Home equity loans - Borrowers refuse to pay

[keepinitreal]

August 11, 2010

During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcyhe does not pay more than $500 for a loan, regardless of how big it isAnything over $15,000 to $20,000 is not collectible

http://www.nytimes.com/2010/08/12/business/12debt.html

[treehugger1]

[Meatstick]

The banks and all other types of businesses never keep paying on bad investments. What your seeing is banks playing on people's emotional attachment to the once fabled American dream of owning a home. It has turned into the American nightmare and the average Joe is throwing it right back and the banks only defense is to play the guilt trip.

Can you imagine what are economy will end up as if those of us who have bad debts going unpaid are never allowed to purchase anything on credit again ???

[ryan]

....Both parties risked something and everyone lost something.

This I agree with. ...I also think each situation and motive is probably more unique than this story suggests.

Morality's role? Not sure, but I do think an immoral financial/banking network should be given just as much scrutiny as individuals.

[onwards]

Yeah, I'm one of them.

I have posted about my case often enough, but as it is relevant to this article, I am no longer making payments on a $125K HELOC, and have offered the bank $10K to settle it. They are still thinking. I am prepared to go up a bit, but no beyond 10% of the value (so the 10c on the dollar number sounds awfully familiar).

If they don't accept? nothing they can do, legally (again, no point in entering the details, search for my posts if you want them). In many ways, I'm being nice in offering something for nothing, but I do feel a moral obligation (funny huh?) to at least try and negotiate in good faith.

We were notified a couple weeks ago that a negotiator will be assigned to our case in mid-august - after six months of absolute hard line "no way no how" talk from the bank. We'll see.

[albacore44]

I'm Guilty

[onwards]

I had to make a couple of comments to portions of the article itself...

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

It's not a paradox of the recession. It's a paradox of falling asset prices. The recession, per se, has nothing to do with it, except that it is also a result of falling asset prices. It's also why this is such an odd recession, with the puzzling economic behavior where the talking heads seem unable to agree about anything, why the stock market and gold and treasuries and so on move in unexpected ways, and why banks are finding that the rules that served them so well for so long were crafted in such a way as to to give ALL the power back to consumers. In many ways, nobody imagined this, and so the rules have never been thought through in some areas, resulting in gaping holes that some of us are now exploiting. Shoe is on the other foot for now and will stay there for the next few years.

But I doubt the rules will remain this way once things are on the way up again. It's why I was so delighted with the consumer protection agency put in place by this administration; not because we need it now, but because we will desperately need it in 5 years, and it will be impossible to create it then.

Yeah yeah yeah. MOST people did not spend recklessly. Furthermore, the banks were making money hands over fist during the same time period; do you remember all those outsized bonus pools? where do you think the money came from? exactly: the same "financial activity", namely all these mortgage refis repackages resells that allowed us to "buy new cars and boats". So easy to forget that, huh? not to mention that the banks never had to "pay" anyone; THEIR benefit was in the form of bonus pools, but they were saved by tax dollars. We consumers are still left with and dealing with the headaches years later.

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

That is way too low. I think the numbers are higher but not acknowledged because the rules were changed to allow banks not to mark to market. The shadow inventory is huge, but banks are holding on to these loans and not writing them off so they don't have to admit the damage.

But even so... $20B? really? sounds like an awfully small number to me. Folks, I want you to keep this in mind - 20 billion is less than, for example, the total bonus pool amongst JP Morgan for 2009 ($27B), on that "horrible year". Cry me a river.

No, it rewards exactly the same thing that america has always prided itself on rewarding: ingenuity, resourcefulness, capitalism. Yes, I know it sucks to be on the receiving end, but we are getting 90 cents for free legally and appropriately. And I applaud every single person who his flicking his middle finger at the lenders these days and squeezing them for all they've got. Right now is an opportunity. Use it in your favor like every red-blooded american has always used opportunities in the history of this great country. It's not like these conditions will occur again.

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it isAnything over $15,000 to $20,000 is not collectible

Smart guy. Great idea. Good on him. So the wheel turns; many consumers are detecting an opportunity and are being resourceful, and this guy detects an opportunity that results from THEIR resourcefulness and capitalizing on THAT. It's EXACTLY how this country works, people.

But the borrowers argue that they are simply rebuilding their ravaged lives.

Not really. We are REALLY saying "screw you, rules work in my favor now", only saying it politely. The smart ones are leveraging their good positions in the best possible way (buy and bail is a fantastic example which I also applaud, as I do strategic defaulters on any form of consumer debt).

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

Yessir. It's what I said above. I wonder why it's tucked down here, huh? oh, wait; let's obscure the truth from people, maybe they won't see the hypocrisy.

But you can't. So you will change it so it doesn't happen again. Alright. In the meantime, eat your lumps.

Correct. And there is nothing immoral about it; it is moral, justified, and proper to do what one can to take advantage of a bad situation. I mean, aren't these "poor bankers" the same people who have always haughtily told us that the "best time to invest is when blood is running in the streets"? well then; erasing debt by taking advantage of the current situation is simply another investment taken when blood is running in the street. Except that this time, the street is Wall St.

PRECISELY. Well done, Mr. Hairston. Stating it like it is seems to be too difficult for so many people.

Because morality is not relevant whatsoever. Sorry folks, but you can't ignore the facts; almost everyone "gets it" on main street, that it has nothing to do with morality. Even those "fiscally prudent" people who CAN'T take advantage of this but realize the opportunity and are a bit envious of not being in a position to do so get it, for the most part. But they would if they could.

Yes sir, although not the numbers you are thinking of. The strength is in the asset price weakness. It just translates to a lot of people.

[onwards]

I also want to add a general comment to a common thread in all these articles that is irritating me to a high degree: it is astounding to me just how condescending bankers STILL are towards consumers.

So many comments seem to imply that we are stupid, we didn't know what we were doing, we didn't think it through and so on.

Actually, it's the LENDERS that didn't think it through. Most people saw easy money and took it; they didn't NEED to think it through much further than that, and they were RIGHT. Why not, prey tell? the lenders, of course, should never have offered all this easy money, but they did anyway because their incentive structure had nothing to do with repayability of debt. And many, also, took the easy money offered (in transaction fees, bonuses, and so on). Again, why not?

We all behaved the same way with the same motivation - quick and easy cash. Most people did not act stupid at all, and the results prove that: this article points out merely one aspect of how nice it was to get money for free. Many folks got a lifestyle upgrade for nothing, some wasted it, and some reinvested it and freed themselves forever from financial shackles. Sounds familiar, no? it's how things always work.

And let me say this - I'll do it again, given the opportunity and right conditions. Easy money is easy money. Why not? the lenders are doing the same right now with the overnight fed lending rates. Why isn't anyone upset about that?

[jjim120]

While it seems to be the consensus to blame home buyers not paying their mortgages and/or buying homes they could not afford, I beg to disagree. The easy money, the incentive structure to offer such easy money, was not just a phenomenon of home mortgages, but of commercial and construction lending as well. The banks who suddenly realized that their lending sprees were creating capital problems in funding those loans, that they were causing the problems by not being able to fund commercial construction loans and business lines of credit led to a cutoff of real estate loans around the country. The bank boards, scared by the eminent failures of big banks such as Lehman, Goldman Sachs, etc. suddenly realized they were overextended and needed to rapidly get out of real estate. Regional bank officers in bank branches all over the country were ordered to get rid of their real estate loans as quickly as possible, in any way possible. (Read the redacted board minutes of National City in the Cleveland Plain Dealer in 2008). On demand and at will clauses in commercial and construction loans did not require proof of cause. As a result, the banks simply stopped funding those loans, then either foreclosed or sold the notes at pennies on the dollar. This led to the losses of jobs and the closures of mid-level businesses all over the country, putting additional stress on small community banks whose loans were the mainstay of their communities. Homeowners without jobs, or with reduced hours or wages cannot pay their mortgages. The bankers who made these decisions ignored the long-term consequences of their panic decisions.
It's time we stopped attacking the American home buyer for causing this deepening recession and put the blame squarely where it belongs: on the big financiers and bankers who ignore their responsibility to the whole and the politicians who hand out whatever goody those bankers ask for without regard to intended and unintended consequences.