Profiting from the next wave of “defaults”

Here is PART of the next wave of “defaults” that will ruin lives and fill the pockets of the Wall Street bankers and intermediaries who are now “servicing” and foreclosing on loans that have already earned extremely high profits, far exceeding the funded amount of the loan. My opinion is that there will be three general classes of people that emerge from this mess on the homeowner side: (1) people who just walk away from the home and don’t pay the obligation (potentially including credit card, student loan and other debt), (2) people who challenge the right to foreclose and who claim damages and a demand to quiet title and (3) people who enter into “modification agreements” only to end up in one of the first 2 classes within 6 months.

These defaults are not real in any sense of the word, but they look real to the homeowner who knows he/she has not made a payment. The obligation has been paid and it is possible that some or all of the pornographic profits made on credit default swaps might actually be due to the homeowner after the “default” is declared or after the home is sold. Most states have a surplus clause that requires any amount of money received in excess of the mortgage be refunded to the homeowner. On some of these more exotic instruments, the amount received could be as much as 30 times the amount of the mortgage. Lawyers take note! There is real money in this.

Come to the workshop in San Diego on September 13 (homeowners) and 14th (CLE Lawyers), if you can still get in, to get more information.
By the way, for those more sophisticated lawyers and accountants, take a look at this: Securitization Accounting Sec 101_Ann Kenyon 1pm
September 9, 2009

As an Exotic Mortgage Resets, Payments Skyrocket

Edward and Maria Moller are worried about losing their house — not now, but in 2013.

That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

Keith Gumbinger, an analyst with HSH Associates, said: “This is going to be the source of tomorrow’s troubles. The borrowers might have thought these were safe loans, but it turns out they bet the house.”

After three brutal years, evidence is growing that the housing market has turned a corner. Sales in July were the highest in a year, and August gives signs of having been even better. In nearly all major cities, home prices are now rising.

Celebration, however, might be premature. The plight of the Mollers and many others in a similar position is likely to weigh on any possible recovery for years to come.

Experts predict a steady drumbeat of defaults over much of the next decade as these interest-only loans mature. Auctioned off at low prices, those foreclosed houses could help brake any revival in home prices.

Interest-only loans are not the only type of exotic mortgage hanging over the housing market. Another big problem is homeowners with “pay option” loans; in many of these loans, principal balances are actually increasing over time.

Still, interest-only loans represent an especially large problem. An analysis for The New York Times by the real estate information company First American CoreLogic shows there are 2.8 million active interest-only home loans worth a combined total of $908 billion.

The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.

John Karevoll, a longtime senior analyst for MDA DataQuick, sees the plight of interest-only owners this way: “You’re heading straight for a big wall and you can’t put the brakes on.”

The greater the length of the interest-only period, the more years the owners have to hope for a recovery, government help, or a miracle. But a long interest-only period works against them, too. A loan that is interest-only for its first 10 years means the entire house has to be paid off in the next 20 rather than the more typical 30 years.

One possible solution: start paying extra each month now to pay down the principal before the loans reset. But many homeowners took out the maximum they qualified for, and don’t have the means to pay more, or at least not enough to make a sizeable dent in the principal.

A decade ago, interest-only loans were rare. But as the boom heated up and desperate buyers sought any leverage they could, these loans became ubiquitous. They were especially popular in Florida, Nevada and above all California. In 2004, nearly half of all buyers in the state got one.

The Mollers bought in 2005, paying $460,000 for their three-bedroom, thousand-square-foot house. A quick refinance a few months later supplied cash to pay debts. Now the house is worth perhaps $310,000. After their interest-only period is up, they expect their monthly payments to increase 20 percent if not more.

“Everyone out here always preached to me, ‘Buy real estate. It’s the best investment you’ll ever have,’ ” said Mr. Moller, who grew up in Iowa. “Then all this stuff started crumbling and I was like, ‘You’re kidding me.’ ”

While default may be a long way off, the prospect is already dampening the couple’s spending habits. They are postponing the new windows the house needs. They recently bought a 2005 Nissan Murano instead of a new car, and they have put off buying a flat-screen TV.

Mark Goldman, a San Diego mortgage broker, said many interest-only buyers thought they would be in control when the loans reset. “They expected to move or refinance,” he said. “But you can’t do either when you’re under water.”

Among the people Mr. Goldman put into interest-only loans was himself. He refinanced five years ago to shrink his payments so he and his wife, Julie, could put their two sons through college. When the interest-only period expired a few months ago, their payments went up by 40 percent.

The Goldmans have been in their house for 20 years, which means they still have some equity. Still, they are unhappy to find themselves in “a world different than we planned for,” said Mr. Goldman, a lecturer in real estate finance at San Diego State. “If you purchased your home with an interest-only loan between 2003 and 2006, you’re cooked.”

The federal government, through the finance company Fannie Mae, increased the scope of a program this summer that might help some interest-only borrowers by letting them refinance. But it will not help many in coastal California. Only loans owned by Fannie Mae are eligible, and during the boom Fannie had a limit of $417,000 — not enough to buy a home at the peak in a middle-class community.

Dean Janis, a Southern California lawyer who bought a $950,000 home in 2004, will see his interest-only loan reset in December. He calculates that will send his payments up a minimum of 27 percent, to $3,726. A rise in rates could eventually push it as high as $6,700.

“I understand I took a risk,” Mr. Janis said. “But I did not anticipate that the real estate market would go down 30 percent.” He talked with Wells Fargo about his options, and the lender said he had none.

Homeowners with interest-only loans have a much greater likelihood of default, the First American CoreLogic figures indicate. Nationally about 18 percent of prime interest-only loans are at least 60 days delinquent. In California, the level is even higher: 21 percent, a rate exceeded only in the other bubble states of Florida and Nevada.

“The bailout is not trickling through to help many of us who have worked hard, under very difficult circumstances, to keep paying our bills,” Mr. Janis said. “I am stuck with nowhere to go — absent trashing my credit and defaulting.”

9 Responses

  1. Great post, I like it this information about to home equity loan and relationship with my blog…thanks

  2. Jose can you please share information on the case with quiet title you assisted in.
    (925) 684-9523

  3. MartyB,
    I am working with a number of Attorneys across the country. Linda above knows me as I am working with her attorneys.

    I am interested as to what is going on in your case and who your attorney is. If you do not mind sharing your information I would appreciate any consideration.

    I do not believe it is a 5 year issue it is simply a complaint to quiet the title. Keep in mind this is a discussion forum and no one is giving any legal advice…

    Thanks,
    Mortgage Audits
    oliver@ipa.net
    john

  4. Ditto Jose Fighter–my attorney does not want to do a Quiet Title–thinks it takes 5 years of non-payments–let’s find case laws to give support to the idea

  5. See UBS Ordered to Post $35 Million Bond in Fraud Case at http://www.reuters.com/article/businessNews/idUSTRE5890RU20090910

    “The court takes UBS employees at their word when they referenced their Notes, these purported investment grade securities which they sold, as ‘crap’ and ‘vomit’, for UBS alone possessed the knowledge of what their product was truly worth,” lawyers for the plaintiff quoted the judge’s statement as saying.

  6. CA Lawyers don’t want to do it because 1) representing clients who can’t afford you and 2) almost impossible to win in the lower courts, especially with recent slap downs as to attacks on who holds the note. It’s also hard to prove wrongdoing on the part of lenders when there’s a broker standing between them and the borrower, and suing a bankrupt broker isn’t going to help much. Lenders will just say it’s the broker’s fault, I’m a holder in due course, I was defrauded just as much as the borrower, etc

  7. Dear Mr. Garfield,

    can we diffuse the or mitigate the fear from some lawyers to look into the actual quiet title action as a means to challenge a foreclosure and a way to start the fight.

    For some reasons some just do not get the fact that they are negotiating with the wrong parties and are getting nowhere.

    Can you help me elaborate.

    Thanks

  8. Let Rome burn.

  9. I have fallen victim to the AMC/Deutsche and am fighting back with the help of my atty. So far, we are having success and I expect coming out of this on the winning side. During the process I have studied this subject extensively and I am interested in learning how I can transition my career into helping people in this area. Does anyone have any suggestions??

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