking the bank how big a mortgage payment you can afford is like asking a car salesman what car would meet your needs.

i think that part of what gets people in trouble, is that they look at how much of a payment they can afford, then take that, along with taxes to see how much money they can spend. that is fine, but when i was looking, a lot of places then had another 200-300 dollar per month HOA fee that the bank (and the home buyer) don't take into account when thinking about how much house they can afford. for me, that extra 300 per month meant sticking to around 110k instead of the 130k that i supposedly could qualify for.

Mad Scienties Matt, No a lender's definition is based upon late payments and defaults. With late payments being a better indicator than defaults.

They can break performance standards down by age groups, area of the country, job history, job type, even down to money in the bank (and more doesn't always indicate a better willingness to pay). Remember they have literally billions of "models" to base their qualifying criteria upon.

Most people want as much as they can qualify for or maybe a little more. I'm working with 2 different people right now who just can't understand why they can't buy as much house as they want "It ain't worth buyin' a house unless I can git what I want." Get a Vet and they will inevitably scream "I served my country and I damn well better be able to buy whatever house I want! You owe it to me!"

I personally would like to be able to own a house and have money left over for little things like havin' fun and playing with cars, but not all people do.

Everyone has different priorities. The bottom line is that until 1999 when Mr. Clinton decided that No income, No Asset loans was what was needed to "balance the inequities" of certain groups being "underserved" (it's interesting that FHA's new motto is to Serve the Underserved) things worked very well. Default rates stayed at under 3% Conventional and VA loans and around 6% for FHA.

No one wants to make a loan that will have problems or be a problem. The laws are stacked in favor of the homeowner not the lender. The homeowner always gets the benefit of the doubt and even in a foreclosure the old homeowner gets any profit on the resale so that pretty much prevents an upside for any lender. But late payments cost the lenders more money that do the foreclosures so they don't want to qualify someone for more home than they can comfortably pay.

And Strizzo the HOA fee has to be taken into consideration when qualifying a purchaser. Whatever that HOA fee is simply reduces the amount of home loan you can qualify for.

I had no idea the Escrows weren't allowed in Maryland. I'll bet you foreclosure rates were higher there. Escrow accounts let you budget your payments better and there are far fewer late payments and foreclosures on homes with escrow accounts.

In reply to carguy123:

does it though? they say you are pre-approved for XXX,XXX dollars on a house, not xxx payment per month. if more people thought about how much they can afford to pay per month in total expenses rather than how expensive of a house they can get approved for (and stayted the hell away from ARMs), a lot fewer people would have gotten in over their head.

Strizzo wrote: does it though? they say you are pre-approved for XXX,XXX dollars on a house, not xxx payment per month. if more people thought about how much they can afford to pay per month in total expenses rather than how expensive of a house they can get approved for (and stayted the hell away from ARMs), a lot fewer people would have gotten in over their head.

Hear, hear. half the people keep talking about "greedy banks" but in fact it was greedy borrowers that got themselves in trouble, fueled by the Clinton-era loan standards and the Fed keeping interest rates artificially depressed. But that still doesn't make it anybody's fault but the consumers.

I mean, I want my car to be able to go 140 mph because I'm aware enough to know when I should go 140 mph. It's my judgment that makes that possible, and the only alternative is to legislate it so that cars cannot go fast enough to get stupid people into trouble. Is that productive or acceptable to the rest of us?

I used to work with a woman my age who was not making anything like as much money but who was trading up to her second or third house just a little after I had bought my first and only house. She came into the office one day saying "I've never left a closing with more than $100 in the bank." My jaw literally dropped open. If I hadn't walked out of my closing without my first 6 mortgage payments in the bank, I wouldn't have bought a damn house.

I'm no cash-only disciple, but you have to use your brain a little.

Duke wrote: Hear, hear. half the people keep talking about "greedy banks" but in fact it was greedy borrowers that got themselves in trouble, fueled by the Clinton-era loan standards and the Fed keeping interest rates artificially depressed. But that still doesn't make it anybody's fault but the consumers.

In a great many ways, I agree with you. When it is all finally said and done it is indeed up to the consumer to read the contract they sign.

That said, the slimyness of many lending institutions, which includes a great many more than mere banks, is remarkable. From the heavy handedness of upselling people on the size of the mortgage, to nasty clauses hidden in contracts (pre-payment penalties, etc). Verbally quoting one rate while writing on the contract another. Suggesting people falsify incomes and not bothering to check employment. Etc, etc, etc.

Any time you have a commissioned salesman doing mortgages, you will have commission enhancing sales being pushed and made. It is no different that car sales.

Strizzo wrote: In reply to carguy123: does it though? they say you are pre-approved for XXX,XXX dollars on a house, not xxx payment per month. if more people thought about how much they can afford to pay per month in total expenses rather than how expensive of a house they can get approved for (and stayted the hell away from ARMs), a lot fewer people would have gotten in over their head.

That's what mortgage girl tried to do for (to) me. As in any business, there are those who are in it for the short haul.

Example: I went to a Circuit City, told the salesgirl (a cute one, too!) what I wanted in a video camera and specifically said 'VHS-C only, no 8mm units, please' (needed to be able to play the tapes in my VCR. Y'all remember VCR's, right?). She took me straight to the highest price 8mm unit they had and started pushing it hard along with batting her eyelashes etc. Sorry ladies that doesn't work on me. My wallet is not made from foreskin. . She wound up losing a sale. Having spotted a unit I was interested in, I came back 2 days later, looked it over, realized it didn't have quite as many features as I needed and another salesperson sold me an upgraded VHS-C unit.

That said, the slimyness of many lending institutions, which includes a great many more than mere banks, is remarkable. From the heavy handedness of upselling people on the size of the mortgage, to nasty clauses hidden in contracts (pre-payment penalties, etc). Verbally quoting one rate while writing on the contract another. Suggesting people falsify incomes and not bothering to check employment. Etc, etc, etc. Any time you have a commissioned salesman doing mortgages, you will have commission enhancing sales being pushed and made. It is no different that car sales.

You are sooo out of date it's not even funny. Back to those qualifying standards of Fannie & Freddie (the good guys in the mortgage industry) I mentioned earlier, the standards are set so that there aren't any of those hidden nasty clauses. Haven't been prepayment penalties on a conforming loan, VA or FHA for literally decades. The documentation is standard so that it doesn't vary by where you get a loan or usually even loan type. The Fannie & Freddie qualifying standards and loan paperwork is so good that it is the gold standard world wide.

These standards go into so many areas you aren't aware of - It even goes into how your house must be built. Between FHA and Fannie you can thank them for an energy efficient home. You also must thank them for a home that is designed to last longer than your loan. Without FHA you wouldn't even have sheetrock inside your house as standard equipment or insulation. You may think of FHA standard carpet as super cheap, but do you know that when that standard was enacted it was thought of as exorbitant and outrageously expensive.

Fannie and Freddie were designed to be fair for all parties and to keep either party from being taken advantage of. Those mean ol' unscrupulous banks (think Jimmie Stewart in It's a Wonderful Life" can't even force you out and sell your house for an insane profit. The money doesn't belong to them, it belongs to the borrower.

As far as quoting one rate and writing up another? Hmm, the only thing I can come up with is when someone calls in for a rate one week and writes a contract another (even another day or later in the day sometimes) because rates change as the market changes. You can count on a rate change every day (usually by just a little), and as a lender finds out more about a person they may find out that person doesn't qualify for the A++++ loan the caller said they did. "I gots me good credit" usually translates into I eventually pay my collections off if they won't leave me alone or I think I want to buy a car or a house. (BTW NEVER pay your collections off anymore, the credit laws have changed and that is guaranteed to lower your scores)

And if you are talking about quoting one rate and writing another on a contract then you are talking about Realtors not Lenders because Lenders have nothing to do with the writing of the contract. But most contracts state that your rate not exceed a certain percentage so good Realtors would give you a little pad so that a Seller couldn't arbitrarily cancel your contract if they decided they didn't want to sell or had a better offer. The rate put on a contract has nothing to do with what interest rate you receive, but your credit, income, outgo, assets, etc. do.

There is no incentive for a lender to screw the borrower as there is so much more money to be made on referrals of their friends, family and co workers. Commissions keep your loan costs down. Banks with fixed overheads have typically more expensive loan products than do commissioned Brokers. As a matter of fact studies credit brokers with driving consumer mortgage rates down by over 1/2% below what banks would have had on their own. I do both Banker loans and Broker loans and I can always be about 1/4% lower on the Broker side.

You go to jail for falsifying incomes or anything. It is investigated by the FBI. They used to randomly check about 1 out of 20 transactions unless there were other red flags. One red flag is a plethora of certain loan types or documentations by a lender. If that happens 100% of that lender's products will be investigated. It ain't worth it! Loans are Federal instruments which mean offenses are Federal offenses and you go to places like Alcatraz or Sing Sing. The Big house seee! (doing my best Jimmie Cagney imitation)

As far as not checking employment, etc. After Mr. Clinton, the Gramm/Leach/Bliley act & the Community Reinvestment Act Lenders were prohibited by law from checking if a borrower didn't want you to. We would have been discriminating and would go to jail ourselves if we took it upon ourselves UNLESS there was clear cut evidence of fraud. What could possibly be fraudulent about doing a stated income loan for a salaried person? I mean after all if they actually made the money they claimed then we could get income verifications or paystubs - oh wait, we weren't allowed to or we'd go to jail! That means there was legal fraud. Don't blame your lenders, blame your legislators.

B loans were another story altogether. B loan wholesalers encouraged lenders not to document the loan 1) to make it easier on the lenders 2) so the B lender could charge higher rates. The higher the risk the higher the rate.

Oh, and ALL qualifications are based upon house payment, not $xxx,xxx of loan. It's a process to convert $ to loan amount that many lenders will do to help a buyer because unless you know what size house $X of monthly payment corresponds to how could you go house shopping?

Want to hear about another crazy law that's in effect right now and is driving down appraisals by 10-20%?

It is called the Home Valuation Code of Conduct. Sounds like it must be a code of ethics or some standards for people who do home valuations doesn't it? That couldn't be further from the truth. Most of these new laws coming out of Washington nowadays have very optimistic and misleading names to make the unwashed masses think they do one thing when they really do something else.

WaMu and their Appraisal Management Company (AMC) were said to be colluding to drive up prices in New York so Andrew Cuomo the attorney general of NY decided to do something about it. First of all AMCs don't do appraisals. AMCs sole function was, for a fee, to order appraisals for large entities that needed one done in areas where their customers didn't have an idea of who did appraisals.

Andrew filed a suit and since it came up right at election time and there was so much press going on the parties involved decided to just settle it. Evidence showed there was no basis for the complaint and Andrew shouldn't have been able to win in court, but he did a very smart thing for such a crooked man. He said that since ultimately Fannie bought these loans then they should share in some of the punishment and brought them into the action. Like I said it was right at election time so Fannie so OK we'll agree that appraisers shouldn't be pressured to bring in a certain price (which was already a law). And the HVCC was drafted. Unfortunately since Fannie is a Federal entity this ended up having an effect all across the country and not just in NY.

Now here's the good part - now on both Fannie and FHA loans ONLY AMCs are allowed to order appraisals!!!

Yeah, that's right the AMCs that were accused of creating the problem somehow are now the only ones who can order appraisals.

Well, what's so wrong with that? Remember I said that they performed their service for a fee? Any idea how much that fee would be? Much more than you'd imagine. Appraisal prices jumped about $200 with the advent of the HVCC but that's the least of the issues. Now the appraisers who used to get paid $300-$400 for an appraisal make $100-$200 for the same appraisal and the AMC gets to keep the rest of the money for simply picking up a phone and ordering the appraisal. That's free enterprise in action.

Appraisers who had been in business for decades are now out of business. Just try to order an appraisal in NJ, you won't find but a handful of appraisers left in the whole state. Good appraisers can't work for $100. So almost all the appraisers out there doing the work are brand new or being hired off of CL for $15 an hour and being trained by the AMC. Most "appraisals" are being done by people don't meet the state or federal standards to be an appraiser.

Andrew Cuomo is presently running for the Governor's office in NY. Did I mention he has financial interests in AMCs?

Carkid-I have personally been encouraged to get letters from my boss saying I am working 60 hours a week and will be doing so indefinitely and that I am due for a significant raise in the next 6 months. I was basically encouraged to find some way to create documentation that proved I could afford the loan. This wasn't by the second or third option lenders, this was by loan agents at major banks. It was always about having a piece of paper to cover the loan agents butt, nothing about whether I could actually afford the loan. I experienced this myself through two house purchases and witnessed it with several friends and family members. Fortunately we all figured out a way to make it happen, but it wasn't because we borrowed as much as they tried to get us to, it was because we borrowed as much as we knew we could pay.

carguy123 wrote: You are sooo out of date it's not even funny.

No offense, but you so don't know what you're talking about.

You keep talking about "good" realtors. I'm talking about the slimeballs. You can believe they don't exist, I KNOW they exist. I used to work for one (Countrywide), writing up the papers you say don't exist.

You're a fool if you think dishonesty does not, and cannot exist in the real estate and mortgage industry.

foxtrapper I'm as current as you can get since I do it for a living and have for 30 years. I also am one of the drafters of some of the licensing laws and have been a mortgage resource for several of our elected officials as well as

Dishonesty exists in all industries. In most industries the percentage of dishonest people are not the norm. There are people that will try to bend every rule. There are those in the real estate and mortgage industry, but unlike industries like used cars, there are real and very severe penalties for infractions on real estate so you don't find dishonesty to be the rule or even common.

To use your words, you are a fool if you think it is rampant in the real estate a mortgage industry as there are safeguards that don't allow the everyday guy to get away with anything on a regular basis. Now if you are a Clinton - think Whitewater - or someone with mega bucks there are ways. Those ways make the headlines and then new guidelines are put into place to stop it from happening again. That is also why your closing costs are so high. As they put more safeguards in that requires new protections, disclosures, programs, etc.

At the moment the National Association of Realtors is trying to do away with appraisals on certain bank controlled properties so that Realtors can do Broker Pricing Opinions. That would be legal mayhem and is analogous to the fox guarding the hen house. While some or even many Realtors would be able to resist temptation and give realistic value figures (although they couldn't be as accurate as an appraisal) it would allow many to just do the expeditious thing. If it happens then it would be legal, but you can be sure it would be the next big thing in the news with lots of 20/20 hindsight about how they shouldn't have done it. But since it's legal we'd have to do it. Legal doesn't always mean right.

I had to pay a certain amount (forget the exact figure) by a certain date to 'lock in' the rate I was quoted way back in '94. Didn't have to do that on this house. I guess that was because the first loan was on new construction and the loan I have now was being written on an existing house.

There are certainly plenty of sleazeballs in every walk of life. I've seen them in the service drive, lawyer's offices, doctor's offices, you name it. How about the temp girl who got busted for identity theft at the soon to be ex's work? Interesting story, that.

The whole problem we now face was the opening of the floodgates to those sleazeballs through the arm twisting of Mac and Mae way back when.

carguy123 wrote: they are very aggressively investigating issues just like walking a house, because it can't be done without committing fraud.

sure it can, if you're not interested in buying another property. you simply stop paying, and turn the house over to the bank. no dishonesty involved. and while i wouldn't be willing to take that black mark on my credit, i don't see anything inherently wrong with doing so. you took out the loan and offered the house as collateral. you can't pay the loan, so you forfeit the collateral. doing it sooner rather than later is smart...there is no obligation to go broke trying to pay a secured debt. that's the point of the security. if the house isn't worth enough to cover the loan balance, that's the bank's fault. the bank shouldn't have loaned money without securing enough collateral to cover the loan.

banks can and should be held accountable for bad decisions just like individuals are and should be.

Datsun1500 wrote:

Buzz Killington wrote: if the house isn't worth enough to cover the loan balance, that's the bank's fault. the bank shouldn't have loaned money without securing enough collateral to cover the loan.

That is where you are wrong. You are still liable for the remainder, just as the bank is responsible to pay you any extra, if there is some.

you're right; i wasn't trying to put on a personal finance lesson; rather i was addressing the recurring sentiment here that walking away is somehow dishonest or dishonorable. for many people, it's the smart financial choice. it's not free, but sometimes that credit hit is the lesser of two evils.

Buzz Killington wrote:

carguy123 wrote: they are very aggressively investigating issues just like walking a house, because it can't be done without committing fraud.

sure it can, if you're not interested in buying another property. you simply stop paying, and turn the house over to the bank. no dishonesty involved. and while i wouldn't be willing to take that black mark on my credit, i don't see anything inherently wrong with doing so. you took out the loan and offered the house as collateral. you can't pay the loan, so you forfeit the collateral. doing it sooner rather than later is smart...there is no obligation to go broke trying to pay a secured debt. that's the point of the security. if the house isn't worth enough to cover the loan balance, that's the bank's fault. the bank shouldn't have loaned money without securing enough collateral to cover the loan. banks can and should be held accountable for bad decisions just like individuals are and should be.

No. Just no. The Bank isn't lending money to the house, it is lending money to YOU. The Bank takes security to minimize its loss in case you turn out to be a deadbeat. It is very simple. When you sign a mortgage note it doesn't say "I'll either pay you back OR give you the house." It says "I will pay you back and I give you the house as collateral to secure my solemn promise." Is it dishonest not to pay it back? Yes, if you are able to pay it back and you don't. You've taken someone else's money that you promised to pay back and you didn't. That's dishonest. Of course, there are unforeseen circumstances that may make you unable to repay the loan and those aren't being dishonest, they are just tough luck for everybody.

Carguy123, this is interesting insider-stuff.

Are you contending that Fannie/Freddie are essentially absolved of any complicity? They are both GSEs and both are realizing tremendous losses on their "thoroughly" vetted loans; said losses have been building for years.

What more will you share?

Buzz Killington's justifications are the exact ones that my friends used when they shortsold. "Why put good money after bad", "We won't be able to pay the mortgage in 6 months or a year, so why pay it in the meantime", "if we qualify for a shortsell and the bank accepts it, there's nothing wrong with that", you get the idea. It comes down to this, if you CAN pay the loan you agreed to pay and you DON'T, it's wrong. Color it however you want. It's funny, my freinds think they made out great and nobody got hurt. Yeah sure the bank took a $100,000 hit, but that's just the big bad banks. Meanwhile, the actions of those people have negatively affected us ALL. My 401k took a big dump thanks to selfish people who don't believe integrity matters anymore.

WilD wrote:

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.

Berkeleying around? Really? I write one check per month that covers mortgage/property tax/insurance. Don't need to worry about putting the property tax in savings, writng a another check to insurance, etc.

And to whomever said they don't give you a monthly payment estimate on your loan is FLAT OUT WRONG.

I purchased my first home in September after looking for about 6 months. Any time we inquired about a particular house, our lender worked up a sheet for us, a "good faith estimate".

It gave us monty amounts for the mortgage, estimates on property tax and insurance based on location house size etc. I would then call MY insurance agent to get a more accurate quote, always cheaper than the bank estimated.

Before we even putan offer in on our current house we knew what the monthly escrow payment was going to be for everything. And since I like to estimate high, turns out at closing our payment ended up $40 a month cheaper than I had budgeted.

Berkeley people who can't be responsible.

Basil Exposition wrote: No. Just no. The Bank isn't lending money to the house, it is lending money to YOU. The Bank takes security to minimize its loss in case you turn out to be a deadbeat. It is very simple. When you sign a mortgage note it doesn't say "I'll either pay you back OR give you the house." It says "I will pay you back and I give you the house as collateral to secure my solemn promise." Is it dishonest not to pay it back? Yes, if you are able to pay it back and you don't. You've taken someone else's money that you promised to pay back and you didn't. That's dishonest. Of course, there are unforeseen circumstances that may make you unable to repay the loan and those aren't being dishonest, they are just tough luck for everybody.

THIS.

But z31maniac, we must help out the irresponsible people. Not everyone is born responsible, you know. There are those born with the disadvantage of being irresponsible, and to help them out, we have to take away the things from the responsible and give them to the irresponsible so that we will have equality.

A lot of people got mortgages that should not have. I think most will agree with that (besides ACORN) I propose that Uncle Bill and the rest knew exactly what would happen if all these "don't ask, don't tell" mortgage rules were put in place. And, BTW, from my reading, it appears that the enforcement mechanism was FDIC insurance. If a bank didn't have so many of these loans to minorities, regardless of the quality of the loan (ability to pay the loan back), the bank lost it's FDIC insurance, which would effectively put it out of business. There was (is) a bank in Dallas that I read about. They had to strive to find minorities to loan money to that actually were good credit risks for the bank. They really went the extra mile to make sure they would get their money back and that the property was worth the mortgage. They did fine in the crash. Go figger, huh?