No Help in Sight, More Homeowners Walk Away

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

See the whole article in New York Times. Extensive discussion of the issue. It’s beginning to look like a parade. There is no question that without principal reduction, the bottom has yet to be reached in home values. Strategic Defaults are on the rise and may well dominate the housing market for years to come.

No Help in Sight, More Homeowners Walk Away

NY Times

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.
“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”


6 Responses

  1. Ian
    For one of the sales on my mortgage loan from the orignator New Century to a Chase entity (within the N.A. or national bank), the mortgage loan was then shuttled around to at least 5 other Chase entities finally ending up in the securities trust with the securities trustee named U.S. Bank, N.A.

    I think each case is unique and in some cases, the originator and trust creator can be under the same N.A.



  3. Mortgage lenders pursue homeowners even after foreclosure

    Buzz up! 575
    o Print

    By Les Christie, staff writer , On Wednesday February 3, 2010, 3:21 pm EST

    As terrible as it is to lose your house to foreclosure, at least it’s a relief to put your biggest financial headache behind you, right?


    Former homeowners may still be on the hook if there’s a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these “deficiency judgments” are ticking time bombs that can explode years after borrowers lose their homes.

    It can even happen to people who got their bank to approve them selling their home for less than it is worth.

    Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.

    “My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.”

    Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called “liar loans” where they didn’t have to verify their income.

    Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances — like unemployment or a job transfer — can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

    “After the banks foreclose, it’s very common now to have large deficiencies with houses not worth the balances owed,” said Don Lampe, a North Carolina real estate attorney.

    Lenders mostly declined comment. Although Corey’s lender, BB&T did indicate it was pursuing more deficiency judgments.

    “They follow the rise and fall of foreclosures,” said the spokeswoman, who would not discuss Corey’s account.

    Can they come after you?

    Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.

    “Once they have a judgment, they can pursue you anywhere,” said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. “They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail.”

    In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

    Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims.

    Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.

    But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.

    “People shouldn’t have a false sense of security that a deficiency judgment may not be later sought,” Zaretsky said.

    He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.

    “The parties who bought those notes wouldn’t have paid money for them unless they had the intention of acting,” Zaretsky said.

    Ticking time bomb

    What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.

    It doesn’t have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.

    It wasn’t until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.

    “I told them, ‘Hey, you guys released the title,'” he said. “As far as I know, I’m off the hook.”

    He wasn’t. Releasing title does not necessarily end the debt. It’s complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.

    Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.

    Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.

    “He had no idea what he was doing,” said Zaretsky. “All the lender had to do was go to court to convert the confession into a deficiency judgment.”

    Lenders are also very inconsistent. One of Zaretsky’s short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.

    Strategic defaults

    Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.

    “Banks are pulling credit reports to see if it’s a strategic default,” he said. “If you’re behind on all your other payments, you’re okay. But if you’re not, they’ll come after you.”

    If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.

    “We don’t favor any short-sale contracts that leave any deficiency that can be pursued,” he said.

    Robinson himself knows what can happen. He paid off a deficiency after his own New Jersey house went through foreclosure 11 years ago.

  4. It appears that before the repeal of the Glass Stiegel
    Act, the commercial banks could monetize the value
    of real estate, but they had to keep the notes in their
    vaults as an asset against the credit deposits they made into the checking accounts of the borrowers.
    Therefore, they were only collecting the interest on this
    credit they created out of nothing.
    With the repeal of the Act, They could now sell those
    Notes on Wall Street, ie “get the principal” instead of
    just the measely interest. This essentially put the
    big commercial banks in the counterfeiting business
    instead of the banking business. They were manufacturing “Notes” and turning them into cash.
    The problem was, they did not want their name on this
    “toxic trash” so they hired “correspondent lenders”
    to do the “dirty work” for them of obtaining “fresh Notes” that they could turn into “cash” by selling them to investors on Wall Street.
    The correspondent lenders would borrow the credit
    from the “warehouse lenders” ie big commercial banks, at about 5%, take 15% off the top as a “yield
    spread premium” and lend the lower amount at a
    higher interest rate, say 6 or 7% to the retail borrower.
    The brokers would receive 10% of this YSP as a back
    end commission, paid outside closing, for bringing
    in the “gullible sheeple” who would sign the Notes,
    they needed to make their “production quotas”.
    To keep production of the Notes high, the brokers
    would obtain inflated appraisals, lie on the income
    statements and lie about the YSP commissions they
    were receiving for being the “boots on the ground”
    dealing with the public.
    Everyone in the chain of production knew these
    loans were fraudulent and designed to fail, so they
    made sure every loan was covered by mortgage default insurance.
    If this were done by the Judges, it would put
    an end to the mortgage crisis and still allow the
    investors to at least recover their principal. IT IS THE

  5. Here is an eye-opener which I haven’t seen on the site before, a list of National Banks’ operating subsidiaries (subprime lenders, mortgage brokers) for 2008, alphabetically listed as to; Name of Operating Subsidiary, DBA listings, Name of National Bank, Operating Subsidiary city/state. Wells Fargo, Wachovia, National City seem to have had dozens if not 100 or more nationally. Go to and under any heading click on “other”, then onto “is my bank a national bank?”, and you will see operating subsidiaries. I wonder if ALL loans originated by an operating subsidiary were in turn put in a trust of the National Bank owning the subsidiary, or were they put in a trust administered by yet another national bank to give the appearance of an arms’ length transaction? Maybe everyone can put in their own two cents’ worth. Thanks, Ian

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