How to Default on Your Mortgage and Stay in Your House 53 comments
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Floyd Norris today finds one of the worst bonds ever underwritten: a securitization, by Merrill Lynch (MER), of second-lien mortgages mostly originated by Ownit. The kicker? When the bond was sold, Ownit had already gone bust, a victim of the fact that far too many of its loans were delinquent out of the gate.
But what's bad for bondholders might be good for homeowners.
Let's say you're a Californian who bought your $200,000 house with a $160,000 first mortgage at 6.5% and a $40,000 second mortgage at 11.2%. Your annual interest payments are $10,400 on the first, and $4,480 on the second, for a total of $14,880, or $1,240 a month.
When the housing market implodes, you can simply stop making payments on the second mortgage. As Norris explains:
"In light of the pressure on home prices and limited or negative borrower equity in their homes, many second liens were simply written off" after several months of payments were missed, Moody's said.
With these loans, it turns out, foreclosure is seldom worth the effort, since all the money would go to the first mortgage holder.
With no fear of foreclosure and being kicked out of your house, your monthly mortgage payments have dropped from $1,240 to $867 - a fall of 30%. And that's before you try to renegotiate your first-lien repayments.
It's walking away without walking away: you can default on your second lien, stay in your home, and see a large reduction in your monthly nut. And since you're in California, where mortgages are de facto non-recourse, you don't need to worry about the owner of the second lien trying to get a court judgment against you.
Of course, as Floyd Norris points out, you do give up any upside if and when you decide to sell the house. The second lien is still there, and unpaid interest payments are accumulating: should the house ever get sold, the second lien owner will take anything the first lien owner doesn't. And for the same reason, you'll never be able to use your house as security for a new loan.
Even so, the idea of walking away from a second mortgage seems much more compelling, especially in California, than the idea of jingle-mail, or walking away from a first mortgage. Which is one reason, I'm sure, that this bond of Merrill's is performing so badly.
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This article has 53 comments:
I have read an article where a dot-com millionaire is doing this exact same thing. He is squatting in a multi-million dollar home that he no longer makes payments on, and the bank can't foreclose. It's been a couple of years now...
Shame on him, but I guess if I found such a way to game the system, who knows what I MIGHT do.
Personally, I love seeing these banks take it in the shorts. The greedy SOB's deserve to fail.
There is no morality involved. Always protect yourself first.
somehow, i still remember the sammy davis estate deal...it owed about $100 000 000 and paid ten cents on the dollar.
try that as a little guy and see what happens. and then...mr and mrs hillary made $109 000 000 last year...and how much did they pay? hmmmm? what was their tax rate?
bottom line....t. jefferson...you should remember him...they cut part of his face off the nickle...stated..when a country loses control of its currency, it is no longer a country
so.......as of 1913 give or take, wilson suddenly turned the united states of america into the united states of anarchy.
so much for morality.
the rich cut our throats. the government bleeds us dry...and the constitution is more or less dead. and then, of course, the dems will raise taxes....oh and btw, what ever happened to getting out of those sand-filled and/or mountainous countries? do we seem to be building a huge prison in afghanistan? with our tax dollars? is this the 51st state or something?
food never gets to the starving in how many countries?
what happened to all those dollar bills shoveled off trucks?
why do economists even bother with core cpi?
why do some stores ration rice here of all places?
why does milk cost the same as gasoline? should we use deathanol in our cereal or ride a cow to work? (for those of us who still have jobs?)
does it really matter who wins the election?
as the GMG says quite often...we are freaking doomed.
As for the comment "why should Mr Blue Collar care about a faceless institution" is uneducated, at best. If the consumers continue to break contractual obligations, then banks and credit unions will restrict credit, or not provide it all all. So the next time someone making $45,000/year want to buy a house, he will have to cough up that purchase price in cash. Chances are that he will not have an extra $275,000 laying around. Next option, ask friends and family, but probably will have the same outcome. Last chance is hard money lenders at credit rates....
I am renter and have plenty saved for retirement. However, I don't see how the math will work out for all the people who put too much into housing. Later, years later, they will cry poor and expect a subsidy from somewhere else. We need to end this cycle and return to rational house prices.
Heard this before ????
"If it sounds too good too be true - it probably ain't."
Yeah - capitalists are a bunch of bastards and the country is going to hell. The worst place to live in the whole damn world - except for all the others.
If I assume that most of the bank bashing posters here are investors, then I would like to know where the hell you make your money ?
If any of the companies you invest in have ANY dealings with banks or other financial institutions then I would expect you to immediately either make them terminate those relationships or sell your stock. If not - you are a hypocrite.
When I look in the mirror every day the guy that looks back at me has never really screwed anyone that didn't truly deserve it.
If I enter into a legitimate agreement I will honor it no matter who it's with.
I signed a contract with the builder - his 9 month schedule turned out to be 2 years not completed until Feb 1 2007. I was downpayment out over $250k - I told WAMU and the builder I wouldn't close because I was afraid the new place couldn't stand the appraisal and I would be better off losing my life's savings than risking closing on a loan that would mean I would own one new home maybe underwater and still have my primary residence.
I hired a real estate attorney - he explained my situation to all parties.
WAMU assured my the new home appraised at more than the purchase price or they wouldn't close on the loan. The assured me my primary home inside the DC beltway with a half acre pool and spa and 3ook under their apppraisal would sell in weeks - "close on the new house - get the elevator for your crippled mother in law" they said - "WAMU will give you a second on the new house to get you through" then"sell your primary, pay off the second on the new house and everything will be fine".
"Other wise, WAMU reminded me if you cancel you will lose your life savings deposit and be subject to a deficiency judgement if the builder can't recover their total cost." That scared me - I wasn't smart enough to see the built in mutual exclusive - if the property was worth it then the builder wouldn't have cause for a judgement. Better to lose my lifes savings and walk - this only came clear six months later.
Ok I agreed with WAMU - you appraise and prove and I will close. WAMU appraised, and the appraisal proved the new home was woth the purchase price and WAMU even financed a wrap second for 10% as promised.
Of course it turns out it was all a lie - WAMU and the builder were both screwed if I didn't close. They colluded - the appraisal turns out to be a fraud - the builder turned around and sold another house like mine for $400k less than the one I closed on.
Today I owe $3million on two houses- best price combined is $2.2 million - after 47 years I am insolvent, I have lost my total life's savings, I could have canceld the second closing but believed the WAMU appraisal, and now have payments exceeding my spouse and my own total take home pay and to top it all off my mother in law fell down the first week in the new home with the elevator, broke her back, neck and shoulder ran up $170,000 in death bills and died six weeks later.
Do I want bail out relief? Not on your life. Is the barney frank bill a travesty on Jeffersonian liberty? You bet. Shoud Ben Bernanke and friends get out of the way and let this mess find its own equilibrium as fast as possible? Absolutely.
Should I get any special treatment? Only equal justice under the law -- what does that mean? Wipe me out - I have nothing left. Don't chase me with the IRS (remember the second house has no debt forgivness) - don't force me into bankruptcy - is that the penalty, is that the price the Limbaugh, Paulson, Bush right wingers insist on - that I have to hope my father dead these many years must see his son in bankruptcy. Thanks a lot America - is this all you have after 47 tax paying FICA contributing years that I have to go through bankruptcy to have any chance of even surviving at my age?
I am not asking nor accepting anything from our "government" - I wouldn't even cash the rebate check. It's just more debt for my daughters and their husbands to pay. But I tell any reader of this message and that includes George Will, Rush Limbaugh, Sean Hannity, and the hundreds of others that if I can't receive equal justice under the law - at least equal to Bear Sterns - If I have to undergo the indignity of bankruptcy after a life that included 3 years as a LT. Foward Observer during Nam, an entrepreneur that created over 6ooo new jobs, a defender of civil liberties, and protector of the unprotected then I say to you right wing idealogists that the Fascist Hatred that you are going to see appear in the land of the free and home of the brave is well deserved.
FOR ALL OTHER HOMEOWNERS: If your loan is underwater by more than 6% as of March 31, 2008, - you owe more than the property is worth and if your payments are such you cannot make them from your take home pay DO NOT SPEND ONE DIME OF YOUR IRA, 401K , ROTH IRA, SEP OR OTHER RETIREMENT TO MAKE HOUSE OR MORTGAGE PAYMENTS. You will never see a dollar of equity in your home - before your credit fails look for a nice apartment that include s utilities if possible, abandon your property, do not notify the lender as you will not be able to reach anyone except a Collection Agent, give no one your name, account number or anything else they can track you with. Move into your new home and forget the past - document your financial circumstances - pay a CPA and Attorney to sign and date your financials. If you are insolvent you will not have any farther claims against you that cannot be easily defeate at low cost in a non attendant hearing. Even if you are not insolvent you can still preserve what you have and avoid any farther liabilities.
Best of luck to all who are living a nightmare only your parents warned you about and now you are livng it.
BSCGOVMAN
I have no idea how we, as a country, have lost our values.
I think that there are still a lot of good, honest and smart people in the US. Many people will suffer, in some way, from the behavior and actions of the stupid and dishonest people. But the very wealthy (like Warren Buffet, Bill Gates, Congressman and Senators, kings, former Presidents) and the less wealthy (like government employees who have pensions) will suffer less...or not at all.
In the meantime, everyone in the US who pays taxes will have to bear the cost of the bad, dishonest decisions made by the stupid people.
Good advice, whether you're underwater or not.
Unfortunately, most borrowers do exactly the opposite... much to their detriment.
(Much) Easier said than done.
First, whenever they want to have some kind of discussion they usually rent out some 5 star resort. While the execs are out playing golf, riding horses and taking balloon rides we set up sound, video and lighting rigs that would make any show you've ever seen at any time in your life look pathetic and puny. For dinner entertainment they hire bands like The Who - yeah I've seen that - or anyone they feel like they want to have entertain them while they eat the finest of foods.
I listen to them discuss the ways that they are going to maximize profits by offshoring so they do not have to pay taxes. They talk about how much money they can save by cutting employee benefits, outsourcing and automation. Every decision they make is filtered through the lens of profit. Every decision, that is, except how much money THEY get to make - they NEVER discuss that.
They have no loyalty to this country, their customers or their employees - none.
With that said, why should we have any loyalty to them? If it were profitable and doable, they would fleece us for everything we have and leave us penniless and homeless. They would not hesitate for one second, not one, to take the food out of your child's mouth if they thought they could make a penny from doing so.
That is the reality, that is the truth. I've seen it with my own eyes and heard it with my own ears. These people are Monsters, nothing more nothing less and we must not ever forget it.
So, if some of you want to game the system then I say go ahead. Payback is a b*tch.
Although I couldn't see me doing this, except under duress (go ahead and tell me that you wouldn't steal a sandwich if you hadn't eaten for 2 weeks -- right..), I find it both interesting and funny that people will bow to Sir Donald Trump and use banks as an ethical example (who was it buying things from Enron and selling them back at a profit -- oh, yeah, the banks that disappeared when the cops showed up), and these same outraged people don't see the principles in use.
Legally, it is just a freakin' contract. You break it, there are consequences - spelled out in the contract and the law. Your soul isn't taken, despite how this is beaten into us middle class by the upper class and other overlords. It is **just** a contract. Donald Trump clearly weighs the value of the contract. How many times has he declared bankruptcy? If he can save a million by not paying a mortgage, it is a business decision -- he pays the consequences. That's the deal. His soul doesn't fry, both parties signed the contract and at least semi-understand our feudal law system. So, get off your high horse, go back to your gas guzzler SUV with the DVD players in the back so you never have to talk to your kids and get on with your now less sanctimonious life... You know, ignoring the **real** important things in life... HA!
However, there are many people out there who didn't do these things who are also being dragged down by this mess, who are watching our net worth dwindle away while we can do nothing but watch. Some of us who purchased homes during the "bubble" weren't carried away with the idea of "making money". We didn't spend more than we could afford. We didn't take out stupid loans. We were simply purchasing a home in which we intend to live - for years, maybe for the rest of our lives.
We purchased our home for $1.2m in CA in Oct '05. 3200+sf, 2/3 acre lot (rare in CA), pool, and cabana - in a nice area. It was (we thought at the time) a good purchase. We had studied the local market and analyzed comps. Because it needed some cosmetic work, it had been on the market awhile, and we were able to purchase it for more than $80K off the original asking price, which brought the price down to approx $130K below similar homes.
We paid 20% down, cash. We took out a jumbo mortgage and paid points to bring down the fixed interest rate to 6%. No second mortgage. No funky ARM. When we started repairs and upgrades, we paid cash (and we're not talking fancy things like granite countertops - we're talking replacing broken garage doors, installing insulation, etc). We have more than $300K CASH in this house, including down pmt, costs, repairs.
2.5 years later, we owe $945K-ish on the mortgage. Comparable homes are now listed at $919K and below and they are NOT selling - nor will they sell any time in the forseeable future. We have lost not just $300K+ CASH, but are roughly $60 below value on our mortgage - SO FAR. As we all know, values are still dropping.
Meanwhile, the value of all of our other investments has dropped tremendously during this crisis: 401K, mutual funds, stocks. Our total net worth has dropped 40% - SO FAR. I am certain the decline is not yet finished. Interest income is virtually zero - and inflation makes it LESS than zero. Further, our earned income has dropped by 12% in the past two years - even as insurance, gas, food, etc have risen.
We have spent years trying to make sound financial decisions. We save. We have ZERO debt besides our mortgage. We pay our credit cards off every month. We shop the sale racks and craigslist. We don't purchase new cars unless we can pay CASH, and we drive them 8-10 years. Our oldest child is in college, and her tuition/room/board are paid up front, CASH. She will leave school with no student loans. (BTW, we are instilling these same "save/invest" values in our children - she has saved more than $5K of her own earned money. She is not yet 19.)
We can still pay our mortgage, and we will continue to do so. But we are F***ed.
I would also like to add that between fed,state,and property, our annual tax obligation is approximately equal to twice the median family income. So, you know those "taxpayers" who will end up paying for this mess? Right here. My family will be shouldering a huge portion of that burden on behalf of lots of other "taxpayers" who in reality don't pay taxes, in addition to trying to dig our own family out of this mess. And we'll still be making our usual charitable contributions - time and money and goods - as the masses and the politicians are screaming for "the rich" to pay their "fair share."
My point is, This is not just an issue of evil lenders and stupid borrowers "getting what's coming to them". The current situation in our economy is bringing everybody down, even those of us who have done our best to build solid financial positions for ourselves.
And to those of you gloating because borrowers/lenders are getting what they "deserve": ALL of us are going to pay for this, to one degree or another.
And this is only the tip of the iceberg. I'm not even going to touch the issues of gas, commodities, etc at this point.
This employer had an intresting viewpoint on pricing (we were in a retail specality market and we were located in a basically residential location). Nearly everything we sold was sold at what at that time was considered substantial discounts from reckonized retail pricing.
Our customers varied from wealty to just above the poverty level. some of our customers were industial and purchased substantial volumes of various products we sold. We also sold to local governments and about 10 public and private schools.
The pricing policy was not how much money you had, not how well you negotiated your prices. It was simple, how much volume were you purchasing today. We absolutly positively gave the best available price to every purchaser, they didn't even need to ask.
Some years later the owner died, The business was closed by the estate. I went to work for a competitor whoes policies were common but penalized the small customer not pruchasing in volume. As a mater of policy a particular product was sold singally at the retail list price and if purchased in package quantities of 20 the sales person must give a discount of 20% is ask and 1/2 package or 10 items a discount of 10%. The issue of fairness comes in here, one day the driver of a prominent wealthy family came and and charged to a personal account of his employer quantity 1 of a $2.00 item. well he charged the $2.00 but when the owner was reviewing the sales slip he ordered the price be revised because Mr. prominent always gets 25% discount. (to say nothing of the bookeeping necessary for the charge sale).
Some how it seems that money is not of equal value. For years I have paid for product and intrest in the case of loans baised substantially upon my assets. So have others, I know of no one with an 820 fica score with a very modest income. Years later I was in a successful small electronics business, paid my bills on time, in full, but because the industry had a lot of less reptuable competitors my insurence costs 22% of my gross business. In 4 years i never had any suggestion of a claim. yes my premium was lowered by about 2% a year but I made near nothing for my 80+ hours per week, every week, no money for family health insurance, so i left the business to work for as an engineer for a company billing $125. an hour for my services that I was grossing about $32. with benifits.
I'm not expecting to get any of this fixed, but I can't help but believe that our children are not properly educated in financial maters with reference to responisibility and not just how to make it work. I really believe we need honesty from both sides and none of these issues would be taking place.
To all, earn a living, live within it, help those who have run into a ligitimate need but never to those who don't put forth the effort needed to improve their situation.
All debt schemers (regardless of what end of the note you are on) should take note; What goes around, comes around.
You reap what you sow.
Here's something to chew on:
blog.metro-real-estate...
Therefore:
1) If a bank lent more money on a home establishing payments higher than what a renter would pay in rent….then it took a risk
2) If a buyer paid or borrowed more on a home than what a renter would pay in rent….then he/she took a risk
In recent years we as a society have lost our ability to value things. We did it with stocks and now with homes. The market does not tell you what an asset is worth. Would you pay more for a car than what you could rent it for on a monthly basis at Hertz? I would hope not.
You know, a funny thing happened today. I am a sub contractor for a large high end cabinet company. I have a 140k first mortgage held by family, and a 340k second mortgage held by the bank. my home has lost half of its value within the past 2 years. I have been faithfully making my 700 first nort payment. My second mort payment has dropped from 2300 all the way down to about 950. market vale on my home is about 220k. The funny ting that happened, is that I was replaced by sub standard, hourly employees. The company will feel their decision in the months to come, but for now, I am faced with the dilemma of default on the second. I would be lashed a thousand times if I defaulted the first. After 8 years of service, toolong and vehicles, this company, called the more space place, just decided to let me go. For financial reasons. Sorry about your luck, we hope the economy picks up. No offer to become an employee, of course. While looking for another source of income, what do I do? WHile having close to 120k in credit debt, I am feeling that the slimy thing is the best thing. Its actually quite appealing. Thank goodness for our capitalist society, soon to be socialist.. but hey, better get while the getting is good.
On May 16 11:14 PM allan wrote:
> Most employers will fire an employee if they can save a dollar by
> doing it. Nothing personal, just business. Sorry 'bout that. All
> you rightious critics are the same ones always harping about loyalty
> to your employer. Then your blindsided by HR and wonder why you did'nt
> earn THEIR loyalty. These mortgages are governed by the contract
> agreed to by both parties. Either party can breach the contract and
> accept whatever penalty allowed by the contract.
> There is no morality involved. Always protect yourself first.
right on, friend. I have 119k in 1099's last year, and show a true income of 91 $. Was just cut from A major custom application cabinet company due to financial problems on their part. They still charge the rates I set forth 3 years ago, yet hired foreign employees to fill my positions. I have no problem at all defaulting on my second mortgage.
I enjoyed your comment, seeming tha I gripe the exact same way, romans, milk etc. I didnt know about the afghan prison, thats interesting.
thanks again,
Nathan c
On May 17 09:44 AM the final horseman wrote:
> its interesting that the word 'morality' popped up here...since when
> are banks and millionaires moral? since when are laws moral? since
> when has the constitution survived over the last 100 years or so
> without a bunch of moral lawyer-politicians trying to bleed the carcass
> dry?
>
> somehow, i still remember the sammy davis estate deal...it owed about
> $100 000 000 and paid ten cents on the dollar.
>
> try that as a little guy and see what happens. and then...mr and
> mrs hillary made $109 000 000 last year...and how much did they pay?
> hmmmm? what was their tax rate?
>
> bottom line....t. jefferson...you should remember him...they cut
> part of his face off the nickle...stated..when a country loses control
> of its currency, it is no longer a country
>
> so.......as of 1913 give or take, wilson suddenly turned the united
> states of america into the united states of anarchy.
>
> so much for morality.
>
> the rich cut our throats. the government bleeds us dry...and the
> constitution is more or less dead. and then, of course, the dems
> will raise taxes....oh and btw, what ever happened to getting out
> of those sand-filled and/or mountainous countries? do we seem to
> be building a huge prison in afghanistan? with our tax dollars? is
> this the 51st state or something?
>
> food never gets to the starving in how many countries?
>
> what happened to all those dollar bills shoveled off trucks?
>
> why do economists even bother with core cpi?
>
> why do some stores ration rice here of all places?
>
> why does milk cost the same as gasoline? should we use deathanol
> in our cereal or ride a cow to work? (for those of us who still have
> jobs?)
>
> does it really matter who wins the election?
>
> as the GMG says quite often...we are freaking doomed.