Att: Barney Frank it's negative equity not big payments that cause default!!

I disagree.

They're not looking at what's BEHIND the numbers.

Just having negative equity in your home doesn't mean you're going to default. Excluding external variables (job loss, need to move, etc.), if you bought within your financial means, and wisely chose a fixed-rate mortgage, your ability to afford those mortgage payments should have absolutely nothing to do with whether your home's value rises to a million dollars or plummets to $15,000.

What DOES make the negative equity more likely to force a default is if the borrower used an exotic variable-rate mortgage that would reset itself in the future to an unaffordable rate. Up until last year, this strategy appeared to be sound, as these borrowers -- knowing full well they would never be able to afford the higher "reset" mortgage payment -- expected the market to continue to climb, thus allowing them to flip the property before the mortgage reset.

This strategy worked perfectly for millions of homeowners. Until -- it stopped working.

But to suggest that simply having negative equity in your home is an indication that you'll default is overly-simplistic. One has to look at your entire financial picture -- most importantly what kind of mortgage you're carrying, and whether it's due to reset to an unaffordable rate.

Frankly, I'd expect more from the Wall Street Journal.

and the new york times?
http://krugman.blogs.nytimes.com/2007/12/14/why-negative-equity-matters/

http://www.bos.frb.org/economic/wp/wp2007/wp0715.pdf
and the Fed??
We attribute
much of the dramatic rise in Massachusetts foreclosures in 2006 and 2007 to the decline in
house prices that began in the summer of 2005. Overall, we find that subprime lending
played an important role in the foreclosure crisis by creating a class of homeowners who
were particularly sensitive to declining house price appreciation.

NYCMatt the link between negative equity and rate of default is highly intuitive. An under-water borrower has no "skin in the game" and very little incentive to maintain his mortgage. At best he's only likely to do so for the following reasons

1) His payments are less than rent
2) Borrower believes he has a moral obligation to continue paying
3) inertia?

Riversider, I suppose I have more faith in people than you do.

It would never occur to me to walk away from a mortgage just because the home was "underwater", and I assumed others wouldn't, either.

I suppose I have more faith in people than you do.

It would never occur to me to walk away from a mortgage just because the home was "underwater", and I assumed others wouldn't, either.

Study says 17 out of 100 Americans would...

http://www.financialtrustindex.org/images/Guiso_Sapienza_Zingales_StrategicDefault.pdf

We also find that no household would default if the equity shortfall is less than 10% of the value of the house. Yet, 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house

I guess this new economic reality is showing what many people are really made of.

Sad.

Consider a 40 year old divorcee who is living in Las Vegas - makes $55,000 (the median income). He is a salaried employee. Last year he made $53,000 and next he'll probably make $58,000. 20 years from now he'll be making $85,000 before he retires. He has 2 kids let's say. He bought a $300,000 house in 2007 (the median price). He thought he was being prudent as he makes the average income and was buying an average priced house. Now the house across the street, built by the same builder, with the same floorpan and the same finishes can be bought from a bank for $110,000 (the median price of foreclosed homes in Vegas right now).
His monthly take home pay is $3,800 and his monthly housing nut is $2,200 or nearly 60% of his income. He has a bit of savings say $40,000 (not sure what the median savings of a Vegas resident is).
If you were him what would you do? You have some cash. You could buy the house across the street - the bank who owns that home is bank A they don't care that if you buy it that your plan is to default on your current loan with bank B across the street. You have a good credit score so you'll be able to get a Fannie Mae loan. Bank A is just glad to have the house off their books, screw bank B.

If you buy the home from Bank A (putting $10K down) you could move across the street and have the same house but instead of having a monthly housing nut of $2,200 you now have a monthly housing nut of $1,000. Your housing nut is now $12K/year or 32% of your income. The principal you owe is now $190,000 LESS (it's taken you 40 years to save $50,000 and now you can save $190,000 and $1,200/month by moving across the street).

Sure it hurts his credit but so what. He now has a 30 year fixed mortgage, he already has his car loans etc. His credit cards may get cancelled or the interest rate may get jacked up but he can pay cash he has some savings. A good credit score for a guy like this just isn't worth $1,000/month. If this person were my family member I'd tell them he would be crazy not to walk away. He made a deal with the bank "I'll make my payments but if I don't you get the house" well now I'm choosing not to make my payments so here are the keys. Walking is his best move.

"You could buy the house across the street - the bank who owns that home is bank A they don't care that if you buy it that your plan is to default on your current loan with bank B across the street. You have a good credit score so you'll be able to get a Fannie Mae loan. Bank A is just glad to have the house off their books, screw bank B."

Um, not quite. You need to have 30% equity in your house before you buy a new one.

I agree that banks olding REO loans would be inclined to make a deal with a new buyer, even extend favorable financing. This is probably the best way to buy home today, assuming you do your due dilligence.

The_President - Not familiar with the 30% equity rule (assume it's a Fannie issue) but without question the person could buy the house across the street as it's happening time and time again in Vegas.

Fannie and Freddie now require you to have 30% equity in your house before you buy a second one. They did this because too many people were "buying and bailing."

how is this any different from geithner cheating on his taxes and fessing up when it comes time to be sec of the treasury? actually, its better because there are no laws being broken here. this is a big part of the problem that neither political party is willing to face because its a sure ticket to not being elected or re-elected.

"It would never occur to me to walk away from a mortgage just because the home was "underwater", and I assumed others wouldn't, either."

Ummmmm...you have assumed wrong as this is precisely what is going on now....

You need to have 30% equity in your house before you buy a new one.

Banks would be smart to have more lenient rules for buyers of their REO properties... And many do. Probably the best opportunities in real estate are here, if you do your due dilligence.

if banks had more lenient rules, people would buy a new house and let their old one go into foreclosure.

sounds like fraud, ....but there have been stories with unethical brokers suggesting this. Of course if the first house is in one name and the new house in another, it might be hard to prove..

Riversider - Why is this fraud? Your mortgage says that if you make your monthly payments you get to live there, if you don't pay then the bank gets the house. Nowhere in any mortgage that I've ever read does it make the buyer agree that if the buyer has the money the buyer has to make the payments. Some states allow for the bank to go after the buyer for it's economic loss but some states don't. Generally people who are foreclosed on don't have any assets worth going after so this law is generally ineffective, but in times like this such a law can be very beneficial for banks and can prevent the "buy and bail" scenario that is happening in Vegas, Florida, PHX, California, and soon more and more places.

Defaulting on one house and then running across the street to borrow for another one?

Hmm.. Let's see I guess when you default you say to the bank, "hey i'm broke, take my house. oh and the loan is non-recourse i' assume"

hmm. then your wife buys an REO property from the bank down the street and doesn't mention your default...

From Wikipedia "in the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual"

So yea, it sounds like fraud.

Firstly, to some extent there's no "news" to a lot of this. Take the converse: you have equity, you don't get foreclosed on. No matter what else occurs - interest rates up, jobless up, etc. if you have equity you don't get foreclosed on, you SELL an get your equity out rather than being foreclosed on and losing it.

Secondly, I have a problem with some of the data being put forth in the WSJ article: the "causes" of foreclosure listed are basically BS. How do you attribute a foreclosure into those categories?
1) Negative Equity - well, 99.9% of foreclosures are caused by negative equity, so this category is meaningless
2) Downpayment of less than 3% - well, this one can cause you to be in negative equity a lot faster, but i don't know how you separate it out vs all the other factors?
3) Motgage Reset upwards: this i can see.
4) Subprime FICO score (<620): how the hell can this CAUSE a foreclosure? This is total nonsense: one you've got the loan, your FICO score doesn't CAUSE anything. I'll bet there are tons of people with sub 620 FICO scores who have not defaulted. So how do you pick this as the CAUSE of the foreclosure, as opposed to something else? (like negative equity and job loss)
5) Unemployment increase: like 3, this i can see.

Thirdly, classically, foreclosure was the result of 2 things happening at the same time: 1) negative equity and 2) the inability to pay the mortgage from either rent on the unit or income from your job. You needed both of those things to occur to have a foreclosure. But a lot of that was because of people's ATTITUDES towards walking away or getting foreclosed on. We have seen a sea change in how people feel about being foreclosed on. Once there is no longer a huge stigma attached to getting foreclosed on, you only need one of the two: negative equity. If there is virtually no penalty associated with being foreclosed on (and the stigma was always the largest), all you need is negative equity and people will walk away. Also remember that in a large number of states, first mortgage loans are non-recourse.

broken record time again: when was the last time that the treasury secretary was nailed for tax evasion at his nomination hearing?

ok let me try again: the treasury secretary said that the reason he failed to pay his taxes on time correctly was that it was too complex. are we in the twilight zone yet?

Secondly, I have a problem with some of the data being put forth in the WSJ article:

Yea, WSJ isn't what it used to be...Another reason why I read the F.T. first and foremost.

"ok let me try again: the treasury secretary said that the reason he failed to pay his taxes on time correctly was that it was too complex. are we in the twilight zone yet?"

Maybe he's just a big Steve Martin fan?

Riversider: "Hmm.. Let's see I guess when you default you say to the bank, "hey i'm broke, take my house."

You're not saying to the bank "hey I'm broke" you are simply saying I'm not going to pay you so per the contract you get the house. There is no deception here. There's no need to have your spouse/friend/family member buy the house for you down the street you can buy it yourself. You just buy it before you stop making the payments on the "underwater" house. You can tell the new bank what you're doing, they just want their house sold to a guy who's going to pay. It's there call whether or not they think you are such a guy. Today's actions from the banks are proving that they're willing to lend money to guys who are walking away from underwater houses.

The mortgage affords you two options - one is to make your payments the other is the right to walk away (non-recourse). You simply are selecting the second option. There is no deceit/fraud involved. You need not even make them foreclose on you, you would simply give them the deed in lieu of foreclosure.

" a fraud is an intentional deception" - there is and was no intention to deceive anyone here. You simply are walking away from a house and per the contract you can. But you suffer the consequence, which in most cases means you lose the house and all of the payments you made for interest, principal, improvements, taxes etc. Plus your credit score is trashed for years.

CC - I couldn't agree more. I was a fan of Obama's until he put a tax cheat in charge of the IRS. No forgiveness for something like that - you cheat on your taxes you can't run the IRS - simple - it's like putting a white collar criminal in charge of the FBI.
Guys like Geithner are not the CHANGE that we voted for.

If you walk away from a mortgage, you will lose your home, you will lose your credit. Your lost credit means you can't borrow, means your insurance will be jacked up, you will have trouble finding a job. Employers check credit scores.

Even in states where there is recourse it is almost never used. Lenders forego recourse in exchange for the borrowers "cooperation" in leaving without damaging the house and stealing all the appliances, bathroom fixtures and copper tubing. Historically, borowers in default never had much in the way of other assets anyway.

But we have traveled far down the path of moral hazard and Americans are a quick study. Default models never predicted that fixed rate borrowers with jobs and income to satisfy their debts would walk away from thier primary residence simply because it was under water from a mark to market point of view.

But the debtor as victim mentality has borrowers emboldened. And hey when everyone is doing it there is no stigma. When the Government agrees that the banks are evil and mortgage borrowers were duped into buying homes it makes it easy to walk away. Chris Dodd et. al. seemed to know what they were doing when they got those sweetheart deals from Angelo Mozilo but the average American is not responsible for understanding the most important financial decision of their lives??

Americans now understand that there is very little consequence for exercising their default option and man oh man are they efficient option exercisers.

lewsGal - Yes, I agree with you. The example given by Jazzman is flawed and not useful. If the homeowner is underwater he will not get a mortgage to buy the house across the street. If he walks away his credit score will be crushed and he will not get the house acropss the street. This is just not a real possibility in any way, shape or form.

a good example would be the buying of a foreclosure across the street and then defaulting on your own property which was purchased at a higher price

Yes, but if he didn't have a lot of equity in his home he is still not going to be able to buy the foreclosed home across the street...especially with 10% down like in the example. It *sounds* like it could happen, but it is not.

Not necessarily true. A bank sitting on a foreclosure has little to lose in extending the credit. This is not creating a new exposure for the bank, so they have incentive to roll the dice(another barney frank quote)

"A bank sitting on a foreclosure has little to lose in extending the credit."

Ehhhhh....let's agree to disagree on this one.

waverly - this is happening all over the country - this is not some hypothetical "what if" it's a reality. Ask anyone who lives in Vegas.

i haven't applied for a mortgage since the recent meltdown so perhaps this has changed as well but...

having owned multiple properties, I have always listed other properties on mortgage application along with my non substantiated valuation and any outstanding mortgage on those other properties. no appraisal has ever been done except on the property for which I was seeking the mortgage; are you suggesting that banks are now doing appraisals on all owned properties?

I am suggesting that when this guy applies for a mortgage and they ask what his monthly costs are, this amount will not allow him to get a mortgage for a 2nd home...especially with 10% down. I don't need to speak to anyone in Vegas. Your example shows a guy paying 60% of his monthly nut for his mortgage. You think ANY bank RIGHT NOW is going to give this guy a 2nd mortgage (and he'll also just put 10% down for this 2nd mortgage)????

I don't think so.

how about a few months of phony rental income?

check this out:

from february

http://www.npr.org/templates/story/story.php?storyId=18958049

"Consider a 40 year old divorcee who is living in Las Vegas - makes $55,000 (the median income). He is a salaried employee. Last year he made $53,000 and next he'll probably make $58,000. 20 years from now he'll be making $85,000 before he retires. He has 2 kids let's say. He bought a $300,000 house in 2007 (the median price)."

Jazzman, right off the bat this premise is already seriously flawed.

There is no way this guy -- or anyone, for that matter -- can reasonably expect to afford a home that costs more than FIVE TIMES his annual income. Strike One.

There is no way the BANK should have extended him a mortgage based on his poor financials. Strike Two.

And if he's a divorce, is he paying child support and/or alimony? If he is, he's really taking home significantly less than $55K. Strike Three. He SHOULD have been OUT.

NYCMatt - you clearly don't know the Vegas market like I do. People with ZERO income (me when I was in grad school) got pre-approved for a 10% down 5/1 ARM for $600,000. It was rampant.

CC - again this is not a hypothetical scenario - it's common place. Google any real estate broker in Las Vegas - call them - ask them if it's happening. Simple proof.
If you're a small bank and have 100 REO's and some guy with a good job and great credit and little debt other than his house walks in to your bank and says I own the place across the street I want to buy your house and walk away from my old one. Why wouldn't you sell it to him and fund the mortgage yourself? The government is giving you free money to lend -your spreads are ridiculously lucrative right now. They're looking for places to put money and in walks a guy who's been paying $2,200 for 2 years without incident and now he wants to buy a house from you with a payment of $1,000. I'd make the loan and so are the banks in Vegas.

little debt other than his house.....

Yeah, the house that costs 60% of his monthly income....that little debt.

waverly- "that little debt" goes away when he walks - I don't understand why it's so hard for you to grasp this concept.

Now you are saying he abandons the first house...black mark on credit for 10 years and then just casually buys the house across the street the next day with 10% down...not happening/couldn't get a mortgage.

Not likely to get a RENTAL, either, if the landlord looks at his credit report.

waverly - please re-read everything - it's now clear why you don't understand what's going on here.

Re-read it and what you are proposing isn't happening.

waverly - google "buy and bail"

Mortgage loans should be recourse with stiff criminal penalties for damages done to bank collateral from previous owners vacating properties. If people with real assets outside of their homes (cash/equities/etc) are walking away from contracts with those other assets intact and buying new homes at distressed prices, that is not what was intended. I guess since there are many more voters who don't want recourse mortgages compared to those who would like things to get tougher (banks), things will be difficult to change. Meanwhile, the ease in which these mortgages were handed out pushed up housing prices to levels that conservative/realistic buyers were priced out of the market. These conservative/realistic buyers will now be paying higher taxes to bail out their spendthrift neighbors and bonus driven bankers.

Oye! I got a sombrero and can carry one tune in spanish... thx you banker MAN for the 0 down $2MM mortgage... now watch me as I learn another song in spanish and the 10% appreciation on my $2MM "home" and leverage it up to 20x for a $4MM property... and if Banker MAN says "NO", I will have Barney Franks in his tiniest rainbow thong sit on BANKER MAN until he learns the spanish word for "YES" => "OUI"

"I will have Barney Franks in his tiniest rainbow thong"

AAAHHHH.....I have just mentally gone blind....

Jazzman - did you read any of that???

Answer: Buy and bail is the result of buying a new home with the intention of bailing on the old. It is considered mortgage fraud. Even extenuating circumstances do not give a home owner the right to commit mortgage fraud.

Your own explanation proves my point....

finally people are agreeing with me....
http://homebuying.about.com/b/2008/07/02/the-trouble-with-buy-and-bail-schemes.htm

damn it.... I googled "buy and ball... " don't do it man... just don't google those two words....

freudian?

waverly - my explanation is that there is now no need to lie on any applications - of course lying on a mortgage app is fraud - today there is absolutely no need to lie - just go buy a new house - that's all- totally legal - the new bank decides if you're credit worthy and more and more the selling bank is happy to lend to any buyer with decent credit and income.

Then just walk about from your old house - totally legal.

This continues to happen around the country and will only get more popular. Like it or hate it, it can be done legally. Granted some/many/most do it fraudulently but it need not be illegal and the more and more desperate the banks get the easier it's getting to do without any repercussions.

Plus - most people who lie on the application are lying on the purchase of the new home. So who's going to sue? The new bank is happy, they sold a house and their buyer is making the payments. The old bank has no recourse. How can the old bank sue because the home owner lied on an application to another bank. Face it, these websites like the one you quoted are not accurate. They are put out by the banks to discourage the behavior. Show me where banks are prosecuting this behavior. Certainly you now agree that it's happening, so where are all of the lawsuits?

w67thstreet
damn it.... I googled "buy and ball... " don't do it man... just don't google those two words....

of course you did, you are a funny guy. Thanks for warning the rest of us.

http://homebuying.about.com/b/2008/07/02/the-trouble-with-buy-and-bail-schemes.htm

"The FBI is presently investigating more than 50,000 cases of mortgage fraud and have made sweeping arrests in the past week."

Anyone seen any corroboration of this?

no

has Casey Serin been arrested yet?

REO - these cases have to do with people lying on their applications and defrauding the bank. There should be 5MM investigations not 50K.

Jazzman - No, I don't agree with you that it's happening. If they don't lie on the mortgage application they won't get the loan and cannot buy the new house. Has it happened? Yes. Is it happening left & right? No. You can keep re-posting it, but it doesn't make it any more real.