We’ve become so accustomed to foreclosures on underwater homes that we forget that’s not how it used to be. Foreclosures have always been part of the system, and prior to the housing bust, foreclosures happened to people who had equity in their properties.
Foreclosures happen because people borrowed money and failed to repay it. The lender exercised their contractual right to call a public auction to recover their capital. They go to the auction and bid up the price to the outstanding value of their loan. If other bidders want to bid more, they are welcome to do so. When the loan is less than 80% of the value of the property, which used to nearly always be the case, then a third party would outbid the bank and buy the property.
In the typical pre-bust foreclosure scenario outlined above, the former owner could have avoided the foreclosure at any time by simply selling their house, paying off the bank, and pocketing their equity. In fact, only in rare cases does the foreclosure actually occur because the vast majority of distressed owners simply sell and move on. It’s only in our new era of loan modification entitlements that delinquent borrowers with equity think they don’t have to sell their houses to repay the bank as promised.
Carolyn Said — Updated 5:33 p.m., Tuesday, December 4, 2012
Larry Faulks says his bank robbed him of over a quarter of a million dollars.
By selling Faulks’ San Francisco house at a foreclosure auction, Wells Fargo wiped out all his equity, he said. Unlike most struggling homeowners, Faulks, 59, was not underwater on the home his family bought in 1962; it was worth considerably more than he owed on it.
Wells Fargo did not rob him of his equity. Mr. Faulks was foolish and ignorant. He could have sold his home by choice as he didn’t require short sale approval. The fact that he chose not to sell doesn’t mean he was robbed; it means he was stupid.
Wells Fargo says it tried to work with Faulks but couldn’t find a way to avoid foreclosure, as his income was too limited.
Outside legal experts who reviewed his case said it highlights how California law doesn’t safeguard the rare homeowners with equity in a foreclosure.
Foreclosure law isn’t designed to protect a homeowner with equity. It’s not supposed to. Foreclosure law is designed to force a sale so a lender can obtain their loaned capital. It’s supposed to be a threat to compel an owner with equity to sell on their own.
“There is a huge gap in the armor that leaves (people with equity) fundamentally unprotected” in foreclosure, said Oakland real estate attorney Charles Hansen, a partner in Wendel Rosen Black & Dean. “In most (foreclosure) cases, the property is over-encumbered so there is no equity for the borrower to forfeit.”
Faulks’ case also serves as a cautionary tale of how a strong attachment to keeping a house can sometimes work against a homeowner’s best interest.
That’s the real truth here. The man could have avoided foreclosure at any time by simply selling the property. The bank would have gladly given him time to complete the sale. They probably would have let him overprice it to game the system for a while, but with all the other postponements over the last several years, they certainly would have given him time to complete a sale — if he was willing to sell. And that’s the whole point of a foreclosure. Without the ability to force a sale, no lender would ever make a home loan because their entire investment would be at risk.
“Home equity is highly illiquid,” Hansen said. “The tragedy is, people may say, ‘I have $300,000 equity in my home,’ but if you cannot get at that equity and don’t have the income to service your current debt, it doesn’t do you any good. They end up squandering their equity trying to save their equity.”
In Faulks’ case, after an illness and failed surgery left him too disabled to continue his work as a technical writer, he sought a loan modification on his mortgage, which carried a sky-high interest rate of 8.2 percent.
Once he could no longer afford his payments in spring 2010, he embarked on a two-year quest
Looks like he had plenty of time to sell the property he could no longer afford. His reasons for losing his income are irrelevant. People aren’t entitled to keep homes they can’t afford.
in which he submitted multiple applications, faxed in reams of paperwork, spent hours on the phone, attended in-person counseling events, contacted politicians, housing counselors and government agencies – all to no avail.
“The bank lost document after document and then claimed I never sent them, and forced me to repeatedly start over,” he said.
Faulks received several denial letters, but each time he said he felt there were errors of missing paperwork or incorrect assumptions so he kept applying, hoping to save the home where he’s lived since he was 9 years old. …
If the guy lived in this house since the early 60s, why did it have a $500,000 mortgage on it? Apparently, he knew full well how to tap his home equity.
“We really worked with him quite extensively to inform him of his choices,” said Vickee Adams, vice president of Wells Fargo Home Mortgage. “Regrettably, despite all efforts, we were not able to find an affordable option for him. This is an example of when customers need to stay very closely in touch with us even if they’re working through authorized third parties.”
At a foreclosure auction in May, a real-estate investment company called DMG Asset Management bought the house for $705,000. … Online real estate site Zillow pegs its value at $1 million; DMG’s attorney said it’s worth $950,000 to $975,000.
Faulks’ mortgage was $574,627. After adding in missed payments and late fees, his total debt was $691,914. As is required by law, he was sent $13,086 for the difference between the $705,000 auction sales price and his debt. Wells also offered him $20,000 in relocation assistance.
But that amount is dwarfed by what he might have netted on the open market. If he had sold the home himself for $1 million, he would have been able to pay the bank everything he owed and walk away with a nest egg of at least $250,000.
“The way they did it left me with no money,” he said.
No. The way HE did it left him with no money. He could have sold the house and got his money at any time. He’s no victim, other than perhaps of a victim of his own pride and foolishness.
After reviewing Faulks’ detailed chronology of his quest, Sitkin said: “Of the third parties helping him, no one seems to have said, ‘The reality is you’re unlikely to get a modification; the rational thing here is to just sell. The more time goes by, the more equity is eaten away by the (missed payments and penalties) accruing.’ “
Bullshit. Is it reasonable to believe it never occurred to this man in the years this dragged on that he could have sold the house. How many realtor flyers did he remove from his front door during that time? How many agents knocked on his door asking him if he wanted to sell? It’s incomprehensible that he was unaware of his right and ability to sell the property.
Faulks is now fighting eviction by DMG, the company that bought the house as part of its business of flipping foreclosures. He said he is living with his belongings in boxes, in anticipation of the sheriff’s knock at the door.In a statement, DMG said it had offered Faulks “cash for keys” as well as the chance to buy back the house for what it paid plus its ongoing costs. Faulks said he can’t possibly afford that.
“It’s nerve-wracking,” he said. “It’s like being in ‘Alice in Wonderland.’ Left is right, right is up.”
Politically speaking, with regards to foreclosures, Left is wrong, Right is silent.
Loan Modification Entitlement
The housing bust created all sorts of moral hazard. One of them is the new entitlement people feel they have to a loan modification. I recently wrote about the ravings of an entitled whiner struggling to keep a house she can’t afford. People have come to believe they are entitled to keep houses their incomes no longer support. What about renters? Renters don’t get to petition for a lower rent just because they see a decline in their income. It’s expected that a renter simply move out and find a more affordable place, but homeowners get to apply for a break on their monthly housing costs, and they’ve come to believe they are entitled to receive it.
For a more in-depth look at the foreclosure process, get our free foreclosure guide.
They extracted the full value of this one
Some Ponzis fared better than others during the housing bubble and bust. The former owners of today’s featured REO extracted every last penny of equity, and they were rewarded for this behavior with over three and a half years of squatting to go with the several hundred thousand they extracted.
- This house was purchased on 11/10/1999 for $332,500. The owners used a $299,250 first mortgage and a $30,000 down payment.
- On 10/19/2001 they refinanced for $332,000 and extracted their down payment.
- On 11/21/2002 they refinanced with a $368,000 first mortgage.
- On 5/12/2004 they refinanced with a $440,000 first mortgage.
- On 2/10/2005 they refinanced with a $495,000 first mortgage.
- On 3/20/2006 they obtained a $210,500 HELOC.
- Assuming they maxed out the HELOC, their total property debt was $705,500, and their total mortgage equity withdrawal was $406,000.
Their original NOD was filed on 6/30/2009. The house was not foreclosed on until 9/28/2012 giving them at least three and one half years of free housing.
$406,000 in free money plus over three years of free housing. I imagine they will want another house as soon as they qualify.
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Proprietary OC Housing News home purchase analysis
$449,900 …….. Asking Price
$332,500 ………. Purchase Price
11/10/1999 ………. Purchase Date
$117,400 ………. Gross Gain (Loss)
($26,600) ………… Commissions and Costs at 8%
$90,800 ………. Net Gain (Loss)
35.3% ………. Gross Percent Change
27.3% ………. Net Percent Change
2.3% ………… Annual Appreciation
Cost of Home Ownership
$449,900 …….. Asking Price
$15,747 ………… 3.5% Down FHA Financing
3.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$434,154 …….. Mortgage
$111,485 ………. Income Requirement
$1,925 ………… Monthly Mortgage Payment
$390 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$112 ………… Homeowners Insurance at 0.3%
$452 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,880 ………. Monthly Cash Outlays
($284) ………. Tax Savings
($695) ………. Equity Hidden in Payment
$17 ………….. Lost Income to Down Payment
$132 ………….. Maintenance and Replacement Reserves
$2,050 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,999 ………… Furnishing and Move In at 1% + $1,500
$5,999 ………… Closing Costs at 1% + $1,500
$4,342 ………… Interest Points
$15,747 ………… Down Payment
$32,086 ………. Total Cash Costs
$31,400 ………. Emergency Cash Reserves
$63,486 ………. Total Savings Needed