Professor advises putting loans back to lender

http://abcnews.go.com/Business/shame-cost-homeowners-big/story?id=9120264

Millions of Americans, whose homes are now worth significantly less than their mortgage, could be making an expensive mistake by continuing to try and pay their loan off when they should, instead, be walking away. In fact, owners are willing to keep piling money into a losing investment simply because they're ashamed to foreclose, according to a controversial new study.
Share
14 percent of homeowners are either behind on payments or in foreclosure.

"Homeowners should be walking away in droves. But they aren't," writes Brent White, an associate professor of law at the University of Arizona.

He explains that some owners who bought at the peak of the market now owe more on their mortgage than they can ever recoup in their lifetime. Although it would make financial sense to cut losses and abandon their homes, feelings are getting in the way. "A lot of it has to do with shame, guilt and fear," says White.

And how could defaulting on a mortgage enable the homeowner to buy anything else in the future? Or even rent an apartment, for that matter?

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494467

Homeowners should be walking away in droves. But they aren’t. And it’s not because the financial costs of foreclosure outweigh the benefits. To be sure, foreclosure comes with costs, including a significant negative impact on one’s credit rating.
43 But assuming one had otherwise good credit, and continues to meet other credit obligations, one can have a good credit rating again – meaning above 660 - within two years after a foreclosure
Additionally, in as little as three years, one can qualify for a federally-insured FHA loan to purchase another home.45
While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals – especially not when compared to the savings from walking away from a seriously underwater mortgage. While a good credit score might save an average person ten of thousands of dollars over the course of a lifetime, a few years of poor credit shouldn’t cost more than few thousand dollars. Moreover, one who plans to strategically default can take steps to minimize even this marginal cost. For example, one could purchase a new vehicle, secure a new home to rent, or even purchase a new house before beginning the process of defaulting on one’s mortgage. Most individuals should be able to plan in advance for a few years of limited credit.

"While the actual financial cost of having a poor credit score for a few years may be hard to quantify, it is not likely to be significant for most individuals – especially not when compared to the savings from walking away from a seriously underwater mortgage. "

Really.

I'd say that not being able to buy another home -- or even being able to get a lease to RENT one -- leaving you essentially HOMELESS "for a few years" -- is pretty damn significant.

Nycmatt, there are landlords who do not care about past bankruptcies and/or don't care about credit scores, even in NYC. I know someone who walked away from her under-water condo as a strategic default, stiffing the condo association in the process. She turned around and rented an even nicer place in Fidi, bad credit score and all.

Foreclosure does not mean living on the streets. Many private land lords are willing to rent to people with damaged credit or don't check. Effects of bad credit can be mitigated by depositing rent in advance, etc. To equate foreclosure with homelessness is a stretch, especially if it is a strategic default(i.e. you still have savings + job)

"She turned around and rented an even nicer place in Fidi, bad credit score and all."

REALLY. That's actually good to hear.

"She turned around and rented an even nicer place in Fidi, bad credit score and all."

REALLY. That's actually good to hear.

"She turned around and rented an even nicer place in Fidi, bad credit score and all."

REALLY. That's actually good to hear.

"She turned around and rented an even nicer place in Fidi, bad credit score and all."

REALLY. That's actually good to hear.

This was an interesting piece. The Salinas example in the paper was jarring (average prices seem to have declined by ~70%, so that someone who bought with no money down could be in a house worth 1/3 of what is owed on the mortgage).

I also hadn't realized that in some states purchase money mortgages are generally non-recourse. Does anyone know if mortgage rates are higher in those states to compensate for the implicit put option that comes embedded in every mortgage?

I agree with riversider. If you're seriously underwater, isn't the plan to stop paying and put the $ you save aside and rent before you get kicked out? That could be all of California, or at least my bitches in Laguna Niguel.

It's tricky. While some states like NY & Florida allow for deficiency judgments the lender must believe there are assets that are reachable. And in the case of Florida there are homestead exemptions. I did a google and looked at one lender's rates. They actually charged less for a California mortgage than a NY one(California is non-recourse).

In NYC, basically no bank goes after any residential (Coop, Condo, Single Family, 2 family) for deficiency judgments. Hasn't happened in the last 20 years and i doubt they are going to start now. For Condos and other Real Property, IF you want to go after the debtor for a deficiency judgment, you have to do it from the beginning of the process. If not, the usual "double jeopardy" prevents them from foreclosing and then going after you again for defaulting on the same loan in a second suit later. So, you have to do it from the get-go. Now, when banks foreclose (which in NY takes way too long anyway), the last thing they want to do is add something to the process which will drag it out even longer, all the while bleeding.

Coops generally use a non-judicial foreclosure, and they don't have a judgment. They would have to start a new suit against you to get a judgment for the deficiency judgment. And they would also have to defend that they way they conducted the sale was "commercially reasonable". Knowing how almost all of the bank foreclosing on Coops do it, I can tell you it isn't difficult for a defendant to make a defense on commercial reasonableness (for example, one of the bigger foreclosure mills has as one of their terms of sale is that the sale IS NOT subject to Board Approval. So, if the Board Rejects you, you still have to go through with the sale. No one at that firm has ever provided an answer to the question "So what exactly are you selling us then?" to me, my partners or any of my attorneys).

____________________

David Goldsmith
DG Neary Realty

Oh, and as far as I know, California is NOT a non-recourse state: they are a "one action" state, just like I described for NY above. They are only non-recourse for purchase money mortgages (in other words, if you refi, HELOC, etc., those are not non-recourse. BUT they still are "one action" state).

Non-recourse States:

Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington

One action states:

California
Idaho
Montana
Nevada
New York
Utah

But those categories are a bit blurry because each state has slightly diffference laws (like the California exemption for purchase money mortgages)

http://www.all-foreclosure.com/procedures.htm
http://www.all-foreclosure.com/judicial.htm

Alabama PrimarilyNon-Judicial

1/3 Possible andPractical

12 Months
Alaska Both 3/4 Not Practical None

Arizona Both 3/4 Not Practical None

Arkansas Both 4/5 Possible andPractical

None
California PrimarilyNon-Judicial

4/4 Not Practical None
Colorado Both 2/5 Possible andPractical

75 Days
Connecticut Judicial/Strict 5/6 Possible andPractical

None
Delaware Judicial 3/7 Possible andPractical

None
District ofColumbia

Non-Judicial 2/4 Possible andPractical

None
Florida Judicial 5/5 Possible andPractical

None
Georgia PrimarilyNon-Judicial

2/2 Possible andPractical

None
Hawaii PrimarilyNon-Judicial

3/4 Not Practical None
Idaho Non-Judicial 5/6 Possible andPractical

None
Illinois Judicial 7/10 Possible andPractical

None
Indiana Judicial 5/7 Possible andPractical

3 Months
Iowa Both 5/6 Not Practical 6 Months,if judicial

Kansas Judicial 4/4 Possible andPractical

6-12 Months
Kentucky Judicial 6/5 Possible andPractical

None
Louisiana Judicial 2/6 Possible andPractical

None
Maine Primarily Judicial 6/10 Possible andPractical

None
Maryland Judicial 2/2 Possible andPractical

None
Massachusetts Non-Judicial 3/4 Possible andPractical

None
Michigan Both 2/2 Possible andPractical

6 Months
Minnesota Both 2/3 Not Practical 6 Months

Mississippi PrimarilyNon-Judicial

2/3 Possible andPractical

None
Missouri PrimarilyNon-Judicial

2/2 Possible andPractical

None
Montana PrimarilyNon-Judicial

5/5 Not Practical None
Nebraska Judicial 5/6 Possible andPractical

None
Nevada PrimarilyNon-Judicial

4/4 Possible andPractical

None
New Hampshire PrimarilyNon-Judicial

2/3 Possible andPractical

None
New Jersey Judicial 3/10 Possible andPractical

10 Days
New Mexico Judicial 4/6 Possible andPractical

None
New York Judicial 4/8 Possible andPractical

None
North Carolina Non-Judicial 2/4 Possible andPractical

None
North Dakota Judicial 3/5 Not Possible 60 Days

Ohio Judicial 5/7 Possible andPractical

None
Oklahoma Primarily Judicial 4/7 Possible andPractical

None
Oregon Non-Judicial 5/5 Not Practical None

Pennsylvania Judicial 3/9 Not Practical None

Rhode Island Both 2/3 Possible andPractical

None
South Carolina Judicial 6/6 Not Practical None

Tennessee Non-Judicial 2/2 Possible andPractical

None
Texas Non-Judicial 2/2 Possible andPractical

None
Utah Both 4/5 Possible andPractical

None
Vermont Both 7/10 Possible andPractical

None
Virginia Non-Judicial 2/2 Possible andPractical

None
Washington Non-Judicial 4/5 Not Practical None

West Virginia Non-Judicial 2/2 Possible andPractical

None
Wisconsin Judicial varies/10 Not Practical None

Wyoming Non-Judicial 2/3 Possible andPractical

3 Months

http://www.foreclosure.com/statelaw_CA.html

How are California mortgages foreclosed?

The primary method of foreclosure in California involves what is known asnon-judicial foreclosure. This type of foreclosure does not involve court action. When thedeed of trust is initially signed, it will usually contain a provision called apower of sale clause, which upon default allows atrustee to sell the property in order to satisfy the underlying defaulted loan. Thetrustee acts as a representative of the lender to effectuate the sale, which typically occurs in the form of an auction. Unlike many states where trustees are appointed by lenders, title companies primarily serve as trustees managing foreclosure sales in California. California has a requirement known as theone-action rule. If a foreclosure is completed by non-judicial means, a second action to recover a deficiency judgment is not permitted. Using a judicial foreclosure, a lender may recover a deficiency judgment in certain circumstances. But since this process takes longer thannon-judicial foreclosure, it is rarely used. California non-judicial remedies have stringent notice requirements and the mortgage documents are required to contain thepower of sale language in order to use this type of foreclosure method.Judicial foreclosure are permitted in California and these usually occur when nopower of sale language is included in the loan documents.

Power of Sale Notice Requirements:

1. Anotice of default is recorded after a default occurs in the county in which the property is located. This does not necessarily occur after one or more payments are not met but for logistical reasons may occur after a loan is in substantial default — sometimes six months or more past due. This is known as the redemption period. The foreclosure process does not move forward for a minimum of 60 days. A notice of sale containing the name and address of trustee, certain disclosures (including that the property is about to be lost to foreclosure sale), the name of thebeneficiary, and other information must be recorded in the county in which the property is located at least 14 days before any foreclosure sale after that time period. This is known as the publication period.
2. The borrower must receive a twenty (20) day notice before any foreclosure sale, further notice of the foreclosure must: (a) mailed to the defaulting borrower (and other creditors whose liens affect the property) and; (b) be posted at the property being foreclosed upon and in a public place in the county where any sale would occur. The defaulting borrower may prevent the foreclosure sale by paying all arrearages up to five (5) days before the sale. The trustees’ foreclosure sale then occurs at the earliest twenty one (21) days after the first publication.
3. Foreclosure sales must take place on any business day between the hours of 9AM and 5PM and must occur at the location referenced on thenotice of sale. The trustee will auction the property to the highest bidder, including the lender. The borrower is permitted to postpone the sale for one (1) day.

In California, the lenders can also go to court in what is known as ajudicial foreclosure proceeding where the court must issue a final judgment of foreclosure. If thedeed of trust does not contain thepower of sale language, the lender may seekjudicial foreclosure. The property is then sold as part of a publicly noticed sale. A complaint is filed in county court along with what is known alis pendens. Alis pendens is a recorded document that provides public notice that the property is being foreclosed upon.
top
What are the legal instruments that establish a California mortgage?

The documents are known as thedeed of trust,note, and in a commercial transaction, asecurity agreement. Sometimes the mortgage document is combined with thesecurity agreement. Alternatively, amortgage is filed to evidence the underlying debt and terms of repayment, which is set forth in thenote.
top
How long does it take to foreclose a property in California?

Depending on the timing of the various required notices, it usually takes a minimum of 120 days to effectuate an uncontestednon-judicial foreclosure. This process may be delayed if the borrower contests the action in court, seeks delays and adjournments of sales, or files forbankruptcy.

http://www.foreclosure.com/statelaw_Ny.html
How are New York mortgages foreclosed?

In New York, thelenders go to court in what is known as ajudicial foreclosure proceeding where the court must issue a final judgment of foreclosure. The property is then sold as part of a publicly noticed sale. The court with jurisdiction over a foreclosure is known as theSupreme Court in the county in which the property is located. A foreclosure complaint involving a property in Manhattan would be filed in the Supreme Court of New York: New York County. A complaint is filed in this court along with what is known alis pendens. A lis pendens is a recorded document that provides public notice that the property is being foreclosed upon.

How are New York mortgages foreclosed?

In New York, thelenders go to court in what is known as ajudicial foreclosure proceeding where the court must issue a final judgment of foreclosure. The property is then sold as part of a publicly noticed sale. The court with jurisdiction over a foreclosure is known as theSupreme Court in the county in which the property is located. A foreclosure complaint involving a property in Manhattan would be filed in the Supreme Court of New York: New York County. A complaint is filed in this court along with what is known alis pendens. A lis pendens is a recorded document that provides public notice that the property is being foreclosed upon.

What are the legal instruments that establish an New York mortgage?

The documents are known as themortgage,note, and in a commercial transaction, asecurity agreement. Sometimes the mortgage document is combined with the security agreement. Amortgage is filed to evidence the underlying debt and terms of repayment, which is set forth in thenote.

How long does it take to foreclose a property in New York?

Depending on the court schedule, it usually takes approximately 120-180 days to effectuate an uncontested foreclosure. This process may be delayed if the borrower contests the action, seeks delays and adjournments of hearings, or files forbankruptcy. A foreclosure sale must be advertised at least four (4) weeks in advance of any sale and sales usually take four (4) months after final judgment for foreclosure is granted.

Is there a right of redemption in New York?

New York has nostatutory right of redemption, which would allow a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs.
top
Are deficiency judgments permitted in New York?

Yes. Adeficiency judgment may be obtained when a property in foreclosure is sold at a public sale for less than the loan amount which the underlying mortgage secures. This means that the borrower still owes thelender for the difference between what the property sold for at auction and the amount of the original loan. The Plaintiff must file a motion within 90 days after the property sale auction to enforce this right.

David Goldsmith
DG Neary Realty

30 years, you are quoting a realtor? I can tell you that hedge funds that own NY mortgages have on occasion taken advantage of deficiency judgments. I have no doubt that this is a-typical, but it can and does occur

Name one single instance of a lender obtaining a deficiency judgment on someone's primary residence (be it Coop, Condo or townhouse) in Manhattan where there was no fraud in the original loan. The only ting I could possibly think of was the Guccione mansion mess (but I don't remember it happening there, either, and there were some very complicated guarantees involved). I'm talking about a loan which was originated as a "normal" residential loan.

There's more to understanding what goes on in a business than cutting and pasting a whole lot from some website which is in the business of selling lists of foreclosed or soon to be foreclosed properties.

____________________

David Goldsmith
DG Neary Realty

Sorry David, just because it's outside your experience doesn't mean it has NEVER occured.

Sorry Riversider, you made a claim. Back it up or STFU.