Why Are Distressed Homeowners Still Paying Their Mortgage?
October 8, 2010

The big question from the mortgage meltdown isn't why so many distressed homeowners are defaulting on their loans.

It's why any of them are still making payments.

In the worst-hit areas millions have no equity left, and little hope of seeing any anytime soon. The market value of their homes is far below the size of the mortgage.

If they just stop paying, what is going to happen to them? In many cases they may get to live in the home rent-free for months, even years, until the bank gets around to seizing it.

If Frank Abagnale—the con man played by Leonardo DiCaprio in the film "Catch Me If You Can"—were operating today, he'd probably be living rent-free in a super-luxury high-rise in Miami.

Consider the latest revelations. The big banks are so backed up with foreclosures that some of them resorted to hustling through repossessions without the proper paperwork. Some of them—including Bank of America, J.P. Morgan Chase and Ally Financial's GMAC Home Mortgage—have announced a temporary freeze in some states on further foreclosures while they sort through the mess.

In one case, a bank employee said she was approving 8,000 foreclosures a month. By my math, that's roughly one for every minute and a half. No, she wasn't reading all the documents thoroughly. (As one wit observed, the banks paid about as much attention to foreclosing on the loans as they did to making them five years ago.)

In many cases, thanks to the fallout from securitization, it's not even clear who owns the mortgage. The payments may be due to different financial institutions around the world, some of which have gone the way of all flesh.

No wonder a fair number of borrowers have simply gone on strike. Nobody knows exactly how many are doing so deliberately—a so-called strategic default—though some estimates suggest these may account for nearly a third of recent defaults.

According to the Federal Reserve Bank of New York, one mortgage borrower in five in Florida and Nevada is more than 90 days' late on payments, and in Arizona and California it's about one in eight. It's a wonder it's not more.

A while back I received an email from a woman in Florida that illustrates the issue.

Her neighbor across the road had stopped paying his mortgage about a year and a half earlier, she wrote. He was still living in his "luxury condo," and the lender hadn't come after him yet. After all, he told her, they were so backed up with the housing collapse it might take them years.

My correspondent—a lawyer—was wondering whether she was being stupid for continuing to make her own payments. After all, she, too, was deeply underwater; her mortgage was far bigger than the value of the home.

So what happens to those who simply go on strike?

Even where the bank is coming after them to evict them, it is taking months, maybe years. During that time they are living rent-free.

When they are evicted, the bank then puts the home on the market. It may take months more to sell. Let's assume it sells, but for a lot less than the size of the mortgage. What can the bank do then?

In some states, the bank can do very little. In so-called nonrecourse states—which include California and Arizona, two of the worst-hit in the housing collapse—banks basically have to eat the loss.

In other states, the banks have some ability to come after the homeowners for the shortfall. But for most distressed homeowners, this threat is more theory than reality. Why? The banks have too many cases to handle. And distressed homeowners typically have so little in surplus capital that there may not be much point.

Imagine you're the bank executive. The loss on the home came to, say, $200,000. The borrower is unemployed, driving a 10-year-old Chevy and living on food stamps. In another state. Or he has a part-time job in gas station, maybe $2,000 in savings, and two kids. How much do you want to spend on lawyers and debt collectors to hunt him down? How much do you think you're going to get back, after costs? You've got 5,000 cases like this.

Indeed, there's a lot the banks can't touch anyway. Money held in a 401(k) account, pension plan or individual retirement account is beyond the reach of creditors. So is college money for the children or grandchildren if held in a 529 plan for more than two years. And so are other assets; it varies by state. Often life insurance is sheltered: That may include mutual funds held in a variable annuity account. Once the borrower files for bankruptcy, the lender ends up with nothing.

Assuming people have taken legal advice, and taken the smart steps, the rules give many of them strong economic incentives to stop paying. In some circumstances, there might be state-tax consequences. They may find it harder to get a mortgage in the future. And their credit score will get dinged, sure, but in the grand scheme of things, is this really a fate worse than death?

The ruthless and the reckless have already walked. Meanwhile, the middle class continues to pay through the nose. It's that old "middle-class morality" that George Bernard Shaw mocked a century ago.

But is this really a case of morality anyway?

I'll confess this issue makes me uneasy. But my feelings are almost certainly awry. We live, alas, in a world, and an economy, which rewards ruthless self-interest and penalizes "morality." Just look at the big banks.

A mortgage isn't a blood oath, it's a business contract—a collateralized loan. It isn't simply a promise to repay the lender. It's a promise to repay the lender or to forfeit the home. Isn't someone simply fulfilling their contract by handing over the keys when asked?

The banks knew full well what the fine print said when they made the loan. And so they should: They wrote the fine print.

The economy will suffer if more homeowners default. But it will suffer if they don't. Those bad debts are doomed and need to be written off. Why should the homeowners eat them rather than the banks? Why is the reckless lender more at fault than the reckless borrower?

Japan struggled for 20 years with "zombie banks"—so called because their debts, if properly recognized, made them insolvent. Here in America, we have millions of zombie homeowners. Why is this any better?

Businesses make secured loans against property or collateral all the time. If the loan goes bad, the lender takes the collateral. Nobody expects executives to dip into their own pockets (a fortunate thing, as they never do). Bank executives pocketed tens of millions in the run-up to the financial crisis, directly as a result of the phony profits from reckless lending. Stockholders pocketed billions in dividends for the same reason. If the taxpayers hadn't stepped in, those banks would have collapsed and creditors would have lost a fortune. But they would have had no recourse—absent proof of fraud—against executives or those who owned equity.

Look through the financial statements of the big companies involved in the housing market, including major homebuilders and property developers, and you'll find frequent references to all the "nonrecourse financing" they've obtained. It's a boast. "Look," they're telling stockholders, "even if things go bad, the lenders can't touch us."

Apparently the only people who haven't gotten the memo are the middle class. For how much longer?

http://online.wsj.com/article/SB1000...editorsPicks_3

This is what happens when people lose MORALS Sad !!

lets see if you had a choice between 2. Underwater house, or Moho & Sandcar ??

House.......Moho............House...........Moho............House...........Moho

I think it was Moho and Sandcar

After awhile you say eff morals, this is a business decision.

That's what happens when people sell their souls to the banks.

l thank God I am not in this type of situation with my house. We all know good people that have lost their home. Most of them were not lacking on good morals.
There is a procedure for foreclosure in the loan docs, the banks get the house. Signed to and agreed to by all.
Now the ones that strip the house bare are the scumbags in my opinion.

You know the shittty part is that my brother has been hit pretty hard my the economy, he has tried to get a home loan mod to help lower intrest rate and his

mortgage payment, before he fell to far behind ( He was trying to do the right thing) and was denied 4 times over a 1 year period.

His mortgage company said "We can't help you in tell you are at least 30 to 60 days behind so sorry" So he said all right Fuuucckkk you then and has not paid a

payment in 8 mths and has banked every penny and is going to have his mother inlaw buy a house in her name and he will have a nice down payment. On a new

Place and this all happened because HIS mortgage company did not want to help the guy who is trully struggling and Trying to do the "RIGHT THING" no they want

To be pricks insted.

Morals have absolutely nothing to do with it. There is no clause in a mortgage that says you must be moral to purchase a house. There is no clause that says a banker has to be moral to lend you money. The banker knows that if you can't pay the note, then he gets the house. He gambles that you can pay off the note or that he can sell the house at a profit to recoup his investment. He also gambles that the bottom doesn't fall out of the market and he loses his butt. Now tell me. When prices were doubling every 2-3 years, where were the bankers that said they won't loan to buyers because the market is in a bubble? There were few if any that admitted that. Money was so easy to get to purchase a house that gardners could claim they made X amount of money and be qualified to buy a house.

In corporate America if there is a asset on the books that is as messed up as most mortages out there and they kept paying on it, someone would lose their job. Business decision going in on both parties and going out.

It's not just the banks in the news doing the foreclose-without-proper-paperwork thing, or other crooked little maneuvers like denying qualified mods because a borrower has equity and the bank stood to profit from foreclosing. I personally know of a case where a bank fired a manager because her division was cutting losses that would've otherwise been billed to taxpayers, then denied a mod after she took a new job at 1/2 pay and tried to foreclose her out because they held the note to her house...

well ill be seeing his property soon....

The fact is this has EVERYTHING to do with common sense and morals. you should see some of the ISH I see when I foreclose on homes, people who took and drained their homes of equity then act like they need help re-mod'd their home loan because they effed up. I would say 9/10 homes are just as I have described. I would say 1/10 are the guys who got completetly screwed by the economy and yes I will say the bank has some dumb rules. But I dont feel sad for those who were not smart finacially, I feel sad for the kids that are along for the roller coaster their parents have sold them into....

just to put a perspective on how many foreclosures happend today... the company I work for has 22 crews, each crew forclosed on 7 homes today and we will be dong this for our 6 day quota of 924 homes before saturday. and this is just riverside, moreno valley, orange, and LA this week

u are on the button my freind! I am not saying who, but several banks have now stopped posting Personal Property Notifications and are ordering properties trashed out immediately.

Pretty sad when a borrower wants to make good on their debt, but needs a lower fixed interest rate, and maybey the length of their loan stretch out, but the banks don't want to work with them. Banks are willing to let homeowners go into foreclosure and lose hundreds of thousands of dollars on a single home, rather than modify a loan. If the banks are willing to let these people walk instead of helping them out, then I say live rent free, stock up on cash, and buy another place. These banks have the ability to rewrite loans, help the home owner stay in their home, and not lose money on a defaulted mortgage. Sounds to me like the banks need a morality check.

Interesting read. I've been contemplating this very thing. How was anyone suppose to know the market would balloon up so big and then crash into a million pieces. It breaks down like this... what is worse? Having a ding on your credit score like a short sale or foreclosure or paying a mortgage for 30 YEARS for a so called investment to get little to none back at the end (meaning your home might be worth what you bought it for by then). I say screw the gov't and their bail outs on the banks because they made shotty loans, because they are apparently trying to screw us!

I have owned (paying on) a house for 25 years, I'm still a home owner. I will be hard pressed to ever buy another house, unless if I can pay cash and that goes for anything else. Never again will I be a slave for a house payment.

Exactly --







How a contract issue became a moral debate in this country is beyond me. There are plenty of areas to discuss the collapse of "morals" of society besides this meltdown. The only difference is that this discussion is governed by a contract. When the debtor exercises the contract to their benefit it is not a "moral issue."

Yea your right it isn't a moral thing it is a contract and only money. Go out today and see who you can screw over to make it better for yourself. Who cares about the person on the other end. Who cares about the people staying in their houses that are upside down, trying to make it work. I was against the bailouts from the beginning, its a broken system, so lets keep it going longer so more can get screwed. Sad times we are in!

Yeah, it's only a contract. Their is no morality problem for someone who spent all their equity on a Deisel Pusher and a Sand Car, then low and behold the market tanks, house is now worthless, so they cut their loss and drive into the sunset with their toys, leaving the property to the bank.

Are you ready to mark anybody who failed on their note with a big purple "A" branded on their chest? Have you upheld all your moral obligations? If so, then by all means be the first to stoke the fires for that branding iron.

The challenge with the bailouts is that it decayed any moral relevance to this debate. It has been occurring for years; anybody remember the Chrysler bailout in the 70's?

The world is no longer "A wonderful life" where we are accountable to our neighbors or for our own actions. To make a sweeping statement that those who exercise the recourse under the terms of the note are somehow morally bankrupt is disingenuous and, unless you have led a virtuous life, very likely hypocritical.

That is a pretty broad brush to be painting everyone with, wouldn't you say? I could tell you stories...

John

Broad brush.........true. dident mean the whole population. there is a lot of suffering out there, thank god I managed to miss that boat. But I am tightening down the ship. This downturn is far from over, despite the rising stock market.

And I could tell you a few stories.

Dang - I had 7 crews and we were only turning about 600 units/month statewide back in 08-09. I think we're seeing the third wave start to roll on right now...

And not only do you feel bad for kids and the 1/10 (close to accurate number) of people who were genuinely the screwee versus screwor, but there's the renters that just moved in the week before foreclosure and gave a two month deposit to the outgoing owner, the animals that get abandoned (I had to take possession of 5 horses in Poway one time and a small herd of milk cows outside Sacramento), so many screwed situations...


There's another thing they're doing wrong...however personal property is a royal pain in the arse - I've had field guys call me and ask how they should value a framed and autographed Eddie Money t-shirt, what to do with drug paraphernalia the police refused to confiscate, etc.


The worst part to me is that they won't do anything with people that are current on their loans. And with interest rates so low these days, you'd think there would be some way to refinance these people even though they're upside down, because if they're making a 6% payment they're probably going to be able to make a 4.375% payment. But with the federal HARP program that's supposed to do that, borrowers can only go back to their lender that made them the loan, and lots of times those lenders aren't working with the borrowers or are intentionally gumming up the works to frustrate people. I've got a dozen people right now who are perfectly qualified to refinance and save a couple hundred bucks a month, but can't because they don't have 20% equity.

Right now lenders are blacklisting borrowers involved in a distressed property for three years - it doesn't matter if you short sell, hand over the property via a deed in lieu, or get foreclosed out, three years later you can play again. Or, if you've got a dummy borrower like a parent, spouse, or sibling, you can jump right back in with a lot better property price and loan terms. I think anyone that isn't going to be able to ride out the storm should jump ship ASAP and start the three year clock ticking...

Last thing - original post said California is a non-recourse state, meaning the lender can't come after you for a deficiency judgment, they can only take your house. This is true if you never refinanced and still have the loan you used to purchase the house, but if you refi'd for any reason (even if you didn't pull cash out), you lose that protection. The legislature passed a bill last month to provide the same protection for people who'd refinanced as people who had purchase money loans, but der Governator vetoed it.

I live a simple life, I treat people the way I want to be treated. I'm a human being, so I'm a long way from being perfect.

The word moral as an adjective, means having to do with the principles of right and wrong with respect to behavior.
The word moral as a noun, means a passage in a story which includes the conclusion of the story.

I think the case people here are talking about is the adjective form, even though some are using it as a noun.

At any rate, I think it is certainly up for discussion as to whether this is an issue of morals. One side of the argument says that walking away from the mortgage is a moral thing to do because it is within the terms of the contract. I think this side believes that as long as the laws are being followed, the person is acting in a moral way. In other words, the law dictates what is the right or wrong thing.

The other side says that although what the person is doing is legal, it is not the right thing to do (is not moral). I think this side believes that there is a set of guiding principles defining what is right and wrong that supersedes the law or is somehow outside the realm of the law.

Of course, both sides are entitled to pass judgment as they see fit. The first side is well within their right to exercise any option of their contract that is legal. The second side is well within their right to think that the first side exercising certain options of the contract such as default is immoral. The great thing about our country is that we are not forced to live by other peoples' morals, only by the laws governing our nation.

The thing I think is more important for people who want to make a moral judgment on another to decide is whether you would be comfortable receiving a moral judgment from someone who had a different opinion than you on what is right and wrong. As for myself, I am perfectly content to pass moral judgment on others, and ignore other peoples' moral judgment of me if I believe their value system is wrong and be merrily on my way. The people I worry about are those that are happy to pass a moral judgment and then become defensive when they themselves are judged.

We are considering a planned default
Lost my job and tried to do a home loan mod. We were current on all payments at the time. During that time they gave us a trial payment until the mod was approved. Send in part of a payment and once they get enough to make a full payment they'd put it towards a months payment. All the while getting behind.
After 6 months of sending paper work we were rejected due to ONE fax not going through!
We are trying the process over and hope it goes through this time.
What a pain in the ass!
We owe or are upside down on toys but never refi'ed to pay for toys.

The bottom line here is the banks lending practices during the housing boom were eff*ed up and all the appraisals were inflated.
I bought a house in California in 2006 and stretched my budget figuring I had to allocate a large amount of my income to mortgage payments to get into the market. My home value has dropped 250K since I bought the house and I've made every mortgage payment on time. I went with a 30 year fixed loan and all I want to do is take advantage of the low interest rates that are available, but I can't afford to shell out 200K just so I can refinance my home.
The banks created this mess and are unwilling to help responsible people out that are making their payments and not handing in their keys. Want to fix the economy...Then free up people's cash flow that manage their money properly and allow us to take advantage of the low interest rates. Then we will be able to pump some extra money into the economy.
I'm not the guy that is going to eff* up my neighbor's property values even more by handing in my keys. Where's my freakin bailout program?
Thanks Wells Fargo!!

CITImortgage is bad too. Three times we have been "approved" for a modification, we should expect our packet to fill out in a few days. Everytime the packet never shows, when we call we get, "we re-evaluated your application and you were denied because you make 2% too much" or "you have been making your payments on time, so you don't need help"

BLAH!

Citimortgage is holding the 2nd mortgage on my house and they can kiss my ass as well!!
"We're sorry, but you make a little too much money so we can't help you"
Well....they're taking about 75% of my monthly paychecks!

Bought 08/06 in Huntington beach... 100k down... perfect on every payment and they have denied me 4 times on a mod... I would strategically default but my step dad in on the loan and has perfect credit and I can't screw his up... I don't really no what to do anymore though...

Do you have to be late to get a mod done?

I started with Downey savings and they sold it to OCWEN.... ***EFF Ocwen

If you've got a conventional loan through Fannie or Freddie, you might be able to refi up to 125% - you're one of the lucky few being serviced by a participating lender...but you'd have to get the new loan retail through Wells...

http://makinghomeaffordable.gov/refinance_eligibility.html

Ocwen kills me - worst of the worst.

I bought my house in Aug 07'
Appraised $440,000
Financed $340,000
Built a 2000 sq ft garage out of my pocket $65,000
Remodeled the house out of my pocket $45,000
Listed for sale for the last month for $179,000 not even one person has called.
I don't care what anyone thinks I am tired of taking it in the ass and I'm done.
I will never have another mortgage, if I can't pay cash then I will rent.
I don't blame the banks, I don't blame me.
And none of my toys/rv or cars/trucks were bought with equity, just cash.

My address doesn't come up as elidgble through either site. What is the 125%? Is that 125% of the actual value? We owe $215k on a house that is now worth $85k.

Years ago , on the last down turn we owed 75 K more than our house was worth . Every month we made the payment saying, as long as we pay we have aplace to live . Our neighbors that bought at that time had payments alot lower than us , as the market went up most of them took the money out we stayed where we were . We now even with the market like it is own more than we owe , just our income has dropped 25 %

Not even a Deisel Pusher ??

Try NACA!! They do help!! www.naca.com

125% of what the house is worth...if you need 250% loan-to-value you're stuck paying, short selling, or walking away.

Really Sad !

Just reading this stuff just breaks my heart and I have seen it with some people I work with. I also know some people that have spoke on this topic. I wished there was a simple answer, I know the mojority of the people (home owners) have tried to do the right things. I'm more pissed off at the banks that knew what they were doing. Yes it is contract and yes the people that signed knew what they were wanting, but the banks had the big over all picture! Then the banks get the bailouts, thats what really upsets me. I say tear it down to foundation and lets start all over.

Mike I am truly sorry to hear of your situation.

it is your case that truly makes me hurt inside, I think alot of people believe I am some sorta Home Natzi, ripping through neighborhoods "childern be damned!" but honestly, I just see so many homes, bad loans, and people who have completely backed themselves into a corner. Today I did a foreclosure where not ONE car in the drive way was older then 07 which included a shelby gt500, duramax, esclade, and E300 mercedes... the house was in..... COMPTON, and the owners admitted they took 200K out of their home in 06 because it was worth half a million (how wack is that!) of course the cars where new, the house was wrecked; interior GUTTED to pocket as much money as possible before they bailed.... 485 days BEHIND in payments and I was the one getting cussed at for kicking them out...

also remember MOST... not all but most are not nice people.. I have a had a gun pulled twice on me during working. This is a no win situation for anyone, I get to leave, call the cops and now this person is hauled off to jail

Fannie, Freddie and Indymac are the hopefuls in the area of refinaciang/modding, chase also works with its owners but they have a huge set of hoops to jump through as well..

Its a tough gig out there. At this point, I blame the banks for their greed and effed up systems.
Right now all 50 states are investigating the banks and I hope they pin it to them for mass signing of docs which breaches their end of the contracts. So many stories of people who had their homes sold while they are still living in them and not even knowing their homes sold while they were trying to Mod or short sale the property. Agents not even knowing..

The current market I am seeing is for the first time buyers.. They are in heaven if they have a down and good credit. Sometimes I wish I was just now ready to buy.

Wow sounds like some true scum...the only people i know going through it are hard working honest people who just had horrible timing. My Brother just went through it and he had his home cleaned and left in perfect order for the bank because he felt bad about it. Anyone who would strip a home is nothing more than a thief. Yes the Banks are were HUGE part of the puzzle but stooping below thier level is BS

Its terribly sad. Many of my good friends have lost there homes in this mess. Unfortunately I don't see it getting better any time soon. As for me I have managed to make every payment, not because I am happy to be way upside down but because I took on a commitment. I will do my best to see that it continues but who knows what the future may bring. Good luck to all of you that are struggling.

worst scum bag was the owners who set fire to the house while I was still in the damn thing at night

What do you do?

foreclose/junk out homes

BLAH![/quote]
If you've got a conventional loan through Fannie or Freddie, you might be able to refi up to 125% - you're one of the lucky few being serviced by a participating lender...but you'd have to get the new loan retail through Wells...

http://makinghomeaffordable.gov/refinance_eligibility.html
[/quote]


My address doesn't come up as elidgble through either site. What is the 125%? Is that 125% of the actual value? We owe $215k on a house that is now worth $85k.
[/quote]
125% of what the house is worth...if you need 250% loan-to-value you're stuck paying, short selling, or walking away.
[/quote]

Conventional Loan with Fannie here but need 129%, just great!!

Depending on where your current rate is, it might be worth it to gamble on appraisal and scrape a few thousand up from somewhere if you've got to bring in cash to close...

Fire? Yikes! How often do you get to see flooding? I had that a lot, the best being a 3 story in Murrieta with a 3rd floor laundry room where after gutting the kitchen and baths (what in the eff do you do with a used toilet???) they let the washer supply lines rip 2 days before I got sent out...