Wall Street Journal - When It's OK to Walk Away From Your Home

[keepinitreal]

http://online.wsj.com/article/SB10001424052748703795004575087843144657512.html?mod=WSJ_article_MoreIn

[onwards]

Excellent piece, not because it says anything new, but because it's in the WSJ... so frank and to the point coming from the newspaper of Wall St.

Not a big surprise either. This has been happening with increasing frequency, and mark my words: the next big story will be defaulting on seconds only (thus walking away from the debt but retaining the property), an even faster rising trend that no one is currently focusing on.

[Flamingo]

Excellent piece, not because it says anything new, but because it's in the WSJ... so frank and to the point coming from the newspaper of Wall St.

Not a big surprise either. This has been happening with increasing frequency, and mark my words: the next big story will be defaulting on seconds only (thus walking away from the debt but retaining the property), an even faster rising trend that no one is currently focusing on.

Big issues here that will arise as to your second paragraph. There are many folks who took out second mortgages to purchase vehicles, appliances, take vacations, whiten teeth, pay college tuition, etc. and not to maybe do major repairs on their home which has decreased in value. Think about that if you were a lender holding that second mortgage.

[onwards]

Big issues here that will arise as to your second paragraph. There are many folks who took out second mortgages to purchase vehicles, appliances, take vacations, whiten teeth, pay college tuition, etc. and not to maybe do major repairs on their home which has decreased in value. Think about that if you were a lender holding that second mortgage.

OK... thinking... thinking... sorry, I don't get it.

[StartingOver08]

The second mtg lender knew the risks when they issued the loan. They charged a higher interest rate because of the higher risk. It is a business decision by the homeowner, just like it was a business decision by the lender to issue the loan.

[onwards]

The second mtg lender knew the risks when they issued the loan. They charged a higher interest rate because of the higher risk. It is a business decision by the homeowner, just like it was a business decision by the lender to issue the loan.

Or maybe they didn't charge higher interest (our second is at prime minus 0.95%). Maybe even they were the nicest lender in the world. Doesn't come into the equation at all. From my own very personal example, our house is significantly underwater on the first, I stopped paying the second, and if and when the lender for it wants to settle, I'm happy to negotiate. I'm ready to give them 15% cash (not that I have to, but because of good faith). If not, oh well.

If they want to go through a foreclosure, they are welcome to it; it will cost them another $200K out of pocket once they pay off the first and then foreclose and sell the house (loan on the first is $570K, worth maybe $450K market, less than $400K in a foreclosure). If they want to do that - all the more power to them. At that point we'll likely be able to live in the house for another 2 years without payments, which will make it even more beneficial for us financially.

Timing-wise, it makes perfect for sense for us to - let's try a bit of actual honesty here - take advantage of market conditions to alter our debt structure. That's what we're doing, plain and simple, no morality or hiding behind adverse conditions or all that nonsense. If the market was still going up, we would have taken advantage of those conditions to get more money out of the asset (just like people did in 03-07) to do whatever with. These two behaviors are completely analogous to each other. One may sound better, but they are really the same.

And don't you think for a second that lenders are not taking advantage of market conditions as well. This is a game we all play; consumers fight with sob stories and populist pressure, lenders fight with their version of sob stories and lobbying. In the end, it will all balance out. Some folks chose to not play the game at all (those who stayed super-conservative and didn't buy/sell/participate in the mortgage bubble). Most people DID participate, and still ARE participating. It's all OK. Really.

[Flamingo]

The second mtg lender knew the risks when they issued the loan. They charged a higher interest rate because of the higher risk. It is a business decision by the homeowner, just like it was a business decision by the lender to issue the loan.

Many folks out there have really low interest second mortgages. Some folks rely on second mortgages/home equity lines to fund everything from dinner at Pizza Hut to trips to Europe just because the money is there. You can certainly see why lenders have reduced credit limits for these accounts as the value of the house has dropped and with folks looking for ways to obtain money, trying to avoid the borrowers utilizing all those funds and then filing. Can you imagine people using up all their available funds in a second mortage/home equity line and then waiting six months to file? There is a lot involved here, along with all the folks who have good credit, have a first and second mortgage and are not under water with both those mortgages. Their home values dropped also - should the second mortgage be eliminated or reduced to accomodate them for their lost value? Many moral, business and other questions here... Whether it's treated as a business decision or not.

[onwards]

Some folks rely on second mortgages/home equity lines to fund everything from dinner at Pizza Hut to trips to Europe just because the money is there.

Or, in the vast majority of cases, to pay for other bills (the uber version of robbing Peter to pay Paul). That's probably the biggest driver behind the debt economy of recent years - with housing prices going up, it never felt like you were borrowing money, which made it a lot easier to use HELOCs to pay for other stuff (including, ironically, the first mortgage). And we were all encouraged to do so, because in a rising market, the lenders saw this as basically another vehicle for attaining credit returns, and even as a nice offset for unsecured credit risks.

Of course, once asset values crashed these loans became trapped in an even worse situation than that of credit cards - zombie loans that, in many states, can't even be pursued to obtain a deficiency judgment against. Secured on paper but unsecured in principle. These HELOCs will never get fully paid back, and the sooner everyone realizes it, the better.

You can certainly see why lenders have reduced credit limits for these accounts as the value of the house has dropped and with folks looking for ways to obtain money, trying to avoid the borrowers utilizing all those funds and then filing.

Oh, absolutely. I was surprised to see just how long they allowed these lines to remain open. But that's the stupidity of credit scores for you.

Can you imagine people using up all their available funds in a second mortage/home equity line and then waiting six months to file?

Been there, done that. Although it wasn't quite like that, in practice it amounted to the same.

There is a lot involved here, along with all the folks who have good credit, have a first and second mortgage and are not under water with both those mortgages. Their home values dropped also - should the second mortgage be eliminated or reduced to accomodate them for their lost value? Many moral, business and other questions here... Whether it's treated as a business decision or not.

That depends on these folks and no one else. If they choose to play hardball, they will get their loans "accommodated" by their lenders. If they don't they won't. Not like the lender has much choice in these cases; the borrower in many states (and especially the hard hit non-recourse ones) holds all the cards.

One of my clients, CIO of a large public firm, a person who is easily worth about $50M, has been following my approach in a similar vein himself, and is poised to rid himself of a $1.1M loan he has absolutely no problem paying, but doesn't want to. He feels, as I do, that it's a business matter, and has really valued my input around the surrounding laws. He is, alas, an even better negotiator than I am, and will likely have an even better end result than I am hoping for. So don't think for a moment that the smart folks who HAVE money don't realize what's going on; they are just more quiet about how they are handling it.

Only those who truly can barely but just afford to continue paying, yet are holding on to the morality mantra are the ones really getting hurt, working themselves to death (most likely creating long-term health issues for themselves and ignoring their families). I wish with all my heart they acted in their own interest, but in the end, it's up to them. I know, I was there. It took me far too long to drop the pretense, and it took a lender that acted in a certain manner to really get me to understand how the whole thing really works, but once the scales fell of my eyes, I have improved my situation greatly, financially, emotionally, and mentally.

So to the lender who ended up driving me over a year ago to seriously examine the notion of a Ch7 filing, and who dealt with me in a manner that was ruthless, unemotional, immoral, and plain abusive, to the point where something inside me finally broke and I started simply looking at things unemotionally, coldly, immorally and ruthlessly just like them - thank you from all my heart. Without you, I would have probably killed myself trying to make good on my obligations, not realizing or willing to admit I didn't really have to. A true eye-opener, that was. Thank you. My life would have much worse now without you.

[albacore44]

Big issues here that will arise as to your second paragraph. There are many folks who took out second mortgages to purchase vehicles, appliances, take vacations, whiten teeth, pay college tuition, etc.

Dont forget Breast implants

[albacore44]

As I'm reading this post, i'm watching out the window as my neighbor across the street is loading a big truck, and moving on. They told my wife a month ago, they had secured a rental from a friend, and were tired of fighting the battle with the bank for a nodification. they are not behind in their mortgage, but decided to cut their losses and move on. They originally put their house on the market in 2007 for $1m. The comparable foreclosures around here are now selling for $400K. this is the 3rd neighbor to leave this year, and many are still struggling. i wish this would all come to an end, but in truth, i know the worst is yet to come.

[backtoschool]

I think the worst is yet to come.

I agree that these helocs will never fully get paid back, and that this will change the housing market in the long run.

The end result will be that lending will go back to the way it was pre-boom in the 1980's, where 20% down was the norm and helocs were only for people who had been in the house for 20 years and had tons of equity due to almost paying the house off.

At some point down the line, the banks will be forced to truly declare the bad assets on their books. This will result in a bank shake out, as some banks fail. Once the inevitable shake out of the banks happens, I think the remaining banks will get quite ruthless and go after those who default on second mortgages/helocs and things will go back to the old standards of second mortgage/heloc defaults forcing foreclosure.

This is many years down the road though. Once the government gets out of the mortgage business, and the banks are forced to declare the bad housing assets on their books, we will have a significantly smaller mortgage market for many many years (if not generations) to come. Middle class home ownership will no longer be easy or inevitable. (Think of the way things were before FHA mortgages came into existence, ie, pre 1934.)

Is this a good or a bad thing? I don't know. Home ownership of an underwater house is not ownership of anything real anyway. Home "ownership" of a house with no money down, and interest only payments is really only renting the house also.

[OhioFiler]

I think the worst is yet to come.

I agree that these helocs will never fully get paid back, and that this will change the housing market in the long run.

The end result will be that lending will go back to the way it was pre-boom in the 1980's, where 20% down was the norm and helocs were only for people who had been in the house for 20 years and had tons of equity due to almost paying the house off.

At some point down the line, the banks will be forced to truly declare the bad assets on their books. This will result in a bank shake out, as some banks fail. Once the inevitable shake out of the banks happens, I think the remaining banks will get quite ruthless and go after those who default on second mortgages/helocs and things will go back to the old standards of second mortgage/heloc defaults forcing foreclosure.

This is many years down the road though. Once the government gets out of the mortgage business, and the banks are forced to declare the bad housing assets on their books, we will have a significantly smaller mortgage market for many many years (if not generations) to come. Middle class home ownership will no longer be easy or inevitable. (Think of the way things were before FHA mortgages came into existence, ie, pre 1934.)

Is this a good or a bad thing? I don't know. Home ownership of an underwater house is not ownership of anything real anyway. Home "ownership" of a house with no money down, and interest only payments is really only renting the house also.

Aren't these mortgages owned by Fannie Mae and Freddie Mac? Those two institutions aren't going to fail.

I think the mortgage industry will change but not to the point it was 30 years or 80 years ago. Once the market settles we'll see loans offered similar to the more recent products. I doubt we'll ever see those insane 125% LTV's or crazy ARM's but the banking industry needs to sell mortgages to stay in business.

[OhioFiler]

Does anyone know how I go about determining who owns my first and second mortgages?

I know they are both serviced by BofA but at one time they were not. I'm just wondering how easy it will be for me to negotiate with a bank if it holds both the first and second.

[StartingOver08]

Does anyone know how I go about determining who owns my first and second mortgages?

I know they are both serviced by BofA but at one time they were not. I'm just wondering how easy it will be for me to negotiate with a bank if it holds both the first and second.

Yes. Send a Qualified Written Request (QWR) to the servicer. In your case, send two: one for the first and one for the second, even if it is the same servicer it is unlikely that you have the same lender. Here is a great QWR sample to send: http://debt-consolidation-credit-rep...ght=QWR+letter

[onwards]

I think the worst is yet to come.

Agreed.

The end result will be that lending will go back to the way it was pre-boom in the 1980's, where 20% down was the norm and helocs were only for people who had been in the house for 20 years and had tons of equity due to almost paying the house off.

I disagree with your conclusion. Standards will remain strict for quite awhile, but not due to banks having any sort of "bad blood" with borrowers - that's completely non-sensical - but rather because it will take quite a while for confidence in asset valuations to return. Risk models will maintain a significantly larger buffer around both default and devaluation for several years, at least.

But you have to remember that banks are in the business of lending. If they don't lend, they don't exist. So lending will resume, and from their perspective, the sooner the better. Right now banks are dealing with some serious conflicting pressures, not least because of government intervention. This, too, shall pass.

With all that said, I do believe that exotic products like negative equity interest only pick a payment plans will for all intents and purposes disappear.

Once the inevitable shake out of the banks happens, I think the remaining banks will get quite ruthless and go after those who default on second mortgages/helocs and things will go back to the old standards of second mortgage/heloc defaults forcing foreclosure.

*sigh*

Why is it that folks have a tendency to think of a company (be it a bank or any other) or the government as a person?

Banks don't give a flying frick about you, me, or anyone else. Banks are not people. Banks have people working in them which are you and me. Banks won't get more or less ruthless because they get hurt; they will remain just as ruthless as always in pursuing profitability. That means that in an environment where it is profitable to chase delinquent borrowers, they will do so, and where it is not, they won't. That's it. No emotion involved.

That seems to be the crux of morality arguments, but it is completely false. Banks don't have morals, because they are not people. They don't have emotions, because they are not people. The PEOPLE inside banks have these, which is why you can sometimes have great experiences and sometimes lousy experiences with the same bank - or company, or government - but it has nothing to do with the entity itself.

This is many years down the road though.

If asset valuations rise enough to justify pursuing delinquencies "ruthlessly", then yes, you are correct; and indeed, it will take many years for this to happen. However, by that time the market will have "flushed", both because many of these loans will have been written off, and the ones that remain will no longer be underwater and people will be paying them. So I simply don't see it. The only way your scenario will work is if the rise in valuation will occur rapidly, "catching" many delinquencies while "in progress" but not yet fully dealt with (written off, settled, and so on).

we will have a significantly smaller mortgage market for many many years (if not generations) to come. Middle class home ownership will no longer be easy or inevitable. (Think of the way things were before FHA mortgages came into existence, ie, pre 1934.)

Why? because doom scenarios are comforting in these times to think about? 1934 was very different, because the economy was far less sophisticated, risk could not be spread or resold, reach was local or regional at best, tools and technology in banking were not available, policies were harsher, money was tied to gold... shoot, there is no way on earth you are going back then. It's like saying the US will go back to relying on agriculture. That's silly.