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rwsaunders
02-25-2010, 11:49 PM
Looking for a deal in Las Vegas....

Nearly one in four mortgages nationwide was in negative equity status as Dec. 31, 2009, up 600,000 from third quarter, according to a report released yesterday by First American CoreLogic.

Nevada is struggling with the nation’s worst equity situation, as 70% of all borrowers owe more than their homes are worth. Arizona follows with 51%, Florida with 48%, Michigan with 39%, and California rounds out the top five with 35% of all mortgages underwater.

Nevada’s statewide loan-to-value ratio is 123%, underwater nearly $25 billion. Arizona and Florida follow with 95% and 91% LTV respectively. Georgia is next at 80%.

News that California’s housing market is stabilizing showed in equity numbers; compared to other high negative-equity states, California had the smallest increase during the fourth quarter, only 0.4%. Nevada, Georgia and Arizona experienced the largest increases.

"Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners," said Mark Fleming, chief economist with First American CoreLogic. Fleming said because he expects home prices to only increase slightly during 2010, negative equity will remain a “dominant issue” in mortgage markets for “some time.”

veloduffer
02-26-2010, 06:14 AM
One of the issues of negative equity is people turning the keys over to the bank because they are so far under. There is a likelihood that the property value won't recover, so it becomes a depreciating asset and monetizing a loss.

On a philosophical front, we are becoming more of a secular society than religious one, so the moral responsibility of continuing to pay the mortgage is lessened (no social stigma). An example is Hong Kong, which has had property bubbles time and again but almost negligible housing defaults; and until a couple of years ago, personal bankruptcies were quite rare but are more common due to credit card debt.

In the US, foreclosures in good communities are competitive (ie bidding taking place) and the winners are ones that are able to pay in cash, since the mortgage process is taking much longer.

Ozz
02-26-2010, 08:00 AM
..."Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners," said Mark Fleming, chief economist with First American CoreLogic. Fleming said because he expects home prices to only increase slightly during 2010, negative equity will remain a “dominant issue” in mortgage markets for “some time.”[/I]
I would guess that not being able to make the payments under the terms of the loan is what is "driving foreclosures"....the negative equity problem only arises when the homeowner is trying to sell the home.

Which it probably is significant for homeowner who were hoping to buy and sell homes as an investment rather than actually live in them....

Not to mention the problem of people buying more home than they could afford, under loan terms they did not understand or chose to ignore.

Ken Robb
02-26-2010, 09:24 AM
inability to make payments is sometimes the cause of defaults but some people just walk away from their pledge to pay. They didn't put much if any $$ down so they have zero equity in a depreciated home and they feel they are "buying" the property again for more than it's now worth.

RPS
02-26-2010, 09:33 AM
On a philosophical front, we are becoming more of a secular society than religious one, so the moral responsibility of continuing to pay the mortgage is lessened (no social stigma). An example is Hong Kong, which has had property bubbles time and again but almost negligible housing defaults; and until a couple of years ago, personal bankruptcies were quite rare but are more common due to credit card debt.
On the housing front, this morning’s report that seasonally-adjusted existing home sales are down is not good. :(

On a philosophical front, I often question the premise of whether there is much of a connection between religion and personal responsibility. I agree with you that there is less social stigma, but I have a hard time connecting that with religion. Over the years I’ve known many irresponsible religious characters and have also known many righteous non-religious types who anyone could seal a deal with a simple hand shake – men of their word, so to speak. And then there is also the argument that churches are full of sinners. ;)

veloduffer
02-26-2010, 09:45 AM
On the housing front, this morning’s report that seasonally-adjusted existing home sales are down is not good. :(

On a philosophical front, I often question the premise of whether there is much of a connection between religion and personal responsibility. I agree with you that there is less social stigma, but I have a hard time connecting that with religion. Over the years I’ve known many irresponsible religious characters and have also known many righteous non-religious types who anyone could seal a deal with a simple hand shake – men of their word, so to speak. And then there is also the argument that churches are full of sinners. ;)

I think I should substitute moral for religion and agree it is personal responsibility. It's part of the reason why American society is so litigious.

On the other hand, corporations renege on contracts all the time. So financial CEOs shouldn't throw rocks in glass houses.

Joellogicman
02-26-2010, 10:12 AM
Which it probably is significant for homeowner who were hoping to buy and sell homes as an investment rather than actually live in them....

or California. A significant portion of the boom in Southern Nevada, and somewhat less in Arizona and Florida was fueled by flippers.

To Veloduffer's point, people who bought houses as an investment probably see walking away from them pretty much the same way any business views walking away from a money losing deal.

There was an interesting guest opinion piece in the NYT a few weeks ago where the author argued that by losing their investment and property rights in foreclosure, the defaulting mortgage holders are in fact paying the penalty as provided in the mortgage contract. Arguing an additional moral obligation implied in contract beyond the agreed upon penalty is wholly outside established understanding of what is meant by the rule of law.

BengeBoy
02-26-2010, 11:04 AM
Let's not kid ourselves. People are walking away.

I lived in Houston during the oil bust of the mid-80's -- it was the same thing. People had "stretched" to get into tiny starter houses way out in the suburbs, and when the oil bust hit, and a bunch of people lost their jobs, house values started to drop.

Eventually, even the people who still had their jobs felt like chumps for making payments on houses with substantial negative equity and no short-term hope of recovery. They walked away by the *thousands,* and moved into houses they could not have afforded closer to their jobs, bigger, in nicer neighborhoods.

The banks were so desperate to unload the homes they had foreclosed on that a homeowner could default on a loan from bank A and sign a contract on a house available from the distressed property division of bank B, with little hassle. As long as you weren't one of the laid off people -- and you could show the bank a steady income stream -- it was possible to get a new mortgage, even if you had defaulted on a prior one.

There is an increasing amount of anecdotal evidence and real reports showing this is happening across the US today.

veloduffer
02-26-2010, 11:33 AM
Besides one's house being underwater, you can see where it would make sense financially to walk away. Given the rising cost of healthcare and retirement (fewer pensions, weak investment returns on retirement funds, rising college costs), it can come down to a choice of accepting financial difficulty for the rest of one's life.

Tobias
02-26-2010, 12:02 PM
There was an interesting guest opinion piece in the NYT a few weeks ago where the author argued that by losing their investment and property rights in foreclosure, the defaulting mortgage holders are in fact paying the penalty as provided in the mortgage contract. Arguing an additional moral obligation implied in contract beyond the agreed upon penalty is wholly outside established understanding of what is meant by the rule of law.
To be clear, who is the "defaulting mortgage holder"? The bank or home owner? :confused:

gone
02-26-2010, 12:17 PM
The dichotomy between what's expected from homeowners versus investment banks is interesting to me. Homeowners are expected to "do the right thing" and keep paying their mortgage even when it makes absolutely zero financial sense to do so and yet corporations walk from loans all the time and call it a "strategic decision". Goldman Sachs walked from 5 commercial properties in San Francisco in the last 90 days. They were deeply under water with no signs of coming out anytime soon. They ran the numbers, saw it didn't make sense to keep paying and walked. IMHO, homeowners should do the same. Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do.

Makes no sense to me. And for the record, I've never been so much as late with any payment any time in my life. Having said that, I just don't believe in being stupid financially.

malcolm
02-26-2010, 12:25 PM
tip of the iceberg

Joellogicman
02-26-2010, 12:28 PM
To be clear, who is the "defaulting mortgage holder"? The bank or home owner? :confused:

I originally typed in the legal term mortagagor meaning the borrower. Mortgagee and mortgagor are tend to confuse people not in the industry, as the meaning is the exact opposite of what some familiar with terms such as say, lessor and lessee.

Changing to what I thought would be easier to read I became distracted and wound up being more confusing.

sloji
02-26-2010, 12:31 PM
This is just the start...!

Joellogicman
02-26-2010, 12:37 PM
The dichotomy between what's expected from homeowners versus investment banks is interesting to me. Homeowners are expected to "do the right thing" and keep paying their mortgage even when it makes absolutely zero financial sense to do so and yet corporations walk from loans all the time and call it a "strategic decision". Goldman Sachs walked from 5 commercial properties in San Francisco in the last 90 days. They were deeply under water with no signs of coming out anytime soon. They ran the numbers, saw it didn't make sense to keep paying and walked. IMHO, homeowners should do the same. Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do.

The mortgagor was given a loan after going through a process created as much by the banks as any player in the business.

In many cases, the troubled mortgagors have asked the bank to reduce the principal or interest of the loan to better reflect reality. The bank's by and large are refusing to do so. If pressed, I am sure the banks would explain they have a business obligation to their investors to get the maximum possible profit out of their business.

That leaves many a mortgagor to look to the mortgage for the only possible business remedy available: surrendering claim and title to the property to the mortgagee.

sloji
02-26-2010, 12:42 PM
The dichotomy between what's expected from homeowners versus investment banks is interesting to me. Homeowners are expected to "do the right thing" and keep paying their mortgage even when it makes absolutely zero financial sense to do so and yet corporations walk from loans all the time and call it a "strategic decision". Goldman Sachs walked from 5 commercial properties in San Francisco in the last 90 days. They were deeply under water with no signs of coming out anytime soon. They ran the numbers, saw it didn't make sense to keep paying and walked. IMHO, homeowners should do the same. Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do.

Makes no sense to me. And for the record, I've never been so much as late with any payment any time in my life. Having said that, I just don't believe in being stupid financially.

What he said.

Ozz
02-26-2010, 12:46 PM
...Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do. .... Having said that, I just don't believe in being stupid financially.
Because they promised they would pay the money back that was loaned to them....not being "financially stupid" also means not paying more for a house than you can afford.

I am not saying what Goldman did (that you reference) is OK. They will probably be sued by the lenders, lawyers will get paid, and Goldman and the lenders will settle upon an agreed upon sum.

Honoring your commitments speaks to ones character, and walking away "because it makes business sense" is a cop out.

Go ahead, call me old fashioned. :cool:

Joellogicman
02-26-2010, 12:56 PM
Because they promised they would pay the money back that was loaned to them....not being "financially stupid" also means not paying more for a house than you can afford.

Borrower will pay back money, or borrower will surrender possession of the property and any claim to title to the lender. These borrowers are not asking the lender to give them anything not in the agreement. They are simply exercising a term provided in the loan agreement.

It would be another thing altogether if the loan agreement provided the borrower promised to pay back the loan even if it meant starving in the weeds behind the 7-11. Call me old fashioned, but if that is what the lenders expected, they should have included it in the agreement.

Benjamin
02-26-2010, 12:58 PM
for those interested, here's a good NPR Planet Money podcast about people walking away from mortgages.

link (http://www.npr.org/blogs/money/2010/01/podcast_to_walk_away_or_stay.html)

the issues of social stigma and responsibility to the community are interesting, but it seems that it's become a pretty cut and dry decision for a lot of folks who are looking out for #1.

other episodes discuss people who are trying to get their properties foreclosed upon so they can rid themselves of the obligation (rather than just being in default), but banks, perhaps because they are so overwhelmed, are just ignoring the non-paying homeowners and not beginning foreclosure proceedings.

Ralph
02-26-2010, 01:06 PM
I always thought signing a mortgage was a contract. Something you are legally (and morally) bound to honor. The fact the house is underwater is kinda irrelavant. Except that the collateral for the loan is now worth less than the loan balance.

Our system makes allowances for situations where people can't pay on the loans. It's called bankruptcy court. A judge rules on whether or not you are bankrupt.

I don't know what you call this trend to walk away from your obligations, just because it's investment potential is gone. Actually....I think I do know what to call it.

nm87710
02-26-2010, 01:07 PM
the dichotomy between what's expected from homeowners versus investment banks is interesting to me. Homeowners are expected to "do the right thing" and keep paying their mortgage even when it makes absolutely zero financial sense to do so and yet corporations walk from loans all the time and call it a "strategic decision". Goldman sachs walked from 5 commercial properties in san francisco in the last 90 days. They were deeply under water with no signs of coming out anytime soon. They ran the numbers, saw it didn't make sense to keep paying and walked. Imho, homeowners should do the same. Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do.

Makes no sense to me. And for the record, i've never been so much as late with any payment any time in my life. Having said that, i just don't believe in being stupid financially.

+1

Joellogicman
02-26-2010, 01:15 PM
I always thought signing a mortgage was a contract. Something you are legally (and morally) bound to honor. The fact the house is underwater is kinda irrelavant. Except that the collateral for the loan is now worth less than the loan balance.

Our system makes allowances for situations where people can't pay on the loans. It's called bankruptcy court. A judge rules on whether or not you are bankrupt.

I don't know what you call this trend to walk away from your obligations, just because it's investment potential is gone. Actually....I think I do know what to call it.

I believe every state in the union has statutes providing the mechanism for foreclosure.

To be sure, after the mortgagee liquidates the foreclosed property, the mortgagor remains indebted to the mortgagee for the balance of the loan.

Most mortgagees do not bother pursuing because there is usually no easy way to collect from someone without propery.

Joellogicman
02-26-2010, 01:17 PM
Our society will unravel quickly if people abandon personal integrity and run their lives as though they are an Inc, Corp or LLC. :crap: :crap: :crap:

Corporations and other legal entities have some of the constitutional rights individuals do?

Why shouldn't individuals in turn have the right to make the business decisions corporations make?

RPS
02-26-2010, 01:35 PM
I believe every state in the union has statutes providing the mechanism for foreclosure.

To be sure, after the mortgagee liquidates the foreclosed property, the mortgagor remains indebted to the mortgagee for the balance of the loan.

Most mortgagees do not bother pursuing because there is usually no easy way to collect from someone without propery.
I was going to bring this up. As I recall the fine print makes it clear that if I default on my mortgage I'm still indebted for any remaining balance, "plus all legal expenses and the like".

Walking away shouldn't be an option one does for financial gain. People buy houses as a home, but also as an investment. As with any investment, it can be good or bad. We can't just say that because the investment didn't turn out the way the buyer expected that he can just cut his debt down to zero by simply walking away. That's not what the contract states in simple English. And if we are not going to honor and/or enforce legal and binding contracts then all hell is going to break loose.

Benjamin
02-26-2010, 01:50 PM
I always thought signing a mortgage was a contract. Something you are legally (and morally) bound to honor. The fact the house is underwater is kinda irrelavant. Except that the collateral for the loan is now worth less than the loan balance.

just curious (and slight devil's advocate here), where do morals come into it?

there is nothing in the mortgage saying you're a bad person if you don't follow through on your end of the contract.

Vancouverdave
02-26-2010, 01:51 PM
Is it possible that speculation-driven housing inflation in some regions produced housing values that could be seen as less than legitimate? Is it also possible that government-enforced limits on the selling price of real property could be part of a solution to all this?

Ozz
02-26-2010, 01:59 PM
just curious (and slight devil's advocate here), where do morals come into it?

there is nothing in the mortgage saying you're a bad person if you don't follow through on your end of the contract.
Ask 5 year old whether they should keep their promises (contracts) and get back to us. ;)

Joellogicman
02-26-2010, 01:59 PM
I was going to bring this up. As I recall the fine print makes it clear that if I default on my mortgage I'm still indebted for any remaining balance, "plus all legal expenses and the like".

Walking away shouldn't be an option one does for financial gain. People buy houses as a home, but also as an investment. As with any investment, it can be good or bad. We can't just say that because the investment didn't turn out the way the buyer expected that he can just cut his debt down to zero by simply walking away. That's not what the contract states in simple English. And if we are not going to honor and/or enforce legal and binding contracts then all hell is going to break loose.

so usually the banks sell the balance for pennies on the dollar to collection agencies. And the collecton industry will tell you that an under or unemployed person with no real property is not going to get a whole lot of attention as anything more than the occasional demand letter and asset check to see whether the debtor lucked into a windfall is good money after bad.

Moreover, mortgagees can and do work out deals with property owners to give up the property without a fight in exchange for not pursuing the balance.

Case in point the Peter Cooper/Stuyvesant Town Village. Tishman Speyer and Blackrock's were able to walk away from $5.4 billion - the single largest real estate deal in U.S. history - without liability for whatever the balance of the debt may come to be.

Joellogicman
02-26-2010, 02:02 PM
Ask 5 year old whether they should keep their promises (contracts) and get back to us. ;)

If breaking the promise means they get one spanking should they volunteer for three - and I think the kid says heck no. Especially if the person doing the spanking is perfectly willing to break a promise when it makes business sense.

RPS
02-26-2010, 02:03 PM
just curious (and slight devil's advocate here), where do morals come into it?

there is nothing in the mortgage saying you're a bad person if you don't follow through on your end of the contract.
It's not about morals, although maybe it should be. The point that is being missed here is that it's not an option. It's a requirement based on a legal contract.

If a person buys a house and it goes up in value a huge amount, the bank can't come back to the owner and request (or require) that the owner share more of the profits, right? That's not an option either (unless it was made part of the contract).

Contracts have to be in black and white.

Joellogicman
02-26-2010, 02:09 PM
It's not about morals, although maybe it should be. The point that is being missed here is that it's not an option. It's a requirement based on a legal contract.

If a person buys a house and it goes up in value a huge amount, the bank can't come back to the owner and request (or require) that the owner share more of the profits, right? That's not an option either (unless it was made part of the contract).

Contracts have to be in black and white.

and most likely the interest would have increased were the property value to increase as interest rates increase with inflation.

The original lenders knew - or should have known - that property values would not signficant increase any time soon if ever. They did not care because they were making money on trading the mortgage securities.

The banks were accepting promises from buyers knowing many were hollow because they wanted to make money from their hollow promise to the customers buying the securities. Indeed, it turns out some lenders were at once selling the securities and betting they would fail. And profiting handsomely doing so.

RPS
02-26-2010, 02:10 PM
so usually the banks sell the balance for pennies on the dollar to collection agencies. And the collecton industry will tell you that an under or unemployed person with no real property is not going to get a whole lot of attention as anything more than the occasional demand letter and asset check to see whether the debtor lucked into a windfall is good money after bad.

Moreover, mortgagees can and do work out deals with property owners to give up the property without a fight in exchange for not pursuing the balance.

Case in point the Peter Cooper/Stuyvesant Town Village. Tishman Speyer and Blackrock's were able to walk away from $5.4 billion - the single largest real estate deal in U.S. history - without liability for whatever the balance of the debt may come to be.
I must not get your point. :confused: What are you trying to say? That the ends justify the means?

If the parties can agree to terms that terminate their agreement (i.e. – contract) more power to them. But we can't have unilateral decision making by either side. This would bring our entire system down.

Ken Robb
02-26-2010, 02:13 PM
Because they promised they would pay the money back that was loaned to them....not being "financially stupid" also means not paying more for a house than you can afford.

I am not saying what Goldman did (that you reference) is OK. They will probably be sued by the lenders, lawyers will get paid, and Goldman and the lenders will settle upon an agreed upon sum.

Honoring your commitments speaks to ones character, and walking away "because it makes business sense" is a cop out.

Go ahead, call me old fashioned. :cool:

we are both old-fashioned. :beer:

Ralph
02-26-2010, 02:15 PM
just curious (and slight devil's advocate here), where do morals come into it?

there is nothing in the mortgage saying you're a bad person if you don't follow through on your end of the contract.


I understand your point. But when my grandfather borrowed some money several generations ago (for a couple years) to build his family a home, he and his banker just shook hands on the deal. They didn't see any difference in that kind of contract VS a signed contract. Even though our world is much more complicated now, and you sure wouldn't do that any more if you are a banker, in many people view, nothing much has changed regarding the obligation of both parties. If you didn't pay with a hand shake deal, you were certainly not considered a good person.

I remember my Dad telling me about 60 years ago...."all any of us really have is our integrity". Our word is our bond. I believe that to this day....even though it's a corny saying.

If I got a bank to agree to a short sale, or allowed a home to go into foreclosure, instead of asking them to agree to not hold me liable for their loss, I would instead ask then to transfer their loss into a long term loan for me to pay back. I would not hire a lawyer in a attempt to hide assets and pretend I did not have any assets. That's just how we were raised. I view some of these situations as an example of low moral character. Then there are legitimate situations....where stuff happens and people can't pay. That's just business.

Of course....being an old guy....I don't much believe in having mortgages last much beyond about 10-15 years either. I kinda figure if you can't pay off a house in 10-15 years, or pay for a car with a 3 or less year loan, you buying too much house or car. Again...a sign of my age I guess.

Joellogicman
02-26-2010, 02:15 PM
I must not get your point. :confused: What are you trying to say? That the ends justify the means?

If the parties can agree to terms that terminate their agreement (i.e. – contract) more power to them. But we can't have unilateral decision making by either side. This would bring our entire system down.

Probably told the lenders take back the property cleanly or we go to the messy route in Bankruptcy court.

In my opinion, the systemic problem here is not the lowly individual borrower, but the lenders allowing the system to get out of hand because there was so much to be made on the securities market.

The lenders created the system. They promoted it aggessively. They profited handsomely for a while. The ends certainly justified their means for a crazy dizzy while. Now that they are hurting they want to cry morals?

Ozz
02-26-2010, 02:18 PM
we are both old-fashioned. :beer:
:beer:

check your PM's

Joellogicman
02-26-2010, 02:18 PM
I understand your point. But when my grandfather borrowed some money several generations ago (for a couple years) to build his family a home, he and his banker just shook hands on the deal. They didn't see any difference in that kind of contract VS a signed contract. Even though our world is much more complicated now, and you sure wouldn't do that any more if you are a banker, in many people view, nothing much has changed regarding the obligation of both parties. If you didn't pay with a hand shake deal, you were certainly not considered a good person.

That bank probably did not sell the loan to investors and then hedge on the possibility that that loan would go bad either.

The banks indeed have changed wildly since that day. Why must the borrower remain static?

Ken Robb
02-26-2010, 02:22 PM
I believe every state in the union has statutes providing the mechanism for foreclosure.

To be sure, after the mortgagee liquidates the foreclosed property, the mortgagor remains indebted to the mortgagee for the balance of the loan.

Most mortgagees do not bother pursuing because there is usually no easy way to collect from someone without propery.

In California purchase money real estate loans on 1-4 unit buildings bought as a personal residence are exempt from risk of a deficiency judgment. This means that besides the moral obligation of their promise to repay the loan that they signed the buyers have no legal responsibility beyond surrendering the property. If the value of the property is lower than the amount owed the lender loses. The catch is that many people in default have refinanced since they purchased the property and these loans have no such protection for the borrower/owner. Lenders can still foreclose and get a lien against other assets of the borrower in default.

Joellogicman
02-26-2010, 02:43 PM
In California purchase money real estate loans on 1-4 unit buildings bought as a personal residence are exempt from risk of a deficiency judgment. This means that besides the moral obligation of their promise to repay the loan that they signed the buyers have no legal responsibility beyond surrendering the property. If the value of the property is lower than the amount owed the lender loses. The catch is that many people in default have refinanced since they purchased the property and these loans have no such protection for the borrower/owner. Lenders can still foreclose and get a lien against other assets of the borrower in default.

Seems the prudent California lender would be far more careful about how much money it puts at risk. But as we know, banks in California were among the more aggressive. Willing both to lend to people buying in subdivisions in isolated Central Valley subdivisions at prices most established suburbs could not get just a few years before and to provide second and third loans to homeowners already under water.

Going back to the post about the bank and the grandfather - traditional banks were more paternalistic. Following the New Deal era anyway, it was rare for banks to lend for speculative home buying. After deregulation, the paradigm changed. Banks made loans that on their face made no sense because trading on the loans was so lucrative.

Our grandfather's lender ran the process like a strict task master, making sure the property appraised out and matched grandad's salary and assets. The bubble lender on the other hand encouraged any one and everyone to borrow as much as possible.

Ken Robb
02-26-2010, 03:24 PM
Seems the prudent California lender would be far more careful about how much money it puts at risk. But as we know, banks in California were among the more aggressive. Willing both to lend to people buying in subdivisions in isolated Central Valley subdivisions at prices most established suburbs could not get just a few years before and to provide second and third loans to homeowners already under water.

Going back to the post about the bank and the grandfather - traditional banks were more paternalistic. Following the New Deal era anyway, it was rare for banks to lend for speculative home buying. After deregulation, the paradigm changed. Banks made loans that on their face made no sense because trading on the loans was so lucrative.

Our grandfather's lender ran the process like a strict task master, making sure the property appraised out and matched grandad's salary and assets. The bubble lender on the other hand encouraged any one and everyone to borrow as much as possible.

My career as a real estate broker began in 1972 and many loans then were approved and carried on the books at the local bank or branch so the underwriting was more accurate. The local bank manager knew that homes on certain sites were prone to settling, etc. I was amazed/amused,dismayed by some of the "comparables" used to justify loans by outa-town lenders and their appraisers.

PaulE
02-26-2010, 04:25 PM
so usually the banks sell the balance for pennies on the dollar to collection agencies. And the collecton industry will tell you that an under or unemployed person with no real property is not going to get a whole lot of attention as anything more than the occasional demand letter and asset check to see whether the debtor lucked into a windfall is good money after bad.

Moreover, mortgagees can and do work out deals with property owners to give up the property without a fight in exchange for not pursuing the balance.

Case in point the Peter Cooper/Stuyvesant Town Village. Tishman Speyer and Blackrock's were able to walk away from $5.4 billion - the single largest real estate deal in U.S. history - without liability for whatever the balance of the debt may come to be.

One of the foreclosure articles I recently read in the WSJ or NY Times said that California and another state, maybe Nevada, had laws limiting the lender's recourse in a mortgage foreclosure to the collateral of the house. In those 2 states, if the collateral isn't sufficient to repay the mortgage in default, the lender has no recourse against the borrower for repayment. As a result, borrowers in those 2 states are paying slightly higher interest rates for that "privilege". The article went on to question why foreclosures and jingle mail weren't higher in those states than what they are, and that a new wave of foreclosures and jingle mail may still be coming there when underwater borrowers decide it's finally time to use that "privilege" that they've paid for.

In the case of the Peter Cooper/Stuyvesant Town deal, I'd bet anything that Tishman Speyer and Blackrock set up a subsidiary LLC or partnership that was ring-fenced and the deal was financed with non-recourse debt by that entity. In that way, all Tishman and Blackrock had at risk was the equity they put into the deal, although that would no doubt be substantial in a deal like that. The 5 properties Goldman Sachs walked away from in the past 90 days were also no doubt financed the same way. With nonrecourse debt, if the deal doesn't work out and and generate enough cash to support the debt, the equity investors have no additional obligation to repay the debt.

veloduffer
02-26-2010, 04:36 PM
In the case of the Peter Cooper/Stuyvesant Town deal, I'd bet anything that Tishman Speyer and Blackrock set up a subsidiary LLC or partnership that was ring-fenced and the deal was financed with non-recourse debt by that entity. In that way, all Tishman and Blackrock had at risk was the equity they put into the deal, although that would no doubt be substantial in a deal like that. The 5 properties Goldman Sachs walked away from in the past 90 days were also no doubt financed the same way. With nonrecourse debt, if the deal doesn't work out and and generate enough cash to support the debt, the equity investors have no additional obligation to repay the debt.

Nearly all commercial property mortgages are non-recourse to the borrower. All at stake is their equity interest.

Most residential mortgages are recourse but it varies by state.

Joellogicman
02-26-2010, 04:41 PM
One of the foreclosure articles I recently read in the WSJ or NY Times said that California and another state, maybe Nevada, had laws limiting the lender's recourse in a mortgage foreclosure to the collateral of the house. In those 2 states, if the collateral isn't sufficient to repay the mortgage in default, the lender has no recourse against the borrower for repayment. As a result, borrowers in those 2 states are paying slightly higher interest rates for that "privilege". The article went on to question why foreclosures and jingle mail weren't higher in those states than what they are, and that a new wave of foreclosures and jingle mail may still be coming there when underwater borrowers decide it's finally time to use that "privilege" that they've paid for.

And again, to me at least, this underscores how far the banks strayed during the bubble years from the traditional paradigm. Limiting creditor recourse should have resulted in less lending. Instead, two of the bubble states apparently had such laws on their books.

In the case of the Peter Cooper/Stuyvesant Town deal, I'd bet anything that Tishman Speyer and Blackrock set up a subsidiary LLC or partnership that was ring-fenced and the deal was financed with non-recourse debt by that entity. In that way, all Tishman and Blackrock had at risk was the equity they put into the deal, although that would no doubt be substantial in a deal like that. The 5 properties Goldman Sachs walked away from in the past 90 days were also no doubt financed the same way. With nonrecourse debt, if the deal doesn't work out and and generate enough cash to support the debt, the equity investors have no additional obligation to repay the debt.

Almost certainly. The lenders in these cases were either completely duped or incredibly naive about the market. The amount paid for Cooper/Stuy was based on value per unit hundreds of thousands beyond what they could every have realized even at the time of the sale - the height of the Manhattan boom.

Joellogicman
02-26-2010, 04:42 PM
All at stake is their equity interest.

nt

Ken Robb
02-26-2010, 06:08 PM
the original lenders were not duped. They were paid to originate loans which they bundled and sold as packages to investors. Those investors now owned the bundle of mortgages and they then paid the loan originators or other financial institutions to service the loans by collecting payments, managing impound accounts, etc. These institutions are now making the same or greater profits as they used to with NO RISK!

The originators might have had some local knowledge that would have precluded their making some loans for their own portfolios but they were paid to make loans that fit the national template from Fannie Mae, Freddie Mac, FAA, VA. etc. Local knowledge was not part of the equation for loan evaluation.

This was all dandy as long as values were rising 20% a year because within a couple of years even buyers who put no money down had 15-20% equity due to inflation and therefore the mortgage holder had some security in the property upon which they held the lien.

majorpat
02-26-2010, 06:10 PM
Wrote a prescient article for the Atlantic Monthly in 2005. In it he predicted a rough estimate of the current scenario but instead of walking away as people are actually doing, he said that they would have to be forcibly evicted in the event of foreclosure:

When the market collapsed, Americans didn't behave the way economic theory said they should. They behaved the way their predecessors in the Depression had: they stayed in their houses, stopped paying their mortgages, and waited for the banks to take the next step. Through much of the Midwest this was a manageable problem: the housing market had gone less berserk to begin with, and, as in the Great Depression, there was a longer-term, more personal relationship between customers and financiers. But in the fastest-growing markets—Orlando, Las Vegas, the Carolina Research Triangle, northern Virginia—the banks simply could not wait. The deal brokered at the White House Security-in-Shelter Summit was ingenious: federal purchase of one million RVs and mobile homes, many of them built at idle auto or truck factories; subsidies for families who agreed to leave foreclosed homes without being evicted by marshals, such that they could buy RVs with no payments for five years; and the use of land at decommissioned military bases for the new RV villages. But it did not erase the blogcam live broadcasts of families being evicted, or the jokes about the "Preachervilles" springing up at Camp Lejeune, the former Fort Ord, and the Philadelphia naval shipyard.

Check it out, he nailed some things, off on others but a pretty good read, nonetheless.

http://www.theatlantic.com/magazine/archive/2005/07/countdown-to-a-meltdown/4041/2/

Pat

hookookadoo
02-26-2010, 07:43 PM
The dichotomy between what's expected from homeowners versus investment banks is interesting to me. Homeowners are expected to "do the right thing" and keep paying their mortgage even when it makes absolutely zero financial sense to do so and yet corporations walk from loans all the time and call it a "strategic decision". Goldman Sachs walked from 5 commercial properties in San Francisco in the last 90 days. They were deeply under water with no signs of coming out anytime soon. They ran the numbers, saw it didn't make sense to keep paying and walked. IMHO, homeowners should do the same. Why sacrifice your kids college education, your retirement, etc., just to keep making payments on a home that might not be above water for 10 years or more? And yet, that's exactly what homeowners are expected to do.

Makes no sense to me. And for the record, I've never been so much as late with any payment any time in my life. Having said that, I just don't believe in being stupid financially.

Working my way through the thread. Lot of interesting comments. As for this situation with Goldman , there are some basic points that are worth noting:

1) a loan is a contract negotiated between a borrower and a lender. Nothing in this process gives Goldman an inherent advantage aside from their financial strength. However, because of their financial strength, relative to you and me, they will get looser terms in their contract. We as individuals can ask for similar terms but smart lenders will obviously refuse them(exception: see sub prime mortgage). :banana:

2) Along the same lines, Goldman cannot legally walk away any easier than an individual except for as allowed under their loan documents. The lender has full rights to pursue under the loan documents and will have to weigh the financial cost of doing so.

3) Where Goldman does differ slightly is that as a business entity they can in fact shield their liability via their legal status and (key point to follow) the lender accepts this risk. You too can acquire a property as a corporation but a smart lender will require a personal guaranty to effectively eliminate that corporate shield.

What is the common denominator? Goldman has the financial power to negotiate a better deal than the rest of us and in doing so can walk away easier. They do not have a legally granted right that you and I don't have they are just able to negotiate a looser contract that the lender is voluntarily willing to accept.

That's all I've got to say about that...
Forrest Gump

Climb01742
02-27-2010, 05:18 AM
Goldman has the financial power to negotiate a better deal than the rest of us and in doing so can walk away easier.

it's this the crux of the issue? leverage to renegotiate?

very good post, BTW.

CNY rider
02-27-2010, 06:38 AM
it's this the crux of the issue? leverage to renegotiate?

very good post, BTW.

Or as an old saying would have it:

If you owe the bank $100 you have a problem.
If you owe the bank $1 million the bank has a problem. :beer:

rwsaunders
02-27-2010, 10:14 AM
As Ken said, originators earn a commission from writing mortgages...the quality of the loan is the lender's issue. Couple that fact with lenders, eager to seek income from a region that is perhaps unfamiliar to them, you create a situation that's ripe for failure.

In addition to the bubble in residential home values, we are about to see an equally disturbing trend in commercial real estate. In that case, bank exposure is even more pronounced, as corporations typically have a "shield" between themselves and the lender, as well as between themselves and the vendors that they deal with.

The commercial real estate developers that I have dealt with, feel no shame in seeking bankruptcy, and view bankruptcy as a tool in doing business. I like to believe the majority of homeowners still have a sense of pride and obligation. When the TARP bailout was initiated however, a lot of people questioned, "why not me too?".

RPS
02-27-2010, 12:13 PM
Let's hope this doesn't become a trend.

"Frustrated Owner Bulldozes Home Ahead Of Foreclosure"

http://www.wlwt.com/news/22600154/detail.html

RPS
02-27-2010, 12:18 PM
P.S. -- I took the survey to see what others think, and was shocked to see that 78 percent think he did the right thing. Only 13 percent think he should be prosecuted for destroying a house he may not lawfully own.

hookookadoo
02-27-2010, 02:54 PM
In addition to the bubble in residential home values, we are about to see an equally disturbing trend in commercial real estate. In that case, bank exposure is even more pronounced, as corporations typically have a "shield" between themselves and the lender, as well as between themselves and the vendors that they deal with.

Very true. This is going to cause more bank failures in 2010 and potentially more than 2009. The failures are going to continue to be at the smaller regional and local banks as they are the ones who took on these type of riskier loans. Unlike the smaller banks, the big banks have plenty of traditional non-real estate loan business to choose from allowing them to limit their exposure to this type of cyclical asset as a percentage of their loan portfolio. There are obviously exceptions.