EDITOR’S NOTE: It is ironic how reality eventually catches up with illusion. While we have been pounding on the issue of principal reduction as the only realistic way out of the recession, and while the financial industry has been busy convincing people that principal reduction is somehow immoral, the contraction of home prices back to reality is having its own consequences.

In the article below the art and necessity of strategic default is revealed as mainstream in the current housing market. In the case of home equity loans or home equity lines of credit the bloating of appraisals at the time of the transactions has blown up in the face of the financial industry. Many of those home equity loans were in reality part of the initial transaction without which the buyer would have been unable to purchase the home. The transaction would have been valid if the appraisal had been valid. It wasn’t.

A simple analysis of basic fundamental figures published monthly over the last 120 years easily demonstrates that the appraised values that were unverified by the alleged “lender” as part of a nonexistent “underwriting process” could not sustain the test of time or circumstance.

In point of fact most new homeowners quickly found out within weeks or months of the initial transaction that their property was worth far less than the representations made to them at the time of closing. The true value was so far below the so-called appraised value that it didn’t cover the home equity part of the transaction even at the time that the transaction was closed.

The reaction of homeowners to the disappearance of the illusion of wealth has been entirely predictable. For the present the number of home equity loans which are going unpaid is soaring both in numbers and percentages, regardless of the borrower’s ability to pay. Any party that wishes to assert itself as the “owner” of the loan is stuck in the position of holding a predatory loan subject to numerous defenses that is completely unsecured by any equity in the home. According to this article there is at least one debt collector that won’t pay more than $500 per loan regardless of the principal amount due.

The rising number of strategic defaults on primary loans is also rising, also predictable and also inevitable. This is the obvious reaction of a marketplace seeking equilibrium and dependable valuations. Until policy makers accept the reality that the wealth of our economy is largely buried under the illusion of debt that is neither secure nor perfected arising from transactions that were illegal, predatory and fraudulent, there is no way out.

Restoring consumers to the position they were in before they were defrauded is the only way to restore confidence in our society that has permitted the privatization of the issuance of money. Financial reform without providing an easy path to restoration of wealth in the middle-class is meaningless.

August 11, 2010

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity


PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”

John Collins Rudolf contributed reporting.

After 8 Lawyers turned Her Down — Jury Awards $1.25 million to Borrower In Suit Against Wells Fargo

To all lawyers who dismissed the idea that they could make money representing homeowners in dispute with their lenders, consider this, by way of example, in addition to the 350 people who have officially walked away with clear title to their homes — many of them acting pro se.

Jury gives woman $1.25M in lawsuit over mortgage
Baltimore Business Journal – by Eli Segall Staff submitted by Mario Kenny

A Baltimore native who defaulted on a subprime loan has been awarded $1.25 million in damages from her lender, Wells Fargo Bank N.A. The case may lead to similar lawsuits nationwide, and also may help Baltimore City’s suit against the bank, claiming it targeted minority neighborhoods with subprime loans, legal and banking experts say.
Kimberly L. Thomas was awarded $250,000 in damages and $1 million in punitive damages in Montgomery County Circuit Court July 31. A six-member jury convicted Wells Fargo of fraud, negligence and other charges for inflating Thomas’ income and assets on her mortgage application, and locking her into a bigger loan than she had applied for — one she couldn’t afford.
Thomas, 41, said in an interview with the Baltimore Business Journal that her case “destroys the myth” that the subprime mortgage meltdown is fueled by homebuyers taking loans they can’t handle.
“They make it seem like it’s the person’s fault,” Thomas said from her Silver Spring townhouse. “But they don’t know what’s going on behind the scenes.”
Brian Maul, her attorney, said Thomas’ loan agent pushed through a bigger mortgage to reap a higher commission. Teri Schrettenbrunner, a Wells Fargo spokeswoman, said the bank followed “responsible lending practices” and will appeal the verdict.
Thomas’ lawsuit, filed in February 2007, may impact Baltimore City’s case; the city alleges that Wells Fargo targeted Baltimore’s minority neighborhoods with “unfair, deceptive and discriminatory lending,” thus helping fuel a foreclosure crisis. The suit, filed in January in U.S. District Court of Maryland, has not gone to court yet.
Suzanne Sangree, chief solicitor in the city’s Department of Law, said the case may not set a legal precedent because it was decided by a jury, without a judge-issued opinion. But the verdict would help nonetheless, as it “supports the allegations of our complaint,” she said.
“The fact that a jury looked hard at the loan documents and said Wells Fargo was negligent, that’s essentially what we’re saying in Baltimore City as well,” Sangree said.
Thomas’ case dates back to June 2006. At the time she was considering separating from her husband, so Thomas, a mother of two, decided to leave Silver Spring and buy a $505,000 house in Burtonsville. Her sister referred her to a Wells Fargo Home Mortgage office in Westminster, where Thomas applied for a $535,000 loan, with a 7.13 percent interest rate.
Roughly two to three weeks later, her loan agent submitted the application with a string of incorrect information, according to court documents. This included the Social Security number of Thomas’ sister, who had a higher credit rating; a monthly income of $14,000, which was nearly double Thomas’ actual income; and assets that included $30,000 cash at Constellation Federal Credit Union. According to the suit, Thomas never claimed to have this much money socked away, at Constellation or elsewhere.

Thomas soon learned that her loan was at 10.625 percent interest, with a monthly payment of roughly $4,600, well above the $3,000 she was expecting. She signed the contract anyway, at the urging of her attorney at the time, figuring it was an honest mistake and Wells Fargo would correct it.

But over the next few days, Thomas said, the bank urged her to refinance with another lender. Thomas then realized she couldn’t back out of the deal, and within a week of closing on the loan, she put the house back on the market.
She also decided to sue; among other problems, her credit rating was getting clobbered by missed mortgage payments. She feared this would harm her job as a government contractor and impede future big-ticket purchases.
Eight law firms rejected Thomas. She said they worried she didn’t have enough money to take on the bank, before Gordon & Simmons LLC, of Frederick, took the case.
“Everybody knows somebody who’s been messed over by them,” Thomas said of the San Francisco bank. “But you don’t see results. You don’t actually see people who say that they won.”

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