Foreclosure-Proof Homeowners

Jingle Mail?

Forget that! It's so 2007.

For 2008, let's try a little reverse financial engineering: Squatting in $3 million dollar waterfront mansions in Florida and paying nothing.

At least, that's a new and growing problem we learn of via MW in South Florida. MW is a local developer, and claims this has become "very serious" (I have been able to independently verify this with a local resident, who tells me the local papers are filled with such tales).

He writes:

"There is a very important phenomenon that is occurring that has only been covered in a "glancing" manner. Beyond the concept of "jingle mail" -- which suggests that folks who can pay their mortgages may just choose to walk away given the dramatic loss of equity due to housing's collapse -- consider the following: As a developer, I had stepped to the sidelines and rented beginning in 2005, because I was sure that housing was unsustainable and was bound to collapse; it took 2 more years for it occur.

Nonetheless, as I have followed several of the homes that my wife and I were interested in a few years back, they are all on the market now. What is shocking, that in each and every case, I have been told by brokers and banks that the owners have ceased paying their mortgages in some cases for nearly 2 years and have continued to occupy these homes. Now, these are homes in excess of $2,000,000 in the very best neighborhoods in South Florida. Brokers have added that these buyers further complicated things by putting huge home equity lines on top of their mortgages and now have no possibility of selling their homes for amounts needed to cover their accumulated debt.

This may not seem like news, but understand what this means: There is currently an 8-10 month wait to get a court date to have a foreclosure filing heard in Dade and Broward counties. The bankers have non-performing loans on their books to the best heeled borrowers in multi-million dollar amounts with no immediate means for recovery; with a non-secured second mortgage in place, there is no possibility for a "short sale" that will satisfy all of the borrower's debt. They are reluctant to take a haircut knowing that they have the home equity debt still around their neck and are likely to frustrate any near-term sale.

There is no clean way to sell the home that would guarantee "clean title", hence a foreclosure is the only means to separate the property from the dead-beat speculator/squatter. Banks do not want to spend the $50,000 required to take a home through a foreclosure and clear the title -- only to put the house back on the market for a deeper loss afterwards. Most likely, they have not revealed these owner occupied defaults to their shareholders, thanks to the sheer numbers of non-performing loans on their balance sheets, and the daunting task of foreclosing on all of them. This is the ultimate seizure and full stop of the market whereby everyone is standing in a stalemate. As one broker said to me, "these bums sitting in $3,000,000 homes overlooking the water are likely to be left alone by the banks for 2 years before the banks even get serious about foreclosure."

So here is the difference between "walking away," these folks are doing anything but walking away, they are sitting on lounge chairs sipping martinis living cost free! (not to mention that they have ceased paying property taxes and insurance). I can only imagine what this market will look like in the coming years . . ."

All I can say is wow.

"MW" has been hearing this for the past six months. He believes both the local and national lenders are in a state of disbelief with no understanding on how to proceed.

If anyone has any local newspaper stories on this, please post in comments.

Comments

[Basic Finance:]

Not sure what "notsosmart" means by calling this "capitalism." The legal restrictions against quickly foreclosing on deadbeats is a RESTRICTION on capitalism, not a result of it. The only scam here is on the part of the home buyer who no doubt falsified the loan application and now doesn't want to pay back the money he/she borrowed to gamble on the housing market. I wish these banks would take a clue from organized crime and send a few guys out to "talk" to these deadbeats. Make sure they understand that when you borrow money you have "obligations" to pay it back. If you don't pay the money back, well....bad things might happen to you ;)

2008 Mar 05 12:01 PM

[TommyG:]

So what's stopping the banks. The value of the mortgage was probably already written down as non-performing, so they trade one asset for another, maybe hold it a while for the market to return like it will in the case of high end real estate. Let's start a vulture fund and start buying mortgages like these. Believe we could make a killing.

2008 Mar 05 01:23 PM

[Matt Blackman:]

And what about the more than $1.6 trillion in mortgages that were used to create SIVs and CDOsin 2006 and 2007, many of which do not have the commensurate mortgage documents attached. In other words, in the excitement to create a CDO with 1 million mortgages (for example) that was later sold on Wall Street, the creators 'forgot' to include mortgage documents and lenders are now learning the hard way when they go to court, the judges are simply throwing these cases out of court. This allows the foreclosed homeowner to continue to live mortgage free until the mess is somehow cleared up... And the longer this legal no-man's-land goes on, the more the value of the home drops as interest, maintenance and taxes accrue.

2008 Mar 05 02:09 PM

[BigPapa714:]

The real fallout is yet to come! The mortgage wells have been poisoned, which in turn have poisoned many financial instruments, banks and insurance wells…you’ll see! Take a look at this article

www.bloomberg.com/apps...

2008 Mar 05 07:48 PM

[cariqunyil:]

There is a bright side to all of this. I would presume that the squatters would keep the homes from becoming mosquito-infested drug dens, and keep crooks from stripping out all the copper wiring. In addition, with the money they save by not paying the mortgage they are free to 'consume' more SUVs and designer labels to 'help' the economy. They likely aren't getting their $600 bailout money anyway, so why should the gov't complain as long as they spend spend spend...

2008 Mar 06 01:26 AM

[Ed Wallis:]

I don't get it.

I mean, in my condo development, if someone doesn't pay the fees for 3 months, THEY ARE EVICTED. Forget about the "foreclosure" phase - there are IMMEDIATE (I consider 3 months a reasonable period) and DIRECT CONSEQUENCES.

Why is this lacking in FLorida?!!?

2008 Mar 06 06:44 AM

[static66:]

I remember moving up to Florida from the caribbean in 05, driving around with my boss saying, this is completely unsustainable! how many people can afford this many condos over $2mil!!! he said it was the global investors and they were selling like hotcakes...I quit my six-figure job there and bought a little house up in vermont and now I am growing my own food and have 6 acres for less than the required down-payment on one of those condos!!! This sitch is just getting rolling, the shitstorm is coming, the fans are just being turned on..... close your mouths!

2008 Mar 06 07:39 AM

[I am wrong:]

I live near poverty and squalor. What am I doing wrong?

Years ago I purchased a small house, no waterfront view, in a so-so part of town because I was told one never takes on a mortgage higher then three years income. I made $75K at the time so there I was stuck and unable to ever own that waterfront home. My wife and I never missed a single payment never paying late even in the official "grace period". We never took on a second mortgage because we thought the idea was to pay our home off. But now I learn I could be living payment free in a $3 million house on the beach all these years? If there is any kind of bailout for these people I am going to be so pissed.

2008 Mar 06 08:09 AM

[TexanInfidel:]

Since when is it not okay to fail? This growing trend of bailing people out of their bad decisions is NOT the responsibility of the government. But who cares!? Take your rebate checks and spend them on useless crap you don't need - that way we can bail out retailers for selling stuff no one needs.

This is all so ridiculous. And the government will bail them out - nevermind those of us who play by the rules and pay our bills.

2008 Mar 06 08:53 AM

[ioniancat21:]

Thanks for the tip!!!! After reading your article I'm very excited about finding a dishonest broker in FL to get me into a subprime loan ASAP as the free rent opportunity is irresistable!! I too would love to live in a mansion rent free for a year or two as I've worked hard and feel I too deserve a handout for all my on-time tax payments in the past when I ignorantly decided to actually pay taxes rather than throw my W2 in the trash. Be like Wall Street, reward failure!! Get smart, get subprime and enjoy the benefits, being broke has never been so good!!!!

2008 Mar 06 10:05 AM

[User 161168:]

This sounds really compelling. I had a hunch stuff like this was happening but it's nice to see it in print. If I owned, and were judgement proof, I'd stop paying and start squating too. And I encourage EVERYONE with 100% financing or two mortgages to do so. I will be years before the bank kicks you out, and by that time you will have saved enough money to buy back a similar our nicer house at a fire sale price. Last year I made a CASH bank deposit of over $1300. I kept my receipt. The deposit just disappeared. No record, no nothing, no notification. I called the bank they said it would be straightened out a few days later and they would call me, of course nothing. I called several more times - get this - the manager says they lost all the records asks me how much I deposited then he just puts that amount in my account! If I had tossed the receipt, or had been too busy to check, guess where my money would be. This was at one of the larges banks in the country - JPM/Chase. It's time for all of the boworrowers out there who were lucky enough to get 80/20 financing to stiff it to the banks HARD. Afterall they were trying to stiff the borrower in the beginning - now it comes back to them.

2008 Mar 06 07:19 PM

[curtisg165:]

Ain't this fun? There's so much greed its hard to keep up. Gordon Gecko was right. Greed is good! It would be even better if some of these very large financial institutions would completely collapse. One can only hope. Unfortunately, the government will probably use taxpayer money to bail out these greedy people. Meanwhile the financial fallout from all this hubris is going to cause hardship for everyone. Its the American way.

2008 Mar 06 09:16 PM

[Jack in Mar...:]

Let the banks that have dug their own graves fail. Credit and other banking services will be provided by the new banks, which will sprout up like mushrooms.

2008 Mar 07 03:28 PM

[po_folks:]

To eventually get out of this mess intact and put this behind us, requires frugality, judgment, and good values on the part of all.

The delinquents mentioned here (both sides; lender/borrower) who seem incapable of such behavior should be considered antisocial enemies. Nevertheless, our courts should also be able to discern whether there are special circumstances that warrant leniency.

I am dismayed at the apparent inability of our justice system to unravel this mess and clear the way for the reckoning that must happen. The article also makes me less optimistic that we will avoid the "Japanese Disease" that has been their ruin for over a decade.

Please everyone, run, do not walk, away from a politician who promises "fairness, restitution, assistance, protection..." from this crisis.

People screwed up and overleveraged the system from top to bottom. Time to clear away the rubble and fix what's left standing.

2008 Mar 07 06:08 PM

[dreaming ag...:]

The American Dream is to "own your own home." But when the home and the banks own you, what good is life; to never be able to sleep at night because you fear being in the streets in the near future, to be spending most of your money to have the dream and not be able to dream due to sleepless nights; paying your over priced mortgage month after month after month, not seeing the beach or the back yard anyway; to spend your days at work wishing you could play with the kids that you never see in the back yard that you now regret having.

Then after 12 and a half months of paying the backbreaking dream stealing mortgage the next years tax bill comes and it drives the mortgage up $400 a month (4800 dollars a year); and the insurance bill went up too. That dream is now a nightmarethat can lead to grey hair, delinquent children and overgrown lawns, undone hair and nails, no time at the gym, weight gain, heart disease, fighting with husband, etc. Anyone would be a fool to continue in this nightmare if they can get out of it.

The bank and the government made their money on me over the past year and a half and the closing cost was the beginning of the payment.

This year, rent is looking good to me. Now that I have made that decision, I am beginning to sleep again.

And I won't be renting an overpriced matchbox condo that charges lifetime mortgage called maintenance fees that rise when the wind blows with other people called the homeowner's association who tell you how to breathe or when to go to the bathroom.

I envision a better future living on cash and not debt.

People did not get into this mess intentionally............ were just dreaming,,,,, that's all :) :) :)

I am one of those in the 100% mortgage, had to buy just before the bubble broke, (my husband and two kids were homeless at the time), now I am quite naturally upside down as they say (didn't see it coming!!!!!).

Now it's time to face reality and get back to living debt free....screw the credit report,,,, it is part of the nightmare.

2008 Mar 08 09:50 PM

[DanH:]

Why all the outrage and surprise? Renters will do the same thing in markets where eviction is legally difficult.

How about a post on the evolving REO market, Barry?

2008 Mar 09 12:44 AM

[History buff:]

There IS a semi-solution but it isn't likely to be used for a while because the banks are too afraid of loss to implement it, which will, in turn create even larger losses for them.

The lenders should do as some banks did during the "Great Depression". Cut a new deal with the buyer. The basics go like this as near as I can remember the description from my grandparents who went through that time.

* bank FREEZES the principal balance for two years, (to be reassessed at the end of that time to see if the problem is turning around or if the temp deal needs to be extended) No new interest charges or bank fees during this time.

* Buyer remains in house, protecting it from decay, looting, squatters, etc. (further reducing the property value for both the lender and the buyer) and continues to pay local real estate taxes and insurance as the only "required" payments. Since the values ARE heading downward the buyer CAN at his option, pay down some on the principal. (this amount goes directly to the bank to minimize their losses on this particular "bad" loan.

Good points to this arrangement is that the banks have a better chance at minimizing losses, buyer may yet end up with a nice home, once we're beyond the "crisis" things will stabilize at something closer to their actual then current value, and the homes will not be destroyed or vandalized by non-buyer squatters. It is now in the best interest of the buyer to do their part to maintain the home as they may not have to lose it, and get a "great financing"(zero interest, and temporarily no "payments") deal to help the prices readjust to more realistic, (post crisis) values.

Yes, the buyers have some responsibility here as do the lenders. But it's a far better deal (with smaller losses) and benefits for both sides.

Will the lenders do it? Probably not. But I betcha it would work.

2008 Mar 11 10:45 AM

[hill:]

well its bin 4 months now and ive yet ta even hear from the bank (i suspect they dont want it on the books yet), as it started to unravel we felt we could, the farther it unraveled the more it looked a bit gloomey, my job was tyde to a spec. builder (he is done, and so is my back), her job (any available to her) couldnt even come close,, we filed for a deferment, but it took three months ta get here, it was due a month BEFORE we got it (didnt bother sendin it back), i still get every re-fi special out there (even tho 6 months ago i asked them to not bother) i can 'apply' for a line of credit on the equity (it actualy has equity) but with the rating we have why bother.. i think a previuos poster had said " I'd stop paying and start squating too. And I encourage EVERYONE with 100% financing or two mortgages to do so. I will be years before the bank kicks you out, and by that time you will have saved enough money to buy back a similar our nicer house at a fire sale price." seems almost doable, we however took 'what money we had' and bought indoor grow lights and started a medical marijuana bisiness, pay the utilitys and prepare for what 'might' come ,, perhaps at that time it will be feasable to find new grounds with the mortgage comp. im not sure ,, but somthing has to be done. we have a 15 % down payment we would like to get it back threw the sale (2 months on the market) of the home , there are lookers but not much for offers (wed take just about any just to respectfully put this behind us), but there are no garanties that we will get it, so it comes down to 'me' or 'them'.. my 'me' has 5 kids, so there 'them' is going to get the shorter end of the stick i have right now. is this wrong, perhaps, was there wrong doing on their part, im sure (mortgage broker closed the loan with her owns funds, to gain another comision). so ill roll my dice and hope for the best, not like im strippin the copper (yet). please bare in mind, we will not be aplying for 'any' program, even if we thought it would work, we dont feel it would be right in any way. if we cant hash it out with the banks then they can have it and in the rear view of my ole dodge truck it will be ... Hill

2008 Mar 11 11:52 PM

[JohnIsOld:]

The ranking member of the House Financial Services Committee is too kind to say something like "I have been trying to tell everyone about this for years." Some of us are waking up. www.house.gov/paul

2008 Mar 14 12:03 AM

[MiamiBeachO...:]

I live in a Condo that I purchased before the insanity of real-estate speculation kicked in full gear. I pay my mortgage and maintenance and 3 different special assessments on time. I pay less on my mortgage than the rest of the fees. Yesterday I received another assessment for $1,100 due in 5 days. The explanation was that there were 11 units in a 243 unit complex in foreclosure. From my understanding the banks are not obliged to pay for any assessment while they have the property and only a maximum of 6 month's maintenance. I've read conflicting laws. On top of that they have no urgency to pay or no real repurcusion if they don't. I live in a very frugal condo compared to what is out there. No one needed to tell me that major shenanigans were going on when new luxury condo's popped up and are new ones are stilling in construction at a rate quicker than rabbits multiply. That is complete insanity. There are no jobs in the market place to occupy these units or the prior ones and there are only so many "foreign investors". Now with the country going into a recession it might be the last condiment in this hugh shit sandwich. And like the movie "Full Metal Jacket" everyone is going to have to take a bite. I really hope there is a large portion for the banks who started this mess.

2008 Mar 21 01:07 PM