I’m about to tell you something anecdotal, but it tells me that the mortgage system is truly broken, and mortgage lenders are doomed.
We had some wonderful neighbors who moved to a new neighborhood at the height of the housing bubble. They paid about $420,000 for their new home.
Now, the bubble has imploded. A home on the same street that they live on - the same model as their house - is LISTING for $185,000.
In other words, they are never getting their money back.
After discussing things over with a lawyer, they decided to stop paying their mortgage. The bank said pay up or we’ll foreclose. My friends told the bank: “Show us the official mortgage paper.”
The bank can’t do that, because it sold, sliced and diced that mortgage from here to Kingdom Come. The foreclosure went to court … and the judge threw the case out. So, our friends are living in their house rent-free - which they’ve been doing for months — while they see what happens next.
Now, a bunch of their other friends are talking about doing the same thing.
You’ll notice a couple of things …
The stigma of foreclosure has evaporated. Friends and neighbors aren’t talking behind their backs - they’re talking to them to learn how to do the same thing.
The solid middle class is in revolt. This is a very hard-working couple, immigrants from Israel. They’re still paying their association dues because, as our friend explained to my wife, “we use the facilities, so we should pay for them.” They aren’t creeps, they aren’t crooks, and they feel the banks have already profited handsomely from middle class misery, and they aren’t going to throw more money down a hole.
What comes next? I don’t dare to guess. But if you think the banks are in trouble with foreclosures now, just you wait.
UPDATE: In response to a couple of comments, I’d like to point out that all ethics are relative, and that goes double when it comes to banks.
I have another friend, a hard-working dude, maybe not a rocket scientist but a sweet guy. About 10, maybe 12 years ago, he was getting close to paying off the mortgage on his little house. It wasn’t a great house, but it was his house. But for one reason or another, he missed a couple of payments. You might think the bank might work with him. But instead, they started foreclosure proceedings and had him kicked out of his house when he had very little left on the mortgage.
Unethical? I think so. And absolutely legal. I don’t know what the bank did financially that year, but let’s say it did well. Did the financial analysts on TV say, “yeah, they had a good year, but they’re real jerks for kicking that guy out of his house in West Palm Beach.” Of course not. Because what the bank did was legal. No one worries about a bank’s ethics. THAT would be crazy!!
Now some other people are doing what I wouldn’t do. A bunch of other people are watching them and thinking that maybe they’ll do the same thing. There is a tidal wave building, and you would be foolish to wait until your feet are getting wet.
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They may not be creeps or crooks but they are unethical. It’s one thing if they lost their jobs and can’t afford their mortgage. But just because the price of the house went down doesn’t excuse them from having to pay for it.
If I buy a stock on margin and it plummets that day, I can’t tell my broker, I’m not going to pay for it. Whether banks are profiting from middle class misery, does not justify them refusing to pay for the house that they signed a contract to buy.
Not paying your mortgage and letting your house go in foreclosure… this the reason banks are going under. Every 5 years or so there is a housing crisis only to rebound so why are people thinking they house will never be worth what they paid for it….if they wait a few years property values will go back up and the house will be worth more than they paid for it.
So it’s now acceptable not to repay money I borrow because the lenders were “crooks”. Now these “nice” immigrants are living rent free in a house that belongs to the banks. But since the banks can’t figure out who owns it for sure, the deadbeat tenants can not be kicked out. The structure is now officially a $400,000 non-performing asset that will get written off. Then the government will buy it, and add the amount to the national debit. In the end me and my children get to pay for it through higher taxes. Thanks Mr & Mrs immigrant from Israel, welcome to how things are done in America!
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While I agree with you Marc that it’s questionable ethics, the point I’m trying to make here is that there is a sea-change going on in how this is perceived by the main-street Middle Class.
Perhaps you’re right. This also puts people like me — who owe very little on their homes — in a pickle. I hope we don’t have to end up paying for other peoples’ excesses.
Yes, T, this will probably weigh on you and me and everyone else who pays their mortgage. But you’re missing the point: I think we’re seeing the beginning of a middle-class revolt against the banks. These people are doing it, but they’re not being shunned by other home owners. They’ve seen these banks profit at taxpayers’ expense and they’re sick of getting stuck with the bill.
Two more questions …
1) Whose fault is it that the banks can’t find the paperwork on the mortgage?
2) When financeers and financial companies use every legal avenue at their disposal to come out ahead, Wall Street calls them sharp. Now the middle class is doing the same thing — it may not be what I would do, or what you would do, but in my opinion it is DEFINITELY what the big banks would do if the roles were reversed.
This is not a good development for our economy or financial system. It’s a shame we’ve come to this. But you shouldn’t ignore it, or pretend it’s just unethical crooks that are going to do this. I think it’s a taste of what’s to come.
How ethical is it that the lender who funded your loan almost certainly sold it within days to another bank who kept transferring it through various other banks until it reached a mortgage-backed security pool, at which time it was sliced up and sold to investors?
Does it make a difference that your original lender was paid in full for your mortgage? And doesn’t that mean your mortgage was paid off?
How ethical is it that a supposed neutral corporation, MERS, was established and is owned by the banks in an effort for them to avoid having to pay various county taxes, transfer and recording fees so the banks can continue selling your mortgage as an investment? And that MERS either forecloses or transfers its rights (which it has none, because it was never the original lender) to another bank to foreclose, but never notifies the homeowner who is the actual owner of the loan?
How ethical is it that banks can take your mortgage (off of which they’re already making money) and sell it to investors to make more money, also purchasing credit default swaps (a hedge against you defaulting, on which they make money), and not pass on any of the profits to you?
There is nothing unethical about requiring a bank which is trying to foreclose on your house to prove that it owns the rights to foreclose. And if the bank can do that, then it can foreclose. But at least half of them can’t prove it, and so should not be allowed to profit from their lack of proper documentation in their rush to make even more money from your mortgage.
I bought my house in Jan 2006 in a new development… paid $300,000 for it… 4 years later, 12 of the 25 houses on my street are empty (abandon or foreclosed). Of the 13 remaining families, 4 are owners and 9 are renters… Borrowers were never properly screened by the banks with loose lending policies in ‘06 or ‘07….. I have never missed a payment and my house is now worth $105,000… Is that my fault???? Or the fault of the Congress pressuring banks to loosen up lending policies as part of the “Community reinvestment act”????? I can totally understand your neighbors position… This problem started with political interference in the free market system, and like everything the government gets involved in, its now a total boondoggle!!! What did you expect from Washington DC????
Well, I have another point in mind, which obviously nobody discusses.
Who has profited from the house at the time of construction?
Who has bought the house some years ago at a much lower price and sold it to the current owner?
The bank? Really? I don’t think so. The bank gave the money to buy it, and the bank got interest payments for it. The bank has by contract the right to get back the money given away. Nevertheless the question I have is dealing with the former owner. He is the guy or company who or which has gained. Therefore I am asking: Doesn’t the former owner has anything to do with the situation?
The whole system is crazy, isn’t it?
Your Israeli friends have failed to take a secular business question one step further which is what is happening here in Vegas. The logical business decision to take is to buy the equivalent house down the street before stopping the payments on the residence. I know several people who are shopping now for a short sale home equivalent or better than their upside down house. They will suffer the 10 - 20% down and buy and move in and then let the old house go. Lawyers advise it is better to let it go to foreclosure rather than a short sale because of deficiency statute of limitations. Of course they suffer a loss of credit rating for a while but it’s up to the individual to make a decision about the amount of under-water vs. the loss of credit. Another cold business trick is to rent the house out after stopping the payments. As a practical matter the banks never come after the rent and you will pocket a nice piece of change during the 1 to 2 year foreclosure process. I agree with Sean….the foreclosures will increase from here for the above reasons.
Of course, if the thing is underwater, there’s nothing wrong with defaulting. If it’s a non-recourse loan, the contract means that you have no further obligation. And in all states, default risk was priced into the mortgage rate you’re paying as part of the “OAS”, or Option Adjusted Spread. Any mortgage rate is higher than corporate loan rates for that reason. It’s assumed that a fraction of people will default strategically. It’s not an individuals responsibility to be in the “irrational” group, and that’s what it’s called professionally when someone pays a 300K mortgage on a house worth 100K: “irrational”. It’s just obvious.
How does one find out who owns your mortgage? Is there a way to test whether they have the paperwork, without too much trouble?
I have tried to refi my house with numerous lenders, I no longer have enough equity to qualify for anything, In the process I found out, much to my amazement, that Fannie Mae owns my loan. This is a prime loan, not a sub-prime loan. So, you may think that the Mortgage Lenders are doomed, but you are looking at the wrong people. It is the US tax payers who are doomed. The Mortgage Lenders made their money when they bundled the loans and sold them to Freddie and Fannie. They are now spending all of their time in one of their 5 or 6 luxury vacation homes. The banks won’t lose anything when you default on your loan, they are merely the “servicer” of the loan. Apparently you and I are paying the banks to collect the mortgage payment, then pass on what they don’t keep for themselves in fees to Freddie and Fannie. Really, this is the biggest tax payer scam of all time. The government needs to get out of the mortgage business. Freddie and Fannie are a huge part of the making of this mess. Mortgage Lenders write a loan, no matter whether they think it will ever be paid, they don’t care because they turn around and sell it to the Feds. NO consequences. NONE.
To find out if your loan is owned by Freddie or Fannie go here: http://www.makinghomeaffordable.gov/loan_lookup.html I don’t know how you find out who owns your loan if it is not Fannie or Freddie. I guess you would start by asking your “servicer.”
The Bankers wrote the laws, of course everything they have done is legal. “Ethics” and “The Law” have little, if anything, to do with each other.
I wasn’t aware of a morality or ethics clause in mortgage papers. Could someone perhaps produce it? I would assume it must be there, since so many speak of morality and ethics in what is strictly a business transaction. When consumers stop pretending they are bound by an imaginary clause that affects their side only, maybe then they will stop getting their fudge packed firmly inward.
When a person defaults, they give up the house. THAT is what is contained within the papers (unless one lives in a state that allows lenders recourse to pursue payment further). One will also have their credit rating tanked for years. Those are the legal penalties. No completely imaginary inventions. If one wishes to bring ‘ethics’ into it, I ask you this: which is more ethical - ruining your family by destroying whatever remains of your finances by attempting the impossible and losing the home anyway after all the money is gone and now you have nowhere to go, or sitting down as a family (if you have one) and discussing strategic default as a way to save what remains, and start over?
A Mortgage is a business transaction. Period. Pretending morality is written into it, is both foolish and self-delusional.