Negative home equity

[mike777]

I think he's saying that there's no law that requires the seller to confirm that the buyer has the financial means to repay the loan.  But the mortgage broker works for the buyer, so he has a fiduciary duty to the buyer to keep him from getting over his head.

 

However, I think the problems that the buyer gets into have to have been foreseeable.  Is he really expected to make sure that every buyer can afford to weather a 30% decline in housing prices?

He may very well have some kind of duty I just doubt it is fiduciary. :)

 

In any case if he broke the law/regulations sue him

 

 

For those who want even more regulations..perhaps we should have a law for the seller also.....:) After all he is getting the money :)

 

Lets back up...It is forseeable that the buyer may lose his job......key word may....and not be able to afford the mortgage. It is forseeable that rates may rise and the buyer may not be able to afford the house....

 

It is forseeable the buyer may key word may get sick or injured and not be able afford the mortgage...

 

It is forseeable a house may key word may go down in value.......

 

Making loans is a risky business.

 

 

Again if the broker commits fraud or breaks the rules or regulations no problem....the buyer almost always..always has a lawyer at the closing........

[mike777]

"Maybe I am misunderstanding something. What is the cause for the increased rates of foreclosure?"

 

 

A foreclosure is when the bank comes in when you stop making your mortgage payments and you did not sell your house to repay the loan.

 

1) if you cannot afford your monthly payment but sell the house for a profit...no foreclosure.

2) if you cannot afford your monthly payment but cannot sellthe house for a profit...foreclosure.......

 

 

1) Many people have variable rate mortgage....rates go up alot...they cannot make payment.

2) Unemployment goes up alot..........people cannot make fixed rate payment.

3) Many take out second mortgage compared to ten or twenty years ago

4) House goes down in value

 

 

equals more foreclosed homes.

 

 

More foreclosed homes may make neighborhood homes go down even more in value........banks go under ....more unemployment........more nonpayments...death spiral......worst case.....

[JoAnneM]

Walking away from a mortgage when you can actually still make the payments just for the purpose that was outlined in the original post should be a crime. If not, I consider it a moral crime and could not respect such a person. But then I have trouble with respect when it comes to a lot of people when it comes to their sense of honor, civic and personal responsibility, etc.

[barmar]

Anyone can get sick, die, lose their job, their house can go down in value, etc. So of course it's foreseeable that these things might happen, but if you go that way then no one will ever get a mortgage unless they have enormous savings to cushion them. It's like the old joke that banks will only make loans to people who don't need them. So you can't give up just because someone MIGHT be hit by lightning, you need to judge how likely it is.

 

There has to be some risk involved -- that's what the banks and insurance companies are being paid to do, spread the risk. The idea is that you make lots of loans, and most of them get repaid and this makes up for the ones that default. So you can't fault sellers and lenders, unless they're reckless in making loans to people who are clearly bad risks.

 

Mike, you keep on saying that there are other duties than fiduciary. What in particular are you thinking of? What laws do you think might be broken in these cases?

[mike777]

"Mike, you keep on saying that there are other duties than fiduciary. What in particular are you thinking of? What laws do you think might be broken in these cases?"

 

I gave the example of the "know your client"

 

There is something called ordinary duty under the law.

 

Most brokers do not have and do not want the power and obligation to act on behalf of someone else.

 

 

"Of course, the mere fact that a business relationship comes into being between two persons does not mean that either owes a fiduciary obligation to the "

 

 

FIDUCIARY DUTY - An obligation to act in the best interest of another party. For instance, a corporation's board member has a fiduciary duty to the shareholders, a trustee has a fiduciary duty to the trust's beneficiaries, and an attorney has a fiduciary duty to a client.

 

A fiduciary obligation exists whenever one person, the client, places special trust and confidence in another person and relies upon that person, the fiduciary, to exercise his discretion or expertise in acting for the client; and the fiduciary knowingly accepts that trust and confidence and thereafter undertakes to act in behalf of the client by exercising his, the fiduciary's, own discretion and expertise.

 

Of course, the mere fact that a business relationship comes into being between two persons does not mean that either owes a fiduciary obligation to the other. If one person engages or employs another and thereafter directs or supervises or approves his actions, the person so employed is not a fiduciary. Rather, as previously stated, it is only when one party reposes, and the other accepts, a special trust and confidence involving the exercise of professional expertise and discretion that a fiduciary relationship comes into being.

 

When one person does undertake to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary on his behalf and the fiduciary must exercise all of the skill, care and diligence at his disposal when acting on behalf of the client.

[barmar]

Walking away from a mortgage when you can actually still make the payments just for the purpose that was outlined in the original post should be a crime. If not, I consider it a moral crime and could not respect such a person. But then I have trouble with respect when it comes to a lot of people when it comes to their sense of honor, civic and personal responsibility, etc.

I have a hard time agreeing that it should be a crime. When you take out a mortgage (or any other loan with collateral), you enter into a mutually-agreeable contract that states "I'll make these payments or you can take possession of the collateral." In other words, giving the bank the house is considered to be equivalent to paying off the loan. Banks understand this when they enter into the mortgage business, and they shouldn't make loans if they're not willing to take the risk that they end up with the collateral rather than the cash. Where does it say that the homeowner must bear all the downside risk?

 

Furthermore, banks take out insurance against defaults. Is there insurance available for individual homeowners, to protect them against declining values? If not, then it just makes good fiscal sense to walk away from a loan when it's not worth it.

 

Defaulting on a loan carries a punishment -- as others have pointed out, it puts an enormous black mark on your credit rating for several years. This isn't as severe as jail, of course.

 

I agree with you that it's not nice to do this, but this is business we're talking about. It would be reprehensible to do this to a friend who made a personal loan to you, but this is banks we're talking about. They have no qualms about raising rates on ARMs and dropping interest on savings accounts. Should we really be concerned with hurting their feelings by walking away from bad loans?

[Lobowolf]

The reason for a good percentage of them, and the most readily avoidable ones, is that people were put into adjustable rate mortgages who were able to pay the monthly payments at the time, but had little to no margin for error, and couldn't make the payments when they increased.

 

I didn't read Phil's comments to imply that brokers had been doing things that were illegal; I read them to say that the problem would be alleviated if the laws/regulations were changed such that they would be held to a higher standard in the future.

[mike777]

Walking away from a mortgage when you can actually still make the payments just for the purpose that was outlined in the original post should be a crime.  If not, I consider it a moral crime and could not respect such a person.  But then I have trouble with respect when it comes to a lot of people when it comes to their sense of honor, civic and personal responsibility, etc.

Ahh I see why you and others responded this way. I could have used another phrase than "walk away". :)

 

Listen to Feldstein yourself but what I meant to only say was mortgages on main home are nonrecourse loans. If you hand over the keys..........most often because you cannot make the payments....you walk away from the debt......the homeloan company cannot go after your other assets.

 

To be fair......even the phrase "make the payments" can be confusing. You may choose to make the car payment and insurance payment and hospital bill payment and not make the house payment...even though you have the option to make the house payment and not pay the hospital. :)

 

 

With a car if you cannotmake the payments, hand over the carkeys...you still owe the money...and the carloan company can go after your other assets.

[pclayton]

Walking away from a mortgage when you can actually still make the payments just for the purpose that was outlined in the original post should be a crime. If not, I consider it a moral crime and could not respect such a person. But then I have trouble with respect when it comes to a lot of people when it comes to their sense of honor, civic and personal responsibility, etc.

Wow. I sort of feel the opposite.

 

When I signed my mortgage (FYI I sold my home 2 hears ago), I agreed that the house would be collateral to the loan. Since the home has gone down in value, and I can arguably negotiate a short sale with the bank, what 'moral' obligation do I have to a 'bank' to continue to service a debt on an asset that is worth less than the loan?

 

If the home goes up in value, the bank's security is improved and I'm in a windfall position. Don't we both win in this circumstance?

 

By the way, in 1993, I bought my 1st home out of foreclosure. It was a very unique situation where a 2nd TD (who foreclosed and cured the default on the 1st) was much higher than the 1st. The 1st stayed on title, and the 2nd, went from being a lender, to an owner, back to being in 2nd position and carried back a lot of paper.

 

In 1995, values went down even further. I negotitated a 'cram-down' with the 2nd because the home had lost value. I didn't want to service debt that was in excess of a home. So we bifurcated the 2nd into a new 2nd, and a 3rd that was paid off 7 years later and was interest free. They didn't see a problem with it.

[barmar]

The reason for a good percentage of them, and the most readily avoidable ones, is that people were put into adjustable rate mortgages who were able to pay the monthly payments at the time, but had little to no margin for error, and couldn't make the payments when they increased.

I've always had a hard time understanding this. When people take out adjustable mortgages, what do they they think is going to happen?

 

Regarding the duties of the lender and broker, have they been painting rosy images for the buyers, telling them that increases are unlikely and they should take out these loans that they could just barely afford? If so, that is certainly irresponsible, perhaps approaching the fraudulent behavior that Mike thinks should be punished.

[jdonn]

The reason for a good percentage of them, and the most readily avoidable ones, is that people were put into adjustable rate mortgages who were able to pay the monthly payments at the time, but had little to no margin for error, and couldn't make the payments when they increased.

I've always had a hard time understanding this. When people take out adjustable mortgages, what do they they think is going to happen?

I think the idea is they generally expected to refinance when the higher rate kicked in, but didn't anticipate that their home would dramatically decrease in value, making refinancing unfeasible. I don't think it's a bad idea to do this as a plan (in fact I have essentially the same plan for my house, bought a year and a half ago) as long as you are pretty sure you would be able to make the higher payments if necessary, just in case!

[Lobowolf]

I've always had a hard time understanding this.  When people take out adjustable mortgages, what do they they think is going to happen?

 

In many cases, they didn't think much about it at all.

 

 

 

Regarding the duties of the lender and broker, have they been painting rosy images for the buyers, telling them that increases are unlikely and they should take out these loans that they could just barely afford?

 

In some/many cases, pretty much, yeah. Loans "on stated income" (i.e. don't ask don't tell...just put down a big enough salary so we can get it past the numbers guys) etc.

 

Yes, those buyers have a definite hand in it; however, it's a complex and technical field in which buyers, particularly first-time buyers have very little expertise, and are dealing with people for whom it's a full time gig. Similarly, prosecuting attorneys have duties that defense attorneys don't have, and eminent domain attorneys representing acquiring agencies have duties that eminent domain attorneys representing property owners don't have. I think there's a strong case to be made for heightened duties here, as well. In addition to the complexity and the vast differential in specialized knowledge, there's a strong public interest (as we've recently seen) when it comes to widespread failed mortgages.

[mike777]

I am not quite sure what higher standards or regulations forum members want, so difficult for anyone to debate/discuss them. :)

 

If I understood Phil there were three mortgages on his home. :)

 

Making loans is a risky business. Fraud is illegal today and was yesterday.

 

"telling them that increases are unlikely "

 

If you want to make it illegal for a broker to give a guess....only a guess on where interest rates might go the next 30 years ok......

 

I rather make it illegal for any buyer to ask and if they do they go to jail.....:)

 

Keep in mind credit card loans are made with no down payment so if you want to make it illegal to make loans with no downpayment ok.

[Lobowolf]

Proving fraud is a tricky business, too.

[mike777]

Speaking of fiduciary duties or just plain duty. :)

 

"Yes, those buyers have a definite hand in it; however, it's a complex and technical field in which buyers, particularly first-time buyers have very little expertise, and are dealing with people for whom it's a full time gig. Similarly, prosecuting attorneys have duties that defense attorneys don't have, and eminent domain attorneys representing acquiring agencies have duties that eminent domain attorneys representing property owners don't have. I think there's a strong case to be made for heightened duties here, as well. In addition to the complexity and the vast differential in specialized knowledge, there's a strong public interest (as we've recently seen) when it comes to widespread failed mortgages"

 

Almost everyone has a lawyer at the closing. Did not the lawyer need to act with an obligation towards his client?

I ask this because the last two times I closed on a mortgage my loan documents which the lawyer had reviewed were wrong. Wrong rates...even wrong name on loan document,my name was not even on the document. :)

 

1) We got the buyer acting stupid.

2) We got the bank acting stupid.

3) we got the broker acting stupid

4) we got the buyers lawyer acting stupid.

4) We got the seller...saying please please sign and let me run fast before you default on that stupid loan and you pay me this stupid inflated price for my home....:)

[Lobowolf]

Speaking of fiduciary duties or just plain duty. :)

 

"Yes, those buyers have a definite hand in it; however, it's a complex and technical field in which buyers, particularly first-time buyers have very little expertise, and are dealing with people for whom it's a full time gig. Similarly, prosecuting attorneys have duties that defense attorneys don't have, and eminent domain attorneys representing acquiring agencies have duties that eminent domain attorneys representing property owners don't have. I think there's a strong case to be made for heightened duties here, as well. In addition to the complexity and the vast differential in specialized knowledge, there's a strong public interest (as we've recently seen) when it comes to widespread failed mortgages"

 

Almost everyone has a lawyer at the closing. Did not the lawyer need to act with an obligation towards his client?

I ask this because the last two times I closed on a mortgage my loan documents which the lawyer had reviewed were wrong. Wrong rates...even wrong name on loan document,my name was not even on the document. :)

 

1) We got the buyer acting stupid.

2) We got the bank acting stupid.

3) we got the broker acting stupid

4) we got the buyers lawyer acting stupid.

4) We got the seller...saying please please sign and let me run fast before you default on that stupid loan and you pay me this stupid inflated price for my home....:)

Your attorneys' screw-ups emphasize the point; how much more likely is an unrepresented home buyer to drop the ball? There's one idea off the top of my (your) head...no sales to unrepresented buyers.

 

I think it's certainly stupid (or worse) for a broker to "guess at interest rates." From a legal standpoint, I think lack of income verification is certainly reckless. For adjustable rate mortgages, maybe a conspicuous print sheet showing what the payment will turn into if interest rates go up 0.5%, 1%, 2%, 3%, etc. in the next 1, 2, 5, 10 years...something like that.

[pclayton]

If I understood Phil there were three mortgages on his home. :)

Mike, I doubt there is a court in the world that would allow me tort damages for being clueless about any real estate transaction when they ask me about me about my resume.

[mike777]

Speaking of fiduciary duties or just plain duty. :)

 

"Yes, those buyers have a definite hand in it; however, it's a complex and technical field in which buyers, particularly first-time buyers have very little expertise, and are dealing with people for whom it's a full time gig. Similarly, prosecuting attorneys have duties that defense attorneys don't have, and eminent domain attorneys representing acquiring agencies have duties that eminent domain attorneys representing property owners don't have. I think there's a strong case to be made for heightened duties here, as well. In addition to the complexity and the vast differential in specialized knowledge, there's a strong public interest (as we've recently seen) when it comes to widespread failed mortgages"

 

Almost everyone has a lawyer at the closing. Did not the lawyer need to act with an obligation towards his client?

I ask this because the last two times I closed on a mortgage my loan documents which the lawyer had reviewed were wrong. Wrong rates...even wrong name on loan document,my name was not even on the document. :)

 

1) We got the buyer acting stupid.

2) We got the bank acting stupid.

3) we got the broker acting stupid

4) we got the buyers lawyer acting stupid.

4) We got the seller...saying please please sign and let me run fast before you default on that stupid loan and you pay me this stupid inflated price for my home....:)

Your attorneys' screw-ups emphasize the point; how much more likely is an unrepresented home buyer to drop the ball? There's one idea off the top of my (your) head...no sales to unrepresented buyers.

 

I think it's certainly stupid (or worse) for a broker to "guess at interest rates." From a legal standpoint, I think lack of income verification is certainly reckless. For adjustable rate mortgages, maybe a conspicuous print sheet showing what the payment will turn into if interest rates go up 0.5%, 1%, 2%, 3%, etc. in the next 1, 2, 5, 10 years...something like that.

1) I have never seen an adjustable mortgage but do they not have something like this? I mean how stupid is the buyer, buyer's lawyer, broker, bank if they do not have something like this?

2) Given this buyer I think the mortgage should also have something about what happens if they lose their job, get sick or injured and cannot work, spend all their money on Kenberg's legal slot machines and legal booze or go to Vegas and lose.

3) If not I sue!

[Lobowolf]

The law recognizes varying degrees of culpability with respect to people's states of mind. While such a buyer is almost certainly negligent (essentially, "should have known better"), the brokers in many cases were reckless (essentially, "did actually know better, and deliberately disregarded it"), which is a higher state of culpability.

[cherdano]

If I understood Phil there were three mortgages on his home. :)

Mike, I doubt there is a court in the world that would allow me tort damages for being clueless about any real estate transaction when they ask me about me about my resume.

Well you could fake your resume, but then there would still be your BBF posts out in the open :)

[barmar]

Listen to Feldstein yourself but what I meant to only say was mortgages on main home are nonrecourse loans. If you hand over the keys..........most often because you cannot make the payments....you walk away from the debt......the homeloan company cannot go after your other assets.

 

To be fair......even the phrase "make the payments" can be confusing. You may choose to make the car payment and insurance payment and hospital bill payment and not make the house payment...even though you have the option to make the house payment and not pay the hospital. :)

 

 

With a car if you cannotmake the payments, hand over the carkeys...you still owe the money...and the carloan company can go after your other assets.

Mortgages on a primary residence have a privileged status in the US. Beside the fact that they're non-recourse loans, you also get tax benefits. Home ownership has long been part of the "American Dream", and the government does what it can to promote it.

 

I was also thinking the same thing about "make the payments". Everything is a choice between paying for one thing or another. But I decided not to write it. Some things are necessities, like food and clothing. While a home is a necessity, owning a house is not. So it's obvious that certain choices will have to go a certain way.

[Mbodell]

In the USA mortgage loans are nonrecourse. If you default you get to walk away from debt. Compare this to Car loans or credit cards which you can default on but still owe money when they take away your car.

Ok so I can walk away from my $300,000 house with a $400000 mortgage and then buy a similar house (maybe even the same house, lol) for $300,000, thereby screwing the bank for $100,000? Strange system.

Yes, people have been doing exactly this. The trick is you need to buy the house across the street or in the same development (that is the exact same floor plan) *before* you default on your original house.