strategic default

[stophorseabuse]

Was just going to get some opinions on strategic default on a mortgage.

I have a co-worker I am very close to, and 6 years ago they bought a house. They had given up their rental and were moving in a few days after signing. When they closed they got the contract and it was 200 dollars a month higher than the 'good faith estimate'. They had no recourse, and signed.

They have never missed a payment, and have been denied year after year for a re-fi. She says their credit is in the high fives (poor). Still, she is thinking of lining up a place to rent, moving her large stuff into storage, and not paying until eviction (my suggestion).

She stands to 'make' 1000 dollars a month until eviction. She could struggle and keep paying, but doesn't really care--as she says they can't improve their credit anyway.

BTW, been on the market for a year way below market value. What's the guess on how long they can stretch out eviction?

[bobbiemcgee]

The reality is she may have a tough time getting a comparable place for a $1000. a mo. nowadays. Landlords want bigger deposits and charge more for people they think may "walk" on them too. Not to mention her credit will be shot for years and she'll have to pay higher rates for everything including stuff like ins. and even cable tv. Foreclosure and eviction is the worst thing that can ever show up on a credit report. The Corporate rental complexes won't even rent to somebody with an eviction. If it's only a lousy grand a month, she might as well stay put.

BTW, I hate that term "strategic default "

[waggy]

State laws differ, but I think some states allow you to walk away. Still affects your credit of course. And other states I think you still owe the difference. And I believe lending institutions are lining up to fight the laws that allow owners to just walk away. Crappy deal all around.

They should be able to sign a lease before the foreclosure hits the credit report. At least that's how I'd do it.

[MADXSTER]

The foreclosure will stay on the credit bureau for 10 years minimum.

I would suggest calling the mortgage company. They are very aware of hardships. Many times the mortgage company will make "Payment Arrangements". Meaning a lower payment for a period of time. It wil show up on the bureau, which doesn't hurt the score(as far as I know) but it, meaning 'Payment Arrangements' does inform other lenders of a red flag regarding extending credit. Once payments get back to normal the mortgage company will take off the 'Payment Arangement' indicator.

If you have a foreclosure it will be even harder to get credit.

I would try for Payment Arrangements with the mortgage company first. Mortgage companies would rather you go this route first as well.

[Smooth]

What has changed since they bought the house? Apparently from your post, at least one of them still has a job. If this simply a matter of them having the mistaken impression that housing values only go up and now that the social stigma of foreclosure has seemingly disappeared, they want to leave someone else (everyone else) on the hook for their mistake, then I say sack up and take responsibility for your own actions. I'm sure there are probably some financial issues besides the "good faith" problem, but we all have to deal with them. As long as they can make payments they should do so. They obviously have other issues to have a credit score that low. They should work on repairing that and getting a financial education so that something like this does not happen again.

I don't think a default is very strategic. Their credit score can get worse and it will take longer to repair the damage. There is also the subjective judgments landlords and others make based on their credit report (different than a credit score) as hey hey hey bobbiemcgee mentioned.

I would not recommend that course of action to someone I am close to. Too many negatives that will last too long into the future.

[MHettel]

credit is an obligation.

if you are the type of person that doesn't feel like you really need to deliver on an obligation, then by all means take the path where you can "make" $1000 a month in the process of defaulting on your obligation.

almost feels like stealing.

[boozehound]

Was just going to get some opinions on strategic default on a mortgage.

I have a co-worker I am very close to, and 6 years ago they bought a house. They had given up their rental and were moving in a few days after signing. When they closed they got the contract and it was 200 dollars a month higher than the 'good faith estimate'. They had no recourse, and signed.

They have never missed a payment, and have been denied year after year for a re-fi. She says their credit is in the high fives (poor). Still, she is thinking of lining up a place to rent, moving her large stuff into storage, and not paying until eviction (my suggestion).

She stands to 'make' 1000 dollars a month until eviction. She could struggle and keep paying, but doesn't really care--as she says they can't improve their credit anyway.

BTW, been on the market for a year way below market value. What's the guess on how long they can stretch out eviction?

Pretty big moral gray (at best...) area here.

If they are a legitimate financial hardship case then there are programs that exist (many of which vary from state to state) to help them make their payments.

I don't see how the inability to refinance is a factor here. Are they on an adjustable rate mortgage?

Personally I think they should honor their financial obligations if they can.

[Mark 3 Pointer]

credit is an obligation.

if you are the type of person that doesn't feel like you really need to deliver on an obligation, then by all means take the path where you can "make" $1000 a month in the process of defaulting on your obligation.

almost feels like stealing.

Amen.

I feel for people that are have finacial difficulties... However, there is never an excuse to walk away from an obligation. Banks are in business to make money... a person that owes a bank money by their own decision and refuses to pay, is stealing from the investors in the bank. We need a revolution of personal responsibility in this country, it really disturbs me.

[Cheesehead]

Why did they sign it orginally? She could have walked at that point. It would have made everyone look at the terms and perhaps she could have had it modified or at the least, explained to her.

Walking away now will take her years to recover.

[tmac03]

[QUOTE=MADXSTER;215183]The foreclosure will stay on the credit bureau for 10 years minimum.
QUOTE]

It will only stay on for seven years, but that doesn't really change the analysis that her credit will be even further screwed if she does walk away.

[boozehound]

Bankruptcy may be a better option for them at this point.

First of all, if their FICO scores are in the 500's it is unlikely that they have been paying all of their bills on time. It is possible to have a FICO score that low without missing payments but very very hard to do. If they aren't missing a lot of payments on other bills then they may have a lot of credit card debt in the form of maxed-out cards. That will obviously follow them.

The question is: is the mortgage payment a problem in and of itself, or is it a problem when combined with their other debt load?

Bankruptcy and Foreclosures are pretty similar in that nobody will lend you money for a long time after (5-7 years minimum) and when you do get loans your interest rates will be sky high. If you car breaks down, you had better be able to pay cash for a new one or pay cash to get it fixed, because you aren't getting a loan.

[MADXSTER]

The foreclosure will stay on the credit bureau for 10 years minimum.


It will only stay on for seven years, but that doesn't really change the analysis that her credit will be even further screwed if she does walk away.

You are correct my friend. Bankruptcy's stay on for 10 years.

My understanding is that the clock starts ticking from the last date that particular line item has been reported to the credit bureau.

[bobbiemcgee]

credit is an obligation.

if you are the type of person that doesn't feel like you really need to deliver on an obligation, then by all means take the path where you can "make" $1000 a month in the process of defaulting on your obligation.

almost feels like stealing.

I agree to a point, that being you shouldn't be able to "save" money when you are voluntarily defaulting, but a lot of banks have behaved dispicably in the last few years, particularly in the credit card area. They took huge gov't bailouts (OUR money), then cut credit lines and raised rates and fees to astronomical levels while borrowing @ 0% and charging 21 to 29% ( loan shark rates imho when they got the money for free !! )

So, let review. They took MY free tax money, raised my credit card rate from 8.1 to 21% ( Cap One which I promptly paid off). Yeah, that seems like stealing too. In fact, I feel like they should lock up the basterds.

[Mrs. Garrett]

Did they consider renting the house to someone else?

I had a friend who was in a situatuion where she built a new house with her then boyfriend (dumb). By the time the house was completed they were already on the outs. Well they built the house in the Detroit metro area where the economy is even worse than the rest of the country.

So they put the house up for sale with no luck and wound up renting the house. They actually did a rent-to-own. That person stayed in the house for several years and the house eventually sold.

There are so many creative options rather than just defaulting on an obligstion. This is just one of them.

[Kahns Krazy]

I agree to a point, that being you shouldn't be able to "save" money when you are voluntarily defaulting, but a lot of banks have behaved dispicably in the last few years, particularly in the credit card area. They took huge gov't bailouts (OUR money), then cut credit lines and raised rates and fees to astronomical levels while borrowing @ 0% and charging 21 to 29% ( loan shark rates imho when they got the money for free !! )

So, let review. They took MY free tax money, raised my credit card rate from 8.1 to 21% ( Cap One which I promptly paid off). Yeah, that seems like stealing too. In fact, I feel like they should lock up the basterds.

You have options when they change your rates, unless you already agreed that they can change your rates at their discretion, in which case, well, you agreed to it, so you can't really complain.

If a credit card company changes the terms of their agreement with you and you do not like the new terms, you can keep your old terms as long as you close the account and continue to make payments under the old terms. You will not be able to make new charges, but they can not change the terms of the credit they have already extended you unless you agree to it.

[madness31]

Once the banking bailout took place (Paulson/Bush) the moral obligation to pay-off debts was lifted. The banks got their free money which in many cases were paid out in bonuses so the public is entitled to their free money as well. Banks were largely responsible for allowing home prices to rise to unrealistic levels. This was done in an effort to increase short-term profits at the expense of the future. Once this strategy of greed exploded in their face they begged for government aid (profits should have been retained for this sort of event rather than being paid out in bonuses to top management). The banks created their own grave so moral concerns should be discarded.

I don't know the legal issues in Ohio but a default does effect credit for 7 years. Some states do allow the bank to stick the mortgage holder with the difference between the sale price and amount owed. If this is true in Ohio than a strategic default would not end well for the individual. A short sale would work better which basically has the bank agree to the sale price of the home before an offer is accepted. The former "owner" would be free and clear at that point.

A strategic default, assuming no recourse is possible by the banks, should only be done if the home is worth dramatically less than the mortgage value. Yes you could avoid a mortgage payment for a year or so while living in the home but it is unclear how long you would have and the hit to your credit score would have other negative impacts as discussed. There are places that will rent to someone with low credit but it does reduce options.

The housing market will likely remain relatively flat for several years unless their is another leg down during that stretch. The person's credit should be recovered before homes appreciate in any meaningful way. Quite possibly their credit will be better than it is now as they should be able to take the lower cost of living and free rent to pay down debt and stay current on all their expenses. Of course someone with a score as low as your friend is also quite likely to make new irresponsible decisions with the increased cash flow and be no better off than they are now.

Good luck.

[madness31]

One other point the Mortgage Bankers Association defaulted on their mortgage in order to take advantage of cheaper facilities. In the business world a strategic default is just a business decision so why should individuals look at it any differently. Study the mortgage documents and figure out what is financially best. Consult an attorney to ensure Ohio is not a state that enables banks to stick the mortgage holder with the financial obligation after the default.

[Kahns Krazy]

Once the banking bailout took place (Paulson/Bush) the moral obligation to pay-off debts was lifted. .

I 100% disagree with this statement in any form.

[boozehound]

One other point the Mortgage Bankers Association defaulted on their mortgage in order to take advantage of cheaper facilities. In the business world a strategic default is just a business decision so why should individuals look at it any differently. Study the mortgage documents and figure out what is financially best. Consult an attorney to ensure Ohio is not a state that enables banks to stick the mortgage holder with the financial obligation after the default.

How about "Don't buy a home you can't afford".

Also, I don't really see how the bailout absolved people of their moral obligation to pay their debts. What happened to personal responsibility?

One could argue that our entire economy is based on the premise of people repaying their debts and that the results of a large-scale mindset similar to the one you are advocating would result in economic collapse.

[MHettel]

One could argue that our entire economy is based on the premise of people repaying their debts and that the results of a large-scale mindset similar to the one you are advocating would result in economic collapse.

And we have a winner!

[Mark 3 Pointer]

Once the banking bailout took place (Paulson/Bush) the moral obligation to pay-off debts was lifted.

Our morals must be different.

[GoMuskies]

If a a mortgage is non-recourse under the laws of your state, I don't have a problem with someone walking away through the jingle mail. It's a legal matter between debtor and creditor, not a moral one IMO.

[MADXSTER]

nm

[bobbiemcgee]

You have options when they change your rates, unless you already agreed that they can change your rates at their discretion, in which case, well, you agreed to it, so you can't really complain.

If a credit card company changes the terms of their agreement with you and you do not like the new terms, you can keep your old terms as long as you close the account and continue to make payments under the old terms. You will not be able to make new charges, but they can not change the terms of the credit they have already extended you unless you agree to it.

Not true when I tried to do it b4 the new credit card legislation, they told me I could pay it off on the new terms or stick it. (payoff the current balance at the higher rate) I'm assuming you see absolutely nothing wrong with taking bailout billions and then sticking it to the consumer. Banking is a great business for people with no ethics siphoning off millions in bonuses for doing a lousy ass job while having the govt pump huge amounts of taxpayer dollars back in it. When the FDIC finally takes over, these guys have millions of our money to retire on and suffer no recourse for their actions. Pathetic.

[Kahns Krazy]

Not true when I tried to do it b4 the new credit card legislation, they told me I could pay it off on the new terms or stick it.

That is not my understanding of the law. Are you sure you hadn't previously agreed to let them change your rate at their discretion? What exactly was the "stick it" option?

Every time I get a change in terms notification from a credit card, it always includes a section on what to if I choose to not accept the changes in terms.

[blobfan]

Once the banking bailout took place (Paulson/Bush) the moral obligation to pay-off debts was lifted. ...

Back when I was in pre-school I was taught that 2 wrongs do not make a right. Nothing I've experience since than has contradicted that. A debt is a debt and if you make the decision to walk away for it, the reasons should darned well be so strong that the damage done by paying the debt back outweighs that obligation. In other words, walking away from a debt should be the lesser of two evils, not a matter of convenience or a cost saving effort. That goes for businesses too, in my opinion. The NMBA wrong to walk away from a debt while advocating that others stick to theirs.

If the person in question had an issue with the required payments the time to address it was at the time of the loan signing. If there is proof that the good faith estimate was different than that actually put in place, the proper thing to do is bring that proof to the mortgage company and ask that the error be corrected. In light of the current climate and the rampant disregard for proper documentation the banks are showing right now the mortgage company may be amenable.

[waggy]

Banks are professional lenders. They take a risk when they give their money to someone. Their securities are the deed, mortgage insurance, and/or 20% down. The borrower is not the only party that holds responsibility. And frankly banks have more protections than borrowers. Bottom line if a person simply cannot make their payments while living a reasonably stress free life, and they can't sell the property due to the market collapsing, then that's what the protections in the system are for. It's the extremes in this situation that has all sides crying foul.

[madness31]

Ok lets take the two wrongs don't make a right theory. Where is the wrong in abiding by the terms of a contract? If the contract basically states that you must hand over the property if you do not make payments then that is an option.

Many of you argue for personal responsibility and then cry foul when someone chooses to make the financial decision that is best for them. If the person in question studies the contract and determines they are financially better off to default than that is taking personal responsibility. It is a business decision pure and simple. The bank was irresponsible and made a bad business arrangement. In the future they will probably go back to requiring down payments and verifying income.

[madness31]

What is wrong with economic collapse? Wouldn't it be better to rebuild from a solid foundation rather than constantly manipulating interest rates, cutting taxes and increasing government spending to keep the economy going? Isn't it better to deal with problems now than to mask them and put them off to a later date? Wouldn't it be beneficial to get the fraud and corruption out of the system? Maybe manufacture some goods rather than trade paper assets?

[stophorseabuse]

Thanks for the replies.

Im not 100% on why they can't make the payment now, but I know her husband has a business, had cancer last year, and there is no doubt the lousy economy hurt. They actually have had the house for 8 years.

I really don't feel there is a 'moral' obligation to banks. But I understood where she was coming from. The 200 dollar difference sprung on them at closing was dirty imo, and was as unethical as they would be for cutting and running. She explained that they felt trapped, as the house had other offers on it.

Financially this sounds like a bad decision for them. She is a smart woman, and I'm sure she will come up with it. However, and I can't be clearer, I think the banking system preaching morals at anybody is laughable.

[Kahns Krazy]

Ok lets take the two wrongs don't make a right theory. Where is the wrong in abiding by the terms of a contract? If the contract basically states that you must hand over the property if you do not make payments then that is an option.

Many of you argue for personal responsibility and then cry foul when someone chooses to make the financial decision that is best for them. If the person in question studies the contract and determines they are financially better off to default than that is taking personal responsibility. It is a business decision pure and simple. The bank was irresponsible and made a bad business arrangement. In the future they will probably go back to requiring down payments and verifying income.

For starters, the scenario in the original post asked how long someone could expect to stay in a house they are no longer paying for. That's not handing over the property, that's manipulating the system to effectively steal the property for a period of time.

From what I can tell, Ohio, Kentucky and Indiana are all recourse states. Maybe you are in a non-recourse state and the mentality is different. I can see how that would be the case when your neighborhood is 75% empty and your house is worthless. Hopefully, that's a scenario I don't have to deal with.

[PM Thor]

I didn't read everyones posts, not enough time, but did they consider short selling the house back to the bank?

It's not the best option in the least, but it's better than allowing it to go into foreclosure.

I HATE dayton.

[Xman95]

Posters keep pointing out that the people should live up to their agreement. Well, it would seem that the agreement is that they will pay their monthly bill until they own the home. However, I'm sure the agreement also states that if they don't make their payments, the bank will foreclose on them and keep (then sell) the home. The latter isn't usually what anyone wants, but it's the way the agreement was set up. In addition, the borrowers will also have their credit detroyed during the process.

So, while I understand the point of the "live up to the agreement" posts, turning the house over to the bank due to lack of payments is technically living up to the agreement. And I'm guessing that if the people had the money they would gladly pay the bills. I don't think anyone wants to be homeless (although they would be renting) with bad credit.

Someone pointed out that banks make loans so they can ultimately make money. This is true. But they also have safeguards in place - like foreclosing and then selling the home - if the loans can't be paid back. Does anyone feel for the banks when a family has paid off $175k of a $250k home, hits hard times, can't pay and gets foreclosed on? Then the bank turns around and sells it at auction for $150k. So now the bank has added an additional $75k. See, banks often used to make out on the foreclosures. That's why they're part of the agreement. The problem they ran into is that there have been so many in recent years that their business model is coming back to bite them in the ass.

Ultimately, if letting the house go (and enduring all that comes with that decision) makes more sense for this family than keeping it and being house-broke, then that's what they need to do. But, before making that decision, they really should look at all the alternatives. Things like short sales, payment plans, etc. might be available and could be better options for everyone involved.

[American X]

What is wrong with economic collapse?

http://cdn1.knowyourmeme.com/i/6530/original/space_ghost_facepalm.jpg?1248719045

[bobbiemcgee]

Posters keep pointing out that the people should live up to their agreement. Well, it would seem that the agreement is that they will pay their monthly bill until they own the home. However, I'm sure the agreement also states that if they don't make their payments, the bank will foreclose on them and keep (then sell) the home. The latter isn't usually what anyone wants, but it's the way the agreement was set up. In addition, the borrowers will also have their credit detroyed during the process.

So, while I understand the point of the "live up to the agreement" posts, turning the house over to the bank due to lack of payments is technically living up to the agreement. And I'm guessing that if the people had the money they would gladly pay the bills. I don't think anyone wants to be homeless (although they would be renting) with bad credit.

Someone pointed out that banks make loans so they can ultimately make money. This is true. But they also have safeguards in place - like foreclosing and then selling the home - if the loans can't be paid back. Does anyone feel for the banks when a family has paid off $175k of a $250k home, hits hard times, can't pay and gets foreclosed on? Then the bank turns around and sells it at auction for $150k. So now the bank has added an additional $75k. See, banks often used to make out on the foreclosures. That's why they're part of the agreement. The problem they ran into is that there have been so many in recent years that their business model is coming back to bite them in the ass.

Ultimately, if letting the house go (and enduring all that comes with that decision) makes more sense for this family than keeping it and being house-broke, then that's what they need to do. But, before making that decision, they really should look at all the alternatives. Things like short sales, payment plans, etc. might be available and could be better options for everyone involved.

Sorry but Banks don't get to keep a profit (if any). They have to return it to the customer less allowable expenses.

[stophorseabuse]

[QUOTE=Xman95;215346]
Someone pointed out that banks make loans so they can ultimately make money. This is true. But they also have safeguards in place - like foreclosing and then selling the home - if the loans can't be paid back. Does anyone feel for the banks when a family has paid off $175k of a $250k home, hits hard times, can't pay and gets foreclosed on? Then the bank turns around and sells it at auction for $150k. So now the bank has added an additional $75k.QUOTE]

That is what would happen with them. They have paid for 86 months or so, 690 a month toward the mortgage. Rougly 60K on a 101K loan. Their house appraises for like 160. The bank would turn and sell it for 100K again, and if the owners financed 30 years would pay about 250K on the house. The bank would make 300K in 38 years on a 100K investment.

Im personally saving to buy a house with cash one day. It might be at retirement, but I'm NOT giving a bank a quarter of a million dollars over 30 years for doing NOTHING but already being rich. I realize I lose money I could be paying toward a house now, but at the same time I just hate corporate America. I prefer renting from middle class people working hard to supplement their income.

[waggy]

Numbers being suggested here aren't making sense to me. If you owe less on the property than it's worth then just sell it and pay off the mortgage. A strategic default would be a situation where you owe much more than it's worth (or may ever be worth again).

[stophorseabuse]

Sorry but Banks don't get to keep a profit (if any). They have to return it to the customer less allowable expenses.

But do the math, the bank already made a $hit load off of the person, but the person has likely paid hardly any principle. Plus, if their was a profit to be made, the person would of sold the house themselves and took a profit rather than getting themselves evicted. The bank wouldn't make a ton on the sale price, it would come in the interest from the new owner.

[MHettel]

Banks do NOT make money on foreclosures. I spend 6 months on a project in 2008 trying to get a handle on mounting losses at a bank.

Prior to foreclosure, all equity is usually sucked out by the owners.

[stophorseabuse]

Numbers being suggested here aren't making sense to me. If you owe less on the property than it's worth then just sell it and pay off the mortgage. A strategic default would be a situation where you owe much more than it's worth (or may ever be worth again).

Waggy,

The numbers in their situation do NOT make sense. It is the fact there are no buyers. The market is totally bare. They put it for sale just before her husband got sick (I think). Currently it's like 55K under appraisal, and like 6K over what they owe plus agent.

[stophorseabuse]

Banks do NOT make money on foreclosures. I spend 6 months on a project in 2008 trying to get a handle on mounting losses at a bank.

Prior to foreclosure, all equity is usually sucked out by the owners.

Hettel, I did not do a project on it. I defer that to you. In no way is that my area of expertise. That's why I originally brought it up.

[waggy]

I suspect they have a bunch of other debt they cant get out from under, maybe even a 2nd. And they cant get refinancing cause loans are now harder to obtain.

[bobbiemcgee]

Having handled many foreclosures myself in better times I can tell you how it works. First the bank has to make a profit. They take depositor money and pay them a (almost nothing now) interest rate - cd's and money markets. They get other depositor funds from business accounts where they do not pay interest but instead provide many more mostly free customer services for the privelege of using that money as "float". They used to invest the "float' overnite @ the Federal Reserver Bank. The Fed paid them, guess what, the federal funds rate which used to be 4-5% for the funds deposited with them overnite. Banks issued CD's, savings and MM and paid the depositors slightly more or less than the fed funds rate - 3.5 to 5.5 maybe. To increase profits, the banks make all types of loans from a few points over the "Prime" rate up to their state's usury limit. Simple. They take your money and put 60-65% of it out in loans. So when somebody says they make 300k over the life of a loan - NO WAY. They might be paying 4-6% on the loan they did @ 7% a few years back. Mortgage money is 4% now cuz they are paying nothing for the money, the fed funds rate, HOWEVER, they can get STUCK with a bunch of 4% loans for 30 friggin' yrs. if the fed raises their rate to say 5%. Thus, the reason nobody wants to lend anymore.

[madness31]

The appraisal should indicate the value of a house which should be set by market conditions. If they are asking $55K under appraisal then the appraisal is very wrong.

Lending conditions are difficult but I can't imagine a property supposedly worth $160K not going for $105K. That would be an investment bargain unless of course property prices are going to fall again soon. Even then you should have plenty of cushion to absorb future declines. I guess everyone is waiting for more home buyer tax credits.

Given the numbers involved they should remain in the property and continue paying their mortgage if they are capable. Take the property off the market and relist it next spring. If they are unable to financially afford the property they should look into arranging a short sale. I believe this is more favorable to someone's credit. Strategic defaults, as another poster mentioned, is for properties where the mortgage is higher than the property value.

[Kahns Krazy]

Posters keep pointing out that the people should live up to their agreement. Well, it would seem that the agreement is that they will pay their monthly bill until they own the home. However, I'm sure the agreement also states that if they don't make their payments, the bank will foreclose on them and keep (then sell) the home. The latter isn't usually what anyone wants, but it's the way the agreement was set up. In addition, the borrowers will also have their credit detroyed during the process.

So, while I understand the point of the "live up to the agreement" posts, turning the house over to the bank due to lack of payments is technically living up to the agreement. And I'm guessing that if the people had the money they would gladly pay the bills. I don't think anyone wants to be homeless (although they would be renting) with bad credit.

Someone pointed out that banks make loans so they can ultimately make money. This is true. But they also have safeguards in place - like foreclosing and then selling the home - if the loans can't be paid back. Does anyone feel for the banks when a family has paid off $175k of a $250k home, hits hard times, can't pay and gets foreclosed on? Then the bank turns around and sells it at auction for $150k. So now the bank has added an additional $75k. See, banks often used to make out on the foreclosures. That's why they're part of the agreement. The problem they ran into is that there have been so many in recent years that their business model is coming back to bite them in the ass.

Ultimately, if letting the house go (and enduring all that comes with that decision) makes more sense for this family than keeping it and being house-broke, then that's what they need to do. But, before making that decision, they really should look at all the alternatives. Things like short sales, payment plans, etc. might be available and could be better options for everyone involved.


There is so much wrong with this post I hardly know where to start.

Liquidated damages in the event of a default is not the same as living up to an agreement. There has been a breach of contract.

Banks can not profit on any gain on the sale of a foreclosed home in excess of the mortgage amount and any associated expenses with the sale (which could be substantial, especially if there are months of late payments involved)

People with homes that are worth $150,000 and only owe $75,000 do not get foreclosed on.

[madness31]

A breach of contract would make the contract null and void. If that were the case then the mortgage holder would get to keep the house and not have to make the payments or they would have to immediately payback the loan. I suppose the states that hold the borrower responsible for the difference between the amount owed and the sale price consider it a breach of contract while those allowing the borrower to walk consider it part of the terms of the contract.

It is the financial institution's responsibility to not loan more than a borrower can afford and to ensure the collateral is adequate for the transaction. This is their duty to shareholders, whereas the individual only has an obligation to himself and his family and is not necessarily qualified to determine if he/she is capable of making payments. The last part of that sentence is sad but all too often true. Either way it should not be required of the borrower to payback in full if they give the house back to the bank. By requiring this it encourages businesses to act unethically and irresponsibly. It is just another factor that enticed banks into making irresponsible loans that lead to the financial collapse.

[Kahns Krazy]

A breach of contract would make the contract null and void. If that were the case then the mortgage holder would get to keep the house and not have to make the payments or they would have to immediately payback the loan.
.

http://i626.photobucket.com/albums/tt348/Karlternative/DoubleFacePalm.jpg

[Xman95]

There is so much wrong with this post I hardly know where to start.

Liquidated damages in the event of a default is not the same as living up to an agreement. There has been a breach of contract.

Banks can not profit on any gain on the sale of a foreclosed home in excess of the mortgage amount and any associated expenses with the sale (which could be substantial, especially if there are months of late payments involved)

People with homes that are worth $150,000 and only owe $75,000 do not get foreclosed on.

It was just an example. Bottom line, the bank giving the loan knows it's risky and that's why there are clauses giving them the house if the borrower can make the payments. If banks didn't want to take that chance then they shouldn't give the loan.

[Emp]

Ohio IS a recourse state. If a bank forecloses and there is a deficit, the borrower is on the hook for that amount. So there is no "strategic" foreclosure option in Ohio. There should be, but there isn't. As suggested earlier, bankruptcy attorneys should be consulted. Mortgage loan debt is dischargeable. Credit card debt is not (banks win on the lobbying on this one.) These folks should consult with someone who knows, not the "experts" with no legal training or knowledge but a righteous moral compass.

The efforts to raise this discussion to a question of morals seems pretty high horse to me (and I'm a guy with plenty of high horse cred, according to consensus. Chico, 87, feel free to chime in here.)

People borrow money, lenders lend money, as a financial risk, not as a moral question. Debtor's prisons were abolished long ago, with good reason. People start businesses that fail every day. Business bankruptcies are a common event (much more common, until recently, than private bankruptcy), and I don't hear any moral outrage that someone made a bad moral choice to start a losing business. It's business.

In any loan transaction, the Lender assesses the risk not as a moral proposition, but a financial proposition: will the borrower repay? If the borrower cannot repay, is there sufficient equity to secure the loan? The lender makes the same financial bet as the borrower. If they both get it right, everyone makes money. If either gets it wrong, one or both may lose money. Fraud aside, it's not a moral issue.

The housing bubble was being noted in the mid 2000s. If either side of the residential mortgage loan crisis was equipped to assess the risk that the bubble would burst, it would be the lenders and the regulators, not Joe Flip This House or Nancy FirstTimeHomeBuyer. But that is not a moral judgment, nor should it be. People and institutions made mistakes. The larger the scale of those mistakes, the more likely we will all suffer and pay.

[Kahns Krazy]

I have no problem with people using the bankruptcy laws as they are designed for protection, and with consequences.

Where my problem starts is with people saying, well, I could pay up to $1,000 a month, but I'm just not going to because I know the bank won't come after me for at least six months, and I can stay here for "free". Also people who can continue to make the payments that default on their loan simply because the house isn't worth as much as they wanted it to be.

I guess that's a legitimate option in non-recourse states, but it drives up the cost of borrowing for the rest of us.

I have a problem with people that conduct business that way as well. Just because it's "business" does not remove the morality of it.

[waggy]

I read somewhere that strategic default has been fairly common in the "luxury" home market. The suggestion being that the owner actually has the means to pay for the home, but it's a black and white financial decision, and the bank takes the loss.

[Kahns Krazy]

I read somewhere that strategic default has been fairly common in the "luxury" home market. The suggestion being that the owner actually has the means to pay for the home, but it's a black and white financial decision, and the rest of us take the loss.

FTFY.

Be it shareholders, bank employees, other bank depositors or taxpayers, that loss isn't just "taken", it's passed along.

[Snipe]

I know a couple that is in foreclosure. They haven't made a payment in about a year and their foreclosure was just suspended by the bank.

People are fighting these things in court and if they don't win it can buy them time. They demand to see the mortgage documents, and many times the banks don't have the paperwork right. So many of these loans have been sold and repackaged and resold again it is tough to figure out where the paperwork is. And if your institution bought shares in an $800 million dollar mortgage backed security it might be difficult to figure out who really owns what anyway.

In Florida many cases have been thrown out of court because they don't have the paperwork, and after three years there you get to keep the house free and clear. Sometimes the bank doesn't even try to take the house back. I read about that in Detroit. Some homes can cost the bank a lot of money.

I know one house that the bank took back. They had to pay to board it up. It was broken into and stripped, and the place is a crap hole. The building department wrote it up for code violations (the department in Cincinnati is targeting foreclosed homes and banks right now, I have heard it firsthand). The place had a mortgage on it in the $60 ~ $75 range I would guess, but I bet the bank doesn't see much more than $10k or even less at this point. They still have to maintain it, send someone to clean up litter, pay fines for litter they don't clean up, pay taxes, and try to market it. They might have been better off walking away.

Here is another interesting take:

Can you take your mortgage servicer to court to prove that you owe them money outside of a foreclosure process? What if I didn't want a bad credit rating, so I kept paying my mortgage? At the same time I kept the payments up to date I filed in court a dispute that I don't owe them the money and asked them to produce the contract. What happens if they can't produce the contract? Do I not owe them the money? Can that be resolved in court?

That is what is happening in some cases in foreclosure. The banks don't have the paperwork. So the banks have resorted to making up the paperwork, and some of them are getting called out for fraud. Some banks have suspended all foreclosures because the paperwork is so bad. So the people I know get to keep living in a house for free. Must be nice.

I also know a person who got $30k off his mortgage with the help of a politician. He contacted his political friend about wanting a mortgage reduction, and he said that his bank then contacted him and offered to reduce the principal by 30K. He had never applied at the bank for a mortgage reduction, he only asked his political friend. Think about how scary that is. Not everyone is going to get a mortgage reduction, and many of those that take place are likely to be politically motivated. A modern day spoils system for the masses.

I want 30k off my mortgage. I want to live in my house without making payments. We can blame the banks for not doing their paperwork, but what happens when we have to bail out the banks? It isn't the banks that are footing the bill for the freeloaders, it is the taxpayer. And we can't afford it.

Mortgages are registered. They are registered and they put up liens against the property in the county records. I can't imagine a mass of people getting out of their obligations even if a fire destroyed all of the paperwork at a bank. It is unreasonable to expect society to pay for the free loaders, even if banks are idiots. Banks should be punished, but taxpayers shouldn't be punished.

I do think I have a moral commitment to pay my mortgage. I gave my word and I signed the contract. I don't think that banks or mortgages are evil at all. I couldn't have afforded my property without them. I don't think banks are greedy per se, I think we are all motivated by self interest.

I think we need to change the way we lend to people who buy homes. People need to put down 20% so they have some skin in the game. That would solve most problems. The whole "strategic" part of a strategic mortgage is the fact that people have put little or nothing down on a home and now that the values have dropped it pays to just walk away. In the future it should be harder to buy a house. Expect higher down payments, shorter lease terms, pre-payment penalties, and higher interest rates that are not fixed. You can also expect all the usual suspects to complain how this will hurt the poor, but government meddling in the system is why we are here in the first place. The mortgage market would not resemble what it is today without massive government intervention in the name of housing. Both political parties are guilty of this.

[MHettel]

Most banks dont actuallyhold mortgages. There is a huge market for fixed and variable loans, and Fannie and Freddie EXIST for the purpose of buying loan securities packaged by banks.

Most loans held in portfolio by banks are "exotic" mortgages where there is no liquid market (some jumbos, some subprime, option ARMs).

Banks make their money on "gain on sale"- i.e. packaging 500 loans with a 6.25% average coupon and creating a security (bond) that pays 5.75%. Banks make .5% of the principal value of the loan, less any admin costs they might have.

Often the bonds are structured (in separate securities) to separate the principal payments from the interest payments, which allow investors to make Interest rate "bets" (i.e. buying Principal Only securities suggets that you believe rates will decrease, meaning people will refi and the entire principal gets repaid faster than planned).

Banks also make money by servicing loans. Many originators will strip out the "loan" part of the loan, but retain the servicing rights.

During foreclosure, the servicer has an obligation to keep the property at the highest "value" it can be. Also, when a owner stops paying, the servicer sometimes still needs to make principal payments to the investor, and MUST make sure all taxes and insurance are paid. There are other costs such as monthly appraisals to determine the value for writedown purposes, maintenance costs (no surprise that people who get foreclosed on usually trash the place---- cement in toilets, copper wiring stripped, etc), etc.

The place I worked had $900,000,000 in servicing advances, and was forecasting to ultimately not collect on about 25% of that.

Foreclosures are bad for everyone involved (unless you buy one for 40% off like I did)

[boozehound]

I think we need to change the way we lend to people who buy homes. People need to put down 20% so they have some skin in the game. That would solve most problems. The whole "strategic" part of a strategic mortgage is the fact that people have put little or nothing down on a home and now that the values have dropped it pays to just walk away. In the future it should be harder to buy a house. Expect higher down payments, shorter lease terms, pre-payment penalties, and higher interest rates that are not fixed. You can also expect all the usual suspects to complain how this will hurt the poor, but government meddling in the system is why we are here in the first place. The mortgage market would not resemble what it is today without massive government intervention in the name of housing. Both political parties are guilty of this.

I agree with you to a point on this, but I think that the effects on the housing market, particularly at the lower end, would be pretty severe.

We have a lot of houses in the country. We probably have more houses than we need. The problem with suddenly requiring 20% down is that far, far fewer people could afford homes, so you would have many many more homes going unsold.

We are already starting to increase down payment requirements and I think that zero down is probably not a very good idea, but we could also look at the credit profile more carefully than banks did. If I have several years at the job, a 2 income family, pristine credit, and a low debt load, I am probably a pretty good credit risk, even with only 10% down. They problem is we were giving 0% down loans to people with slow payment history and not verifying income.

[madness31]

Snipe, great post. I generally agree with what you said but with some minor differences. I agree that there is nothing wrong with a bank making money and I have no problem with whatever interest rate they charge, though the rate should be fixed or at least fixed to a benchmark to prevent abuse. I do however think greed played a huge role in the current mess. Yes congress contributed but banks were never ordered to give no documentation, 0 down or negative amortization loans. Those things were thought up by the mortgage industry and were the primary cause of the housing bubble and the ensuing collapse. I also agree that the government should have no role in housing and should basically stay out of banking other than ensuring proper disclosures and rules set forth in the contracts are followed. Some guidelines on appropriate leverage and risk taking in general is apparently also necessary if tax payers are going to foot the bill when the banks collapse. I'd also be ok with not limiting their risk taking, letting them fail and allowing the chips to fall where they may.

On one hand it makes sense that one would have to prove they are the mortgage lender on the other hand it is insane that someone can remain in a house and never make a payment because the mortgage was sliced and diced into pieces and sold to multiple parties. Doesn't the bank receiving payment send the proceeds somewhere if they are not the current holders? Why not just follow the money to find the relevant parties? Name the 10 or 100 individuals/businesses currently holding the paper as the beneficiaries of the foreclosure and call it a day. I'm not sure if that is how the securities work with the mortgage traunches as they might just be indexed and payments to the bond holders could be based on a broad based index depending on the class of securities owned. If that is the case then you would think the house would be foreclosed once proof of the existing loan balance is presented. The proceeds from the sale after expenses would go to everyone holding the appropriate class of mortgage securities. If that can't be determined than it could be divided up among all mortgage security holders. Not sure who the proper beneficiary is but allowing a person to keep the house free and clear is definitely not right. I'd also be fine if the foreclosure went to the FDIC or some other agency free and clear to manage and profit from.

Interesting idea on forcing the bank to prove ownership of the loan without missing payments. That would definitely be a nighmare for the courts and obviously banks.

[madness31]

Great post Emperor.

Kahns, taking advantage of opportunities is what business is all about. That being said it does feel a little wrong to live somewhere rent free for an extended period of time. On the other hand the banking/mortgage industry knew exactly what they were doing when they created the housing bubble for the sole purpose of huge immediate bonuses. If they did not know this was going to end badly then I have no idea how they achieved a position of authority. So we are back to the two wrongs don't make a right argument as it just doesn't seem to make sense to let the people that caused this problem in the name of greed get rewarded 3 times (original bonuses during the bubble, bonuses during bailouts, bonuses during recovery). Think of the moral hazard that is being created from that set of circumstances.

[Kahns Krazy]

Great post Emperor.

Kahns, taking advantage of opportunities is what business is all about.

I disagree. Providing a value or a benefit to your customer is what business is about. Getting value or benefit for your money is what it's about to be a customer. There is nothing about taking advantage of anyone that enters into my definition of how business should be run, or how businesses should be treated as a customer.

What ever happened to the golden rule?

[chico]

The efforts to raise this discussion to a question of morals seems pretty high horse to me (and I'm a guy with plenty of high horse cred, according to consensus. Chico, 87, feel free to chime in here.)


Whatever, Maverick. I try to answer your questions in a completely different thread and you feel the need to post this. Poor, persecuted Carlos.

[Snipe]

Let’s Not Start Lionizing The Anti-Foreclosure Deadbeats (http://www.cnbc.com/id/39657316)


Now that all fifty states have launched a joint investigation into fauxclosuregate, it’s probably time to soberly address the fact that nearly everyone who has been ‘victimized’ by robo-signers and foreclosure mills is in default on their home loans.

I know there are cases—or at least, one case—where people have been wrongfully foreclosed upon. But there is little evidence that banks are engaged in any systemic practice of throwing people who do not have mortgages or are current on their mortgages out of their homes.

The typical person who is fighting foreclosure on “show me the note” grounds is someone who has stopped making payments on their mortgage but refuses to surrender their house to the bank. Some of them may not even be suffering from financial hardship—other than having taken on debt that they cannot afford.

Earlier this week, CNN Money told the tale of a woman from Wappinger Falls, New York named Replique D'Amelio. She owes just under $400,000 on her mortgage, which is currently underwater. Even at the height of the housing boom, however, $400,000 would have bought you a very nice place in Wappinger Falls.

CitiMortgage modified D’Amelio’s mortgage but she defaulted anyway. Now she claims that Citi cannot foreclose upon her because Fannie Mae is the owner of her mortgage. Her lawyer argues that the mortgage was improperly assigned to Citi, and is contesting the foreclosure on those grounds.

Let’s grant D’Amelio not only the facts but also her interpretation of foreclosure law. Perhaps Citi, which purchased the mortgage in late 2006 and sold it to Fannie Mae in early 2007, shouldn’t be able to foreclose. Maybe the MERS system somehow vitiated any security interest attached to her house through the mortgage.

This doesn’t change the fact that D’Amelio is attempting to stay in a house while reneging on her obligation to repay the loan she used to buy the home. The fact that her mortgage is owned by Fannie Mae actually makes her default uglier. Her refusal or inability to pay is inflicting losses on a mortgage company that is owned by the government and funded by tax-payers.

There’s nothing in the story that paints a picture of financial hardship here—she might be just strategically defaulting. She could be a new breed of Super-Strats—borrowers who default but don’t walk away. They stay and fight.

None of this excuses the actions of banks that falsified affidavits, did not properly transfer mortgage notes and lien documents, forged documents, and sold shoddily securitized mortgages to investors. But the wronged party in these situations is not the defaulting borrower—it’s the investors in the banks, the courts, the buyers of the securities, and the broader American public.

It’s actually a bit sickening to hear defaulted borrowers describing the misdeeds of banks as “mortgage fraud.” What some banks have done might well be fraud—but the fact of that fraud doesn’t erase the other fact that the borrower agreed to make payments or face the penalty of losing her home.

"These companies that are too big to fail apparently also think they're also too big to comply with the law of the land and it's beyond outrageous," D’Amelio’s lawyer tells CNNMoney.

Maybe I’ve missed something here. Can someone please explain why banks being ‘too big to fail’ should mean that D’Amelio should get to live in a house she hasn’t paid for?

Amen brother!

[boozehound]

Good article Snipe.

Some people are always looking for ways to game the system.

[MHettel]

It's just now occuring to me how much of an oxymorn the phrase "strategic default" really is.

I mean, if you had a strategy at all, you wouldn't be facing the looming foreclosure.

[Snipe]

It's just now occuring to me how much of an oxymorn the phrase "strategic default" really is.

I mean, if you had a strategy at all, you wouldn't be facing the looming foreclosure.

It certainly can be strategic. I have relatives in northern Virginia who bought a home there and watch as prices more than doubled. At one point they thought of selling just to cash out. They should have.

People that bought at the height of the boom have seen home prices collapse. If you bought a $600k home that is now worth $475 it is strategic if you can find a way to walk away on a $125 loss. If you can stall in court and live there free for a year or more even better. These people thought that they would be able to resell the home in a decade and make hundreds of thousands, not lose money.

People aren't all doing this because they can't afford it, that is why it is strategic. They have judged that their best interest is to walk away on the contract that they made and let someone else pick up the tab for their speculation.

[MHettel]

They have judged that their best interest is to walk away on the contract that they made and let someone else pick up the tab for their speculation.

I think that is the root issue for most people. They are HAPPY to consider it an investment and collect on the upside of real estate values, but as soon as it doesn't work out they look for a bagholder.

I've always been surprised by how many people just acted like cattle in the whole situation. It's amazing that people didn't see the bubble. It was right in front of us, yet we all just stared off into space and elected to ignore it. Mooooooo.

Just take 2 data points, average salary and house values. Then apply an annual increase to these. The increase to salary is simply normal wage increase (maybe 4-5%), while the increase to home values is annual appreciation (was about 15-20%). Now calculate and plot this over a 10 year period. See the shape of the curves, and the increasing distance between the lines over time? That's the bubble.

Don't need a PhD in economics for this.

PEOPLE WITH houses can move up to the next house by rolling their equity over.

BUT, the people that DONT have houses are suddenly faced with much steeper prices on that "starter house", so they overextend or get into a neg-am mortgage all on the assumption that these 2 "curves" are sustainable.

I have little sympathy to people that couldn't grasp the marco view of the housing bubble. People overextended themselves, and not becasue they did a careful deliberate evaluation of their situation, but rather because everyone else was doing it.

it's the same old analogy about would you jump off a bridge because your friend did it? Apparently, yes.

[Snipe]

I have sympathy for many people in the housing crisis. Some lost jobs or had medical tragedies or other unexpected bills. Some people bought houses they couldn't afford because it was the only way to get their kid into a good school. Then fuel prices go up, the economy slows down, money is hard to come by and the house you bought isn't worth what you paid for it. You can't afford it and you can't sell.

Many people buy a more expensive home just because it is in a better school district. The home may be no bigger or better than the one they have, but schools come alongside homes, and they pay the premium for the school district. It is often overlooked, but government schools had a hand in the housing bubble. I sympathize with those people because they took on that debt so their children could have a better education and a better life.

[MHettel]

I have sympathy for many people in the housing crisis. Some lost jobs or had medical tragedies or other unexpected bills. Some people bought houses they couldn't afford because it was the only way to get their kid into a good school. Then fuel prices go up, the economy slows down, money is hard to come by and the house you bought isn't worth what you paid for it. You can't afford it and you can't sell.

Many people buy a more expensive home just because it is in a better school district. The home may be no bigger or better than the one they have, but schools come alongside homes, and they pay the premium for the school district. It is often overlooked, but government schools had a hand in the housing bubble. I sympathize with those people because they took on that debt so their children could have a better education and a better life.

So many victims.

How bout this:

Want your kids to go to a better school? Get a better job!

Want a bigger house? Make more money!


I'll buy, to SOME DEGREE, the people that dealt with medical emergencies. But that wasn't some epedemic or phenomenon that just casue the housing meltdown. medical emergencies have ALWAYS been around, and are already "baked in" to historical foreclosure numbers.

And what the hell is an "unexpected bill." Seriously. What is that? "honey got another bill today for something we didn't buy and for somethign we didn't know about, I gues we should just default on the mortgage." WTF is that?

People didn't read their mortgage docs? Not my problem.
Didn't understand them? Not my problem.

This whole mess is about collective ignorance. There are no victims. Nobody forced anyone to buy a house or sign a document.

[XULucho27]

It is often overlooked, but government schools had a hand in the housing bubble.

Can't really agree with this. I understand your point, parents in search of better schools possibly over-extended themselves in search of homes in better areas thereby helping exacerbate the housing bubble (that is your point right?). But, that is a miniscule aspect of the crisis as a whole and not a relevant factor in my opinion.

I agree with MHettel in some respects namely, a herd mentality by consumers and lenders alike got us in this mess. I can't agree though, that all consumers are at fault. Some, (including members of my family) budgeted wisely and bought a house within their means only to lose their jobs in a down economy and watch their houses plummet in value. I don't blame people in that situation for walking away if it's the only option left.

[dc_x]

So many victims.

How bout this:

Want your kids to go to a better school? Get a better job!

Want a bigger house? Make more money!


I'll buy, to SOME DEGREE, the people that dealt with medical emergencies. But that wasn't some epedemic or phenomenon that just casue the housing meltdown. medical emergencies have ALWAYS been around, and are already "baked in" to historical foreclosure numbers.

And what the hell is an "unexpected bill." Seriously. What is that? "honey got another bill today for something we didn't buy and for somethign we didn't know about, I gues we should just default on the mortgage." WTF is that?

People didn't read their mortgage docs? Not my problem.
Didn't understand them? Not my problem.

This whole mess is about collective ignorance. There are no victims. Nobody forced anyone to buy a house or sign a document.

You'll never get elected to public office with that attitude. All the ills of the world are the fault of big business and the government. You can't blame people.

[bobbiemcgee]

A few unexpected bills I've had over the years: Car engine blew up (2). Transmission blew up (2). Kids illnesses I thought were insured - they weren't. Braces. Kids college tuition went up 12-25% in 4 yrs. Kids car's blew up. Hot Water heater blew up. A/C and all duct work had to be replaced due to well going dry (was heated water system). Roof problems. Are you kidding me?

[smileyy]

I think that is the root issue for most people. They are HAPPY to consider it an investment and collect on the upside of real estate values, but as soon as it doesn't work out they look for a bagholder.

That's funny, because the banks who created CDOs fueled by subprime lending, profitted from them briefly, and then watched them destroy most of the banking industry had no trouble passing that bag along to the government.

Apparently people are small enough to be allowed to fail, but banks aren't.

[MHettel]

You'll never get elected to public office with that attitude. All the ills of the world are the fault of big business and the government. You can't blame people.

Don't worry about me not being elected to public office. Not exactly my agenda.

[MHettel]

A few unexpected bills I've had over the years: Car engine blew up (2). Transmission blew up (2). Kids illnesses I thought were insured - they weren't. Braces. Kids college tuition went up 12-25% in 4 yrs. Kids car's blew up. Hot Water heater blew up. A/C and all duct work had to be replaced due to well going dry (was heated water system). Roof problems. Are you kidding me?

Yes, because car problems, home maintenance, medical care and tuition increases could NEVER be anticipated.

That's like predicting the sun will come up tomorrow.

[MHettel]

That's funny, because the banks who created CDOs fueled by subprime lending, profitted from them briefly, and then watched them destroy most of the banking industry had no trouble passing that bag along to the government.

Apparently people are small enough to be allowed to fail, but banks aren't.

And keep in mind, I worked at a huge bank that was selecetd to be the "sacrifical lamb" so Tarp could get passed. I lost my job and a BOATLOAD (to me) of money in company stock etc. But I didn't overextend. Heck, I had a 15 year fixed loan that I was halfway through.

Certain banks were mortgage machines, and others turned mortgages into CDO's and other derivatives of mortages.

Citi, JP Morgan and Bank of America ALL had failed. JP Morgan was gifted WaMu to provide liquidity, and Wachaovia was given to Citi before Wells stepped in and foiled the govt's plan to provide that behind the scenes bailout.

JP Morgan has a $1TRILLION dollar derivatives book. That thing would have come crumbling down and seriously taken the WHOLE WORLD with it. Did you read Snipe's crazy post about the end of society? That was the doomsday scenario.

But look today, and who is TOTALLY untarnished? JP Morgan, thanks to our good old govt.

[Snipe]

It is often overlooked, but government schools had a hand in the housing bubble. .


Can't really agree with this. I understand your point, parents in search of better schools possibly over-extended themselves in search of homes in better areas thereby helping exacerbate the housing bubble (that is your point right?). But, that is a miniscule aspect of the crisis as a whole and not a relevant factor in my opinion.



You do understand my point. And it isn't just my point.

Robert Frank is an economics professor at Cornell. He sometimes writes for the New York Times and the Washington Post. This article appeared in the Post:

Don't Blame All Borrowers (http://www.washingtonpost.com/wp-dyn/content/article/2008/04/25/AR2008042502783.html)


Even in the 1950s, one of the highest priorities of most parents was to send their children to the best possible schools. Because the labor market has grown more competitive, this goal now looms even larger. It is no surprise that two-income families would choose to spend much of their extra income on better education. And because the best schools are in the most expensive neighborhoods, the imperative was clear: To gain access to the best possible public school, you had to purchase the most expensive house you could afford.

But what works for any individual family does not work for society as a whole. The problem is that a "good" school is a relative concept: It is one that is better than other schools in the same area. When we all bid for houses in better school districts, we merely bid up the prices of those houses.

In the 1950s, as now, families tried to buy houses in the best school districts they could afford. But strict credit limits held the bidding in check. Lenders typically required down payments of 20 percent or more and would not issue loans for more than three times a borrower's annual income.

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the intervening decades. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families' ability to bid for housing.

The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to send its children to schools of at least average quality. (How could a family aspire to less?) But if a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.

Matthew Yglesias (http://www.theatlantic.com/politics/archive/2008/04/the-house-school-treadmill/44525/)adds: "there clearly is some positional component here and I think Frank's analysis explains at least some of what we've seen." Doesn't sound like Yglesaias thinks it is miniscule.

Timothy Lee of the CATO Institute responds thusly:


This is an eloquent indictment of our perverse system of linking schools to real estate. We don’t generally limit access to hospitals, libraries, or colleges by geography, and there’s no good reason children’s schools should be determined that way either. People should be able to live wherever they want, and then they should be free to send their children to any school that meets their needs. There are a variety of ways to allocate space in the most sought-after schools—academic merit, aptitude in the school’s area of focus, demographic diversity, or by lottery—that would be more reasonable than our current policy of arbitrary geographic boundaries.

And yes, some schools would choose students based on their ability to pay. What Frank’s article nicely illustrates is that our current system of geographically-based school assignment already segregates children by their parents’ income, it just does so in an unnecessarily cumbersome manner. If we had a free market in education, parents who wanted to invest in sending their children to a better school would be able to do so directly, instead of having to buy more house than they might want just so they can get a spot at a better school.

The most important thing to note, though, is that the scarcity of good schools Frank identifies is not an inherent fact about the universe, but a consequence of the public school monopoly. In a competitive education market, a shortage of good schools in a given area would spur people to either start new schools or expand the best of the existing ones. But the public school system has few mechanisms for doing either of those things (charter schools are a very limited mechanism for starting innovative public schools). Which means that the supply of good public schools is artificially limited, leading parents to bid up their price. The way to alleviate the shortage of good schools is not to re-regulate the mortgage market, but to reform the education system so that it’s easier to start and expand high-quality schools. Few things would do that as effectively as a robust program of school choice.


I do not think that government schools have a miniscule effect on housing patterns. It is clear to me that they have a huge effect. They do in Cincinnati. Cross the CPS boundry into Anderson Township and the prices climb quickly. I am talking right over the line. This street is CPS, that street is Anderson Township and I bet the difference in price is six figures for comparable homes. Cross the boundry from CPS into Wyoming and you find the same thing. Go from Westwood to Green Township and the same pattern emerges.

My brother lives up in Mason, and just about every single family on the street has kids. I don't think any old folks live in his development. All young couples as far as the eye can see. My kids go up there for Halloween. It is a swarm. Did all those young adults grow up dreaming of living in Mason, Ohio? Do their children figure into the decision?

It isn't hard to do the math. Private schools are expensive and they range in cost from around $4,000 to $10,000 (and even more if you have the green for the elite). If you have two kids and are spending $12,000 for both of them that is another $1,000 a month you could be spending on a house outside of the Cincinnati Public School district. Another $1,000 to your mortgage payment could add about $170,000 in house if you bought in a good school district. People do the math. They leave. Other parents follow. They don't want their kids left behind. Maybe they really can't afford an extra $170,000 of house, but they will be damned if they are gonna betray their own blood. And once everyone starts moving you feel like a fool if you stay behind. Herd mentality for sure.

I grew up in Westwood. Just about everyone I knew from Westwood lives somewhere else, and those homes are more expensive than Westwood. When people get married and have children they generally move to good school districts. For many families that is the single most important thing on the list. So no, I don't think it is miniscule at all. Goverment schools have had an impact on the housing bubble and housing patterns. My sources gave you an economics prof (contributor to the Times and the Post), a lefty like Yglesias, and the libertarian CATO institute.

Imagine if you could only go shopping at your neighborhood supermarket. People would compete to get in neighborhoods with good shopping markets with fresh, abundant and delicious food. It sounds silly, but why do we connect schools to homes? We don't do it with supermarkets, or medical care. We do it with schools, and it has a dramatic effect on the housing market. I am surprised that this is news.

[Snipe]

JP Morgan has a $1TRILLION dollar derivatives book. That thing would have come crumbling down and seriously taken the WHOLE WORLD with it. Did you read Snipe's crazy post about the end of society? That was the doomsday scenario.



Sounds like my crazy ideas were a little too close for comfort.

[Snipe]

Imagine if you could only go shopping at your neighborhood supermarket. People would compete to get in neighborhoods with good shopping markets with fresh, abundant and delicious food. It sounds silly, but why do we connect schools to homes? We don't do it with supermarkets, or medical care. We do it with schools, and it has a dramatic effect on the housing market. I am surprised that this is news.

I should amend this argument.

The government has a monopoly on schools, with 90+ percent of the take. Most of the urban schools in Cincinnati are bad. Some of them or so bad the middle class white world couldn’t even fathom how bad they are. Teachers try hard only not to let the blood run like a river in their classrooms. Lots of learning going on there.

Imagine if you could only go shopping at your neighborhood supermarket. Now imagine that the government had a monopoly in the supermarket industry with a history of bad performance in certain areas that was not going to change. Some supermarkets sell questionable meat and not so fresh produce, and other neighborhoods had an abundant supply of the best available.

It is crazy to imagine, but people would work hard to get to where the good food is. Who wants to live with questionable meat? We don't do that with supermarkets. We don't do it with health care. We don't do that with college education. Where you live doesn't tie you down to anything except your children’s schools. And for some people that is the biggest decision that they will ever make.

People love their children, and I am sure than many entered into risky situations where they could default and even go bankrupt to give their children a better life. It is admirable in a way even. They took the risk not for profit but for their kids. Then the price of gas went up, inflating their cost of commuting and buying the products they need. Then the economy fell out and maybe they experienced a loss of income. Many people live at the margins. Some live at the margins because they refinanced their house and went on vacation or bought a boat. Some live at those same margins to put their kids through the best school they could buy. I sympathize with the parents that risked bankruptcy and foreclosure for their kids. They never should have been given those loans. In the future I hope they won't be given those loans. But they got invited into the better schools and they took it for the kids. They have my sympathy.

We say homeless and not bum today. A homeless person could have lost their home last night in a fire. They have my sympathy. A bum could be a deranged addicted criminal who never gave life good effort. He doesn't get my sympathy. Same thing with housing. Some good people with good intentions made bad long term decisions. And some bad people abused the system for speculative gain and lost and now take it to court to stay as long as they can before they walk away for us to hold the bag.

[GuyFawkes38]

Snipe makes some great points. As Snipe notes, there is some public school competition in the suburbs. If West Chester's schools went downhill, housing values would drop because people would move to a suburb with a better school district. West Chester would quickly respond by making changes so they compete better with other suburbs.

Of course, that can't happen in the city of Cincy where lots of people are stuck.

It's ridiculous to limit school competition. And that's exactly what we are doing by tying it to houses.

[Porkopolis]

Snipe makes some great points. As Snipe notes, there is some public school competition in the suburbs. If West Chester's schools went downhill, housing values would drop because people would move to a suburb with a better school district. West Chester would quickly respond by making changes so they compete better with other suburbs.

Of course, that can't happen in the city of Cincy where lots of people are stuck.

It's ridiculous to limit school competition. And that's exactly what we are doing by tying it to houses.

Would West Chester compete by voting yes or no on their levy? Just curious, as the citizens of Lakota seem to want a first class school system while paying no taxes.

[GuyFawkes38]

Would West Chester compete by voting yes or no on their levy? Just curious, as the citizens of Lakota seem to want a first class school system while paying no taxes.

Who knows. That's for the people of West Chester to decide.

But that's the beauty of competition amongst the suburbs. If the levy doesn't improve the schools, it will directly hurt house prices.

Indeed, there's a big incentive to question needless spending on schools.

[Kahns Krazy]

Why is it when Snipe gets involved in a conversation, it always goes in one or two directions? I realize in some areas, schooling has excerbated the housing crisis, but it's not the cause of it. If it were simply about better schools, the value of homes would be moving geographically, not declining overall.

[XULucho27]

Good articles Snipe, they present a point of view that I wasn't familiar with. "Miniscule" is perhaps too strong of a word to describe the impact on the housing bubble of families searching for better homes/schools.

Big picture however, I'm still inclined to believe that it's a smaller part of the problem when compared to say, de-regulatory reform in the mid to late 1990's, or rampant investment by Government Sponsored Enterprises in sub-prime assets, or forecasting housing prices to rise in perpetuity.

[Snipe]

Why is it when Snipe gets involved in a conversation, it always goes in one or two directions? I realize in some areas, schooling has excerbated the housing crisis, but it's not the cause of it. If it were simply about better schools, the value of homes would be moving geographically, not declining overall.

I am a one trick pony Kahns.

I said in passing that it is often overlooked that government schools had a hand in the housing bubble. That was disputed, and Lucho said it would have been a "miniscule aspect". I then made my case that the effect of government schools was not miniscule.

I did not say that government schools are the sole cause of the housing bubble. I don't think there is a sole cause of the housing bubble. I think that government schools had a hand in the housing bubble, and I think that is the case.

[Snipe]

Good articles Snipe, they present a point of view that I wasn't familiar with. "Miniscule" is perhaps too strong of a word to describe the impact on the housing bubble of families searching for better homes/schools.

Big picture however, I'm still inclined to believe that it's a smaller part of the problem when compared to say, de-regulatory reform in the mid to late 1990's, or rampant investment by Government Sponsored Enterprises in sub-prime assets, or forecasting housing prices to rise in perpetuity.

Things like a housing bubble happen for a variety of reasons. Republicans and Democrats alike pushed for making housing easier to come by, especially for the poor and minorities. George Bush had his "ownership society". People looked at the way that owners took care of their stuff, compared neighborhoods with a strong percentgage of owners to neighborhoods that consist mainly of renters and determined that ownership was a better alternative. An ownership agenda was established. It was bi-partisan. I have to admit that some of the arguments sounded pretty good to me too.

[Kahns Krazy]

I am a one trick pony Kahns.

I said in passing that it is often overlooked that government schools had a hand in the housing bubble. That was disputed, and Lucho said it would have been a "miniscule aspect". I then made my case that the effect of government schools was not miniscule.

I did not say that government schools are the sole cause of the housing bubble. I don't think there is a sole cause of the housing bubble. I think that government schools had a hand in the housing bubble, and I think that is the case.

I don't understand what was different about government schools from 1995-2005 that wasn't the case in 1985-1995, for example. I understand people move for schools, but that isn't new at all.

[Xman95]

I don't understand what was different about government schools from 1995-2005 that wasn't the case in 1985-1995, for example. I understand people move for schools, but that isn't new at all.

I think in many areas the quality of the schooling continued to decline to a point that many people thought those schools were no longer an option for their children. In addition, as Snipe pointed out, the Clinton and Bush years made home ownership easier. That allowed people, who didn't previously have the means to move/own a home, to get outta Dodge and find better school districts.

You're correct that moving for schools is not new. But it seems even more people may have had reasons and, perhaps more importantly, the means to move than in the past.

[Kahns Krazy]

I think in many areas the quality of the schooling continued to decline to a point that many people thought those schools were no longer an option for their children. In addition, as Snipe pointed out, the Clinton and Bush years made home ownership easier. That allowed people, who didn't previously have the means to move/own a home, to get outta Dodge and find better school districts.

You're correct that moving for schools is not new. But it seems even more people may have had reasons and, perhaps more importantly, the means to move than in the past.

Which leads me back to the financing being the issue, not the fact that governments are involved in schools. The schools were always there, but it got cheaper to move there.

Some of the biggest housing busts happend in Tampa, Las Vegas, Naples, Phoenix, Miami, and L.A. Is there something about the schools in these cities that is different than other cities? Those cities don't strike me as places I would move for schooling.

[GuyFawkes38]

Things like a housing bubble happen for a variety of reasons. Republicans and Democrats alike pushed for making housing easier to come by, especially for the poor and minorities. George Bush had his "ownership society". People looked at the way that owners took care of their stuff, compared neighborhoods with a strong percentgage of owners to neighborhoods that consist mainly of renters and determined that ownership was a better alternative. An ownership agenda was established. It was bi-partisan. I have to admit that some of the arguments sounded pretty good to me too.

Do you read Steve Sailer. He too comes down hard on Bush (ummm, not that I read Steve Sailer.....).

[Snipe]

I actually liked some of the principles in the ownership society or ownership agenda. Getting people to be more self sufficient and save for retirement is a good idea. Owning a home can be a damn good idea to, but not everyone is cut out for it. Promoting the values of ownership and responsibility are not exactly the same as relaxing the mortgage rules so everyone can buy a house though. We are learning some tough lessons?

Who is Steve Sailer?

[GuyFawkes38]

Who is Steve Sailer?

Really???!!! With the way you write, I have sometimes wondered if you are Steve Sailer.

He's kind of the rebel in the blog community (occasionally says really stupid stuff about race that I definitely don't endorse).

http://isteve.blogspot.com/

http://www.isteve.com/

I know you said you've read Marginal Revolution. Here is Cowen's opinion on Sailer:

http://www.marginalrevolution.com/marginalrevolution/2009/04/why-steve-saile.html