Mar022012

Delinquent mortgage squatters predominate high-end properties

The housing bust began when subprime borrowers were unable to make payments on their 2/28 loans. Subprime borrowers have less resources than other borrowers, so when they experience any financial distress, they immediately implode. The collapse of subprime in 2007 led to a large number of foreclosures in 2008, and housing began its death spiral. I have been bearish on high end properties since the beginning of the housing bust. So far, reality has not met up with my most dire predictions. Despite this fact, my basic analysis of the situation hasn’t changed. The high end is going to come down, and it will be very painful for those who have been spared to worst so far.

Market observers who really know what’s going on predicted the foreclosure virus would spread up the housing ladder. It was never the borrowers who were the problem, it was the loans they were given. These same toxic loans were given to every borrower class, so it was only a matter of time before high end borrowers defaulted in large numbers as well. The big difference between these groups is how they have been treated by lenders. Both groups are delinquent on their mortgage payments. Subprime borrowers were foreclosed on while prime borrowers have been allowed to squat.

Many casual observers have concluded the high end was not as distressed as the low end.

To date, homeowners in expensive neighborhoods have been better equipped to handle the housing downturn than those with the lowest priced real estate within the same city, says McCabe. Well-off homeowners who lost their jobs were more likely to have savings or retirement accounts they could dip into to pay their mortgage, says Brad Hunter, chief economist at Metrostudy, a housing market research and consulting company. Many of them also had valuable assets to sell, such as jewelry or cars, to stay afloat. But with the job market still weak, those still trying to find work could be running low on ways to pay their mortgage, says Hunter.

The reasons given above are largely bullshit. Many loan owners in high end neighborhoods quit paying their mortgages long ago. They have been allowed to squat by a banking system hoping to avoid the inevitable losses.

For the Costliest Homes, Foreclosure Comes Slowly

February 28, 2012 — By SHELLY BANJO And NICK TIMIRAOS

Michael Underwood hasn’t made a full mortgage payment on his four-bedroom house in San Francisco’s East Bay area since early 2008. But he has yet to be evicted from the home, which includes a lagoon-style pool carved into the property’s natural sandstone.

The Alamo, Calif., home that he bought in 1999 is now worth about $1.05 million, less than the $1.58 million that he owes after refinancing several times.

“I feel guilty, it bothers me,” says the 63-year-old former mortgage banker, who says he depleted much of his savings and sold assets, including jewelry, to make house payments after he initially ran into trouble. “This has been going on for, wow, four years.”

Mr. Underwood’s failure is very instructive. This guy works with mortgages and should have known better. Now he is old and broke, and the cash cow he was counting on to provide for his retirement has stopped giving milk. What is he to do?

At some point — and it should have been four years ago — this guy is going to be kicked to the curb and experience the unceremonious fall from entitlement. He lived the lifestyle of a Ponzi and pissed away well over half a million dollars in home equity. He accepted the false and foolish beliefs of the housing bubble, and now he must endure the consequences. It would be sad except that he is squatting in a million dollar mansion while he awaits the gallows.

His extended stay illustrates yet another consequence of the complex U.S. foreclosure system—and banks’ skittishness in disposing of certain large loans. A new analysis for The Wall Street Journal shows that high-end homeowners are able to remain in their houses, without making payments, for far longer than those with smaller mortgages.

Nationally, borrowers with loans of at least $1 million were in default for an average 792 days last year before banks repossessed their homes, according to an analysis by data provider Lender Processing Services. For loans under $250,000, the wait stood at an average 611 days—a difference of about six months. The numbers are current through November.

The intervals are especially long in states such as Connecticut, New York and Florida, where judges are required to approve foreclosures before banks take back properties.

The link between larger loans and longer foreclosures holds true in all but five states: South Dakota, North Dakota, Iowa, Rhode Island and Nebraska, states where there was a small or nonexistent sample of million-dollar foreclosures. In California, where foreclosures don’t have to go through the court system, the timeline averages 671 days for loans above $1 million and 445 days for loans below $250,000.

Lenders have not been foreclosing on high end borrowers because they know this will cause prices to crash. Lenders hoped a resurgent economy would bring back buyers to absorb this inventory.

Never going to happen.

When subprime borrowers were wiped out, it took out the bottom of the housing ladder. And since prices at the lowest rungs of the housing ladder still haven’t bottomed, nobody has any move-up equity created by appreciation. With no equity for a move-up market, the upper levels languish with low sales volumes and prices drifting ever lower.

There are several reasons why holders of large mortgages are able to stay in place longer. A key factor is that banks tend to keep larger mortgages on their books, while smaller mortgages are more likely to be bundled into securities and later resold to investors with backing from Fannie Mae and Freddie Mac. Fannie and Freddie, the government-controlled mortgage giants, have set strict foreclosure timelines and will fine mortgage servicers that are found to be needlessly delaying the foreclosure process.

Mortgage companies may also be more flexible with borrowers because they may have more assets and better prospects of recovering. “The banks have hope for the wealthy—of future employment, additional income or bonuses as the market comes back,” says Genevieve Salvatore, a Connecticut real-estate lawyer who represents delinquent borrowers as part of her practice.

Hope is all bankers have. Bankers hope prices will somehow come back. Bankers hope high wage earners (wealthy people don’t have debt troubles) will make more money and chose to remain debt slaves. Bankers hope taxpayers will continue to bail them out.

Economists say banks are also more reluctant to foreclose on high-end properties because they are expensive to maintain and take longer to sell.

What’s more, wealthier borrowers tend to be more sophisticated at stalling foreclosure by hiring attorneys. “It’s cheaper to pay a monthly retainer to a lawyer than a $20,000 mortgage payment on an underwater loan,” says Christopher Fountain, a Greenwich, Conn., real-estate broker.

I spent a full year evicting a squatting couple in Boulder City, Nevada. The day we took possession, on the counter we found a check for $50 written out to the attorney to file another appeal they hoped would give them another free month’s stay.

… As recently as 2008, the foreclosure gap didn’t exist. Then, the average foreclosure took 260 days for loans under $250,000, and 251 days for loans of $1 million or more. As the housing crisis dragged on, the split grew.

Lenders learned from the subprime foreclosures that if they foreclose and sell on the MLS, a price crash is certain.

… Loans above $1 million, by contrast, are less likely to have been bundled and sold into mortgage-backed securities as they weren’t eligible for backing from Fannie and Freddie. That means banks may own more of the bigger loans on their balance sheets and have more flexibility to delay or postpone foreclosures.

Banks began the music on the amend-extend-pretend dance. They are still dancing today.

Mr. Underwood fell behind on his monthly payments of roughly $5,000 after he stopped working and went on disability due to an illness he traces back to his military service in Vietnam.

If he stopped making enough money to support the mortgage, why doesn’t he sell the house and reconstitute his lifestyle to live within his means? Oh, I forget. HE IS ENTITLED. Once he takes possession, he gets to keep the house for life even if he can’t afford it. In his mind, he probably thought he could afford it. If the HELOC money had kept coming in, he could have managed the payments. Appreciation is income, right?

He sought a loan modification and filed for bankruptcy protection in 2009 to improve his chances of getting help. His bank, Wells Fargo & Co., finally foreclosed in July 2011, but then rescinded the foreclosure action to ensure it hadn’t run afoul of a federal law protecting active duty military members after it learned Mr. Underwood’s son was deployed overseas.

Let’s look at his methods of gaming the system: (1) loan modification, (2) bankruptcy, (3) relying on son’s service to exploit a loophole designed to protect those currently serving.

Shortly after, Wells Fargo agreed to re-evaluate him for a loan modification under an in-house program. The bank has also filed to re-foreclose on Mr. Underwood’s house but has postponed the date at least four times, most recently until mid-March, while it considers him for a modification.

“Foreclosure is in our view a measure of last resort,” says Wells Fargo spokesman Tom Goyda. Foreclosure timelines are driven heavily, he says, by how actively homeowners have pursued loan modifications and whether they have filed for bankruptcy. Both steps, he explains, usually compel banks to delay the foreclosure process.

The bank has been stymied by his efforts, but they are still poised to call the auction.

Let’s say they grant this guy a loan modification based on his current disability income. Do you think it’s right that he gets to continue to live in a million dollar mansion on an income that qualifies him for a low-end condo? There is a family somewhere being displaced by this guy being allowed to enjoy a property he has no business occupying. Am I wrong? Is it his house? He is $500,000 underwater and unable to pay the rent on the money. He owns a loan, but he can’t even afford that.

Some analysts say smaller banks could also be drawing out the process because they want to avoid the losses that hit their balance sheet when large loans go through foreclosure. “It makes sense banks would try to take more time to work those out,” says Sean O’Toole, president of ForeclosureRadar, a firm that tracks foreclosure filings in five Western states and whose research also shows larger loans take longer to complete foreclosures.

It does make sense for lenders to keep the debt slaves who can make payments on the hook. However, once they can’t service the debt, banks should move quickly to get them out of the property.

Consumer advocates cry foul. “It’s our concern that lenders are doing more to avoid foreclosures in upper-income, higher-value markets,” says David Berenbaum, chief program officer at the National Community Reinvestment Coalition, a consumer advocacy group that focus on fair-lending issues. In harder-hit neighborhoods with depressed values, banks “don’t seem to offer the same efforts to keep the house out of foreclosure or to maintain the house once they’ve taken it back,” he says.

Yes. High end borrowers get to continue to enjoy their entitlements while low end borrowers do not.

When Virgilio Wani and his wife both lost their jobs in the winter of 2010, the couple fell behind on their $1,700 monthly mortgage payments. From November 2010 to the following March, the couple had missed four out of five payments on the West Hartford, Conn., home they bought in 2006 for $210,000 with 100% financing.

Last spring, Mr. Wani found a part-time job as a cashier. He tried to restart payments on the $199,000 that remained of his mortgage and sent a $1,700 payment in April. But the lender, Sovereign Bank, returned the money and began foreclosure proceedings, he says.

A spokesman for Sovereign declined to comment.

Ten months later, the couple and their five kids faced an eviction notice and sought temporary housing. Now, the family is living in a two-bedroom apartment nearby. Mr. Wani is still working as a part-time cashier, and his wife got back her job as a nursing assistant.

That’s a fall from entitlement. When we see high-end loan owners end up in two-bedroom apartments, justice will be served.