Feb012013
GSEs now permit unrestricted strategic default with no financial consequences
Paul Simon wrote There Are 50 Ways to Leave Your Lover. There are many ways people can leave their unwanted properties, but if the debt is recourse, they can’t walk away from the debt as the lender can track them down to force repayment. In fact, zombie debt collection will be a significant growth industry over the next decade as those who thought their mortgage debts were extinguished find out otherwise.
You can’t just “step out the back, Jack.”
Most banks will now let borrowers off the hook if they complete a short sale. Of course, banks use the opportunity to demand the borrower liquidate other assets to repay the debt or they won’t approve the short sale. The main reason short sales take so long is because mortgage holders and borrowers fail to come to an agreement on how much money must be repaid. Many borrowers who fail to execute a short sale merely stop paying their mortgage and wait for foreclosure. They stop communicating with their lenders entirely, put their heads in the sand, and hope the debt disappears.
Now the GSEs are providing another option. For those borrowers current on their mortgages, if for any reason they want to get out, the GSEs will accept a deed-in-lieu and not go after any other assets. This should open the floodgates for struggling loanowners to strategically default with no financial consequences. They will still endure a hit to their credit scores, but they won’t have to sell any other assets or repay the shortfall. It’s an outrageous tax subsidy to irresponsible borrowers.
Fannie To Allow Walkaways by On-Time Borrowers: Mortgages
By Kathleen M. Howley – Jan 28, 2013 10:37 AM PT
Fannie Mae (FNMA) and Freddie Mac will let some borrowers who kept up payments as their homes lost value erase their debts by giving up the properties, helping Americans escape underwater loans while adding to losses at the mortgage giants bailed out with $190 billion of taxpayer money.
Non-delinquent borrowers with illness, job changes or other reasons they need to move will become eligible in March to apply for a so-called deed-in-lieu transaction that erases the shortfall between a property’s value and the size of its mortgage.
And what “other reasons” might those be? This will be so loosely defined as to permit any reason at all. At some point, they will stop asking because they know the answer doesn’t matter. If they want out, they can get out.
It follows a change in November that lets on-time borrowers sell properties for less than they owe, known as short sales, wiping out the remaining mortgage debt. Normally, the lenders could pursue people to recoup their losses.
Committing not to go after deficiency judgements and now allowing unrestricted walkaways ought to bring more properties to the market. Every borrower with a GSE loan that’s struggling or severely underwater will walk away.
“It’s an extraordinarily generous approach for companies still in debt to American taxpayers,” said Phillip Swagel, a professor at the University of Maryland’s School of Public Policy in College Park, Maryland. “We’re giving people an incentive to walk away, right when the housing market is starting to right itself.” …
Generous? It’s a bailout. And yes, it will give people a huge incentive to walk away. In the long run, it will be good for the economy to purge the excess mortgage debt, but I don’t like being the one who has to pay for it through my tax dollars.
“Fannie and Freddie are playing catch-up, making these changes when defaults are falling and the housing market is coming back to some extent,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California. “It should have happened a long time ago.”
Right on, Kurt. I hope you’re a reader.
“The government is saying you can just turn in your home and we’re not going to come after you for the money you still owe,” said Peter Schiff, chief executive officer of Connecticut-based brokerage firm Euro Pacific Capital. “Some of these are going to be people who might otherwise have stayed in their homes and kept making payments.” …
Yes, and it will increase our taxpayer liabilities as a result.
“Fannie and Freddie are finally recognizing that some people are stuck in their homes,” she said. “There are a lot of families who need to move who can’t do it if they’re going to have debt hanging over their heads. There’s no winner when someone is forced to default on their mortgage — not the investor, not the homeowner, and certainly not the neighborhood,” Gordon said.
Bullshit. The homeowner benefits by getting rid of the black hole on their family’s balance sheet. The neighborhood benefits when a solvent borrower buys the home, and the community benefits from the additional spending money put into the local economy. The bank or the mortgage investor gets hurt, but they made a stupid loan, so they deserve to get hurt. Perhaps they won’t make stupid loans again next time.
For either a deed-in-lieu or a short sale, the failure to pay off the full mortgage balance will be reported to credit bureaus even as the amount is forgiven. The effect on scores will be nearly as bad as foreclosures, according to Fair Isaac Corp. However, if borrowers keep current with their payments during the process, they won’t take additional hits for delinquencies.
At least these consequences are still in place to provide some punishment to the borrower for taking on the debt in the first place.
To qualify for the programs, borrowers are required to have a 55 percent debt-to-income ratio — meaning 55 percent of their monthly gross income goes to paying debt. To be eligible, homeowners have to document a hardship, such as illness, for Fannie Mae and Freddie Mac to consider the deal. For a deed-in- lieu transactions, servicers must confirm the property is being left in good condition.
Those conditions will be lessened or waived entirely within a year in my opinion.
While Fannie Mae and Freddie Mac forgive any remaining first-lien obligations, they can’t control what the holders of second mortgages do. Last year they said servicers can offer the owners of home equity debt up to $6,000 to release borrowers from requirements to pay off those loans.“The second-lien holder gets a say — they don’t have to release the title,” said Mark Goldman, a mortgage broker at C2 Financial Corp. in San Diego. “It can get complicated when other people have a stake in a property.”
Most second lien holders will try to cut a deal. Most of these borrowers have little or no assets, so playing hardball with them will drive the borrower into bankruptcy where the second lien holder gets nothing.
Fannie Mae and Freddie Mac may require repayment of some of the shortfall between the value of the home and the mortgage balance — if the borrowers have the means. Homeowners who apply for deed-in-lieu transactions may be asked to make cash contributions of up to 20 percent of their financial reserves, excluding retirement accounts, according to the guidelines.
Borrowers will hide their assets to avoid any repayment. They do it now for short sales. I expect this requirement will go away in time too.
“I don’t have a huge amount of sympathy for someone who says they need help from Fannie and Freddie when they still have a vacation home,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.
Actually, that doesn’t bother me as much. In all likelihood, their vacation home is deeply underwater. There is no second home market right now, and there won’t be for the foreseeable future. People with second homes couldn’t sell them anyway because they have no equity. The smart ones will walk away from those properties too, if they already haven’t.
“There are lots of families who are trapped in their homes,” said Gordon, of the Center for American Progress. “They need a way to get out.”
I have been an advocate of strategic default from the beginning of the housing crash. It makes no sense for a family to keep paying a mortgage much larger than a comparable rental when they are deeply underwater. This issue has me torn between my desire to see people get out of their debt troubles and my desire to see taxpayers protected from losses. I just hope this doesn’t happen again.
Hmmm, what would motivate Fannie to
make it easierencourage homedebtors who’re current to walk away, when …..Fannie Mae: Housing market ‘has turned the corner’
Home prices, sales and mortgage rates point to continued growth
http://www.inman.com/news/2012/12/18/fannie-mae-housing-market-has-turned-corner
All comments from realtors, bankers, and the GSEs are self-serving bullshit. They all want to pump the market for their own reasons. Realtors and mortgage brokers want commissions, reporters want to make people feel good, and lenders want to see more collateral value backing their bad loans. They are all either liars or merely seeing what they want to see. Wishful thinking. They hope that if they pump the market, they might induce more buying which serves their greater purpose.
el O,
You will like this article from Bill Gross of Pimco:
Credit Supernova!
So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.
REPEAT: THE COUNTDOWN BEGINS WHEN INVESTABLE ASSETS POSE TOO MUCH RISK FOR TOO LITTLE RETURN.
Visible first signs for creditors would logically be 1) long-term bond yields too low relative to duration risk, 2) credit spreads too tight relative to default risk and 3) PE ratios too high relative to growth risks. Not immediately, but over time, credit is exchanged figuratively or sometimes literally for cash in a mattress or conversely for real assets (gold, diamonds) in a vault. It also may move to other credit markets denominated in alternative currencies. As it does, domestic systems delever as credit and its supernova heat is abandoned for alternative assets. Unless central banks and credit extending private banks can generate real or at second best, nominal growth with their trillions of dollars, euros, and yen, then the risk of credit market entropy will increase.
The element of time is critical because investors and speculators that support the system may not necessarily fully participate in it for perpetuity.
Speed Read for Credit Supernova
1) Why is our credit market running out of heat or fuel?
a) As it expands at a rate of trillions per year, real growth in the economy has failed to respond. More credit goes to pay interest than future investment.
b) Zero-based interest rates, which are the result of QE and credit creation, have negative as well as positive effects. Historic business models may be negatively affected and investment spending may be dampened.
c) Look to the Japanese historical example.
2) What options should an investor consider?
a) Seek inflation protection in credit market assets/ shorten durations.
b) Increase real assets/commodities/stable cash flow equities at the margin.
c) Accept lower future returns in portfolio planning.
Indeed. Thanks.
He sure is toot’n that inflation horn.
Also, it appears he’s a bit of a history buff….
(5) Be cognizant of property rights and confiscatory policies in all governments.
I would love to see where Gross is putting his own money right now.
(5) Be cognizant of property rights and confiscatory policies in all governments.
It reminds of that Kelso case on eminent domain
“The bank or the mortgage investor gets hurt, but they made a stupid loan, so they deserve to get hurt. Perhaps they won’t make stupid loans again next time.”
This is the important statement in your post. I think the banks need to feel pain or we are just going through this cycle again. And I think the borrowers need to go through strategic default, if they can’t pay the lender back, then you need to go through bankruptcy.
Everyone involved needs to experience negative consequences or they will repeat their mistakes again. That’s the essence of moral hazard.
…need to feel pain or we are just going through this cycle again…”
In other words, take big risks, suffer no consequences.
If this cycle isn’t somehow broken, then we taxpayers are taking yet another giant step towards nationalized (aka welfare) housing.
Why don’t we just cut to the chase and throw in free property tax payments,
utilities and maintenance, big screen TV’s and cell phones?
“Why don’t we just cut to the chase and throw in free property tax payments, utilities and maintenance, big screen TV’s and cell phones?”
Don’t give them any ideas. I could easily see the geniuses in Washington coming up with some minority assistance program that does just that.
My only hope is that the feds get greedy and start charging more G-Fees and mortgage taxes, which then allows competition to take business away from Fannie, Freddie, and FHA.
RealtyTrac: 57% of Metros See Increase in Foreclosure Activity
More than half of the nation’s largest metros experienced an upturn in foreclosure activity in 2012 compared to 2011, according to a report from RealtyTrac.
RealtyTrac observed foreclosure trends in 212 markets with a population of 200,000 or more and found 120 markets, or 57 percent, displayed an increase in foreclosure activity from 2011. At its peak, foreclosure activity was up in 181 out of 212 metros in 2010.
“Markets with increasing foreclosure activity in 2012 took the first step in finally purging delayed distress left over from the bursting housing bubble,” said Daren Blomquist, VP at RealtyTrac.
“Meanwhile, the underlying fundamentals in many of those markets are slowly improving, making it an opportune time to absorb additional foreclosure inventory this year — and that is particularly good news for buyers and investors hungry for more inventory to purchase in those markets,” he added.
Among the 20 largest metros, 12 experienced a slowdown in foreclosure activity in 2012 compared to 2011, according to RealtyTrac. The five large metros that led with the biggest declines were Phoenix (37 percent), San Francisco (30 percent), Detroit (26 percent), Los Angeles (24 percent), and San Diego (24 percent).
Out of the eight large metros where foreclosure activity picked up, Tampa led with the biggest surge—80 percent—while Miami ranked as a distant second with its 36 percent increase. Baltimore (34 percent increase), Chicago (30 percent increase), and New York (28 percent increase) rounded out the top five.
California markets dominated the top five list for their high foreclosure rates, beginning with Stockton, where 3.98 percent of housing units received a foreclosure filing in 2012. Riverside-San Bernardino-Ontario ranked second with its foreclosure rate of 3.86 percent, while Modesto (3.82 percent) and Vallejo-Fairfield (3.73 percent) took the next two spots. Miami broke the trend by ranking No. 5.
Home Price Expectations Vastly Different from Coast to Coast
Capital Economics expects home prices to increase about 5 percent over the year at a national level. However, housing markets across the nation are markedly different, and this 5 percent will not be a constant in all regions.
At the two far ends of the spectrum, the Northeast and the West will experience far different market climates this year, according to Capital Economics.
The Northeast is much more likely to see no price growth at all than anything close to the 5 percent national average this year, the analytics firm stated in a recent outlook.
A potential for an increase in supply is one factor that may keep prices at bay this year.
Northeastern states have relatively long foreclosure timelines, and their foreclosure rate as of the third quarter of last year was 5.6 percent. This compares to just 2.7 percent in the West.
Capital Economics, therefore, anticipates price increases in the region would lead to increased supply as both lenders and homeowners unload properties onto the market. “Ironically, these factors will conspire to keep price gains muted in the coming years,” the firm stated.
On the other side of the country, the West has already dealt with much of its foreclosure inventory, and the region is well-positioned for potential economic growth and rising incomes.
While housing starts increased 30 percent in the region last year, this growth was not necessarily reflected in the region’s total sales. New home sales made up 15 percent of home sales for the year – making the new construction increase “unlikely to offset the lack of supply in the existing homes market,” according to Capital Economics.
While the Northeast is likely to experience no price gain this year, the West may experience nearly 10 percent, according to the firm.
What do you bet, that these homes will languish to keep up prices and appearances until they are eventually condemned and torn down like in Detroit where housing is being wiped away. Banks get free interest on their money anyway from interbank lending so its not like they care how long these bad loans fester. I mean, try to buy a house today. You need cash, and good luck at that because I think you need a contact too. With free money interbank lending at the bank they would raise prices even further by tearing these vacancies down.
I am amazed at how well the banking cartel has withheld inventory from the market. As prices rise, the players have more incentive to cheat and liquidate, but with basically free money to borrow and no regulatory pressure, they can wait as long as they want. I think they will try to restrict inventory until the squatters are no longer underwater, then they will foreclose and get all their money back.
This is exactly what’s going to happen. If you’re squatting you should be rooting for the housing situation to get worse not better. If prices get close enough to where they can get close to or break even they’re going to foreclose unless the squatter can come up with years of back mortgage payments (yeah right!)
I’ve had bad timing. Should of been a loanowner pre-2000, maxed out on the loan in 2004, used the cash in 2007/2008 for stocks and stopped paying the banks. I did everything wrong. saved to have a large downpayment, forgoed lavished lifestyle while those in OC lived the life of Riley.
” I did everything wrong. saved to have a large downpayment, forgoed lavished lifestyle while those in OC lived the life of Riley.”
I know how you feel. Being prudent has not been rewarded over the last 15 years in OC.
A large down payment, in general, is not the best use of capital.
The banksters learned a valuable lesson: It is hard to get a ‘loanowner’ out of a house. Prepare to be a renter.
”The next bubble will eventually burst after 2015.75 and it will be centered in government debt this time. Interest rates will increase and bondholders start to realize they should diversify. Once that takes place, banks will have to bid for cash sending real rates higher. That is where the debt bubble will explode.”
The real reasons on these GSE/tax forgiveness are to level the paying field for flyover country that have recource loan vs. CA and other non-recourse states and mostly to have the taxpayers liable, since the sale was GSE-approved the difference will be made up by the GSE via the taxpayer. It’s another bank bailout saided helping the homeowner/loanowner.
It like the tweekers saying you need to give them $100 or their children will starve, They will use $90 to feed their habit and possible $10 will be left over to buy food. The govt uses a 80:20 rule to define sucess. If at least 20% goes to those in need, it a success. The flip side, 80% going to those not in need is acceptable.
” The govt uses a 80:20 rule to define sucess. If at least 20% goes to those in need, it a success. The flip side, 80% going to those not in need is acceptable.”
I hadn’t thought about it that way, but I think you’re right. Waste is not a big concern for those in government.
And even if 20% does actually “get down directly to the intended need,” the benefit isn’t always easy to discern.
A little clarification on the 20%, that 20% of the funds given out to the “those in need.” It doesn’t count the 60% to 70% administrative cost.
“The bank or the mortgage investor gets hurt, but they made a stupid loan, so they deserve to get hurt. Perhaps they won’t make stupid loans again next time.”
problem is that the banks/brokers are not getting hurt.
as for the investors, they are getting hurt. problem is that lots of them are “innocents” (or stupid) too. retirement accounts, pension funds, etc. and of course the rest of us pay the price for that (societally via more poor old people, or higher taxes to re-fund public pensions, or higher prices to re-fund private pensions)
No-money-down mortgages are back
By AnnaMaria Andriotis
Some affluent buyers are getting the keys to their new home without putting a penny down.
It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.
In most cases, borrowers end up with one loan and one monthly payment. Depending on the lender and the borrower, roughly 60% to 80% of the loan can be pegged to the home’s value while the remaining 20% to 40% can be secured by investments. On a $2 million primary residence, for instance, the borrower could get a $2 million loan, which would require a pledge of assets in an investment portfolio to cover what could have been, say, a $500,000 down payment. The pledged assets can remain fully invested, earning returns as normal, without disrupting the client’s investment goals.
While these affluent clients may be flush with cash, this strategy allows them to get into a home without tying up funds or making withdrawals from interest-earning accounts. And given the market’s gains combined with low borrowing rates in recent years, some banks say clients are pursuing 100% financing as an arbitrage play—where the return on their investments is bigger than the rate they pay on the loan, which can be as low as 2.5%. Some institutions offer only adjustable rates with these loans, which could become more expensive if rates rise. In most cases, the investment account must be held by the same institution that’s providing the loan. See: Home improvement gets a makeover
These loans also provide tax benefits. Since borrowers don’t have to liquidate their investment portfolios to get financing, they can avoid the capital-gains tax. And in some cases, they can still tap into the mortgage-interest deduction. (Borrowers can usually deduct interest payments on up to $1 million of mortgage debt.)
While these loans make up a small portion of banks’ overall lending, demand for them has been rising. BNY Mellon Wealth Management’s mortgage team says it experienced a 10% increase in requests for 100% jumbo-mortgage financing involving clients’ investment portfolios in 2012 compared with a year prior. BOK Financial, which offers up to 100% financing just to medical doctors through its private-banking divisions in eight states, including Arizona, Oklahoma and Texas, says there has been a roughly 25% increase (or about 100 more borrowers) in this lending from a year ago. Also, at Citi Private Bank, applications have been growing over the past two years. “Demand is two to three times what it normally is,” says Peter Ferrara, managing director of the private bank’s residential real estate.
Some banks are using this product to lure in clients, such as BOK Financial’s offer, which is available to new physicians. To provide the loan, the bank must first receive proof that the borrower has cash or investments, like stocks or mutual funds, that equal 10% of the borrowed amount. (The company says it doesn’t seek a pledge of those assets but just wants to know that borrowers can meet their obligations over time.)
What to consider before signing up:
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Portfolio restrictions. The amount clients can borrow against investment accounts will depend on what the portfolio comprises. In most cases, they can get up to 95% if the account comprises cash, up to about 80% if it’s bonds, and between 50% and 75% with stocks. Withdrawing pledged funds is typically restricted while the loan is outstanding.
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Relationship pricing. To get the lowest rate, clients who already have significant assets at a particular bank should consider applying for 100% financing there.
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Underwriting standards. Borrowers will still need to pass regular underwriting requirements, including having a high credit score, a low amount of overall debt—including student debt—and providing documentation of substantial income or assets.
[…] now permit unrestricted strategic default with no financial consequences OC Housing News Posted by Steve Bartin var addthis_pub="stevebartin"; at 6:05 AM […]
[…] ————GSEs now permit unrestricted strategic default with no financial consequences – … Now the GSEs are providing another option. For those borrowers current on their mortgages, if for any reason they want to get out, the GSEs will accept a deed-in-lieu and not go after any other assets. This should open the floodgates for struggling loanowners to strategically default with no financial consequences. They will still endure a hit to their credit scores, but they won’t have to sell any other assets or repay the shortfall. It’s an outrageous tax subsidy to irresponsible borrowers. … – OC Housing News […]
[…] ————GSEs now permit unrestricted strategic default with no financial consequences – … Now the GSEs are providing another option. For those borrowers current on their mortgages, if for any reason they want to get out, the GSEs will accept a deed-in-lieu and not go after any other assets. This should open the floodgates for struggling loanowners to strategically default with no financial consequences. They will still endure a hit to their credit scores, but they won’t have to sell any other assets or repay the shortfall. It’s an outrageous tax subsidy to irresponsible borrowers. … – OC Housing News […]