Former mortgage payers
New rule lowers principle and interest on mortgages when borrower stops payment for 90 days.
Federal housing regulators took a significant step on Wednesday toward helping borrowers who are falling behind on their mortgage payments — a move that will help more people but also introduce new risks that some homeowners could deliberately stop paying in order to become eligible for assistance.
The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, announced that borrowers who are more than 90 days late on their mortgages will become automatically eligible for a modification to the terms of the home loan. The goal is to reduce monthly payments.
In the past, to be eligible for a mortgage modification, borrowers had to provide documentation they had a financial hardship. They will no longer be required to do so — though providing such documentation will make borrowers eligible for more substantial monthly savings.
“This new option gives delinquent borrowers another path to avoid foreclosure,” said Edward DeMarco, the acting director of FHFA. “We will still encourage such borrowers to provide documentation to support other modification options that would likely result in additional borrower savings.”
The program is only available to loans owned or guaranteed by Fannie and Freddie, which have been government-backed and controlled since late 2008. The relief would come in the form of a reduced interest rate, extended timeline for payments, or other measures.
Some analysts worried that the new program could encourage borrowers to deliberately miss payments in order to become eligible for the program.
“The primary issue is whether this will encourage borrowers to strategically default on their mortgage in order to get the modification. This risk exists because the new program does not require the borrower to demonstrate financial hardship,” Jaret Seiberg, an analyst with Gugenheim Partners, wrote Wednesday. “
Amnesty for illegal entry into the United States, four-years rent free living in foreclosed homes, now, you want a lower interest rate, just don’t pay the bill for three months. Living on the straight and narrow looks increasing like a suckers’ game these days.
Why not? This New York Times writer sees nothing immoral about it and I suppose he’s right. Feels wrong, though.
[T] he housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?
Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career atGoldman Sachs.)
The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.
There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.
The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.
Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P.Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.
Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.
So, welching on a mortgage debt, fair or foul? Contract law has always treated contractual promises as outside the scope of morality (with certain equity exceptions for duress, unconscionability, etc.). Assuming two capable adults, a contract gives each a choice: perform or pay damages – no moral culpability attaches either way.
So if you buy a house for a $1 million and a bank loans you $800,000 to help buy it, both parties are assuming certain risks. one of which is that the property value is sufficient to justify the price you’re paying and to secure the loan in the event of your default. In states that don’t allow lenders to pursue recourse beyond the property (and Shoeless, I believe Connecticut does), that bank is knowingly assuming the risk that the property value will drop. If it does and the borrower walks, he has still performed his side of the contract: he didn’t perform by paying back what he borrowed but the agreed -upon-in-advance damages are the house. If he hands over the keys, I’d say he had done all that he was obligated to do. In states that do allow recourse from other assets the defaulting borrower’s life is made more miserable but still, I don’t see the immorality of his actions.
Sit down at a restaurant and you are entering into an implied contract: if the restaurateur provides a meal, you will pay for it. If, upon presentation of the check, you discover that you’ve lost your wallet, you have not broken any moral law, but you are obligated to return to pay for the meal you consumed or, if this is the movies, wash dishes. Sneak out the back window and that’s a crime. Come in originally with the intention of dining and then sneaking out the back window, that’s a bigger crime.
I’m sure I’m not the ony one raised to believe that an honest man kept his word and paid his debts. But that’s a private morality and not something recognized by law.
That’s what some Californian mortgage-defaulters are discovering.
WSJ: PALMDALE, Calif. — Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.But ever since they quit paying their mortgages and walked away from their homes, they’ve discovered that giving up on the American dream has its benefits.Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes — one with a pool for the kids, the other with a golf-course view — for a fraction of their former monthly payments.”It’s just a better life. It really is,” says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.
People’s increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.Thanks to a rare confluence of factors — mortgages that far exceed home values and bargain-basement rents — a growing number of families are concluding that the new American dream home is a rental.Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That’s freeing up cash to use in other ways.Ms. Richey’s family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Mr. Fernandez takes his girlfriend out to dinner more frequently. “We’re saving lots of money,” Ms. Richey says.
Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that’s roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.
The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers’ pockets.For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven’t paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month — an injection that in the long term could be worth more than the tax breaks in the Obama administration’s economic-stimulus package.”It’s a stealth stimulus,” says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. “The quicker these people shed their debts, the faster the economy is going to heal and move forward again.”
“Strategic defaults” – people with the ability to pay who simply walk away from their house and their mortgage – are on the rise. The rate doubled in 2008 from 2007 and now such defaults make up 18% of all “seriously delinquent” (60 days late or more) loans. Not surprisingly, the bulk of these borrowers are financially savvy and can calculate the relative costs of damaging their credit and being freed from, say, a $500,000 debt. Turns out, the better the original credit score, the more likely the borrower is to become a strategic defaulter.
Will this hit Greenwich? I don’t know – it’s been awhile since I played mortgage lawyer but Connecticut law used to (and still does, so far as I know) permit a suit for a deficiency judgment against defaulting borrowers. Other states apparently force the lender to accept the house as full payment. If you have other assets that the bank can chase, walking away from your house won’t be as appealing here as in other states, but maybe you’ve used up your other assets trying to stay in your house and there’s nothing else to grab. In that case, go for it.
That, of course, is just what we need: another 400 homes in inventory, all bank-owned.