Happy days are here again:
As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners — those who can afford to pay their mortgages but have decided not to — are starting to walk away from their homes.+
Typically borrowers who turn in their keys are those who have run into financial trouble or need to relocate but can’t sell their homes. But mortgage-industry executives and consumer counselors say they are starting to see people who aren’t in dire financial straits defaulting on their mortgages because they don’t want to pay for properties that have negative equity.
Many are speculators who had planned to quickly flip the home, but others appear to be homeowners who had second thoughts about their purchase.
I blame Pelosi.
I’m actually watching Cavuto on Business (guest host today) right now (I watch FoxNews for the humor value), and they’ve got multiple people on claiming that Clinton and Obama’s negative talk about the economy is going to drive us into a recession. Quite hilarious, until one guy spoiled the mood by saying it was regulators asleep at the wheel while interest rates plummeted that’s causing our economic problems.
This is one of those times that truly reward the debt-advers, modestly frugal (but not skinflint) financial habits my wife and I have followed over the last 25 years together. We paid off the mortgage early on the first house we owned after marriage (and stayed in for nearly 20 years), and were able to buy our present house with only a third of the purchase price financed by a fixed % 15-yrmortgage. Gosh, if we ever get upside on this, the country is going to hell in a handbasket. We never leave any visa card debt outstanding at the end of each month, and use debit cards the overwhelming majority of the time to avoid going into even a small amount of consumer debt in the first place. Of course, there is no mercedes or lexus sitting in our driveway, although we could technically qualify for such (by going into debt, natch). Honda civic and Ford Escapes for us (paid for). No fancy vacations in exotic locations.
I’m not being smug here – we’re in fortunate circumstances, and frankly the only way we ever got into our first house was by…going into debt exactly the way most people need to do, with zero savings left over after the down payment. But by avoiding temptation to get over our heads in the first place in the consumer/status rat race, and habitually living below our means (though in modest comfort) for twenty years, we’ve succeeded to a large extent in insulating ourselves from the sort of financial precipice many people find themselves on the scary edge of, or too often falling off the cliff.
In part, this crisis was brought on through no fault of the people so devastatingly affected, but for some of them – they did contribute by trying to raise their living standards by indebtedness. The suburb we live in is probably (if you really knew people’s true situation) a mix of some people much like us, and others in hock up to their eyeballs to afford the house and fancy stuff sitting in their driveway. That is part of the problem, but it’s uncomfortable and politically incorrect to say so.
Voice of Reason
Actually, if you read Joseph Stiglitz lately, you know that you can blame Iraq:
the fascinating thing to me is that the banks and assorted lender-enablers (not to mention offshore hedge funds)–who wouldn’t think twice about screwing someone or bailing on a bad deal–counted on some obscure social mores (shame or some other variant) to keep homebuyers from making what would otherwise be rational economic decisions. in other words, they thought their commercial standards somehow would not leap to individuals. as with politics, i am from time to time amazed by the lack of thinking on display in the US.
one rule for thee, another for me.
Warning! Jackalope Alert!
As tempting as it is to indulge in yet another story about “Oh Noes! look how screwed up our country is!”, you might want to take a closer look at this story, as it may not stand up under scrutiny.
There have been a lot of colorful stories in the MSM recently about the so-called jingle mail phenomenon, but not much in the way of data to back up the idea that intentional walk-away foreclosures are dramatically up, as opposed to the old fashioned variety where people lack the capacity to continue keeping up with their payments. Tanta at calculatedrisk has been asking some hard questions about whether this trend is real or not, and IIRC not much in the way of convincing answers has turned up yet.
The thing to keep in mind is that this is a very self-serving meme for the lenders, helping to deflect attention away from their miserably bad business decisions during the credit bubble by focusing on ruthless borrowers. The latter may exist, the real question is are they widespread enough to be worth the attention, or are we being encouraged to pay no attention to the idiot lender behind the curtain?
To unpack it a little more:
What is at issue regarding the housing meltdown is not the question: are defaults rising rapidly and do we have a big fat stinking mess on our hands? The evidence for that is overwhelming. The question is, could this mess have been foreseen and prevented, and if so then who is to blame for failing to do so?
If jingle mail is becoming widespread the lenders can make a reasonable argument that a sea change in cultural attitudes towards debt is happening, which they could not have foreseen, and should not be held responsible for. On the other hand, if the borrowers simply cannot afford the houses the lenders financed, why did the latter fail to properly evaluate income levels, etc., before making really stupid loans?
This isn’t just an academic question – there will almost certainly be some sort of multi-billion dollar bailout package coming from Uncle Sugar before this is over, so the question of who is to blame is worth a lot of money. The jingle mail stories in the MSM thus far have been based on anecdotal information being supplied by the lenders, which should make one take them with a grain of salt.
I guess this is the meme – mean old irresponsible borrowers who are bilking the honest, hard working mortgage industry bankers – that they’ll be running out up to the “Bail Out Bankers” legislative push.
Personal Responsibility, Bitches!
Dennis - SGMM
The demands for a bailout will be accompanied by outraged bellows of indignation if said bailouts are accompanied by new legislation requiring better disclosure and greater transparency in financial transactions. The same people whose cupidity and willful suspension of disbelief got us into this will be the same who declare that they know best and therefore would be hobbled by more regulation.
In other words: “We’re already working on the next bubble, do nothing to impede our progress.”
Jingle mail terror is a pretty desperate line to be pushing. What if borrowers believe it? Self fulfilling prophecies can be a pain.
Hopefully they are walking away from non-recourse mortgages.
Well, stable home values don’t mean much when your suburb has been destroyed by one of Saddam’s nukes.
Which sounds worse: being foreclosed on of being beheaded by mullahs? I’ll take the former, thank you very much. And that’s why we’re right to be in Iraq.
Nothing wrong with walking away, to quote a great American businessman, “You gotta understand, this is not personal, it’s just business”
It’s just business, use every legal means at your disposal to improve your position. Companies will and do regularly cause great harm to individuals because it is cheaper (see “Health Care, refusal to pay”).
Now, I have to also totally agree with LeftTurn. This is a very good meme for Banks looking for gubm’t handouts. Banks wrote loans that they knew were risky, counting on the social/financial stigma of foreclosure to offset the good business decision to walk away from a loan. This was why banks used to require 20% down, to recoup foreclosure costs and to make it very expensive for the buyer to walk away. 80/10/10’s, 90/10’s and interest only loans allowed the bank to do more business, but with more risk. Risk they happily accepted.
Please recall.. just two years ago, banks were making record profits. This whole thing stinks like another “Short term gains and out” swindle from top management and investors.
I’ll have to go with C: Troll logic
Oh….My….God….my suburb is being targeted by Saddam’s cloaked nukes!!?? Well at least he won’t take out a major city. Hope he gets the loud family down the street; those folks are annoying!
But anyway, back here on planet earth, any thoughts on the theory that the recent bankruptcy changes have made home-dumping a rational move vis- getting whacked on credit card debt?
The Other Steve
I understand what you are saying, and it is reasonably good advice.
But you were fortunate to have started 30 years ago.
The past 10 years with home prices going through the roof, no matter what house someone bought it was beyond their means. I watched my house, that I bought in 1998 go from $100k to $180k in value. Yet, salaries have not doubled in that time.
On top of that, it used to be if you wanted a relatively inexpensive house you moved a bit further out from the city. Now with gas at $3/galloon, that is not very economical.
I don’t know what we do, but simply blaming people for trying to buy a home isn’t the answer.
Eh. Walk away. A man’s word isn’t worth the paper it’s written on these days. Honor, integrity, sense of obligation… those are archaic 20th century concepts that have no place in our 21st century “mine, now, free… no, fuck YOU” world.
Jeez, even if we stipulate it as true – so what? All this sky-is-falling talk over businesses having to suffer the downsides of risk-taking behavior. It’s amazing how quick we are to defend the survival of the fittest business behavior till the moment a lot of multinationals start to suffer.
Mom & Pop grocery driven out by Wal-Mart? The market at work.
Citibank taking it
on the chinin the pocketbook because some borrowers decide to suffer the consequences (and let’s not pretend there aren’t any) of walking away from a loan? Disaster!
Shit, PMI exists for a reason. If the bank still loses money after it pays out and the property is sold at auction, well, that’s the risk they took in exchange for the opportunity to make money. They made a bad bet, either in extending that loan or (more likely) in buying that mortgage. Any person or business who is unwilling to take that risk in exchange for the possible reward can buy t-bills and enjoy their 1% return.
Hope he gets the loud family down the street; those folks are annoying!
Nice. As a liberal, you pretend to care passionately for mankind and for those less fortunate, yet you unashamedly wish for the death of the family down the street.
Why do you hate them so much? My guess is that is has something to do with the Yellow Ribbon magnet on their car. Or maybe it’s the “Support the Troops” bumpersticker that angers you so much.
I’m guessing it’s because they have laminate countertops. Limousine liberals like to look down their noses at hard-working Americans who don’t waste money on frivolities like granite countertops.
Actually, yes, walk away. Do the computation of the cost of walking (credit score, etc.), and, if the cost is lower than the cost of supporting the house…turn on your heel and walk. The bank can choose to negotiate with you or not but you can, and sometimes should, just turn and walk.
The banks are deathly afraid of that, and I don’t think they want people seriously thinking about it. Their big threat is “you won’t qualify for credit for seven years”. What if you can do the math and say “I won’t qualify for credit for seven years *either way*?” Suddenly, the bank has no threat against you, and you, the borrower, are completely in control.
So I don’t think that banks are actively spreading these stories, although I also think that the incidents they’re based on are rare. Even if only 10% of the people with negative equity in their homes are in this situation (and I’m expecting that the fraction is far higher), the banks can not afford a mass walk away. Stories like this could give some smart activist the idea of staging a mortgage strike to get mass write offs (with the threat of mass default behind the strike). Banks are deathly afraid of that.
Why should I act with honor and integrity and avoid availing myself of my legal options when the entity with whom I signed a contract will not act with honor and integrity?
That’s the threat people know about. Few realize you can’t just walk away from a refi or second mortgage like you can with a first mortgage.
Two thoughts on walking away:
As demimondian observes, walking away is the rational thing to do (in a literal sense) in some situations. Banks have been depending on people behaving irrationally in a few ways: taking on more debt than they could reasonably afford, paying too much attention to sunk costs, and thinking of abandoning a contract as being dishonorable. Screw that–banks have never played by those rules, and if they’ve overestimated people’s irrational impulses, well, that’s the way the game is played.
More frivolously, walking away from a mortgage isn’t a new kind of idea. Ever run into someone who’s had their car repossessed? I have. Mortgages are a lot bigger, of course. . .
Because that kind of rational economic calculus is (repeat after me) only OK if you’re a rich republican/multinational. Cost of doing business, natch.
For you and me it’s debtors prisons, payday loans, stagnant incomes, bankruptcy we can’t file, etc.
Exxon & Microsoft can make $10+ billion/year in PROFITS! but we have to keep subsidizing them with tax breaks and R&D incentives or they’ll shrivel up and die. But heaven forbid we make healthcare or housing more affordable through government assistance. Heaven forbid we raise corporate taxes or the top marginal tax rate on people making $500k/year or more. That’s just a totally off-limits use of the government.
Fucking Republicans and “Libertarians” with their bullshit economic “theories” got us into this mess. Unfortunately it’s gonna take many years of Dems in charge to get us out. At which point Republicans will claim credit and start the cycle over again.
Um, that’s called snark. There is no noisy family on my street. Folks, I’m fairly new to this blog. Is this guy for real? Seems more like a liberal doing an impersonation of the stupidest winger on the planet. Is DougJ just someone doing a lampoon of Bushite ‘conservatives’?
The Other Steve
I would have to echo the sentiments of those who say “It’s just business, nothing personal.”
How many times have companies had layoffs, or closed down factories because it was no longer as profitable?
I can’t see myself walking out on a piece of property, because I buy a home as a place to live, not as an investment. But I can understand why others might.
Gotta give it to Saddam for working on his nuclear program in the afterlife.
That is one wily adversary.
Perhaps the economy is faltering due to head-choppy fearmongering?
DougJ is just like Steve Colbert except unfunny and douchebaggier.
The Other Steve
That’s not true, you can walk away from a first or second. They both have the house as collateral. The difference is the first gets paid first, and the second gets whatever is left over.
So a house that is upside down equity wise, the second mortgage is a real loser to the bank.
p.a. – DougJ took a beating on the previous thread (as Dug Jay) and he is just not happy about it.
And that irrationality is what the banks bank on.
Don’t get me wrong: FDDD and I are so irrational about the demi-bunker that we’ve turned down profitable job offers to stay here. Those were certainly bad business decisions, but good family decisions, and I don’t regret them. However, if the burden of paying for the house got in the way of paying for things the kids need, we’d be out in a minute — because that’s also a good business decision.
Mortgage holders depend on borrowers’ unwillingness to move, though, and on their natural, but irrational, attachment to their territory.
The Other Steve
I wouldn’t say it is irrational. The value of my home is more than the value of the walls. It’s also the fact that I’m fairly close to work, and it’s close to stores, banks, library, everything. Last year I put only 8000 miles on my car, and 1000 miles on my scooter.
compare this to living in my old house where I put 25,000 miles a year on my car.
“Folks, I’m fairly new to this blog. Is this guy for real? Seems more like a liberal doing an impersonation of the stupidest winger on the planet. Is DougJ just someone doing a lampoon of Bushite ‘conservatives’?”
Probably. He wouldn’t be the first.
For those interested in some more likely fallout from the subprime mess, check out this article in the current Atlantic:
The author is pointing to larger demographic trends at work, but the current crisis is acting somewhat like an accelerant.
hey D-Chance.. you sound exactly like quotes I’ve read from early 20th century socialists. They too were distressed at the growing lack of personal responsibility (albeit at the start of the 20th century). They saw that industrial capitalism encouraged decisions that were morally wrong so long as they were financially sound. When labor was cheap, it was cheaper to replace injured workers than it was to make a safe workplace, etc. Indeed Monopoly’s main pre-cursor, called The Landlords Game, was invented to illustrate the inherent dangers of rents in (then) modern capitalism.
Capitalism requires us to do what is in our financial best interests. We balance the long term costs of staying in the mortgage vs. the damage to our reputation and future ability to borrow capital and we make a purely economic decision.
Your ‘honor’ in a capitalistic society is your credit score. When you run a company, and you do bad long term business for short term gain, then escape (quit, retire) with the proceeds before the long term costs are applied, you have engaged in perfectly good capitalism. Your own personal credit score could not be better, you are rich. Your acts as CEO will damage the company’s reputation, not your own.
You may not be able to get further work as a CEO, but that is not even always true. Plenty of people with a track record of losing money get re-hired elsewhere. Your record looks fine because the costs of your actions were incurred on the company after you were gone. Even if you are ‘blacklisted’ you are rich.. you aren’t going to starve.
This is the incentive model that capitalism has provided and the only real way ensure loss is continue down a bad economic path because you have given your word, despite the fact that no business will keep their word when it is in their financial best interests to do otherwise.
Furthermore, and I know I am running at the mouth here, walking away is the right thing to do for the market as a whole. Markets only learn from gains or losses. If enough people walk away, the markets will no longer support loans that hide risk like these no doc 90/10/10 or 100% loans do.
“I watched my house, that I bought in 1998 go from $100k to $180k in value.”
I watched mine more than double in value in that same timeframe.
“Yet, salaries have not doubled in that time.”
Yup. Were I in the market today, I could not afford the house I currently own.
Other Steve – that is exactly the sort of tradeoff people are making (noted in the article I just linked). The broad trend of moving out to the burbs seen in the second half of the last century is starting to slowly reverse. Higher energy prices are the other factor aside from the miles (and commute time) on your car. People are moving back into urban areas across the country.
Now that you mention it, I do detect a superficial similarity between DougJ and Dug Jay. . .
Depends. If your real reason for staying in the house is the commute, then, no, it isn’t irrational. If, however, it’s something more amorphous about “this being your home, your den, your hideaway, whatever”, then, yes, it is irrational. You may be more than happy to pay the tax of that irrational behavior, as we are, but that doesn’t make the behavior rational.
Recognizing that doesn’t mean changing it — there may be non-financial costs to behaving as an economic rational actor, and those costs, however non-monetary, are real. However, recognizing it does allow you to quantify those costs and isolate them. Once they’re finite, bounded things, the bank has a minimum price for your house below which your heels are what they see.
Liberal Masochist — that guy is repeating the mantra we’ve heard a number of times in the last fifty years…and, every time, it’s turned out to be snake oil.
There’s no evidence to support the claim that cities are drawing families back. There’s a lot of evidence that cities are retaining singles and couples without dependents better, but, even there, the reason for the apparent demographic changes in urban populations is due to the increase in couples without children, not to a change in the behavior of nuclear families.
You understand these issues better than I do, demi, but can it be said that this behavior is rational if we take non-economic factors into account in a complex enough utility function?
It’s never been clear to the denizens of the comments section whether Dug Jay was a DougJ sockpuppet or someone making fun of DougJ making fun of whatever the clown prince is making fun of today. Cole knows, of course, because he can look at the logs. The rest of us? It’s just a guess.
That’s a really really good question, and it took a long time before somebody found the right assay.
The answer, surprisingly, turns out to be “No” — there’s a body of work by Duncan Luce and Michael Cohen that proves the non-existence of any utility functional, much less a true utility funciton.
I am not Dug Jay. That guy is an idiot. I admit to being all the other people that I am.
Stagflation is here to stay,
Because the Republicans got their way,
There’s no gold at that rainbow’s end,
Just the bills for what you spend
From what I’ve read and I may have got it all mixed up but AFAIK a first mortgage can be walked away from because the bank can’t go after any of your other assets to satisfy any loss on the resell of the reclaimed home. With refi’s, HELOCs or second mortgages you put yourself in another category where the bank can go after you. Basically they reposess your home on which you owe $120000 and they sell it for $100000. For any loan except a first mortgage they can come after you for the other $20000.
Is this wrong? Close to right?
Yep, funny how the Democrats are at the same time big Loozerz and so powerful their words can fuck up a war that is going swimmingly, send soldiers into crippling despair, cause every married couple to split up and move in with a goat and ruin a thriving economy.
Cool, thanks for the pointers. That is an unintuitive answer, to me.
Me, too. That’s why Mike and Duncan are among my heroes…
What you’re talking about is the difference between a recourse and a non-recourse loans. In nearly all states your first mortgage (when you first buy the house) is a non-recourse loan. This means the bank can only take the property if you fail to pay, you are not otherwise personally liable. Second mortgages and refinances are almost always recourse loans. This means the bank can come after your other assets, although they rarely do (this is important). Further complicating things, some states also make refis (that replace your first mortgage, not a HELOC or Home Equity Loan) non-recourse loans.
So if you have a non-recourse loan the only thing you lose when practicing jingle mail is your upside-down house and your credit record suffers. Even if you have a recourse loan, you might be playing “roulette”, but banks have rarely (historically) gone after homeowners for anything other than the house.
YMMV, IANAL, IANACPA.
Despite the horror the the recent bankruptcy bill is, it isn’t as bad as people make it out to be (absent student loan handling…that was every bit as bad as Clinton made it out to be). It’s inconvenient, and you may not be able to walk instantaneously, but if you want to do so, and are willing to take the hit, your house can not become a ball and chain that ruins your life.
At the end of the day, yes, you can walk. It hurts your credit rating, but the banks are not all powerful, and, no, they can’t chase you to the end of the world. They can, will, and have every right to, make it hard to default, but that’s all they can do.
And I’d believe you exactly *why*, sire? I am but the pale shadow of you masterful eminence, but even I know that I don’t trust the things I myself write. Since your skills are so far beyond mine…
Hmm, this must be some of that famous liberal “tolerance” I’ve heard so much about.
Typical of you latte-slurping elitists to look down on a true patriotic American like DougJ.
Bob In Pacifica
Ah, all this makes me nostalgic for the S&L deregulation days. Where’s Neil Bush?
Jeebus, Steak — the only “tolerance” liberals show is to the IV drugs they do.
J. Michael Neal
I don’t know about the rest of you elitists, but I slurp my latte sitting down watching the lesser people hard at work. So, I’m usually looking up at DougJ. With a sneer.
J. Michael Neal
Hopefully, it will make Congress nostalgic for the S&L crisis, too. An RTC type solution is probably the best option at this point.
That may change. Historically the banks have wanted the house because the house is the most valuable item (and you don’t have to chase after the owner to get it back). But the real value lies in the willingness of another person to purchase the house. No buyer, no value. The more empty houses you have on a block, the less likely you are to get a buyer. The point where there were more homes than buyers was the point when the lenders started to realize that everything wouldn’t “balance out.”
Every bank CEO’s worst nightmare is very short: The entire population says “Fuck my credit rating.”
The Other Steve
That’s probably the key. It hurts your credit rating, which means your lifestyle is going to be dependent upon your ability to pay cash.
Which is probably a good thing for most people.
Not surprising. It’s what happens every time a real estate boom goes bust. It happened in the 1991-04 bust too. Part of the blame goes to unscrupulous lenders and part to the buyers who knew they couldn’t afford what they were buying but thought they’d get away with it since the market would NEVER stop going up.
It’s not Pelosi’s fault, blame the Clenis.
Exactly. And since credit ratings are relative, everyone doing it hurts nobody individually. These guys are in the business of loaning money, so they HAVE to loan, and they’ll make bad loans if that’s all there is out there.
I don’t buy that there are a lot of people walking away from homes they can make the payments on, by the way. But I do agree that we’ve largely brought this on ourselves. Cheap-ass interest rates, asking the pubic to do their patriotic duty and buy shit, no regulation and oversight. And when the states tried to step in and do some regulation, Bush stopped them.
Watching them install granite countertops in your mansion purchased with SCHIP funds, no doubt. You leftists really have no shame.
Lesser people? They’re the only thing standing between you and a beheading. And you don’t you forget that.
J. Michael Neal
I’m usually pretending to read Sartre, too. The problem is figuring out how to get the contractors to park in back without ruining the lawn, or how to park in the front without denting my Jag.
J. Michael Neal
Beheading? No, the faux ancient Roman statuary is in the garden. You should be standing between me and the stove, installing my countertops.
They say granite is the perfect material on which to be beheaded. The mullah’s blade goes right through your neck and bangs against the hard rock without leaving a mark.
Fucks up the blade. Fail more.
This thread is six hours old and it’s the most recent? I guess there has been nothing but good news for Hillary and McCain today. Bad news for Barack gets ignored everyday.
Good one. As it is legal to walk away – just like it’s legal to lend money to people to buy things they can’t afford. Nice mess the banks are in.
Yeah, they’re the ones who get SRO “seats” down by the stage. We tell them it’s for the view, but the truth is that they keep the blood and piss off my summer outfit.
Dirty Fucking Hippies v. The Suits.
I’ve heard that the best way to help your candidate is to whine incessantly. If that’s true, Hillary’s got it all wrapped up!
J. Michael Neal
The housing crisis has led to one of my favorite legal opinions, written by Federal District Court Judge Christopher Boyko, who was dealing with the inability of some lawyers hired by Deutsche Bank to bring the paperwork he’d asked for to court.
It starts out:
So, he had been pretty specific about what he wanted to see, which is the documentation you are supposed to produce in court to foreclose on someone. Boyko follows it with some of the most basic information that a lawyer should learn in his forts torts class, but these guys apparently missed. He then takes them to the woodshed, demonstrating the ways in which they have fialed, not only to follow his previous instructions, but to meet the most basic requirements of establishing a tort.
The footnotes are a nice touch:
Footnote 3 is where he really starts stomping on lawyers’ hands with golf shoes:
Needless to say, the sordid story ends:
Awesome. Thanks for the quotes.
J.M.N. thanks for reposting this ruling. It is one of the best judicial beat downs I’ve ever read and your description of Footnote 3 is spot on.
I believe that less than a month later another Ohio judge tossed 52 of DB’s foreclosure requests for the same reason.
Basically, when it was DB’s turn to play sub-prime loan roulette. [Bang!]
J. Michael Neal
Lesson: If you want to try to save some money by filing a bunch of foreclosures in federal court rather than having to go to every county courthouse in the state, you’d better have your shit together. Federal judges are professionals, and they hate to have their time wasted. Filing foreclosures in federal court is, by definition, wasting their time, so they’re looking to smack you around.
And for god’s sake, if a federal judge is smacking you around, smile and take it. Don’t lecture him.
I’m actually wondering what happens to the legal theory of foreclosure when a mortgage has been securitized. Who holds the lien? The issuer of the security? The purchasers of the security? I would assume that the aggregator who bought the loans and securitized them initially should hold the papers, ne?
Oh, you should look up Tanta’s commentary on the commentary as well. She has a wonderful story about how she sent a bank into total panic mode by insisting on validating every single transfer on a set of mortgages…..
I think a lot of us become lawyers because of the joys of writing legal snark.
Pathetic. I’ve already faked my way through Foucault, Chomsky and the collected works of Che Guevera by the time I’m finished my free-range egg-white omelette (with organic veggies grown by my local P-Patch co-op buddies).
I’ve got no time to watch people install granite – too busy figuring out new ways to mount a fifth column from my decadent enclaves on both coasts (naturally I have homes in both San Francisco and New York).
You and me buddy, somehow we’re always the one left holding the bag once the rich peeps and big MNCs discover the bag’s full of shit.
If memory serves (too lazy to read the entire ruling again) that was the problem for DoucheSpank. They purchased the loans but didn’t have the papers and they should have. Possibly they bought a chunk of loans from a number of lenders but the only evidence of the purchase was a single document. In my opinion, Boyko was looking to nail them so he asked for the documents (likely suspecting they didn’t have them). The shit head attorney saying “Hey babe, you can trust me,” must have been the icing on his cake.
I think that would be Toto.
Wanna bet if Joe Consumer ever tried 1/100000th of the tactics big corporations do, especially without the docs to back it up, s/he would be spanked back into oblivion?
If corporations are granted corporate “personhood” it’s about time they start getting the shaft like the rest of us persons.
You are pretty close.
This may have already been answered in the thread, but here’s the skinny from someone in the Tax business who just did a Seminar presentation a few months ago on Foreclosures & Cancellation of Debt Income:
The original purchase of your main home is a “non-recourse” event – if you default you lose the property and have a “Sale of Main Residence”. But outside of maybe sleeping in the street and screwing up your credit rating you have no further financial consequences. Your “Sale Price” is the remaining Principal Balance of your loan. If you owned and lived in the home for at least 2 of the last 5 years you may take an exclusion of $250,000 ($500,000 for Married couples filing jointly) on any gain from this sale, provided you have not taken this exclusion within the last two years.
If you did a re-finance on your home you have a “Recourse” loan…that means you are “Personally Liable” for it, so you could have TWO Tax Events. You still have the Sale of your Main Home, since a foreclosure is an “Involuntary Conversion” – an Involuntary Conversion is considered a sale. In a Recourse situation your Sales Price is the FMV (Fair Market Value) at the time of the foreclosure (or abandonment)- usually what the lender received when they sold it – and this is still a “Sale of Main Residence” subject to the same Exclusion rules as above. However, if your Principal Loan Balance exceeds the FMV…which has occurred mainly when folks have re-financed beyond their original purchase price in order to buy other stuff, then you have Cancellation of Debt Income, which is not subject to any exclusion except a Bankruptcy filing or insolvency. It’s very much taxable (Form 1040, line 21). If your re-fi is only to restructure your original purchase price or for IMPROVEMENTS you MAY be able to exclude the Cancellation of Debt Income using Form 982 even if your loan is a “Recourse” loan. But once your re-fi amount goes beyond that original purchase price you are not going to slide out from under that COD income situation…not legally, anyway.
BTW – the rules for Form 982 have been changed and new instructions have recently been issued. Make sure you are looking at the ones from Feb, 2008 or later if you are using this form.
So if you purchased your home in, say, 2004, for $300,000, saw the value go up to, say, $600,000, saw a brand new Hummer and some “bling” you liked and re-fi’d up to, say $500,000 you, my friend, have turned a Non-recourse loan where only you could only lose possession of the home for defaulting into a Recourse loan that’s going to add $200,000 in Taxable income to your Tax Return for the year the foreclosure/abandonment occurred in.
Oh…preferred Capital Gains rate DO NOT apply to Cancellation of Debt Income – they would apply to any Sale of a Main home as long as it was owned over one year.
One more thing – losses on the Sale of a Main Home are NOT deductible.
Well, maybe one for “fun thing” – depending on the State you reside in there may be further tax consequences on that level.
…and the rules for “Business Properties”, such as rental properties are different. Some other day for that, eh?
OOPS! Forgot to close the blockquote.
And the Tax consequences on the Cancellation of Debt Income if the Principal Balance is higher than the Fair Market Value on the Form 1099-A you will receive from the lender.
See my 8:30pm comment above.
One problem for Big Corp. is it has put too many “normal” people in a bad position at one time. If this were a handful of foreclosures a month scattered around the country with the houses quickly re-sold, if anyone noticed the banks could shake their heads sadly, mutter something about deadbeats and approve another batch of loans. “Just a few deadbeats” doesn’t work so well when entire neighborhoods are empty.
I haven’t gotten my head around the whole thing yet and I’ve been watching this load of shit fly towards the fan for a while, but at the end of the day we will be awe-struck by how these guys willfully and joyfully fucked themselves over. I know it will be 100x worse for poor Joe Consumer, but we’re talking about people in the business of money. They had to know the party would end one day. They had to know roughly when it would end and they had to know that because Bush was in office the states would have to come up with their own solutions. If you think corporations hate federal regulation, ask them about complying with the regulations of 50 different states. That’s at least 50 different people you’ve got to pay off, instead of one guy at the fed.
Tax Analyst, do you actually have to take the $$ out for that “taxable event” to occur, or is just getting a line of credit (which you don’t use) also change your situation over from non-recourse to recourse?
One of the biggest factors leading to this whole mess is that the they you reference was not one monolithic entity. Information and risk were severed from one another because they were dispersed amongst multiple parties not working together. In fact this disaster would never have happened if the entire process was owned soley by one big giant EvilCorp financial entity, assuming the latter was looking out for itself.
Lenders originating loans did not need to know or care if borrowers could possibly afford them, in fact they almost certainly knew that this was untrue – that was the whole point of teaser rates – to get somebody into a loan they would never qualify for at a fixed rate. It didn’t matter because the lender was not going to own the loan – they were handing toxic loans out the front door and then securitizing them and selling them as CDOs out the back door. Banks who in the old days used to service these mortgages turned instead into transaction brokers with no skin in the game after the first 30-90 days.
What about the fools who were buying the CDOs? They did not have adequate information to judge the risk of the instruments they were purchasing, because the details of the loan origination processes underlying the CDOs were not being passed up the food chain (the slicing and dicing of tranches helped to increase the opacity of this process), and because the monoline insurers and rating agencies all said it was safe.
The monoline insurers and rating agencies seem to have been best placed (in the middle of this food chain) to detect something smelly in Denmark, while also having something at risk (solvency in the case of the monolines, reputation in the case of the ratings agencies). I think this is where the silly assumption that a bubble market will only keep going up forever was the most damaging. The ratings agencies also seem to have been (and still are) beneficiares of monopolistic thinking – not paying any attention to their reputational risk because after all, who is going to replace them? Much like the arrogant attitude of the big 5 accounting firms during the Enron – WorldCom audit scandals.
So the people whose money was at risk did not have the correct information, and those who had that information were not risking their own money. Those who had a bit of both are impossible to replace and thus cannot be allowed to pay a penalty for their failures.
So a big giant EvilCorp can hose itself silly. A big giant EvilCorp can see another big giant EvilCorp hose itself silly and still hose itself silly. Thanks for clearing that up.
And the people whose money was at risk did not have the correct information because all they saw was a chance to make more money. The fact that their money was at risk should have made them more cautious. “Gee, that’s a lot of people qualifying for loans all of a sudden …”
Option A: Ask 1,000 questions.
Option B: Take the cash.
jcricket already nailed this: Normal, prudent people don’t behave in this manner. This is the equivalent of buying the Brooklyn Bridge and 500 acres of prime Florida real estate before heading out for a snipe hunt. But of course, the people whose money was at risk won’t wind up living in their cars because they were incredibly stupid and greedy.
Now let’s look at those who had the information. Well, look at this they certainly do have money at stake (sorry about the extended quote but this is good stuff):
Ouch. I don’t know what sort of fines these companies are looking at but I’m going to take a wild guess and say A FUCK OF A LOT OF $$$.
As for those irreplaceable middlemen, who are they and why are they irreplaceable?
J. Michael Neal
In finance, it’s practically a rite of passage. Financial companies have the institutional memories of your average banana slug. They also attract the sort of geniuses that are really stupid. So, we go through the same cycle every ten years.
Some genius comes up with a brilliant insight as to how financial instruments move. He puts together some fantastic regression formulas showing how when Instruments A-N do such and such, you want to by Asset O by the barrel full, because it’s going to go up. He makes a lot of money doing it. So, a lot of other geniuses start doing the exact same thing.
What all of these very smart, stupid people forget, every single damned time, is that statistical distributions and regression equations only work when you are modeling independent events. When they were working in physics, all of those atoms really were behaving independently. In finance, it’s a dead certain guarantee that your independent events are going to stop being independent at exactly the moment in time when it will do you the most damage.
My degree is in statistics. I love the math that underlies financial wizardry. I hope to get back into the industry at some point. Yet, it amazes me how all of these people forget one of the most basic principles of statistical analysis. They forget it every time, having paid no attention to how it crushed the generation before them. They’re like fruit flies.
1987: Dow drops 22% on Monday, October 19th as everyone’s program trading software sends sell orders at the same time. Whoops. I guess it’s not independent when everybody does it.
1997: Long Term Capital Management collapses when bets it has placed on European debt instruments stop being independent, and all move in the same direction at the same time. In fairness, there is some evidence that this was an act of malice, and the independent events stopped being independent through active manipulation by other market participants who had access to LTCM’s book. Still, a disappearance of independence is a disappearance of indepndence.
2007: The entire credit system melts down when foreclosures, which are completely independent events so long as house prices are going up, become highly correlated as house prices start to fall.
As I said, I really want back into the industry, even though I know that means that I’ve become a parasite on society. It’s that fascinating. I’m learning accounting, though, because I have a feeling that this fuckup might be so big that some lessons get learned, and the demand for derivatives analysts plunges over the next few years. Hey, I gotta eat.
It might make for a more interesting conversation if you could tone down the hostility level a little bit. I didn’t create this situation, nor am I trying to excuse it. I was trying to make some points regarding what broke that helped to make this mess possible, which is sort of important to understand if we want to put pressure on our elected reps to fix things so this is less likely to happen all over again the next time the economy is expanding.
“Evil greedy people” is not a very good explanation, because we’ve had evil and greedy people around during other periods when the banking industry wasn’t behaving this way, so something else must be at work here, in addition to greed and evil. That’s what I was trying to explain. Let me try again:
The people who are 1st in line to lose large amounts of investment money as this credit bubble unwinds are the folks who purchased the mortgage backed CDOs. They were not the ones who were making the lending decisions. This is a big problem.
Ideally, there should be a feedback loop connecting risk to investors and lending origination, so that lenders will be punished by losing their own money if they blow it, thereby encouraging them to be more prudent. That feedback loop was what was missing during this bubble. That is what we need to fix.
In the wake of the Great Depression various fixes were put in place to make the mortgage lending a very boring, low risk-low return sector of the banking industry. These worked pretty well for roughly half a century, but within the last generation these firewalls have been torn down in the name of greater efficiency.
There is good deal of controversy on various econ/finance blogs about when this happened – there have been a whole series of regulatory and structural changes in the banking industry since the early 1970s, many of which can be fingered as possible culprits either individually or in combination. We need to put those firewalls back in place, IMHO.
I hear you. I also think there was a longer term factor at work here than just the periodic folly of financial wizards.
The individual and institutional memory of the Gr. Depression has been fading for decades. My parents were children, and my grandparents were adults during the 1930s. I vividly remember some of their stories from that period. People with this sort of perspective have been slowly fading away for years now, and I think we reached a tipping point back in the 1990s where it stopped being relevant anymore to the folks making the big decisions.
Our polity stopped being willing to invest (in the sense of efficiencies not sought) in firewalls or safety nets designed to protect us from low-frequency high-impact events like a major deflation. That is what happens when you have a long period of stability, and folk-memory of what instability feels like fades away.
I read a lot of history, and it often feels like an unending series of catastrophes and follies on the scale of once or twice per century. I think this periodicity may reflect the decay half-lives of multi-generational folk-memories. Another example would be fading of memories from the Napoleonic Wars which destabilized late 19th Cen. Europe and helped pave the way for the events of August 1914.
It seems to me like human nature dictates that every 3rd or 4th generation we have to get our asses kicked, just to remind us that we aren’t as smart or powerful as we like to think.
J.M.N. — actually, when you look at your examples, you’ll notice something: the actual failures of independence are becoming more and more subtle. That’s actually a sign of significant learning, not a sign of repeated stupidity. What that means is that next time there’s a meltdown, it’ll be over something even harder to see going in.
(Which also means it’ll be larger, because more people will not be able to foresee it.)
No one has any “long term interest” (let alone long-term memory). They figure, I’ll make $1m in bonuses for a couple of years and then quit/move on before the shit hits the fan. One of the whole “benefits” of CDOs and SIVs is that you’re dumping the shit (ha!) on someone else and moving on to the next big swindle. I’m not saying people who did this are all crooks, just that they took advantage of everyone’s continual appetite for “big returns” in a way that left them the least exposed to the downsides of the risk that was being taken.
Another example of this is CEOs, for whom granting big stock options was supposed to “align their interests with the shareholders”. They have instead figured it’s fine to game the quarterly earnings short-term, b/c even if you fuck things up long term, you’ve cashed out and can get your golden parachute and walk away.
Which reminds me, I need to gets me into that free money club, where there’s just literally no downside – the worst that happens is “less ridiculously great upside”.
There’s some quote about this that I can’t quite recall… Something about forgetting history and repetition… hmmm, what was that again? No matter, off to do buy some stock in unprofitable non-revenue advertising dependent generating web-2.0 companies!
Web-2.0 companies which generate unprofitable non-revenue advertising dependent *what*, jcricket?
I mangled my words while attempting to be witty. Is this better?
And so on. Having managed to survive the dot-com crash (I was employed in tech, now I work in tech management but not at a tech company) I can just see the signs from a mile away.
I work for a large web-based company dependent upon advertising revenue for our income. I won’t say we’re a “Google competitor”, but what’s true of them is, for the most part, true of us, too.
We *are* profitable, but nobody inside the walls would claim that we were recession-proof; that’s the hype the stock touts are selling. What we are is *somewhat* recession resistant; it’s easy for us to serve customers internationally, for instance, so we tend to be able to average over local fluctuations. However, in the even of a major recession hitting all the large markets simultaneously (see LCTM, above), we would be hurt just as much as anyone else.
Right – some companies actually are more recession resistant than others. And still others literally only thrive in recessions. My industry is actually one of those that can fairly claim to thrive best in up-markets and moderate-to-severe downturns – but I guarantee even we are not recession or depression proof.
If the companies and industries we serve had people going out-of-business left and right we’d actually increase business for a while. But then if everyone retrenched for a long winter (so to speak), we’d probably see business shrink as well.
Regarding walking away from a mortgage and deficiency judgements: This is state-dependent. In some states, mostly judicial foreclosure states, a lender can come after you for the difference between what you owe and what the house is worth. That is the case, for example, in Florida — under Florida law, if you walk away from a house, the bank can sue you for the difference between what you owe and how much money they made from selling your house (the “deficiency”), then once they get a deficiency judgement, can garnish your wages, seize your bank accounts, place liens upon any other property you own, etc. Other states, deficiency judgements basically are not allowed. Here in California, they have to go the judicial foreclosure route to get a deficiency judgement, which is not going to occur on residential properties (which are deed-in-trust transactions subject only to non-judicial foreclosure).
This is a separate issue from federal tax law, which will under certain circumstances record “discharge of debt income” that you are required to pay taxes upon. The Mortgage Forgiveness Debt Relief Act of 2007 exempts all first mortgages on a primary residence from “discharge of debt income” and exempts second mortgages that were taken out either to acquire the property (a popular method for avoiding PMI in the past) or to repair or improve the property. Basically, if you got cash out and the debt later gets discharged via foreclosure, you’ll have to pay tax on the cash as “discharge of debt income” . But again, this is tax law, not foreclosure law, and deals with all non-bankruptcy discharges of debt.
As usual, IANAL, consult a lawyer in your own state for details of your own state’s laws, etc…
– Badtux the Law Penguin
And while I’m at it — there were more foreclosures than home sales in California in January 2008. Happy days, eh?!
I know nothing about economics, financial acrobatics, or real estate, but even I could see that when a person making a (supposedly) middle-class income couldn’t even dream of affording a house in many parts of the country, something was deeply wrong and was going to be brutally corrected. Between this and the Enron mess I think–I hope–that we’ll come to the collective realization that capitalism NEEDS a certain amount of regulation to function. Otherwise you just have a bunch of smash-and-grab looters fucking up the system for everybody. Even Adam Smith acknowledged this, as far as I can tell from the bits I’ve read of his work.
No no no. What we need is more tax cuts. Silly woman.
I can’t find it right now but there’s a good Adam Smith quote about the limits of free market capitalism. Basically something like, “All this stuff works unless corporations act monopolistically or are basically all-powerful”. For example, there is this quote:
Adam Smith was quite concerned we’d end up in the situation we are now, and spent plenty of time arguing in favor of what we would call regulations.
Smith was also against government subsidies, of which are large corporations are very, very, very fond.
Who knew that so many corporations were socialists in free-traders’ clothes?
One thing that needs to be remembered when reading Adam Smith is that he was writing at a time when capitalism iteself was still very young. That means he had little to draw on in the way of historical data regarding low frequency events in a capitalist system, sort of like a hydrologist who’s never seen or heard of a 100-year flood.
Some of the justification for regulation comes from its ability (if done right) to protect us from the worst effects of events that happen very rarely, on a time scale of a century or more. We have 200+ years of additional information available to us today, that Adam Smith did not have back in the late 18th Cen. We should be able to improve on his work with the benefit of that larger sample.
You don’t understand that Adam Smith is like that other Smith guy, in that he received words directly from God and wrote them on inerrant stone tablets.
Any attempts to further update his work are blasphemy. If there isn’t a specific call-out for a regulation in Adam Smith’s treatises, the regulation shouldn’t be implemented.
Sorry to take so long to get back, I haven’t been on the InterNet since Saturday night.
If your re-finance is for more than your original purchase price and did NOT go for actual improvement you have Cancellation of Debt Income if the amount the bank receive(the FMV) is less than the Principal Balance of the Debt. The COD income is the difference between the PB and the FMV, but only to the extent it exceeds the original purchase price. Hmmm…that raises an interesting question in my mind that I haven’t pondered yet…which I won’t discuss here because I hadn’t thought about or research yet…well, OK – it’s not part of your question, anyway.
Now I’ll stop repeating myself and try to address your question.
I’m guessing the LOC in this situation is being made against the Taxpayer’s Home Equity. If your LOC is classified as a re-finance then it probably changes the nature of your loan into a Recourse, but I would venture that unless you actually drew against that LOC that you wouldn’t have any income to report as long as your loan has not actually been increased from the original purchase price amount.
I guess a lot of this would depend on what conditions are actually set forth on the re-finance documents that get signed – small print areas and all.
Now don’t any of you cut and paste this and try to use it as a position paper to support your Tax filing – I don’t think the IRS considers a psuedononymous (is that even a word?) blog comment posting to be a proper Tax Authority reference.
This thread may be dead by now, but if not I’d like to mention that this is very, very good stuff here, Badtux.
Thanks for giving more definition from the legal standpoint.